UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2009 |
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD __________ TO __________ |
Commission File Number 0-28579
BERLINER COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE | 75-2233445 | |
(State or Other Jurisdiction of | (I.R.S. Employer | |
Incorporation or Organization) | Identification No.) |
97 LINDEN AVE. ELMWOOD PARK, NEW JERSEY 07407
(Address of Principal Executive Offices)
201-791-3200
(Registrant’s Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act: | Name of Each Exchange on Which Registered: | |
NONE | NONE |
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.00002 PER SHARE
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section15(d) of the Act.
Yes ¨ No x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant: (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 ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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 definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based on the last reported sale price on December 31, 2008, was approximately $5,562,000.
As of September 23, 2009, 26,515,732 shares of the registrant’s common stock, par value $0.00002, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PART III — | Incorporated by reference to the registrant’s proxy statement to be mailed or sent to securities holders on or about October 24, 2009. |
TABLE OF CONTENTS
PAGE | ||
PART I | ||
ITEM 1. | Business | 3 |
ITEM 1A. | Risk Factors | 11 |
ITEM 2. | Properties | 17 |
ITEM 3. | Legal Proceedings | 18 |
ITEM 4. | Submission of Matters to a Vote of Security Holders | 18 |
PART II | ||
ITEM 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 19 |
ITEM 6. | Selected Financial Data | 20 |
ITEM 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 21 |
ITEM 7A. | Quantitative and Qualitative Disclosures About Market Risk | 31 |
ITEM 8. | Financial Statements and Supplementary Data | 31 |
ITEM 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 31 |
ITEM 9A(T). | Controls and Procedures | 31 |
ITEM 9B | Other Information | 32 |
PART III | ||
ITEM 10. | Directors, Executive Officers and Corporate Governance of the Registrant | 33 |
ITEM 11. | Executive Compensation | 33 |
ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 33 |
ITEM 13. | Certain Relationships and Related Transactions and Director Independence | 33 |
ITEM 14. | Principal Accountant Fees and Services | 33 |
PART IV | ||
ITEM 15. | Exhibits and Financial Statement Schedules | 33 |
SIGNATURES | 34 | |
INDEX TO EXHIBITS | 35 |
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PART I
ITEM 1. BUSINESS
General
Berliner Communications, Inc. was originally incorporated in Delaware in 1987 as Adina, Inc. (“Adina”). Adina’s corporate existence was permitted to lapse in February of 1996 and in August of 1999 was reinstated as eVentures Group, Inc. (“eVentures”). In December of 2000, eVentures changed its name to Novo Networks, Inc. (“Novo”).
On February 18, 2005, Novo entered into an asset purchase agreement with the former Berliner Communications, Inc., which subsequently changed its name to Old Berliner, Inc. (“Old Berliner”) and BCI Communications, Inc. (“BCI”), a Delaware corporation and Novo’s wholly-owned subsidiary. As part of this transaction, BCI acquired (the “Acquisition”) the operations and substantially all of the assets and liabilities of Old Berliner. On September 16, 2005, Novo changed its name to Berliner Communications, Inc. (“Berliner”). Berliner is now the public reporting entity, and all of our operations are run out of Berliner’s wholly-owned subsidiary, BCI. Unless the context otherwise requires, references to “we”, “us”, “our” and “the Company” refer to Berliner and its consolidated subsidiary BCI.
Prior to the Acquisition, Old Berliner provided wireless carriers with comprehensive site acquisition, construction and zoning services. Old Berliner was founded in 1995, and over the course of the following years, its service offerings were expanded to include radio frequency and network design and engineering, infrastructure equipment construction and installation, radio transmission base station modification and project management services. With the consummation of the Acquisition, BCI carried on the operations of Old Berliner.
On February 19, 2007, we acquired substantially all of the assets of Comtech Systems, Inc. (“Comtech”), which expanded the depth of our Specialty Communications Services business, which is described in more detail below. On February 28, 2007, BCI entered into an Asset Purchase Agreement with Digital Communication Services, Inc. (“Digitcom”) and its affiliates for the purchase of certain of its assets in Arlington, Texas. This acquisition has expanded and strengthened our presence in Texas, Oklahoma and the Midwest region. On April 16, 2007, we entered into an Asset Purchase Agreement with Radian Communication Services, Inc. (“Radian”) to purchase certain of the U.S. assets and operations of Radian and assume certain liabilities of Radian. This acquisition expanded our presence in Los Angeles, California, Las Vegas, Nevada, Seattle, Washington, Salem, Oregon and Tempe, Arizona. These acquisitions have allowed us to become a nationwide service provider for our customers, the most significant of which have nationwide operations that require us to have a broad scope of services and an ability to service many geographic regions at once. These acquisitions have also expanded our customer base and added depth to growing lines of business.
With the consummation of these acquisitions, BCI is now a leading self-performing, full service vendor to the wireless communications industry, providing a wide range of services, on a nationwide basis. Our core activities include site acquisition and zoning; infrastructure equipment construction and installation; network services; radio frequency and network design and engineering; radio transmission base station installation and modification; and in-building network design, engineering and construction. We provide some combination of these services primarily to companies in the wireless telecommunications and/or data transmission industries, cable operators, original equipment manufacturers, or OEMs, and, to a lesser extent, to utility companies and government entities.
An Overview of Our Markets and Products
We currently report our financial results on the basis of two reportable segments: (1) infrastructure construction and technical services and (2) site acquisition and zoning. Our infrastructure construction and technical services segment consists of the following service lines: infrastructure equipment construction and installation, radio frequency and network design and engineering, radio transmission base station modification, in-building network design, engineering and construction, project management, specialty communication services, configured solutions and power system solutions. Our site acquisition and zoning segment stands as a separate service line. Each of these lines, as well as the business of our site acquisition and zoning segment, is described below.
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Infrastructure Equipment Construction and Installation. Infrastructure equipment construction and installation services are important drivers of our business, and the majority of our revenue comes from this service offering. We construct and install the communications equipment that is necessary to make wireless networks work. The quality of the installation work in a wireless telecommunications system build-out is one of the most critical aspects of its performance. Once the necessary site acquisition steps have been completed, materials to construct a tower or install a system on a roof-top are ordered from a fabricator. In some cases, equipment and materials are ordered to modify an existing site. Depending on our customers’ needs, we could be involved in all aspects of site acquisition, construction and installation. Installation of towers could involve clearing sites, laying foundations, bringing in utility lines and installing shelters and towers. Installation of a rooftop site could include installing shelters and antennae, bringing in power or installing power systems, and related construction and electrical work. Once we finish this part of the process, we install any remaining technical equipment and, if it is a tower build, landscape and perhaps fence the site. The site is now ready to be put into service once the remainder of the network is completed. Installation may start once the preliminary work has been completed and the individual “cell site” or switch location is ready to be built. Every site is then tested with a simulation to see what levels of line loss exist and how the transmission systems perform. We manage everything from “one-off” projects involving a single site to “long-range” installation projects involving hundreds or possibly thousands of sites. These large projects involve significant financial and operational resources and planning and project management skills that we believe distinguish us from many of our competitors, particularly our smaller competitors.
Radio Frequency and Network Design and Engineering. Wireless network designs are based on projected subscriber density, traffic demand and desired coverage area. The initial system design is intended to optimize available radio frequency and to result in the highest possible signal quality for the greatest portion of projected subscriber usage base within existing technical constraints. Based on such initial guidelines, our customers can hire us to identify and rank potential sites. This process is known as identifying “search rings.”
Radio Transmission Base Station Modification. We currently perform cellular base station upgrades and modifications for wireless telecommunications carriers. This work involves upgrades to existing hardware as well as adding new hardware such as radios, duplexers, power systems and site controllers. This work is essential for enhancing network capacity and paving the way to the deployment of new networks using new technologies, including third generation, or 3G, and fourth generation, or 4G, systems. In order to minimize the impact on existing wireless customers, most of the upgrade or modification work must be performed at night during a so-called “maintenance window” between the hours of 11:00 PM and 5:00 AM. Carriers generally entrust this kind of work only to trained, capable vendors, such as BCI, who can reliably and successfully complete the work at each site during such timeframes.
In-Building Network Design, Engineering and Construction. We offer complete in-building solutions that involve distributed antennae for wireless coverage in malls, shopping centers, casinos, office buildings and airports and may include voice services (using cellular or personal communications services (“PCS”) and wireless private branch exchange (“PBX”) technologies), data services (including 802.11 (2.4 and 5 GHz)), enhanced coverage for safety spectrum (police, fire and rescue) and wireless primary and secondary broadband backbones, synchronous optical networks (“SONETs”) and campus connections.
Project Management. We also supervise all of the efforts associated with a project, whether it involves one or more of the foregoing services or a “turn-key” solution, so the carrier can ultimately broadcast from the newly configured site. Project management includes vendor management, project planning and preparation, budget tracking, and engineering and construction coordination. A single project may involve thousands of individual sites, and we believe our ability to manage projects of this size and complexity distinguishes us from some of our competitors who do not have our experience or resources in this area.
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Specialty Communication Services. Our specialty communication services provide enhancements to existing wireless and wired telephone and computer networks designed to improve productivity for a specified application. We provide microwave systems where voice or video over land lines is not feasible. We also provide “structured cabling services” to provide voice, data and video over traditional copper and fiber networks. We believe this business presents a significant growth opportunity for us, and we intend to grow this aspect of our business during fiscal 2010.
Configured Solutions. In early fiscal 2008, we introduced a configured solutions service offering, designed to supplement our other business lines by providing logistics services to our customers and to other third parties that may not have the facilities, resources or capabilities that we do. These services include transportation, tracking, storing and delivering of equipment, and configuring and testing equipment at our locations. Our diverse geographic locations provide an excellent platform for these services, and we have the expertise in-house for the testing and configuration work. We believe this will provide an additional source of revenue, allow us to further utilize existing resources and facilities and provide yet another service that our customers need and not all of our competitors can offer.
Power System Solutions. In late fiscal 2008, we created our Green Energy Group. This Division provides a complete portfolio of traditional network power equipment integrated with “environmentally friendly” or “Green” primary and backup power solutions. These solutions are designed to meet our customers’ growing network needs and help address the growing environmental challenges BCI and our customers feel strongly about. We are positioned to provide a wide array of power options for their consideration, including hydrogen fuel cells, micro turbines, solar and wind power solutions. These new product and service offerings will seamlessly integrate with our existing network installation and technical services business. We have many years of experience with the installation of back-up power systems, primarily generators and batteries, and this makes the addition of the Green Energy Group a natural extension of what we believe we already do very well.
Site Acquisition and Zoning. We began our business providing primarily site acquisition services that generally involve acting as an intermediary between telecommunications companies and owners of real estate and other facilities. In order to build and expand their networks, such companies require locations that have direct access to highways and roads to mount their antennae and equipment. The telecommunications companies are typically able and willing to pay fees for the rights to place their equipment in such strategic locations. Facility owners are generally eager to earn additional income from their properties. We generate fees by introducing telecommunications companies and real estate managers. We identify appropriate properties, negotiate the transactions and handle the administrative details. We also use our accumulated knowledge and relationships to assist in the planning and installation of the telecommunication facilities, and offer customers assistance in acquiring the necessary permits, entitlements and approvals that are required by various municipalities. We also prepare all zoning applications that may be needed, attend any necessary hearings and obtain any required land use permits to begin installation.
Staffing Services. In fiscal 2009, we introduced a staffing service offering to provide staffing services in all leading technologies to carriers, vendors and suppliers in the fixed line and cellular communications markets. We offer a comprehensive range of skills—including engineering, installation and acceptance and testing and can provide maintenance personnel for network rollouts, transmission technology, network planning, optimization and operations. We also specialize in project and program management at all levels.
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Industry Background
Wireless Telecommunications Networks
Wireless telecommunications networks are built using radio-based systems that allow a telephone or data terminal to communicate without a metallic or optical cord or wire equipment. The life cycle of a wireless network continually evolves and consists of several phases, including strategic planning, design, deployment, expansion, operations and maintenance. During the strategic planning phase, operators pursue the licenses necessary to build out a wireless system and make decisions about the type of technology and equipment to be used, where it will be located and how it will be configured. Technical planning and preliminary engineering designs are often required to decide on a deployment strategy and determine construction costs and the revenue generating ability of the wireless system.
Following acceptance of a wireless network design, access to land or building rooftops must be secured for towers or telecommunications equipment, including radio base stations, antennae and supporting electronics. Each site must be qualified in a number of areas, including zoning ordinance requirements, regulatory compliance and suitability for construction. Detailed site location designs are prepared, and radio frequency engineers review interference to or from co-located antennae. Construction and equipment installation then must be performed, and site performance is measured after completion of construction. Finally, professional technicians install and commission the new radio equipment, test it, integrate it with existing networks and tune the components to optimize performance.
Once a wireless network becomes operational and the number of subscribers increases, the system must be expanded to increase system coverage and capacity. In addition, the wireless system must be continually updated and optimized to address changes in traffic patterns and interference from neighboring or competing networks or other radio sources. Operations and maintenance also involves tuning the network to enable operators to compete more effectively in areas where there are multiple system operators.
Finally, as new technologies are continuously developed, wireless service providers must determine whether to upgrade their existing networks or deploy new networks utilizing the latest available technologies. Overlaying new technologies, such as late second generation, third generation and fourth generation (“2.5G”, “3G” and “4G,” respectively), onto an existing network or deploying a new network requires operators to reengage in the strategic planning, design, deployment, expansion, operations and maintenance phases of a new cycle in the life of an existing or new network. Today many carriers are considering or implementing major network overlays, some of them based on 4G, or WiMax, technologies, and others based on what is known as Long Term Evolution, or LTE, technologies. A significant portion of our business today is modifying existing sites by overlaying new technologies, as well as developing new sites for wireless carriers and others.
Rapid Growth and Evolution of the Wireless Telecommunications Industry
Worldwide use of wireless telecommunications has grown rapidly as cellular and other emerging wireless communications services have become more widely available and affordable for the mass business and consumer markets. The rapid growth in wireless telecommunications is driven by the dramatic increase in wireless telephone usage, as well as strong demand for wireless Internet and other data services. According to the Cellular Telecommunications and Internet Association, or CTIA, there were approximately 270.3 million wireless subscribers in the United States in December 2008, up from 207.9 million in 2005. These subscribers used 2.2 trillion minutes, up from 1.5 trillion in 2005 and 431.9 million in 1995. This usage accounted for approximately $148.1 billion in wireless service revenue in 2008, an increase of 7% from the prior year. Also according to the CTIA, there were 242,130 cell sites in the U.S. in December 2008, up from 183,689 in 2005 and 22,633 in 1995. Clearly the wireless industry continues to be in a strong growth mode, and we expect that to continue for the foreseeable future.
Wireless access to the Internet is also growing rapidly as web-enabled devices become more accessible. Demand for wireless Internet access and other data services is accelerating the adoption of new technologies, such as those embodied in 3G and 4G, to enable wireless networks to deliver enhanced data capabilities. Examples of wireless data services include e-mail, messaging services, Wi-Fi, WiMax, music on-demand, mobile-banking, locations-based services and interactive games. Text-messaging alone has increased dramatically over the past several years, with 110.4 billion text messages sent every month as of December 2008, up from 9.8 billion per month in December 2005. As new technologies are introduced, network upgrades often become necessary, and we are well-positioned to assist our customers with the required upgrade work as we have the technical expertise, experience and capabilities to handle this work on a large scale, nation-wide basis. We believe that the industry’s commitment to adopt LTE (long term evolution) or WiMax equipment, both of which will generate significant capital expenditures by the major carriers, will provide the potential for significant opportunities for us over the next several years. Our company is a significant beneficiary of cell site modification work in the wireless business, particularly because we are technology neutral. Therefore, we are positioned and trained to assist our customers regardless of the technology they adopt, for example, LTE or WiMax.
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Industry Challenges
During the past several years, the major wireless carriers began evaluating their costs for engineering and constructing wireless sites and, as a result, those expenses became an important issue. At that time, several well-funded private and public firms entered the industry as high-level general contractors. These larger companies, sometimes referred to as “consolidators”, include such companies as Bechtel Corporation and General Dynamics Corporation. These and other similarly situated companies put themselves between the larger wireless service providers, like Sprint Nextel, AT&T Wireless Services, Inc., Verizon Wireless, T-Mobile USA, Inc., and MetroPCS and their former contractors, such as us, by negotiating flat rate pricing. Many contracting firms entered into agreements with limited knowledge of the actual cost to complete the work, resulting in many lower than market bids. As a result, many smaller subcontractors could not compete at such reduced margins. During 2004, the wireless carriers also significantly reduced the number of sites they were going to build. These factors contributed to industry attrition in the equipment construction and installation sector. They also had a severe negative effect on the profitability of companies such as ours during that time. Today, we have the size, scope and resources to establish direct-to-carrier relationships. In addition, carriers are contracting with original equipment manufacturers, or OEMs, such as Ericsson, Huawei, Samsung, Nokia and Motorola, to perform installation services, and we have been working directly with these OEMs to assist with these installation projects.
Position in Industry
We believe that the large wireless carriers have not been entirely satisfied with their experience with some of the large contracting or project management firms, and that this dissatisfaction created an opportunity for full service, “self-performing” firms, such as BCI, with the ability to handle significant volume, to take over a portion of the work currently being performed by such firms. Now that we have become what is known as a “tier one” service provider, we receive purchase orders directly from the end user customer, the wireless carriers. This situation enhances our profitability by removing a layer of costs from our projects. We expect to continue to benefit from new developments in wireless technology and additional consolidation in the telecommunications industry.
Key Drivers of Change in Our Business
The key drivers of change in the wireless telecommunications industry have been:
• | the introduction of new services or technologies; |
• | the increase in the number of wireless subscribers served by wireless providers; |
• | the increasing complexity of wireless systems in operation; |
• | continuing mergers, acquisitions and divestitures in the telecommunications sector; |
• | the issuance of new or additional licenses to wireless service providers; and |
• | the increase in spending to rebuild and improve other communications networks, such as Public Safety Networks. |
Each of these key drivers is discussed below:
The introduction of new services or technologies. The rapid introduction of new services or technologies in the wireless market and the need to reduce operating costs in many cases have resulted in wireless service providers and equipment vendors outsourcing an increasing portion of their network services development work to companies such as ours. For example, new technologies such as text messaging, Internet access and video streaming to cellular telephones have driven wireless carriers to continually expand and enhance their networks. Such efforts involve providing both additional network capacity and expanded geographic coverage to address wireless customers’ expectation of network quality, speed and service. Therefore, wireless service providers have retained firms such as ours that have the technical expertise, experience and resources to assist with this network development and enhancement.
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The increase in the number of wireless subscribers served by wireless providers. The number of wireless subscribers in the United States continues to increase rapidly. This creates an increase in usage by those subscribers and a scarcity of wireless spectrum, which requires carriers to expand and optimize system coverage and capacity to maintain network quality. The wireless carriers have engaged companies such as ours to increase the coverage and capacity of their networks. The wireless system also must be continually updated and optimized to address changes in traffic patterns and interference from neighboring or competing networks or other radio sources. Our customers also need companies such as ours to supplement their internal resources to address these developments.
The increasing complexity of wireless systems in operation. As new technologies are developed, wireless service providers must determine whether to upgrade their existing networks or deploy new networks utilizing the latest available technologies in order to maintain their market share. For example, overlaying new technologies, such as WiMAX or 4G, with an existing network or deploying a new network requires wireless service providers to reengage in the strategic planning, design, deployment, expansion, operations and maintenance phases of a new cycle in the life of an existing or new network. If the wireless carrier elects to upgrade an existing network, we can provide the services necessary to implement such an upgrade. If the carrier elects to deploy a new network, we can also provide the services necessary to implement this new development. For companies such as ours, the type of technology that our customers deploy or their decisions on whether to build new or upgrade existing networks is not critical. The driver for our business is the rapid growth of technology and increasing complexity of the networks that requires carriers to hire companies such as ours on an ongoing basis.
Continuing mergers, acquisitions and divestitures in the telecommunications sector. In light of recent consolidation in the telecommunications sector, wireless service providers are faced with issues regarding the integration of separate telecommunications networks. This may provide us with the opportunity to provide services relating to performing network compatibility testing and resolving integration issues. We provide significant modification work to existing networks besides the construction of new wireless sites. In addition, when companies divest themselves of divisions or business units, this also provides opportunities and potential new customers for us. For example, in May 2008, our then-largest customer, Sprint Nextel Corporation, announced an agreement with Clearwire Corporation to form a new wireless communications company called Clearwire. Clearwire is building the first nationwide mobile WiMAX network, which, according to Clearwire, will offer enhanced speed and access to the Internet, among other things, for Clearwire customers. Clearwire is being funded by various other strategic partners, including Intel Corporation, Google Inc., Comcast Corporation, Time Warner Cable Inc. and Brighthouse Networks. This type of transaction, with the addition of significant financial support from strategic partners, provides an excellent opportunity for us to participate in the build-out of the WiMAX networks by Clearwire, and we have begun to do this work in various markets across the country.
The issuance of new or additional licenses to wireless service providers. The Federal Communications Commission, or FCC, has issued, and we expect it will continue to issue, new licenses to wireless service providers that we believe will present new opportunities for us. For example, in the first few months of 2008, the FCC auctioned a significant number of licenses in the 700 MHz spectrum. This introduction of new licenses allows new entrants into the industry who will need to develop new networks. After receiving new or additional licenses necessary to build out their wireless systems, wireless service providers must make decisions about what type of technology and equipment will be used, where it will be deployed and how it will be configured. In addition, detailed site location designs must be prepared and radio frequency engineers must review interference to or from co-located antennae. Construction and equipment installation must then be performed and professional technicians must install and commission the new radio equipment, test and integrate it with existing networks and tune the components to optimize performance. We believe we are well positioned to service these needs.
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The increase in spending to rebuild and improve other communications networks, such as Public Safety Networks. There has been and we believe there will continue to be increased spending on rebuilding and improving other communications networks, including wireless and wired data, video and voice networks, particularly those dedicated to the expansion of broadband access to rural regions of the United States, public safety, and homeland security communications. We currently service this growing market, and we plan on developing further expertise and adding resources to this area, specifically through the growth of our Specialty Communications Services. The FCC has recently announced that in February 2010 it will once again attempt to sell certain “D-Block” licenses to support public safety networks across the country. We believe the D-Block licenses will ultimately be purchased, additional networks will be developed to support these frequencies, and this will lead to additional opportunities for network development and installation companies such as ours.
Plan of Operation
We believe it will be necessary to take the following steps within the next 12 months in order to meet our revenue goals and to achieve increased profitability:
Increase Business Development Activities. In fiscal 2009, we devoted a significant amount of time and resources to growing and reorganizing our business development team. We hired a new Vice President level executive to lead this effort, and he has worked directly with senior management as well as a Committee of our Board of Directors to restructure the Business Development group. We have now organized our business development team on a market basis, and have also assigned account management responsibilities to each team member. We recognize the need to increase our focus on business development, customer retention and the diversification of our customer base. We anticipate achieving this result though a variety of means, including, without limitation, hiring additional business development staff, increasing our exposure at trade shows and customer-sponsored events, and increasing our marketing efforts in an organized and effective manner.
Increase Subcontractor Base. As we experience increased demand for our services, we will have to be flexible and utilize subcontractors in order to meet construction schedules to the extent we are unable to staff such jobs with existing staff. We have a robust qualification process for our subcontractors, and we believe our ability to locate and retain high quality, reliable subcontractors that meet our qualifications will be a significant part of our ability to achieve our growth goals. To that end, we have implemented an Internet based electronic payables system that allows our subcontractors to invoice us electronically, significantly easing the burden on our administrative staff, speeding up our payments to our subcontractors and helping us maintain our goal to be a “green” company by eliminating a significant amount of paper from the payment process. We have also implemented a Subcontractor Bill of Rights, making it clear that we treat our subcontractors as important members of our service team, and we believe our positive relationships with our subcontractors is a significant asset for our customers, reduces project-related disputes and distinguishes us from many of our competitors, specifically some of our larger competitors.
Increase Marketing Activities. Although we have achieved recognition in the wireless area, we believe that our typical customer may not be aware of our entire range of services. For example, one set of our customers may recognize us for our site acquisition and zoning or infrastructure equipment construction and installation services without being aware that we also provide radio frequency and network design and engineering services. Accordingly, we have recognized a need to create and implement a marketing plan to market us as a provider of the full range of wireless services. Our integrated service package might be of interest not only to potential customers looking for complete “turn-key” solutions but also clients who are more interested in an “a la carte” approach to their wireless needs. We have hired a Director of Marketing to assist with these efforts and provide the appropriate amount of focus to achieve our desired results in this area.
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Seek Additional Strategic Acquisitions and Integrate Recent Acquisitions. In fiscal 2010, we plan to acquire compatible businesses that can be assimilated into our organization, expand our geographic coverage and add accretive earnings to our business. Our preferred acquisition candidates will have (i) service offerings that supplement, and not necessarily overlap with, our existing service offerings, (ii) an expansive customer base that will allow us to diversify our customer concentration, and (iii) a favorable financial profile. In Fiscal 2007, we acquired the assets and businesses of Digitcom and Radian, and these acquisitions have expanded our customer base, geographic presence, and number of employees. We believe we have successfully managed the associated growth and the integration of these companies into our business, and that this was an important part of our success in fiscal 2008, and to a lesser extent, fiscal 2009. We will need to continue to see strong results from these offices to achieve our fiscal 2010 goals, in addition to successfully managing and integrating any new businesses we may acquire.
Competition
The telecommunications industry is highly competitive. It is difficult to clearly identify our competitors because we offer such a wide breadth of service offerings and many companies provide services similar to ours. However, we currently believe that our most significant competitors include WFI Deployment Services, NSORO LLC (now owned by MasTec), Goodman Networks Inc., Bechtel Corporation, and General Dynamics Corporation. Some of these competitors have greater capital resources, longer operating histories, larger customer bases, and more established industry relationships than we do. We distinguish ourselves from these competitors by being large enough to provide the resources our customers need on a nation-wide, self-performing basis, while still maintaining our ability to be responsive, on a local level, to customer specific tasks that arise during any given engagement for services. We also compete at a local market level with a variety of smaller installation, construction and site acquisition companies, particularly on small projects that do not require the resources we bring to bear on larger scale or nation-wide projects.
Government Regulation
Although we are not directly subject to any FCC or similar government regulations, the wireless networks that we design, deploy and manage are subject to these requirements. Those requirements dictate that the networks meet certain radio frequency emission standards, not cause unallowable interference to other services, and in some cases, accept interference from other services. Those networks are also subject to certain state and local government regulations and requirements. Other FCC regulations, such as the proposed requirement for wireless carriers to maintain eight-hour back-up power supplies for their cell sites, affect our business by driving our customers to pay for additional services to meet these requirements, which we can provide.
Major Suppliers and Vendors
Historically, we have relied upon our own employees and subcontractors to perform services in order to fulfill our contractual obligations. Currently, the costs attributable to subcontractors represent approximately 52% of our cost of revenues. Approximately 25% of our subcontractor costs relate to fees paid to electrical and architectural and engineering (“A&E”) firms, as we do not hold electrical or A&E licenses in any of the jurisdictions where we operate. We do not rely on any one subcontractor, and we must utilize subcontractors that meet our qualification standards, timeframes and the contractual requirements of our customers.
Major Customers
As of and for the year ended June 30, 2009, we derived 43% of our total revenue from three customers, and those customers represented 28% of our accounts receivable. During the year ended June 30, 2009, Metro PCS, Inc. (and its subsidiaries) represented 19%, T-Mobile (and its subsidiaries) represented 13%, Clearwire US LLC represented 11%,of our total revenue.
As of and for the year ended June 30, 2008, we derived 84% of our total revenues from our two largest customers, and those customers represented 62% of our accounts receivable. During the year ended June 30, 2008, Sprint Nextel Corporation represented 77% and Metro PCS represented 7% of our total revenues. Our work for Sprint Nextel includes 4G, or WiMax (work for their Xohm Division), CDMA (Code-Division Multiple Access) and IDEN (Integrated Digital Enhanced Network) work.
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Seasonality
Incidents of inclement weather, particularly in the winter months in the northern parts of the country, hinder our ability to complete certain outdoor activities relating to the provision of certain of our services. Demand for our services is typically higher in the last few months of the calendar year, due primarily to acceleration of most customers’ capital expenditures for completing year-end projects, with a corresponding decrease in activity during the first few months of the following calendar year, typically because customers are evaluating their plans for such capital expenditures for the coming year during that period.
Backlog
As of June 30, 2009 and 2008, our backlog was approximately $24.8 million ($6.5 million in infrastructure construction and technical services and $18.3 million in site acquisition and zoning) and $15.2 million ($11.1 million in infrastructure construction and technical services and $4.1 million in site acquisition and zoning), respectively. We believe substantially all of our backlog at June 30, 2009 will be filled within the fiscal year ending June 30, 2010.
Employees
As of June 30, 2009, we employed 425 full-time and 7 part-time employees. We anticipate the need to increase our work force as additional contracts for projects are received. None of our employees are represented by labor unions.
ITEM 1A. RISK FACTORS
Although we have had net income in prior periods, we experienced losses in fiscal 2009 and we may never achieve sustained profitability.
Although we had net income during the years ended June 30, 2008, 2007 and 2006, we were not profitable during the year ended June 30, 2009 and we may not be profitable in future periods, either on a short or long-term basis. To the extent that revenue declines or does not grow at anticipated rates, increases in operating expenses precede or are not subsequently followed by commensurate increases in revenue or we are unable to adjust operating expense levels accordingly, your investment could be jeopardized.
We generate a substantial portion of our revenue from a limited number of customers, and if our relationships with such customers were harmed, our business would suffer.
As of and for the year ended June 30, 2009, we derived 43% of our total revenue from three customers, and those customers represented 28% of our accounts receivable. During the year ended June 30, 2009, Metro PCS, Inc. (and its subsidiaries) represented 19%, T-Mobile (and its subsidiaries) represented 13%, Clearwire US LLC represented 11% of our total revenue.
As of and for the year ended June 30, 2008, we derived 84% of our total revenue from our two largest customers, and those customers represented 62% of our accounts receivable. During the year ended June 30, 2008, Sprint Nextel Corporation represented 77% and Metro PCS represented 7% of our total revenue.
We believe that a limited number of clients will continue to be the source of a substantial portion of our revenue for the foreseeable future. Key factors in maintaining our relationships with such customers include, without limitation, our performance on individual contracts and the strength of our professional reputation. To the extent that our performance does not meet client expectations, or our reputation or relationships with one or more key customers are impaired, this could cause a significant decrease in our revenue, which would negatively impact our ability to generate income. In addition, our key customers could slow or stop spending on initiatives related to projects we are performing for them, which could be impacted by the increased difficulty in the credit markets as a result of the recent economic crisis, and this, while outside our control, could materially impair our operating results.
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For example, during the fourth quarter of fiscal 2008, we were advised that our largest customer at that time, Sprint Nextel, had slowed the implementation of initiatives related to significant projects we were performing for them. This customer notified us of the cancellation of certain purchase orders, and instructed us to delay the completion of other existing purchase orders. This loss of revenue had a material impact on our financial results, including our revenue and operating income for fiscal 2009.
If we experience material delays and or defaults in customer payments, we could be unable to cover all expenditures.
Because of the nature of our contracts, we commit resources to projects prior to receiving payments from our customers in amounts sufficient to cover expenditures on client projects as they are incurred. Delays in customer payments may require us to make a working capital investment, or obtain advances from our line of credit, which may be adversely affected by the current turmoil in the credit markets. If a customer defaults in making its payments on a project or projects in which we have devoted significant resources, it could have a material negative effect on our results of operations or negatively impact our financial covenants with our lenders.
If the percentage of our revenue derived from construction-related activities increases, our gross margins may suffer.
We have historically earned lower relative gross margins on engineering and construction-related activities. We typically perform our own network design-related, site acquisition-related services and hire subcontractors to perform engineering and construction services under our direct management. Subcontracted work generally carries lower profit margins than self-performed work. If the proportion of construction-related services we deliver increases, then our gross margins and net income may suffer.
We may need additional working capital, the lack of which would likely have a significant negative impact on our ability to grow our business.
We may require additional working capital in order to fund the growth of our operations. If adequate funds are not available on terms acceptable to us, we may not be able to effectively grow our operations and expand our business. Our ability to fund our operations and corporate infrastructure is directly related to the continued availability of these and other funding sources, which may be adversely affected by the current condition of the credit markets.
We can provide no assurances that we would be able to raise such financing when needed or on acceptable terms. As a result, we may be forced to reduce or delay additional expenditures or otherwise delay, curtail or discontinue some or all of our operations.
Delays in the adoption and deployment of next generation wireless networks could negatively affect the demand for our services and our ability to grow our revenue.
Wireless service providers may delay their development of next generation technology if, among other things, they expect slow growth in the adoption of such technology, reduced profitability due to price competition for subscribers or regulatory delays. For example, even though wireless service providers have made substantial investments worldwide in acquiring third generation, or 3G licenses, some providers have delayed deployment of 3G networks. Others are investing in fourth generation, or 4G, networks, and others in long term evolution, or LTE, networks. Since we expect that a substantial portion of our growth will be derived from our services related to new technologies, further delays in the adoption and deployment of these technologies, such as 4G and LTE, would negatively affect the demand for our services and our ability to grow our revenue as quickly as expected.
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We bear the risk of cost overruns in some of our contracts.
We conduct our business under various types of contractual arrangements. Under such contracts, prices are established, in part, on cost and scheduling estimates, which are based on a number of assumptions, including, without limitation, assumptions about future economic conditions, prices and availability of labor, equipment and materials, and other exigencies. These assessments are made more difficult by the current uncertainty in the capital markets and the wide fluctuation of prices for equipment, fuel and other costs associated with our services. If those estimates prove inaccurate, or circumstances change, cost overruns may occur, and we could experience reduced profits or, in some cases, a loss for that project.
Our dependence on subcontractors and equipment manufacturers could adversely affect us.
We rely on third-party subcontractors as well as third-party equipment manufacturers to complete our projects. To the extent that we cannot engage subcontractors or acquire equipment or materials, our ability to complete a project in a timely fashion or at a profit may be impaired. If the amount we are required to pay for these goods and services exceeds the amount we have estimated in bidding for fixed-price contracts, we could experience losses in the performance of these contracts. In addition, if a subcontractor or a manufacturer is unable to deliver its services, equipment or materials according to the negotiated terms for any reason, including the deterioration of its financial condition, we may be required to purchase the services, equipment or materials from another source at a higher price. This may reduce the profit to be realized or result in a loss on a project for which the services, equipment or materials were needed.
If we guarantee the timely completion or performance standard of a project, we could incur significant, additional costs.
In some instances, we guarantee to a customer that we will complete a project by a scheduled date. The contract sometimes provides that the project, when completed, will also achieve certain performance standards. If we subsequently fail to complete the project as scheduled, or if the project falls short of guaranteed performance standards, we may be held responsible for cost impacts to the client resulting from any delay or the costs to cause the project to achieve such performance standards. In some cases, where we fail to meet those performance standards, we may also be subject to agreed-upon liquidated damages. To the extent that these events occur, the total costs of the project could exceed its original estimates and we could experience reduced profits or, in some cases, a loss for that project.
The nature of our construction business exposes us to potential liability claims and contract disputes that may negatively affect our results of operations.
We engage in construction activities, including the oversight of engineering firms, for wireless networks where design, construction or systems failures can result in substantial injury or damage to third parties. Any liability in excess of insurance limits at locations constructed by us could result in significant liability claims against us, which claims may negatively affect our results of operations, perhaps materially. In addition, if there is a customer dispute regarding our performance of project services, the customer may decide to delay or withhold payment to us. If we were ultimately unable to collect on these payments, our results of operations would be negatively impacted, perhaps materially.
We maintain a workforce based upon current and anticipated workloads. If we do not receive future contract awards or if these awards are delayed, we may incur significant costs in meeting workforce demands.
Our estimates of future performance depend on, among other matters, whether and when we will receive certain new contract awards. While our estimates are based upon our good faith judgment, they can be unreliable and may frequently change based on newly available information. In the case of our larger projects where timing is often uncertain, it is particularly difficult to project whether and when we will receive a contract award. The uncertainty of contract award timing can present difficulties in matching our workforce size with our contract needs. If an expected contract award is delayed or not received, we could incur costs resulting from reductions in staff or redundancy of facilities that would have the effect of negatively impacting our operating performance.
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We may not be able to hire or retain a sufficient number of qualified employees to meet our contractual obligations or maintain the quality of our services.
As a service business, our ultimate success depends significantly on our ability to attract, train and retain system deployment, managerial, marketing, sales and marketing personnel who have excellent technical and interpersonal skills. Competition for employees with the required range of skills fluctuates, depending on customer needs, and can be intense. At times, we have had difficulty recruiting and retaining qualified technical personnel to properly and quickly staff large customer projects. In addition to recruitment difficulties, we must fully and properly train our employees according to our customers’ technology requirements and deploy and fully integrate each employee into our customers’ projects. Competition in the wireless industry is increasing the level of specific technical experience and training required to fulfill customer-staffing requirements. This process is costly, and resource constraints may impede our ability to quickly and effectively train and deploy all of the personnel required to staff projects.
Intense competition in our industry could reduce our market share.
We serve markets that are highly competitive and in which a large number of multinational companies compete. In particular, the telecommunications services, site acquisition and construction markets are highly competitive and require substantial resources and capital investment in equipment, technology and skilled personnel. Competition also places downward pressure on our contract prices and profit margins. Intense competition is expected to continue in these markets. If we are unable to meet these competitive challenges, we could lose market share to our competitors and experience an overall reduction in our operating performance.
We are vulnerable to the cyclical nature of the market we serve.
The demand for our services and products is dependent upon the existence of projects with engineering, procurement, construction and management needs. The wireless telecommunications market, where we principally compete, is particularly cyclical in nature. This industry has historically been, and we expect it will continue to be, vulnerable to general economic downturns and is cyclical in nature. As a result, our past results have varied considerably and our performance may continue to be volatile, depending upon the demand for future projects in the industry.
We may experience significant fluctuations in our quarterly results as a result of uncertainties relating to our ability to generate additional revenue, manage expenditures and other factors, some of which are outside of our control.
Our quarterly operating results have varied considerably in the past, and may continue to do so, due to a number of factors. Many of these factors are outside our control and include, without limitation, the following:
| financing provided to customers and potential customers; |
| the commencement, progress, completion or termination of contracts during any particular quarter; |
| the availability of equipment to deploy new technologies, such as 4G and LTE; |
| the growth rate of wireless subscribers, which has a direct impact on the rate at which new cell sites are developed and built; and |
| telecommunications market conditions and economic conditions generally. |
Due to these factors, our results for a particular quarter, and therefore, our combined results for that same period, may not meet the expectations of investors, which could cause the price of our common stock to decline significantly.
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Our stock price is volatile and purchasers of our common stock could incur substantial losses.
Historically, our stock price has been volatile. The stock market in general, particularly recently, and the market for telecommunications companies in particular, has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above their respective purchase prices. The market price for our common stock may be influenced by many factors, including, but not limited to, variations in our financial results or those of companies that are perceived to be similar to us, investors’ perceptions of us, the number of our shares available in the market, future sales of our common stock, and general economic, industry and market conditions.
There is a lack of a public market for our shares, which limits our shareholders’ ability to sell their shares.
There is currently a limited public market for our shares, and we cannot assure you that a more active market for our common stock will develop. Consequently, investors may not be able to liquidate their shares at a suitable price, or at all.
We have experienced, and expect to continue to experience, long sales cycles, we expect to incur significant costs to generate new business and our customer base may not experience growth commensurate with such costs.
Historically, purchases of our services by customers often entailed a lengthy decision-making process for the customer. Selecting wireless network deployment services involves substantial costs and has strategic implications. Senior management of the customer is often involved in this process, given the importance of the decision, as well as the risks faced by the customer if the services do not meet the customer’s particular needs. We may expend substantial funds and effort to negotiate agreements for these services, but may ultimately be unable to consummate agreements for services and expand our customer base. As a result of lengthy sales cycles, we expect to continue to incur relatively high costs to generate new business.
If we are unable to identify and complete future acquisitions, we may be unable to continue our growth.
We may not be able to identify additional, attractive acquisition opportunities. Even if we identify favorable acquisition targets, there is no guarantee that we can acquire them on reasonable terms or at all. If we are unable to complete attractive acquisitions, we may not experience growth.
If we fail to accurately estimate costs and other factors associated with contracts accounted for using the percentage-of-completion method of accounting, this may reduce our profitability.
We recognize revenue and profit on our contracts as the work progresses using the percentage-of-completion method of accounting. Under this method, contracts in progress are valued at cost plus accrued profits less earned revenue and progress payments on uncompleted projects. This method relies on estimates of total expected contract revenue and costs.
Contract revenue and total cost estimates are reviewed and revised monthly as the work progresses, such that adjustments to profit resulting from revisions are made cumulative to the date of revision. Adjustments are reflected for the fiscal period affected by those revised estimates. If estimates of costs to complete long-term projects indicate a loss, we immediately recognize the full amount of the estimated loss. Such adjustments and accrued losses could result in reducing our profitability.
We may incur goodwill and other intangible impairment charges which could reduce our profitability.
In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, we review the carrying values of our goodwill and indefinite lived intangible assets at least annually. We determine the fair value of businesses acquired (reporting units) and compare it to the carrying value, including goodwill, of such businesses. If the carrying value exceeds its fair value, the goodwill of the unit may be impaired. The amount, if any, of the impairment is then measured, based on the excess, if any, of the reporting unit’s carrying value of goodwill over its implied value. Accordingly, an impairment charge would be recognized for the period identified which would reduce our profitability.
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A default on our debt obligations could result in foreclosure on all of our assets.
In April 2008, we replaced our credit facility with Presidential Financial Corporation of Delaware Valley with a new credit facility of up to $15 million with PNC Bank, National Association. The PNC facility is secured by a blanket security interest in collateral that covers certain of BCI’s receivables, equipment, general intangibles, inventory, investment property, certain real property, certain leasehold interests, all subsidiary stock, records and other property and proceeds of all of the collateral. An event of default with respect to the PNC facility could result in, among other things, the acceleration and demand for payment of all principal and interest due and the foreclosure on the collateral. The sale of such collateral at foreclosure would result in a substantial disruption in our ability to operate our business and could significantly lower our revenue and profitability. We may not be able to refinance or obtain extensions of the maturities of all or some of such debt only on terms that significantly restrict our ability to operate, including terms that place limitations on our ability to incur other indebtedness, to pay dividends, to use our assets as collateral for other financings, to sell assets or to make acquisitions or enter into other transactions. Such restrictions may adversely affect our ability to finance our future operations or to engage in other business activities. If we finance the repayment of our outstanding indebtedness by issuing additional equity or convertible debt securities, such issuances could result in substantial dilution to our stockholders.
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ITEM 2. | PROPERTIES |
As of June 30, 2009, we had leases or contractual arrangements to utilize approximately 211,818 square feet for our operations, as set forth below:
Size in | End of | |||||
Location | Square Feet | Description | Lease Term | |||
1210 West Alameda Drive Tempe, AZ | 2,460 | Office space | Month-to-month | |||
14270 Albers Way Chino, CA | 10,607 | Office and warehouse space | December 2010 | |||
4885 Fulton Drive Fairfield, CA | 5,200 | Office and warehouse space | September 2010 | |||
2801 Camino Del Rio South San Diego, CA | - | Office space | November 2009 | |||
2580 N. Powerline Road Pompano Beach, FL | 7,600 | Office and warehouse space | February 2010 | |||
1765 L Cortland Court Addison, IL | 3,800 | Office and warehouse space | January 2010 | |||
8300 Stayton Drive Jessup, MD | 19,853 | Office and warehouse space | November 2010 | |||
95 Ryan Drive Raynham, MA | 6,500 | Office and warehouse space | March 2012 | |||
148 Rangeway Road Billerica, MA | 3,500 | Office and warehouse space | June 2010 | |||
49B Old Elan Avenue Valley Park, MO | 5,100 | Office and warehouse space | November 2009 | |||
4550 Copper Sage Street Las Vegas, NV | 3,750 | Office and warehouse space | Month-to-month | |||
97 Linden Ave * Elmwood Park, NJ | 13,000 | Office and warehouse space | Month-to-month | |||
270 Market Street ** Saddle Brook, NJ | 9,780 | Office and warehouse space | July 2010 | |||
45 Stouts Lane Monmouth Junction, NJ | 5,000 | Office and warehouse space | November 2011 | |||
1100 Taylor's Lane Cinnaminson, NJ | 10,209 | Office and warehouse space | November 2009 | |||
18-01 Pollitt Drive Fairlawn, NJ | 76,926 | Office and warehouse space | September 2017 *** | |||
7701 N. Broadway Extension Oklahoma City, OK | 3,000 | Office and warehouse space | January 2010 | |||
7720 N. Robinson Avenue Oklahoma City, OK | 6,000 | Office and warehouse space | January 2010 | |||
4280 25th Street NE Salem, OR | 6,000 | Office and warehouse space | Month-to-month | |||
1846 Lockhill Selma San Antonio, TX | 725 | Office space | August 2009 | |||
Alexander Business Center Corpus Christie, TX | 200 | Office space | Month-to-month | |||
15030 Highway 99 Lynwood, WA | 12,608 | Office and warehouse space | March 2010 |
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* One third of the office space is sub-leased
** Warehouse space is sub-leased
*** Based upon a commencement date of October 1, 2009, See Note 11
We also own 0.9 acres of property, including office and warehouse facilities, in Arlington, Texas.
ITEM 3. | LEGAL PROCEEDINGS |
None.
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None.
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PART II
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock is currently quoted on the National Association of Securities Dealers-Over the Counter Bulletin Board (“OTCBB”). On September 16, 2005, our trading symbol was changed to “BERL.OB” to reflect, in part, our name change. Prior to that date, our stock was traded under the symbol “NVNW.OB.”
From | To | Ticker | Market | |||
September 17, 2005 | Present | BERL | OTCBB |
The following table sets forth the high and low bid prices of our common stock on the applicable market for the quarterly periods indicated. Such prices reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not necessarily represent actual transactions:
Quarter Ended | Low | High | ||||||
June 30, 2009 | $ | 0.60 | $ | 1.00 | ||||
March 31, 2009 | 0.70 | 1.31 | ||||||
December 31, 2008 | 0.65 | 1.60 | ||||||
September 30, 2008 | 1.10 | 1.60 | ||||||
June 30, 2008 | 1.10 | 1.60 | ||||||
March 31, 2008 | 1.15 | 2.00 | ||||||
December 31, 2007 | 1.02 | 1.20 | ||||||
September 30, 2007 | 1.01 | 1.20 |
Our stock has experienced periods, including, without limitation, certain extended periods, of limited or sporadic quotations.
As of June 30, 2009, there were 439 holders of record of our common stock.
Recent Sales of Unregistered Securities
Not applicable.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information, as of June 30, 2009, with respect to all compensation plans and individual compensation arrangements under which equity securities are authorized for issuance to employees or non-employees:
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Number of securities | |||||||||||||
remaining available for | |||||||||||||
Number of securities to | Weighted average | future issuance under | |||||||||||
be issued upon exercise | exercise price of | equity compensation plans | |||||||||||
of outstanding options, | outstanding options, | (excluding securities | |||||||||||
Plan Category | warrants and rights | warrants and rights | reflected in column (A)) | ||||||||||
Equity compensation on plans approved | |||||||||||||
by security holders | 2,185,273 | (a) | $ | 13.42 | 883,723 | ||||||||
Equity compensation on plans not | |||||||||||||
approved by security holders | 18,704 | (b) | $ | 6,786.00 | None | ||||||||
2,203,977 | $ | 70.90 | 883,723 |
(a) | Represents options granted under our 1999 Omnibus Securities Plan and our 2001 Equity Incentive Plan, each of which was approved by our stockholders (the “Option Plans”). |
(b) | Represents options granted under stand-alone option agreements, which were not associated with the Option Plans, and which vested over three or four year periods. |
Dividend Policy
We have not paid cash dividends on our common stock nor do we anticipate doing so in the foreseeable future.
ITEM 6. | SELECTED FINANCIAL DATA |
Not applicable.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read together with our consolidated financial statements and their notes included elsewhere in this Annual Report. See “Forward-Looking Statements” and Item 1A – Risk Factors for a discussion of factors that could cause our future financial condition and results of operations to be different from those discussed below.
Business
We are a leading contractor to the wireless communications industry, providing a wide range of services primarily to wireless and traditional telecommunications carriers. Our core activities include communications infrastructure equipment construction and installation; site acquisition and zoning to support communication network build-outs; radio frequency and network design and engineering; radio transmission base station installation and modification; and in-building network design, engineering and construction. We also provide specialty communication services, configured solutions, staffing services and power system solutions. We provide some or all of these services to our customers, most of which are companies in the wireless telecommunications and/or data transmission industries, as well as to utility companies and government agencies and municipalities. Our customers rely on us to assist them in planning, site location and leasing. For a more complete discussion of our business, see Item 1 of this Annual Report entitled “Business”.
On February 28, 2007, we entered into an Asset Purchase Agreement with Digital Communication Services, Inc. and its affiliates for the purchase of certain of its assets in Arlington, Texas. This acquisition expanded and strengthened our presence in Texas and the Midwest region. On April 16, 2007, we entered into an Asset Purchase Agreement with Radian Communication Services, Inc. (“Radian”) to purchase certain of the U.S. assets and operations of Radian and assume certain liabilities of Radian. This acquisition expanded our presence in Los Angeles, California, Las Vegas, Nevada, and Seattle, Washington, and added offices in Salem, Oregon and Tempe, Arizona. These acquisitions have allowed us to become a nation-wide service provider for our customers, the most significant of which have nationwide operations that require the types of services we provide. These acquisitions have also expanded our customer bases.
Basis of Presentation
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Major assets and liabilities that are subject to estimates include allowance for doubtful accounts, goodwill and other acquired intangible assets, deferred tax assets and certain accrued and contingent liabilities. One of the more significant processes requiring estimates is percentage-of-completion.
We recognize revenue and profit on our contracts as the work progresses using the percentage-of-completion method of accounting. Under this method, contracts in progress are valued at cost plus accrued profits less earned revenue and progress payments on uncompleted projects. This method relies on estimates of total expected contract revenue and costs.
We currently report our financial results on the basis of two reportable segments: (1) infrastructure construction and technical services and (2) site acquisition and zoning.
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YEAR ENDED JUNE 30, 2009 COMPARED TO YEAR ENDED JUNE 30, 2008
(amounts in thousands unless otherwise stated)
Revenue
Years Ended June 30, | ||||||||||||
2009 | 2008 | (Decrease) | ||||||||||
Infrastructure construction and technical services | $ | 44,897 | $ | 98,563 | $ | (53,666 | ) | |||||
Site acquisition and zoning | 9,594 | 29,809 | (20,215 | ) | ||||||||
Total | $ | 54,491 | $ | 128,372 | $ | (73,881 | ) |
We had revenues of $54.5 million for the year ended June 30, 2009, versus $128.4 million for the year ended June 30, 2008. This represents a decrease of $73.9 million, or 58%.
Revenue from infrastructure construction and technical services decreased $53.7 million, or 54% for the year ended June 30, 2009 as compared to the year ended June 30, 2008 and represented 82% and 77% of total revenue for these years, respectively.
Site acquisition and zoning decreased $20.2 million, or 68% for the year ended June 30, 2009 as compared to the year ended June 30, 2008, and accounted for approximately 18% and 23% of total revenues for these years, respectively.
These decreases in revenue are related to several factors:
· | Our largest customer during fiscal 2008, Sprint Nextel, cancelled purchase orders beginning in the fourth quarter of fiscal 2008 for work previously awarded to us, and asked us to delay the completion of other purchase orders. These cancellations and delays were related to Sprint’s sale of its fourth generation, or 4G, WiMax networks business to Clearwire Communications (“Clearwire”), and were unrelated to our performance on these projects. This significantly impacted our financial results throughout fiscal 2009 as Sprint was previously our largest customer. We have actively sought to replace this work, and have received a number of purchase orders related to the continuation of this 4G work, primarily in the site acquisition and zoning segment of our business as this needs to be completed prior to the beginning of construction work. As of June 30, 2009, our backlog was approximately $24.8 million as compared to $15.2 million as of June 30, 2008 and $22.7 million as of March 31, 2009. We believe substantially all of our backlog at June 30, 2009 will be filled before the end of our fiscal year ending June 30, 2010. We believe our prospects for continuing to support the 4G network build-out are good so long as we continue to provide outstanding customer service, and this will present an important opportunity for new business for us in fiscal year 2010. |
· | Our fiscal 2009 was a period of transition for us. In fiscal 2008, almost 80% of our business was from one customer. We made a significant effort to diversify our customer base to remove the risks associated with reliance on one customer. We hired a national business development team to lead this effort, with a new Vice President level executive to lead this team. We also diversified into new lines of business, including our cable services and green energy groups. Perhaps most importantly, we began to emphasize seeking business from companies outside of the wireless industry, including wire-line, cable, and fiber companies, and enterprise and government clients. With the convergence of communications networks and technologies, we saw the need to service more than the wireless carriers that have historically been our top customers. This effort took time and resources, and we believe this planning will result in long-term financial rewards. We also believe that establishing these initiatives had a negative impact on our financial results in 2009 as we hired and trained new people with the appropriate skills sets to support these projects, and began long sales cycles with these new customers. |
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· | Our fiscal second half was also a period of transition for some of our customers and their projects, and this had a negative impact on our revenue for that time period. Several of our customers are just beginning large-scale build-outs for new networks, including Clearwire and the development of its 4G network, and other customers, such as Verizon, that are beginning work on new LTE (or Long-Term Evolution) networks. While we are involved with these initiatives, and we have devoted significant time and resources to position ourselves to support these projects, they have only recently begun in earnest. In addition, some of our other customers completed projects during the third and fourth quarters of fiscal 2009 in some markets, and while we continue to work for these customers, we saw a decline in business from them immediately after the completion of these market launches. |
· | The general downturn in national and global economic conditions during fiscal 2009 also impacted us and we believe many of our customers, subcontractors, vendors and suppliers as well. Many of our customers delayed decision-making on capital spending budgets during this period, particularly during the beginning of calendar 2009, because of the uncertainty associated with general economic conditions. This in turn led to delays in initiating network development projects that were awarded to us. This required us to maintain staffing levels to support these projects, but in some cases being unable to fully utilize this staff until receiving authorization from our customers. In addition, we have seen and continue to see pricing pressure in some of our service lines, and we believe this is attributable in part to a shift in our customer base and to a lesser extent general economic conditions. |
Historically we win and begin projects on an irregular basis, and, therefore, we have seen in normal economic conditions considerable variability in our historic quarterly results. In light of this, and the broad-based uncertainty surrounding general economic conditions, we expect to continue to see significant quarterly variability. We believe our overall financial position is strong, our customer base is diverse and has growth potential, and our backlog of business has grown significantly since December 31, 2008. We also see growth in the wireless industry, and we see our customers focused on expanding their networks to support growing subscriber needs. We also see the convergence of communications networks bringing new opportunities for us as wire-line, cable and fiber companies seek installation companies such as ours to support their network development and integration efforts. Our objective is to use the national platform and broad range of expertise we have developed so that we can take advantage of these growth opportunities as they present themselves. We expect our revenue to increase over the course of fiscal 2010 primarily during the third and fourth quarters, with an overall revenue increase in fiscal 2010 over fiscal 2009.
We recognize revenue using the percentage-of-completion method of accounting.
Cost of Revenue
Years Ended June 30, | ||||||||||||
2009 | 2008 | (Decrease) | ||||||||||
Infrastructure construction and technical services | $ | 33,960 | $ | 64,643 | $ | (30,683 | ) | |||||
Site acquisition and zoning | 4,826 | 18,809 | (13,983 | ) | ||||||||
Total | $ | 38,786 | $ | 83,452 | $ | (44,666 | ) |
Our cost of revenue was $38.8 million and $83.5 million for the years ended June 30, 2009 and 2008, respectively. This represents a decrease of $44.7 million, or 54%, during a period when sales decreased 58%. These amounts represent 71% and 65% of total revenues for the years ended June 30, 2009 and 2008, respectively.
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Cost of revenue for infrastructure construction and technical services decreased $30.7 million for the year ended June 30, 2009 as compared with the year ended June 30, 2008. This represents a decrease of approximately 47% during a period when sales for this segment decreased 54%.
Cost of revenue for site acquisition and zoning services decreased $14.0 million for the year ended June 30, 2009 from the similar period ended June 30, 2008. This represents a decrease of approximately 74% during a period when sales for this segment decreased 68%.
Gross Profit
Years Ended June 30, | ||||||||||||
2009 | 2008 | (Decrease) | ||||||||||
Infrastructure construction and technical services | $ | 10,937 | $ | 33,920 | $ | (22,983 | ) | |||||
Site acquisition and zoning | 4,768 | 11,000 | (6,232 | ) | ||||||||
$ | 15,705 | $ | 44,920 | $ | (29,215 | ) |
Our gross profit for the years ended June 30, 2009 and 2008 was $15.7 million and $44.9 million, or 29% and 35% of revenues, respectively. This decrease in gross margin was in part caused by an increase in infrastructure construction and technical services revenue from 77% of total revenue to 82%. Margins from infrastructure construction and technical services are typically lower than those associated with site acquisition and zoning.
In light of the current telecommunications market and economic conditions in general, we have decided to bid our services more aggressively than we have in the past. Competition has increased and many of our customers are exploring ways to reduce costs, which could impact pricing for some services. In addition, we have been awarded a significant amount of work from OEMs and other project management companies that do work for the carriers, which is at a lower profit margin than the work we do directly for our carrier customers. This has led to a decrease in our gross profit margins.
Selling, General and Administrative Expenses
Years Ended June 30, | ||||||||||||
2009 | 2008 | (Decrease) | ||||||||||
Infrastructure construction and technical services | $ | 17,409 | $ | 20,885 | $ | (3,476 | ) | |||||
Site acquisition and zoning | 3,064 | 4,818 | (1,754 | ) | ||||||||
$ | 20,473 | $ | 25,703 | $ | (5,230 | ) |
Selling, general and administrative expenses for the year ended June 30, 2009 was $20.5 million as compared to $25.7 million for the year ended June 30, 2008. This represents a decrease of approximately $5.2 million, or 20% during a period when revenues decreased 58%. $2.2 million represents a decrease in payroll expenses. Additionally, as we aggressively managed our cost, we recognized decreased spending of approximately $0.7 million in insurance premiums, $0.6 million in accounting and legal fees, $0.5 million in occupancy expenses. The year ended June 30, 2008 included a charge of $0.2 million to increase our estimated reserve for an assessment by a state department of revenue. Selling, general and administrative expenses did not decrease at the same rate as revenue in part because the Company maintained its nation-wide platform required to support anticipated growth and increased revenue.
Depreciation and Amortization
Depreciation expense for the year ended June 30, 2009 was $0.9 million as compared to $0.8 million for the year ended June 30, 2008. This represents an increase of $0.1 million.
Amortization expense for the year ended June 30, 2009 was $0.4 million as compared to $0.4 million for the year ended June 30, 2008.
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Interest Income and Expense
Interest income for the year ended June 30, 2009 was $59 thousand, a decrease of $12 thousand from $71 thousand for the year ended June 30, 2008. This decrease was caused by the decrease in cash and cash equivalents during the year ended June 30, 2009.
Interest expense for the year ended June 30, 2009 was $0.2 million. This represents a decrease of $1.2 million from $1.4 million for the year ended June 30, 2008. This decrease was primarily caused by the conversion in June 2008 of our 7% Subordinated Convertible Note with Sigma and the other participating noteholders and the reduced usage of our lines of credit with Presidential and PNC.
Amortization of deferred financing fees and accretion of debt discount was $60 thousand for the year ended June 30, 2009 as compared to $2.0 million for the year ended June 30, 2008. This decrease was caused by the issuance of warrants related to our financing transactions with Sigma and the other participating noteholders during the fiscal year ended June 30, 2008.
Other Income
Other income increased to $0.4 million during the year ended June 30, 2009 as compared to $0.2 million for the year ended June 30, 2008. These amounts primarily relate to subrental income recognized on office and warehouse space formerly occupied by the Company and royalty income from mineral rights recognized from land owned by the Company, as well as the settlement of a litigation claim which resulted in an increase of approximately $0.3 million to our income before income taxes for the year ended June 30, 2009.
Income Tax Expense (Benefit)
Income tax benefit was $2.5 million for the year ended June 30, 2009 as compared to a tax expense of $6.4 million for the year ended June 30, 2008. The effective tax rate for the years ended June 30, 2009 and 2008 was 42% and 43%, respectively.
At June 30, 2009, we had total income taxes receivable of approximately $2.7 million, consisting of $2.2 million federal and $0.5 million state income taxes receivable which we expect to receive during the third quarter of fiscal 2010.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2009, we had consolidated current assets of approximately $26.5 million, including cash and cash equivalents of approximately $1.4 million and net working capital of approximately $14.3 million. Historically, we have funded our operations primarily through operating cash flow, the proceeds of private placements of our common and preferred stock and borrowings under loan arrangements. The principal uses of cash during the year ended June 30, 2009 have been working capital, and purchases of property and equipment.
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On April 17, 2008, we entered into a revolving line of credit with PNC Bank, National Association as lead lender, which provides for revolving loan advances from time to time in an amount up to the lesser of: (i) 85% of the value of certain of our receivables approved by the lenders as collateral; or (ii) $15.0 million. Outstanding borrowings are secured by a blanket security interest in favor of the lender that covers all of our receivables, equipment, general intangibles, inventory, investment property, certain real property, certain leasehold interests, all subsidiary stock, records and other property. The loan terms have covenants and conditions which include financial tests for minimum undrawn loan availability, minimum Fixed Charge Coverage Ratios (as that term is defined in the PNC Facility), and minimum EBITDA levels, all generally measured on quarterly basis.
BCI was not in compliance with its Fixed Charge Coverage Ratio for its second fiscal quarter. BCI entered into an Amendment with PNC which waived compliance with the ratio, increased the interest rates and provided that during the term of the PNC Facility as amended, BCI would observe the following financial covenants:
1. | Minimum Undrawn Availability: BCI cannot cause, suffer or permit Undrawn Availability plus cash on deposit at PNC to be less than (1) Two Million Two Hundred Fifty Thousand ($2,250,000) Dollars as of March 31, 2009, or (2) Three Million Five Hundred Thousand ($3,500,000) Dollars as of June 30, 2009; |
2. | Fixed Charge Coverage Ratio: BCI must cause to be maintained at all times a Fixed Charge Coverage Ratio of not less than (1) 1.00 to 1.00 from July 1, 2009 through September 30, 2009, (2) 1.10 to 1.00 from October 1, 2009 through June 30, 2010, tested quarterly on a building four (4) quarter basis, and (3) 1.10 to 1.00 thereafter, tested quarterly on a rolling four (4) quarter basis; |
3. | Minimum EBITDA: BCI cannot cause, suffer or permit EBITDA to be less than (1) Two Million Six Hundred Twenty-Two Thousand ($2,622,000) Dollars for the trailing twelve months ending March 31, 2009, or (2) One Million Five Hundred Thousand ($1,500,000) Dollars for the fiscal quarter ending June 30, 2009. |
As a result of our operating results, we breached the minimum EBITDA covenants noted above. To correct this issue, on September 25, 2009 the Company and PNC entered into a Second Amendment to Revolving Credit and Security Agreement (the “Second Amendment”) to amend the PNC Facility. Pursuant to the terms of the Second Amendment, PNC waived compliance by BCI with the minimum EBITDA covenants, and therefore BCI is in complete compliance with all terms and conditions of the PNC Facility as of the date of this Annual Report. Going forward, there is no longer a minimum undrawn availability covenant or a minimum EBITDA covenant, but BCI must maintain compliance with the Fixed Charge Coverage Ratio noted above.
The balance outstanding at June 30, 2009 was $3.0 million and the amount additionally available on the line of credit was $7.7 million.
Our ability to satisfy our current obligations is dependent upon our cash on hand, borrowings under our credit facility with PNC, and the operations of BCI. Our current obligations consist of capital expenditures, debt service and funding working capital. In the event we are not able to generate positive cash flow in the future, or if we incur unanticipated expenses for operations and are unable to acquire additional capital or financing, we will likely have to reassess our strategic direction, make significant changes to our business operations and substantially reduce our expenses until such time as we achieve positive cash flow. The cancellation and/or deferral of a number of projects from our largest customer may have a material impact on our ability to generate sufficient cash flow in future periods. We anticipate that certain cost savings strategies will be necessary unless and until our largest customer elects to proceed with these cancelled or deferred projects or we have obtained orders from other customers sufficient to replace these projects.
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The net cash flows for the years ended June 30, 2009 and 2008 are as follows:
For the Years Ended | ||||||||
June 30, | ||||||||
2009 | 2008 | |||||||
Net cash (used in) provided by operating activities | $ | (2,527 | ) | $ | 7,944 | |||
Net cash used in investing activities | (599 | ) | (947 | ) | ||||
Net cash (used in) provided by financing activities | 1,343 | (6,307 | ) |
Cash Provided by / Used in Operating Activities
Net cash used in operating activities for the year ended June 30, 2009 totaled approximately $2.5 million. Net cash provided by operating activities for the year ended June 30, 2008 was approximately $7.9 million.
During the year ended June 30, 2009, cash used in operating activities primarily resulted from an operating loss of $1.0 million, net of non-cash charges. Cash provided by operating activities primarily resulted from a decrease in accounts receivable of $10.9 million and a decrease in other assets of $0.5 million which were partly offset by decreases in accrued liabilities of $8.4 million and accrued income taxes of $1.8 million.
During the year ended June 30, 2008, cash provided by operating activities primarily resulted from operating income of $12.6 million, net of non-cash charges. Cash used in operating activities primarily resulted from an increase in accounts receivable of $8.3 million due to increased revenue during the period and decreases in accounts payable of $2.6 million. These amounts were partly offset by increases in accrued liabilities of $4.8 million and accrued income taxes of $1.5 million.
Cash Used in Investing Activities
Cash used in investing activities for the years ended June 30, 2009 and 2008 totaled approximately $0.6 million and $0.9 million, respectively.
During the year ended June 30, 2009, cash used in investing activities primarily resulted from purchases of property and equipment of $0.4 million.
During the year ended June 30, 2008, cash used in investing activities primarily resulted from purchases of property and equipment of $1.0 million.
Cash Provided by / Used In Financing Activities
Cash provided by financing activities for the year ended June 30, 2009 totaled approximately $1.3 million as compared to cash used in financing activities for the year ended June 30, 2008 of approximately $6.3 million.
During the year ended June 30, 2009, cash provided by financing activities resulted primarily from net borrowings under our credit line of $2.8 million which was partly offset by the repayment of other debt of $1.3 million.
During the year ended June 30, 2008, cash used in financing activities primarily resulted from a net pay down under our credit line of $5.3 million and repayment of other debt of $1.0 million.
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We believe our existing cash, cash equivalents and line of credit will be sufficient to meet our cash requirements in the near term. Our future capital requirements will depend on many factors, including our rate of revenue growth, the timing and extent of capital expenditures to support our contracts and expansion of sales and marketing. We cannot assure that additional equity or debt financing will be available on acceptable terms, or at all. We expect our sources of liquidity beyond twelve months will be our then current cash balances, funds from operations, if any, our current PNC credit facility and any additional equity or credit facilities we can arrange.
Forward-Looking Statements
“Forward-looking” statements appear throughout this Report. We have based these forward-looking statements on our current expectations and projections about future events. It is important to note that the occurrence of the events described in these statements and elsewhere in this Report, including, without limitation, those risks identified in Item 1A – Risk Factors set forth elsewhere in this Report, could have an adverse effect on the business, results of operations or financial condition of the Company.
Forward-looking statements in this Annual Report include, without limitation, the following statements concerning:
· | our financial condition and strategic direction; |
· | our future capital requirements and our ability to satisfy our capital needs; |
· | the potential generation of future revenues and/or earnings; |
· | our ability to adequately staff our service offerings; |
· | opportunities for us from new and emerging wireless technologies; |
· | our ability to obtain additional financing; |
· | our growth strategy; |
· | trends in the wireless telecommunications industry; |
· | key drivers of change in our business; |
· | our competitive position; and |
· | other statements that contain words like “believe”, “anticipate”, “expect” and similar expressions that are also used to identify forward-looking statements. |
It is important to note that all of our forward-looking statements are subject to a number of risks, assumptions and uncertainties, such as:
· | risks related to a concentration in revenues from a small number of customers; |
· | risks associated with competition in the wireless telecommunications industry; |
· | risks that we will not be able to generate positive cash flow; |
· | risks that we may not be able to obtain additional financing; |
· | risks that we will not be able to take advantage of new and emerging wireless technologies; and |
· | risks that we will be unable to adequately staff our service offerings. |
This list is only an example of the risks that may affect the forward-looking statements. If any of these risks or uncertainties materialize or fail to materialize, or if the underlying assumptions are incorrect, then actual results may differ materially from those projected in the forward-looking statements.
Additional factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, without limitation, those discussed elsewhere in this Report. It is important not to place undue reliance on these forward-looking statements, which reflect our analysis, judgment, belief or expectation only as of the date of this Report. We undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date of this Report.
Critical Accounting Policies
Revenue Recognition
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Site acquisition and zoning services revenue is based upon output measures using contract milestones as the basis. Revenue from infrastructure equipment construction and installation contracts, which are generally completed within 90 days, is recorded under the percentage-of-completion method based on the percentage that total direct costs incurred to date bear to estimated total costs at completion. Losses are recognized when such losses become known. All other revenue is recognized as work is performed.
Unbilled receivables represent revenue on uncompleted contracts that are not yet billed or billable, pursuant to contract terms. Deferred revenues principally represent the value of services to customers that have been billed as of the balance sheet date but for which the requisite services have not yet been rendered.
Risks and Uncertainties
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of accounts receivable. We routinely assess the financial strength of our customers and do not require collateral or other security to support customer receivables. Credit losses are provided for in our consolidated financial statements in the form of an allowance for doubtful accounts. Our allowance for doubtful accounts is based upon the expected collectability of all our accounts receivable. We determine our allowance by considering a number of factors, including the length of time it is past due, our previous loss history and the customer’s current ability to pay its obligations. Accounts receivable are written off when they are considered to be uncollectible and any payments subsequently received on such receivables are credited to the allowance for doubtful accounts.
Effects of Inflation
We do not believe that the businesses of our subsidiaries are impacted by inflation to a significantly different extent than the general economy. However, there can be no assurance that inflation will not have a material effect on operations in the future.
Recently Issued Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS 157 which is intended to increase consistency and comparability in fair value measurements by defining fair value, establishing a framework for measuring fair value and expanding disclosures about fair value measurements. The provisions of SFAS No. 157, which are effective for financial statements issued for the fiscal years beginning after November 15, 2008, and interim periods within those fiscal years except as it relates to financial assets and liabilities, which we adopted effective July 1, 2008. The Company will adopt the remaining provisions of SFAS 157 beginning July 1, 2009. The Company has determined that the impact of SFAS 157 will not have a material effect to the financial statements taken as a whole.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities ("SFAS 159"). This statement permits companies to choose to measure many financial assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. We adopted SFAS 159 on July 1, 2008. The adoption was not material to the financial statements taken as a whole.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS 160”). This statement amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest (minority interest) in a subsidiary and for the deconsolidation of a subsidiary. Upon its adoption, noncontrolling interests will be classified as equity in our consolidated balance sheets. Income and comprehensive income attributed to noncontrolling interests will be included in our consolidated statements of operations and our consolidated statements of equity. SFAS 160 is effective for fiscal years beginning after December 15, 2008, therefore the Company will adopt SFAS 160 starting July 1, 2009. This statement shall be applied prospectively as of the beginning of the fiscal year in which this Statement is initially applied, except for the presentation and disclosure requirements which must be applied retrospectively for all periods presented.
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In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (Revised), Business Combinations (“SFAS 141R”). This statement provides companies with principles and requirements on how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree as well as the recognition and measurement of goodwill acquired in a business combination. The statement also requires certain disclosures to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Acquisition costs associated with the business combination will generally be expensed as incurred. SFAS 141R is effective for business combinations occurring in fiscal years beginning after December 15, 2008. Early adoption of this statement is not permitted. We will adopt SFAS 141R effective July 1, 2009.
In February 2008, the FASB issued FASB Staff Position FAS No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”). This pronouncement amends FASB Statement No. 142, Goodwill and Other Intangible Assets, regarding the factors that should be considered in developing the useful lives for intangible assets with renewal or extension provisions. FSP FAS 142-3 requires an entity to consider its own historical experience in renewing or extending similar arrangements, regardless of whether those arrangements have explicit renewal or extension provisions, when determining the useful life of an intangible asset. In the absence of such experience, an entity shall consider the assumptions that market participants would use about renewal or extension, adjusted for entity-specific factors. FSP FAS 142-3 also requires an entity to disclose information regarding the extent to which the expected future cash flows associated with an intangible asset are affected by the entity’s intent and/or ability to renew or extend the arrangement. FSP FAS 142-3 will be effective for qualifying intangible assets acquired by the Company on or after July 1, 2009. The application of FSP FAS 142-3 is not expected to have a material impact on the Company’s results of operations, cash flows or financial positions; however, it could impact future transactions entered into by the Company.
In May 2008, the FASB issued FASB Staff Position APB No. 14-1, Accounting for Convertible Debt Instruments that May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”), which applies to convertible debt that includes a cash conversion feature. Under FSP APB 14-1, the liability and equity components of convertible debt instruments within the scope of this pronouncement shall be separately accounted for in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008. The Company will adopt FSP APB 14-1 effective July 1, 2009. This adoption is not expected to have a material impact on the Company’s consolidated financial position and results of operations.
In June 2008, the FASB ratified EITF Issue No. 07-5, Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity’s Own Stock (“EITF 07-5”). EITF 07-5 provides that an entity should use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. It also clarifies on the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. EITF 07-5 is effective for fiscal years beginning after December 15, 2008. The Company will adopt EITF 07-5 effective July 1, 2009. The Company is currently evaluating the impact of the adoption of this pronouncement.
In November 2008, the FASB ratified EITF Issue No. 08-6 “Equity Method Investment Accounting Considerations” (“EITF 08-6”). EITF 08-6 clarifies the accounting for certain transactions and impairment considerations involving equity method investments. EITF 08-6 is effective for fiscal years ended on or after December 15, 2008. The Company adopted EITF 08-6 for its fiscal year ended June 30, 2009. This adoption did not have a material impact on the Company’s consolidated financial position and results of operations.
30
In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, “Subsequent Events” (“SFAS 165”), to be effective for the interim or annual periods ending after June 15, 2009. The objective of this Statement is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this Statement sets forth a) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; b) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and c) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The effect of the adoption of SFAS 165 was not material on the Company’s consolidated financial position and results of operations. The Company evaluated subsequent events through September 28, 2009, which is the date the financial statements were issued.
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162” (“SFAS 168”). The objective of SFAS 168 is to replace Statement 162 and to establish the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. This statement shall be effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company will adopt SFAS 168 effective July 1, 2009.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Please refer to pages F-1 through F-27.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A(T). CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that the information we are required to disclose in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information is accumulated and communicated to management, including our chief executive officer and our chief financial officer, to allow timely decisions regarding required disclosure.
In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. Our chief executive officer and our chief financial officer evaluated the effectiveness of the design and operation of the Company’s disclosure controls as of the end of the period covered by this Annual Report on Form 10-K for the year ended June 30, 2009. As a result of that evaluation they have concluded that our system of disclosure controls and procedures was effective at a reasonable level of assurance, and that all of the information required to be disclosed in this Annual Report on Form 10-K has been recorded, processed, summarized and reported in a timely manner.
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Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rule 13a-15(f). Our system of internal control over financial reporting is designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements and the reliability of financial reporting. Because of their inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Our management assessed the effectiveness of our internal control over financial reporting as of June 30, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework. Based on that assessment, we believe that as of June 30, 2009, our internal control over financial reporting is effective.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary SEC rules that permit us to provide only management’s report in this annual report on Form 10-K.
Beginning with our Annual Report on Form 10-K for the year ending June 30, 2010, management’s report on internal control over financial reporting must contain a statement that our independent registered public accountants have issued an attestation report on management’s assessment of such internal controls and conclusion on the operating effectiveness of those controls, unless the SEC extends the compliance date for such auditor attestation.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during our last fiscal quarter that materially affected, or is likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF THE REGISTRANT
Information called for by Item 10 will be set forth under the caption “Election of Directors” in our 2009 Proxy Statement, which will be filed not later than 120 days after the end of our fiscal year ended June 30, 2009, and which is incorporated herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION
Information called for by Item 11 will be set forth under the caption “Executive Compensation and Other Matters” in our 2009 Proxy Statement, which will be filed not later than 120 days after the end of our fiscal year ended June 30, 2009, and which is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information called for by Item 12 will be set forth under the caption “Security Ownership of Directors, Management and Principal Stockholders” in our 2009 Proxy Statement, which will be filed not later than 120 days after the end of our fiscal year ended June 30, 2009, and which is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Information called for by Item 13 will be set forth under the caption “Certain Relationships and Related Transactions” in our 2009 Proxy Statement, which will be filed not later than 120 days after the end of our fiscal year ended June 30, 2009, and which is incorporated herein by this reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information called for by Item 14 will be set forth under the caption “Principal Accountant Fees and Services” in our 2009 Proxy Statement, which will be filed not later than 120 days after the end of our fiscal year ended June 30, 2009, and which is incorporated herein by this reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
Financial Statements:
Our Consolidated Balance Sheets as of June 30, 2009 and 2008
Our Consolidated Statements of Operations for the years ended June 30, 2009 and 2008
Our Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2009 and 2008
Our Consolidated Statements of Cash Flows for the years ended June 30, 2009 and 2008
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SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) 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.
Berliner Communications, Inc. | |
By: | /s/ Rich B. Berliner |
Name: | Rich B. Berliner |
Title: | Chief Executive Officer |
Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on September 28, 2008.
SIGNATURE | TITLE | |
/s/ Rich B. Berliner | Chief Executive Officer | |
Rich B. Berliner | (Principal Executive Officer) | |
/s/ Raymond A. Cardonne, Jr. | Chief Financial Officer and Treasurer | |
Raymond A. Cardonne, Jr. | (Principal Financial Officer) | |
/s/ Mark S. Dailey | Director | |
Mark S. Dailey | ||
/s/ Peter J. Mixter | Director | |
Peter J. Mixter | ||
/s/ Mehran Nazari | Director | |
Mehran Nazari | ||
/s/ John Stevens Robling, Jr. | Director | |
John Stevens Robling, Jr. | ||
/s/ Thom Waye | Director | |
Thom Waye |
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INDEX TO EXHIBITS
Exhibit Number | Description | Filed Herewith | ||
10.1 | Amendment and Waiver Agreement, dated September 27, 2007, among Berliner Communications, Inc., Sigma Opportunity Fund, LLC, Pacific Asset Partners, LP, Operis Partners I LLC, and Sigma Berliner, LLC | Incorporated herein by reference from Company’s Form 10-K filed on October 2, 2007 | ||
10.2 | Employment Agreement, dated as of November 15, 2007, by and between Berliner Communications, Inc. and Raymond A. Cardonne, Jr. | Incorporated herein by reference from Company’s Form 8-K filed on November 15, 2007 | ||
10.3 | Employment Agreement, dated as of June 30, 2009, by and between Berliner Communications, Inc. and Richard B. Berliner | Incorporated herein by reference from Company’s Form 8-K filed on July 2, 2009 | ||
10.4 | Employment Agreement, dated as of June 30, 2009, by and between Berliner Communications, Inc. and Nicholas Day | Incorporated herein by reference from Company’s Form 8-K filed on July 2, 2009 | ||
10.5 | Employment Agreement, dated as of June 30, 2009, by and between Berliner Communications, Inc. and Michael S. Guerriero | Incorporated herein by reference from Company’s Form 8-K filed on July 2, 2009 | ||
10.6 | Employment Agreement, dated as of June 30, 2009, by and between Berliner Communications, Inc. and Robert Bradley | Incorporated herein by reference from Company’s Form 8-K filed on July 2, 2009 | ||
10.7 | Asset Purchase Agreement, dated as of April 16, 2007, by and among Radian Communication Services, Inc. and BCI Communications, Inc. | Incorporated herein by reference from Company’s Form 8-K filed on April 20, 2007 | ||
10.8 | Revolving Credit and Security Agreement, dated April 17, 2008, between BCI Communications, Inc. as borrower and PNC Bank National Association as lender and agent | Incorporated herein by reference from Company’s Form 8-K filed on April 23, 2008 | ||
10.9 | First Amendment to Revolving Credit and Security Agreement, dated March 31, 2009, by and between BCI Communications, Inc. and PNC Bank, National Association | Incorporated herein by reference from Company’s Form 8-K filed on April 3, 2009 | ||
10.10 | Second Amendment to Revolving Credit and Security Agreement, dated September 25, 2009, by and between BCI Communications, Inc. and PNC Bank, National Association | X | ||
10.11 | $15,000,000 Revolving Credit Note, dated April 17, 2008, between BCI Communications, Inc. as borrower and PNC Bank, National Association as lender and agent | Incorporated herein by reference from Company’s Form 8-K filed on April 23, 2008 | ||
10.12 | Guaranty & Suretyship Agreement, dated April 17, 2008, made by Berliner Communications, Inc. as guarantor on behalf of BCI Communications, Inc. and in favor of PNC Bank, National Association | Incorporated herein by reference from Company’s Form 8-K filed on April 23, 2008 | ||
10.13 | Guarantor’s Ratification of that certain Guaranty & Suretyship Agreement dated April 17, 2008, made by Berliner Communications, Inc. as guarantor on behalf of BCI Communications, Inc. and in favor of PNC Bank, National Association | X |
35
10.14 | Subordination & Inter-creditor Agreement, dated April 17, 2008, by and among PNC Bank, National Association as agent for the lenders and Sigma Opportunity Fund, LLC, Sigma Berliner, LLC, Operis Partners I LLC, and Pacific Asset Partners as the subordinated investors | Incorporated herein by reference from Company’s Form 8-K filed on April 23, 2008 | ||
10.15 | Amendment to Note Purchase Agreement and Notes and Security Agreement Thereunder, dated April 17, 2008, by and among Berliner Communications, Inc., Sigma Opportunity Fund, LLC, Sigma Berliner, LLC, Operis Partners I LLC, and Pacific Asset Partners | Incorporated herein by reference from Company’s Form 8-K filed on April 23, 2008 | ||
10.16 | Agreement and Plan of Reorganization, dated September 15, 2008, between Berliner Communications, Inc, and Old Berliner, Inc. | Incorporated herein by reference from Company’s Form 8-K filed on September 15, 2008 | ||
21.1 | Subsidiaries of Berliner Communications, Inc. | X | ||
23.1 | Consent of BDO Seidman, LLP | X | ||
31.1 | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | X | ||
31.2 | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | X | ||
32.1 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | X |
36
BERLINER COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm | F-2 |
Consolidated Balance Sheets as of June 30, 2009 and 2008 | F-3 |
Consolidated Statements of Operations for the years ended June 30, 2009 and 2008 | F-4 |
Consolidated Statements of Stockholders' Equity for the years ended June 30, 2009 and 2008 | F-5 |
Consolidated Statements of Cash Flows for the years ended June 30, 2009 and 2008 | F-6 |
Notes to Consolidated Financial Statements | F-8 |
F-1
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Berliner Communications, Inc.
Elmwood Park, New Jersey
We have audited the accompanying consolidated balance sheets of Berliner Communications, Inc. and Subsidiaries as of June 30, 2009 and 2008 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years ended June 30, 2009 and 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Berliner Communications, Inc. and Subsidiaries at June 30, 2009 and 2008, and the results of their operations and cash flows for the years ended June 30, 2009 and 2008 in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO Seidman, LLP |
Woodbridge, New Jersey
September 28, 2009
F-2
BERLINER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
June 30, | ||||||||
2009 | 2008 | |||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 1,390 | $ | 3,173 | ||||
Accounts receivable, net of allowance for doubtful accounts | ||||||||
of $200 and $830 at June 30, 2009 and 2008, respectively | 20,116 | 31,189 | ||||||
Income tax receivable | 2,659 | - | ||||||
Inventories | 1,005 | 1,012 | ||||||
Deferred tax assets - current | 429 | 536 | ||||||
Prepaid expenses and other current assets | 891 | 762 | ||||||
26,490 | 36,672 | |||||||
Property and equipment, net | 2,239 | 2,924 | ||||||
Amortizable intangible assets, net | 479 | 816 | ||||||
Goodwill | 2,284 | 2,084 | ||||||
Deferred tax assets - long-term | 2,789 | 505 | ||||||
Other assets | 276 | 268 | ||||||
Total Assets | $ | 34,557 | $ | 43,269 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable | $ | 4,644 | $ | 4,820 | ||||
Accrued liabilities | 3,685 | 11,919 | ||||||
Accrued income taxes | - | 1,849 | ||||||
Line of credit | 2,967 | 217 | ||||||
Current portion of long-term debt | 777 | 1,133 | ||||||
Current portion of capital lease obligations | 118 | 118 | ||||||
12,191 | 20,056 | |||||||
Long-term debt, net of current portion | 18 | 467 | ||||||
Long-term capital lease obligations, net of current portion | 194 | 305 | ||||||
Other long-term liabilities | 105 | 104 | ||||||
Total liabilities | 12,508 | 20,932 | ||||||
COMMITMENTS | ||||||||
STOCKHOLDERS' EQUITY | ||||||||
Common stock | 1 | 1 | ||||||
Additional paid-in capital | 25,766 | 22,630 | ||||||
Accumulated deficit | (3,718 | ) | (294 | ) | ||||
Total stockholders' equity | 22,049 | 22,337 | ||||||
Total liabilities and stockholders' equity | $ | 34,557 | $ | 43,269 |
The accompanying notes are an integral part of these financial statements.
F-3
BERLINER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
Year Ended June 30, | ||||||||
2009 | 2008 | |||||||
Revenue | $ | 54,491 | $ | 128,372 | ||||
Costs of revenue | 38,786 | 83,452 | ||||||
Gross profit | 15,705 | 44,920 | ||||||
Selling, general and administrative expenses | 20,473 | 25,703 | ||||||
Depreciation and amortization | 1,285 | 1,190 | ||||||
Gain on sale of fixed assets | (8 | ) | (11 | ) | ||||
Income (loss) from operations | (6,045 | ) | 18,038 | |||||
Other (income) expense | ||||||||
Interest expense | 208 | 1,359 | ||||||
Amortization of deferred financing fees and | ||||||||
accretion of debt discount | 60 | 2,031 | ||||||
Interest income | (59 | ) | (71 | ) | ||||
Other income | (373 | ) | (162 | ) | ||||
Income (loss) before income taxes | (5,881 | ) | 14,881 | |||||
Income tax (benefit) expense | (2,457 | ) | 6,427 | |||||
Net income (loss) allocable to common shareholders | $ | (3,424 | ) | $ | 8,454 | |||
Net income (loss) per share: | ||||||||
Basic | $ | (0.13 | ) | $ | 0.47 | |||
Diluted | $ | (0.13 | ) | $ | 0.31 | |||
Weighted average number of shares outstanding: | ||||||||
Basic | 26,439 | 17,918 | ||||||
Diluted | 26,439 | 27,166 |
The accompanying notes are an integral part of these financial statements.
F-4
BERLINER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands except share and per share data)
Common Stock | ||||||||||||||||||||
100,000,000 shares authorized | Additional | Total | ||||||||||||||||||
$0.00002 par value | Paid-in | Accumulated | Stockholders' | |||||||||||||||||
Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
Balance at June 30, 2007 | 17,080,906 | $ | - | $ | 15,655 | (8,748 | ) | $ | 6,907 | |||||||||||
Stock-based compensation expense | 181 | - | 181 | |||||||||||||||||
Exercise of warrants | 2,982,951 | - | 5 | - | 5 | |||||||||||||||
Exercise of stock options | 126,875 | - | 69 | - | 69 | |||||||||||||||
Change in conversion price on convertible | ||||||||||||||||||||
notes payable | - | 720 | - | 720 | ||||||||||||||||
Conversion of convertible debt | 6,000,000 | 1 | 6,000 | - | 6,001 | |||||||||||||||
Net income | - | - | 8,454 | 8,454 | ||||||||||||||||
Balance at June 30, 2008 | 26,190,732 | 1 | 22,630 | (294 | ) | 22,337 | ||||||||||||||
Stock-based compensation | - | 580 | - | 580 | ||||||||||||||||
Tax benefit on exercise of stock options | - | 18 | - | 18 | ||||||||||||||||
Exercise of Warrants | 200,000 | - | 146 | - | 146 | |||||||||||||||
Issuance of Director Shares | 125,000 | - | 137 | - | 137 | |||||||||||||||
Reorganization expenses | - | (106 | ) | - | (106 | ) | ||||||||||||||
Effect of Reorganization | - | 2,361 | - | 2,361 | ||||||||||||||||
Net loss | - | - | (3,424 | ) | (3,424 | ) | ||||||||||||||
Balance at June 30, 2009 | 26,515,732 | $ | 1 | $ | 25,766 | $ | (3,718 | ) | $ | 22,049 |
The accompanying notes are an integral part of these financial statements.
F-5
BERLINER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year Ended June 30, | ||||||||
2009 | 2008 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | (3,424 | ) | $ | 8,454 | |||
Adjustments to reconcile net income (loss) to net | ||||||||
cash (used in) provided by operating activities: | ||||||||
Depreciation and amortization | 1,285 | 1,190 | ||||||
Amortization of deferred financing fees | 60 | 591 | ||||||
Bad debt expense | 342 | 569 | ||||||
Stock-based compensation | 734 | 181 | ||||||
Gain on sale of fixed assets | (8 | ) | (14 | ) | ||||
Accretion of debt discount associated with warrants | - | 1,372 | ||||||
Financing fees | - | 26 | ||||||
Deferred tax assets, net | 184 | 204 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 10,925 | (8,262 | ) | |||||
Income tax receivable | (2,659 | ) | - | |||||
Inventories | 7 | (308 | ) | |||||
Prepaid expenses and other current assets | 460 | 41 | ||||||
Other assets | (9 | ) | 119 | |||||
Accounts payable | (174 | ) | (2,578 | ) | ||||
Accrued liabilities | (8,401 | ) | 4,837 | |||||
Accrued income taxes | (1,849 | ) | 1,522 | |||||
Net cash (used in) provided by operating activities | (2,527 | ) | 7,944 | |||||
Cash flows from investing activities: | ||||||||
Purchases of property and equipment | (413 | ) | (956 | ) | ||||
Proceeds from the sale of property and equipment | 14 | 48 | ||||||
Cash paid for acquisitions and transaction costs | (200 | ) | (39 | ) | ||||
Net cash used in investing activities | (599 | ) | (947 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from line of credit | 70,904 | 120,453 | ||||||
Repayment of line of credit | (68,154 | ) | (125,773 | ) | ||||
Repayment of long-term debt | (1,276 | ) | (972 | ) | ||||
Repayment of capital leases | (171 | ) | (90 | ) | ||||
Proceeds from exercise of stock options and warrants | 146 | 75 | ||||||
Reorganization expenses | (106 | ) | - | |||||
Net cash (used in) provided by financing activities | 1,343 | (6,307 | ) | |||||
Net increase (decrease) in cash and cash equivalents | (1,783 | ) | 690 | |||||
Cash and cash equivalents at beginning of period | 3,173 | 2,483 | ||||||
Cash and cash equivalents at end of period | $ | 1,390 | $ | 3,173 |
The accompanying notes are an integral part of these financial statements.
F-6
BERLINER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year Ended June 30, | ||||||||
2009 | 2008 | |||||||
Supplemental cash flow information: | ||||||||
Interest paid | $ | 134 | $ | 1,310 | ||||
Income taxes paid | $ | 1,972 | $ | 5,492 | ||||
Non-cash investing and financing activities: | ||||||||
Assets purchased under capital leases | $ | 13 | $ | 262 | ||||
Federal net operating loss carryforwards acquired | ||||||||
in Old Berliner Reorganization | $ | 2,361 | $ | - | ||||
Purchase of vehicles financed with notes payable | $ | - | $ | 14 | ||||
Conversion of 7% Convertible Notes Payable | $ | - | $ | 6,000 |
The accompanying notes are an integral part of these financial statements.
F-7
BERLINER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2009
($ amount in thousands except per share and share amounts)
1. | Business |
Berliner Communications, Inc. was originally incorporated in Delaware in 1987 as Adina, Inc. (“Adina”). Adina’s corporate existence was permitted to lapse in February of 1996 and in August of 1999 was reinstated as eVentures Group, Inc. (“eVentures”). In December of 2000, eVentures changed its name to Novo Networks, Inc. (“Novo”).
On February 18, 2005, Novo entered into an asset purchase agreement with the former Berliner Communications, Inc., currently named Old Berliner, Inc. (“Old Berliner”) and BCI Communications, Inc. (“BCI”), a Delaware corporation and Novo’s wholly-owned subsidiary. As part of this transaction, BCI acquired (the “Acquisition”) the operations and substantially all of the assets and liabilities of Old Berliner. On September 16, 2005, Novo changed its name to Berliner Communications, Inc. (“Berliner”). Berliner is now the public reporting entity, and all of our operations are run out of Berliner’s wholly-owned subsidiary, BCI. Unless the context otherwise requires, references to “we”, “us”, “our” and “the Company” refer to Berliner and its consolidated subsidiary BCI.
Prior to the Acquisition, Old Berliner provided wireless carriers with comprehensive site acquisition, construction and zoning services. Old Berliner was founded in 1995, and over the course of the following years, its service offerings were expanded to include radio frequency and network design and engineering, infrastructure equipment construction and installation, radio transmission base station modification and project management services. With the consummation of the Acquisition, BCI carried on the operations of Old Berliner.
During fiscal 2007, we entered into several asset purchase agreements which expanded our presence primarily in the West and Southwest portions of the United States.
On November 1, 2008, we entered into an Agreement with T3 Communications, Inc. to purchase certain of its assets and operations. This acquisition provided our Specialty Communications services with additional resources and a regional presence in the Southeast.
The results of these acquired businesses have been incorporated into our consolidated financial statements since the dates of acquisition.
The Company operates in two business segments: (1) infrastructure construction and technical services; and (2) site acquisition and zoning.
2. | Summary of Significant Accounting Policies |
Basis of Presentation, Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Major assets and liabilities that are subject to estimates include allowance for doubtful accounts, goodwill and other acquired intangible assets, deferred tax assets and certain accrued and contingent liabilities. One of the more significant processes requiring estimates is percentage-of-completion.
We recognize revenue and profit on our contracts as the work progresses using the percentage-of-completion method of accounting. Under this method, contracts in progress are valued at cost plus accrued profits less earned revenue and progress payments on uncompleted projects. This method relies on estimates of total expected contract revenue and costs.
F-8
BERLINER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2009
($ amount in thousands except per share and share amounts)
Principles of Consolidation
The consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
We consider all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents are stated at cost, which approximates fair value. The Company’s cash and cash equivalents are invested in investment-grade, short-term investment instruments with high quality financial institutions.
Accounts Receivable, Allowance for Doubtful Accounts
Accounts receivable are customer obligations for services sold to such customers under normal trade terms. The Company’s customers are primarily communications carriers, corporate and government customers, located primarily in the U.S. The Company performs periodic credit evaluations of its customers’ financial condition. The Company provides allowances for doubtful accounts. Provisions for doubtful accounts are recorded in selling, general and administrative expenses. The adequacy of the reserve is evaluated using several factors including length of time a receivable is past due, changes in the customer’s credit worthiness, customer’s payment history, the length of the customer’s relationship with the Company, current industry trends and the current economic climate.
Inventories
Inventories, which consist mainly of parts and raw materials, are stated at the lower of cost or market. Cost is determined using the average cost method.
Prepaid Expenses and Other Assets
Prepaid expenses are recorded as assets and expensed in the period in which the related services are received. At June 30, 2009 and 2008, current prepaid expenses and other current assets totaled approximately $0.7 million and $0.8 million, respectively, and consisted mainly of insurance and deferred financing fees. Other non-current assets of approximately $0.3 million at June 30, 2009 and 2008 are mainly deposits for our office and warehouse locations.
Property and Equipment
Property and equipment consist of automobiles and trucks, equipment, computer equipment and software, furniture and fixtures, buildings, land and leasehold improvements. Each class of asset is recorded at cost and depreciated using the straight-line method over the estimated useful lives which range from a period of three to five years. Leasehold improvements are amortized over the term of the lease or the estimated useful life, whichever is shorter. Buildings are amortized over 27.5 years. Maintenance and repairs are charged to expense as incurred. Significant renewals and betterments are capitalized. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in our Statements of Operations.
Goodwill and Other Intangible Assets
In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), goodwill and indefinite lived intangible assets are no longer amortized but are assessed for impairment on at least an annual basis. SFAS 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment.
F-9
BERLINER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2009
($ amount in thousands except per share and share amounts)
SFAS 142 requires that goodwill be tested at least annually, utilizing a two-step methodology. The initial step requires the Company to determine the fair value of the business acquired (reporting unit) and compare it to the carrying value, including goodwill, of such business. If the fair value exceeds its carrying value, no impairment loss is recognized. However, if the carrying value of the reporting unit exceeds its fair value, the goodwill of the unit may be impaired. The amount, if any, of the impairment is then measured in the second step, based on the excess, if any, of the reporting unit’s carrying value of goodwill over its implied value.
The Company determines the fair value of the business acquired (reporting units) for purposes of this test primarily using indications of value determined by the use of Guideline Public Company and Precedent Transactions Analyses. The fair value of the Company’s reporting units derived using the aforementioned analyses exceeded the carrying values of the reporting units at January 31, 2009. Accordingly, step two was unnecessary and no impairment charge was recognized in the consolidated statements of income for the year ended June 30, 2009. On an ongoing basis, the Company expects to perform its annual impairment test at January 31 absent any interim impairment indicators.
Goodwill through the years ended June 30, 2009 and 2008 consisted of the following:
Beginning balance, July 1, 2007 | $ | 2,270 | ||
Digitcom acquisition - purchase price adjustment | (225 | ) | ||
Comtech acquisition - additional payment | 39 | |||
Ending balance June 30, 2008 | 2,084 | |||
T3 acquisition | 200 | |||
Ending balance June 30, 2009 | $ | 2,284 |
Revenue Recognition
Site acquisition and zoning services revenue is based upon output measures using contract milestones as the basis. Revenue from infrastructure equipment construction and installation contracts, which are generally completed within 90 days, is recorded under the percentage-of-completion method based on the percentage that total direct costs incurred to date bear to estimated total costs at completion. Losses are recognized when such losses become known. All other revenue is recognized as work is performed.
Unbilled receivables represent revenue on uncompleted infrastructure equipment construction and installation contracts that are not yet billed or billable, pursuant to contract terms. Deferred revenues principally represent the value of services to customers that have been billed as of the balance sheet date but for which the requisite services have not yet been rendered.
Income Taxes
We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities in the financial statements and their respective tax bases. Deferred tax assets and liabilities are measured using applicable tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on the deferred tax assets and liabilities of a change in tax rates is recognized in the Statement of Operations in the period that includes the enactment date. A valuation allowance is provided for significant deferred tax assets when it is more likely than not that such assets will not be recovered.
F-10
BERLINER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2009
($ amount in thousands except per share and share amounts)
Stock-based Compensation
We elected to adopt Statement of Financial Accounting Standard No. 123 (revised 2004), Share Based Payment (“SFAS 123R”) using a modified prospective application, whereby the provisions of the statement are applied going forward only from the date of adoption to new (issued subsequent to July 1, 2005) stock option awards, and for the portion of any previously issued and outstanding stock option awards for which the requisite service is rendered after the date of adoption. All of our previously issued options had fully vested prior to July 1, 2005.
Compensation expense must be recognized for any awards modified, repurchased, or cancelled after the date of adoption. Under the modified prospective application, no restatement of previously issued results is required.
The fair value of each option award is estimated on the date of the grant using the Black-Scholes Merton option pricing model. Expected volatilities are based on the historical volatility of WPCS International, which is another company in our industry sector with similar revenue streams. We use historical data to estimate an option’s expected life. The risk free interest rate input is based on the market yield on United States Treasury securities at 5-year constant maturity in effect at the time of the grant. Compensation costs, net of forfeitures, are recognized on a straight-line basis over the period between the grant and vesting dates. The expected term represents the period that the Company’s stock-based awards are expected to be outstanding using the simplified method since the Company does not have sufficient historical exercise activity pursuant to Staff Accounting Bulletin (“SAB”) 107 and SAB 110.
The following weighted average assumptions used for purposes of determining the fair value were as follows:
2009 | 2008 | |||||||
Expected Volatility | 64% - 68% | 66% - 71% | ||||||
Expected dividend yield | 0% | 0% | ||||||
Risk-free interest rate | 1.50% - 3.06% | 2.58% - 4.97% | ||||||
Expected life | 6.25 Years | 5 - 7.5 Years |
Earnings (Loss) per Share
Basic earnings (loss) per share are computed by dividing income (loss) available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares that would have been outstanding if the dilutive potential common shares had been issued. The dilutive effect of the outstanding options and warrants are reflected in diluted earnings per share by application of the treasury stock method. Diluted loss per share only includes the weighted-average number of common shares outstanding during the period because the addition of options and warrants would be anti-dilutive.
The following table sets forth the computations of basic earnings (loss) per share and diluted earnings (loss) per share:
F-11
BERLINER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2009
($ amount in thousands except per share and share amounts)
Year Ended June 30, | ||||||||
2009 | 2008 | |||||||
Basic earnings (loss) per share: | ||||||||
Numerator: | ||||||||
Net income (loss) allocable to common shareholders | $ | (3,424 | ) | $ | 8,454 | |||
Denominator: | ||||||||
Weighted average common shares outstanding | 26,439 | 17,918 | ||||||
Net income (loss) per share - basic | $ | (0.13 | ) | $ | 0.47 |
Year Ended June 30, | ||||||||
2009 | 2008 | |||||||
Diluted earnings (loss) per share: | ||||||||
Numerator: | ||||||||
Net income (loss) allocable to common shareholders | $ | (3,424 | ) | $ | 8,454 | |||
Denominator: | ||||||||
Weighted average common shares outstanding | 26,439 | 17,918 | ||||||
Effect of dilutive securities: | ||||||||
Stock options | - | 563 | ||||||
Warrants | - | 8,685 | ||||||
Weighted average common shares outstanding | ||||||||
assuming dilution | 26,439 | 27,166 | ||||||
Net income (loss) per share - diluted | $ | (0.13 | ) | $ | 0.31 |
Common share equivalents consist of stock options and warrants using the treasury stock method. For the year ended June 30, 2008, 320,690 stock options were excluded from the computation of diluted net income per share because the exercise price of these were greater than the average market price of the Company’s common stock during the period, and therefore the effect is antidilutive.
Fair Value of Financial Instruments
The Company adopted SFAS No. 157, "Fair Value Measurements" (“SFAS 157”) as it relates to financial assets and liabilities effective July 1, 2008. This pronouncement defines fair value, establishes a framework for measuring fair value, and requires expanded disclosures about fair value measurements. SFAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and defines fair value as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. In June 2009, the Company also adopted FASB Staff Position FAS No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that are Not Orderly (“FSP FAS 157-4”).
F-12
BERLINER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2009
($ amount in thousands except per share and share amounts)
SFAS 157 discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost), which are each based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. SFAS 157 utilizes a fair value hierarchy that prioritizes inputs to fair value measurement techniques into three broad levels:
Level 1: | Observable inputs such as quoted prices for identical assets or liabilities in active markets. | |
Level 2: | Observable inputs other than quoted prices that are directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets; quoted prices for similar or identical assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. | |
Level 3: | Unobservable inputs that reflect the reporting entity’s own assumptions. |
The Company’s investment in overnight money market institutional funds, which amounted to $1.2 million at June 30, 2009 and 2008, is included in cash and cash equivalents on the accompanying balance sheets and is classified as a Level 1 asset.
The Company’s consolidated balance sheets include the following financial instruments: short-term cash investments, trade accounts receivable, trade accounts payable, long-term debt and the PNC line of credit. The Company believes the carrying amounts in the financial statements approximates the fair value of these financial instruments due to the relatively short period of time between the origination of the instruments and their expected realization or the interest rates which approximate current market rates.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration of credit risk consist principally of temporary cash investments and accounts receivable. The Company does not enter into financial instruments for trading or speculative purposes.
Recently Issued Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS 157 which is intended to increase consistency and comparability in fair value measurements by defining fair value, establishing a framework for measuring fair value and expanding disclosures about fair value measurements. The provisions of SFAS No. 157, which are effective for financial statements issued for the fiscal years beginning after November 15, 2008, and interim periods within those fiscal years except as it relates to financial assets and liabilities, which we adopted effective July 1, 2008. The Company will adopt the remaining provisions of SFAS 157 beginning July 1, 2009. The Company has determined that the impact of SFAS 157 will not have a material effect to the financial statements taken as a whole.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities ("SFAS 159"). This statement permits companies to choose to measure many financial assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. We adopted SFAS 159 on July 1, 2008. The adoption was not material to the financial statements taken as a whole.
F-13
BERLINER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2009
($ amount in thousands except per share and share amounts)
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS 160”). This statement amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest (minority interest) in a subsidiary and for the deconsolidation of a subsidiary. Upon its adoption, noncontrolling interests will be classified as equity in our consolidated balance sheets. Income and comprehensive income attributed to noncontrolling interests will be included in our consolidated statements of operations and our consolidated statements of equity. SFAS 160 is effective for fiscal years beginning after December 15, 2008; therefore the Company will adopt SFAS 160 starting July 1, 2009. This statement shall be applied prospectively as of the beginning of the fiscal year in which this Statement is initially applied, except for the presentation and disclosure requirements which must be applied retrospectively for all periods presented.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (Revised), Business Combinations (“SFAS 141R”). This statement provides companies with principles and requirements on how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree as well as the recognition and measurement of goodwill acquired in a business combination. The statement also requires certain disclosures to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Acquisition costs associated with the business combination will generally be expensed as incurred. SFAS 141R is effective for business combinations occurring in fiscal years beginning after December 15, 2008. Early adoption of this statement is not permitted. We will adopt SFAS 141R effective July 1, 2009.
In February 2008, the FASB issued FASB Staff Position FAS No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”). This pronouncement amends FASB Statement No. 142, Goodwill and Other Intangible Assets, regarding the factors that should be considered in developing the useful lives for intangible assets with renewal or extension provisions. FSP FAS 142-3 requires an entity to consider its own historical experience in renewing or extending similar arrangements, regardless of whether those arrangements have explicit renewal or extension provisions, when determining the useful life of an intangible asset. In the absence of such experience, an entity shall consider the assumptions that market participants would use about renewal or extension, adjusted for entity-specific factors. FSP FAS 142-3 also requires an entity to disclose information regarding the extent to which the expected future cash flows associated with an intangible asset are affected by the entity’s intent and/or ability to renew or extend the arrangement. FSP FAS 142-3 will be effective for qualifying intangible assets acquired by the Company on or after July 1, 2009. The application of FSP FAS 142-3 is not expected to have a material impact on the Company’s results of operations, cash flows or financial positions; however, it could impact future transactions entered into by the Company.
In May 2008, the FASB issued FASB Staff Position APB No. 14-1, Accounting for Convertible Debt Instruments that May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”), which applies to convertible debt that includes a cash conversion feature. Under FSP APB 14-1, the liability and equity components of convertible debt instruments within the scope of this pronouncement shall be separately accounted for in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008. The Company will adopt FSP APB 14-1 effective July 1, 2009. This adoption is not expected to have a material impact on the Company’s consolidated financial position and results of operations.
In June 2008, the FASB ratified EITF Issue No. 07-5, Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity’s Own Stock (“EITF 07-5”). EITF 07-5 provides that an entity should use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. It also clarifies the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. EITF 07-5 is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact of the adoption of this pronouncement.
F-14
BERLINER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2009
($ amount in thousands except per share and share amounts)
In November 2008, the FASB ratified EITF Issue No. 08-6 “Equity Method Investment Accounting Considerations” (“EITF 08-6”). EITF 08-6 clarifies the accounting for certain transactions and impairment considerations involving equity method investments. EITF 08-6 is effective for fiscal years ended on or after December 15, 2008. The Company adopted EITF 08-6 for its fiscal year ended June 30, 2009. This adoption did not have a material impact on the Company’s consolidated financial position and results of operations.
In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, “Subsequent Events” (“SFAS 165”), to be effective for the interim or annual periods ending after June 15, 2009. The objective of this Statement is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this Statement sets forth a) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; b) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and c) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The effect of the adoption of SFAS 165 was not material on the Company’s consolidated financial position and results of operations. The Company evaluated subsequent events through September 28, 2009, which is the date the financial statements were issued.
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162” (“SFAS 168”). The objective of SFAS 168 is to replace Statement 162 and to establish the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. This statement shall be effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company will adopt SFAS 168 effective July 1, 2009.
3. | Accounts Receivable and Concentration of Credit Risk |
Accounts receivable at June 30, 2009 and 2008 consist of the following:
June 30, | ||||||||
2009 | 2008 | |||||||
Accounts receivable | $ | 16,204 | $ | 23,870 | ||||
Unbilled receivables | 4,112 | 8,149 | ||||||
20,316 | 32,019 | |||||||
Allowance for doubtful accounts | (200 | ) | (830 | ) | ||||
Total | $ | 20,116 | $ | 31,189 |
Unbilled receivables represent revenue on uncompleted infrastructure construction and site acquisition contracts that are not yet billed or billable, pursuant to contract terms. Unbilled receivables are generally billed within three months subsequent to the provision of services. Deferred revenue principally represents the value of services to customers that have been billed as of the balance sheet date but for which the requisite services have not yet been rendered. Unbilled receivables and deferred revenue are reported net in accounts receivable. The total value of deferred revenue was $0.6 million and $0.8 million at June 30, 2009 and 2008, respectively.
F-15
BERLINER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2009
($ amount in thousands except per share and share amounts)
The allowance for doubtful accounts for the years ended June 30, 2009 and 2008 consisted of the following:
Balance at | Recoveries/ | Balance at | ||||||||||||||
Beginning | Charged to | Deductions/ | End of | |||||||||||||
of Period | Expense | Write-offs | Period | |||||||||||||
Allowance for doubtful accounts: | ||||||||||||||||
Year ended June 30, 2008 | $ | 261 | 569 | - | $ | 830 | ||||||||||
Year ended June 30, 2009 | $ | 830 | 342 | (972 | ) | $ | 200 |
As of and for the year ended June 30, 2009, we derived 43% of our total revenue from three customers, and those customers represented 28% of our accounts receivable. During the year ended June 30, 2009, Metro PCS, Inc. (and its subsidiaries) represented 19%, T-Mobile (and its subsidiaries) represented 13%, and Clearwire US LLC represented 11% of our total revenue.
As of and for the year ended June 30, 2008, we derived 84% of our total revenue from our two largest customers, and those customers represented 62% of our accounts receivable. During the year ended June 30, 2008, Sprint Nextel Corporation represented 77% and Metro PCS represented 7% of our total revenue.
4. | Property and Equipment |
Property and equipment at June 30, 2009 and 2008 consisted of the following:
Year Ended June 30, | ||||||||
2009 | 2008 | |||||||
Automobiles and trucks | $ | 1,691 | $ | 1,701 | ||||
Furniture and fixtures | 469 | 454 | ||||||
Equipment | 3,312 | 3,179 | ||||||
Computer equipment and software | 454 | 392 | ||||||
Buildings | 313 | 313 | ||||||
Leasehold improvements | 256 | 244 | ||||||
6,495 | 6,283 | |||||||
Less: accumulated depreciation | (4,346 | ) | (3,449 | ) | ||||
2,149 | 2,834 | |||||||
Land | 90 | 90 | ||||||
$ | 2,239 | $ | 2,924 |
Depreciation on property and equipment for the years ended June 30, 2009 and 2008 was approximately $0.9 million and $0.8 million, respectively.
5. | Non-Current Assets |
Non-current assets include amortizable intangible assets consisting of customer relationships and covenants not to compete. These assets, together with goodwill, were the result of the allocation of the purchase price for acquisitions. Amortization expense related to amortizable intangible assets was $0.3 million and $0.4 million for the year ended June 30, 2009 and 2008, respectively.
Intangible assets subject to amortization are amortized based upon the assets’ estimated useful lives. Customer relationships have estimated useful lives of 70 months and covenants not to compete have estimated useful lives of approximately 45 months. We will continue to evaluate the estimated useful lives on an ongoing basis.
F-16
BERLINER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2009
($ amount in thousands except per share and share amounts)
Scheduled amortization charges for the intangible assets, as of June 30, 2009 are as follows:
2010 | 253 | |||
2011 | 128 | |||
2012 | 77 | |||
2013 | 21 | |||
Total | $ | 479 |
6. | Accrued Liabilities |
Accrued liabilities at June 30, 2009 and 2008 consisted of the following:
June 30, | ||||||||
2009 | 2008 | |||||||
Employee compensation | $ | 1,230 | $ | 2,998 | ||||
Construction costs | 2,027 | 8,107 | ||||||
Other | 428 | 814 | ||||||
$ | 3,685 | $ | 11,919 |
Accrued construction costs are reported net of amounts deferred in the calculation of percentage of completion for our construction and site acquisition projects. The amount of deferred expense included in accrued construction costs was $1.3 million and $0.8 million at June 30, 2009 and 2008, respectively.
7. | Income Taxes |
Income tax expense differed from amounts computed by applying the U.S. federal tax rate of 34% to pre-tax income as a result of the following:
Year ended June 30, | ||||||||
2009 | 2008 | |||||||
Tax expense at statutory rate of 34% | $ | (1,999 | ) | $ | 5,109 | |||
Increase (decrease) in valuation allowance against deferred tax assets | 54 | (2 | ) | |||||
State and local income tax expense, net of income tax benefit | (335 | ) | 1,092 | |||||
Meals and entertainment | 63 | 64 | ||||||
Financing fees | - | 8 | ||||||
Other (net) | (240 | ) | 156 | |||||
(Benefit) provision for income taxes | $ | (2,457 | ) | $ | 6,427 |
The following summarizes the (benefit) provision for income taxes:
Year ended June 30, | ||||||||
2009 | 2008 | |||||||
Current: | ||||||||
Federal | $ | (2,208 | ) | $ | 4,825 | |||
State and local | (285 | ) | 1,744 | |||||
Total Current | (2,493 | ) | 6,569 | |||||
Deferred: | ||||||||
Federal | 178 | (105 | ) | |||||
State and local | (142 | ) | (37 | ) | ||||
Total Deferred | 36 | (142 | ) | |||||
(Benefit) provision for income taxes | $ | (2,457 | ) | $ | 6,427 |
F-17
BERLINER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2009
($ amount in thousands except per share and share amounts)
The tax effects of temporary differences that give rise to deferred tax assets and liabilities at June 30, 2009 and 2008 are as follows:
2009 | 2008 | |||||||||||||||
Federal | State | Total | ||||||||||||||
Deferred Tax Assets | ||||||||||||||||
Current: | ||||||||||||||||
Allowance for doubtful accounts | $ | 60 | $ | 17 | $ | 77 | $ | 328 | ||||||||
Allowance for obsolete inventory | 8 | 2 | 10 | - | ||||||||||||
Accrued bonus | 2 | 1 | 3 | 126 | ||||||||||||
Accrued vacation | 15 | 4 | 19 | 82 | ||||||||||||
NOL Carryforward | 320 | - | 320 | - | ||||||||||||
405 | 24 | 429 | 536 | |||||||||||||
Non-Current: | ||||||||||||||||
Stock-based compensation | 320 | 94 | 414 | 181 | ||||||||||||
NOL carryforward | 2,961 | 691 | 3,652 | 1,520 | ||||||||||||
Customer list amortization | 156 | 45 | 201 | 128 | ||||||||||||
Covenant amortization | 34 | 10 | 44 | 18 | ||||||||||||
Amortization of warrants in deferred financing fees | 73 | 22 | 95 | 99 | ||||||||||||
3,544 | 862 | 4,406 | 1,946 | |||||||||||||
Total Deferred Tax Assets | 3,949 | 886 | 4,835 | 2,482 | ||||||||||||
Deferred Tax Liabilities | ||||||||||||||||
Long-Term | ||||||||||||||||
Goodwill amortization | 96 | 23 | 119 | 65 | ||||||||||||
Depreciation expense | 189 | 55 | 244 | 176 | ||||||||||||
Total Deferred Tax Liabilities | 285 | 78 | 363 | 241 | ||||||||||||
3,664 | 808 | 4,472 | 2,241 | |||||||||||||
Less: Valuation allowance | (550 | ) | (704 | ) | (1,254 | ) | (1,200 | ) | ||||||||
Net deferred tax assets | $ | 3,114 | $ | 104 | $ | 3,218 | $ | 1,041 |
Deferred income taxes result from temporary differences in the financial reporting basis and tax basis of assets and liabilities.
In assessing the realizability of deferred tax assets, we consider whether it is more likely than not for some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
F-18
BERLINER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2009
($ amount in thousands except per share and share amounts)
Based on management’s assessment of certain state tax attributes, we have determined that it was more likely than not that certain deferred tax assets totaling approximately $1.3 million will not be realized. These assets relate to net operating loss carryforwards. Accordingly, valuation allowances have been established for these assets.
On February 4, 2009, the Company closed its reorganization transaction with Old Berliner (see Note 16). On April 6, 2009, Old Berliner, Inc. transferred all of its assets to the Old Berliner Liquidating Trust, completing the final phase of the distribution for tax purposes. As part of the transaction, the Company received approximately $6.9 million of Old Berliner’s unused federal net operating loss carryforwards. We have recorded a $ 2.4 million deferred tax asset related to these carryforwards.
We have net operating loss carryforwards for federal and state income tax purposes of approximately $1.2 million expiring in 2026 and approximately $6.1 million expiring between 2012 and 2014, respectively, which may be applied against future taxable income. We can only utilize approximately $1.0 million per year of the federal carryforward due to limitations as a result of the Acquisition and Old Berliner reorganization.
At June 30, 2009, we had total income taxes receivable of approximately $2.7 million, consisting of $2.2 million federal and $0.5 million state income taxes receivable which we expect to receive during the third quarter of fiscal 2010.
8. | Revolving Credit Facility |
PNC Bank, National Association Facility
On April 17, 2008, our wholly owned subsidiary BCI, as borrower, became obligated under a Revolving Credit and Security Agreement (the “PNC Facility”) with PNC Bank, National Association (“PNC”) and such other lenders as may thereafter become a party to the PNC Facility (collectively, the “Lenders”). Under the terms of the PNC Facility, BCI is entitled to request that the Lenders make revolving advances to BCI from time to time in an amount up to the lesser of (i) 85% of the value of certain receivables owned by BCI and approved by the Lenders as collateral or (ii) a total of $15.0 million. Such revolving advances were used by BCI to repay existing indebtedness owed to Presidential, pay fees and expenses relating to entering into the PNC Facility and provide for BCI’s working capital needs and shall be used to assist in the acquisition of companies engaged in the same line of business as BCI.
Interest on the revolving advances shall accrue (a) for domestic rate loans, at a rate per annum equal to 2.25% plus the higher of (i) the base commercial lending rate of PNC as publicly announced to be in effect from time to time, or (ii) the federal funds open rate plus 1/2 of 1%, and (b) for Eurodollar rate loans, at a rate per annum equal to 3% plus (i) the rate at which U.S. dollar deposits are offered by leading banks in the London interbank deposit market (as displayed by Bloomberg), divided by (ii) one minus the reserve percentage requirement as determined by the Board of Governors of the Federal Reserve System. Such amounts are secured by a blanket security interest in favor of the Lenders that covers all of BCI’s receivables, equipment, general intangibles, inventory, investment property, certain real property, certain leasehold interests, all subsidiary stock, records and other property and proceeds of all of the foregoing.
The term of the PNC Facility is three years and shall terminate on April 17, 2011. BCI may terminate the PNC Facility at any time upon sixty (60) days’ prior written notice and upon payment in full of the obligations owing under the PNC Facility or any related documents. Upon such early termination by BCI, BCI shall pay the Lenders an early termination fee in an amount equal to three eighths of one percent (0.375%) of $15.0 million if the early termination occurs on or before April 16, 2010.
In connection with the closing of the PNC Facility, Berliner Communications, Inc. became obligated under that certain Guaranty and Suretyship Agreement (the “Guaranty”), dated April 17, 2008, in favor of the Lenders, pursuant to which we unconditionally guaranteed and became surety for the prompt payment and performance of all loans, advances, debts, liabilities, obligations, covenants and duties owing by BCI to PNC as agent for the benefit of the Lenders, of any kind or nature, present or future, whether direct or indirect, absolute or contingent, joint or several, due or to become due, now existing or hereafter arising, to the Lenders by BCI. In the event BCI is unable to pay any amounts owed to the Lenders, we would be liable, pursuant to the Guaranty, for such amounts upon the same terms and conditions as BCI would be liable.
F-19
BERLINER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2009
($ amount in thousands except per share and share amounts)
Along with the PNC Facility, BCI entered into a Revolving Credit Note (the “PNC Note”) with the Lenders, pursuant to which, BCI agreed to repay the Lenders the principal amount of $15.0 million or, if different from such amount, the unpaid balance of advances due and owing to PNC under the PNC Facility, plus interest on the principal amount from time to time outstanding until such principal amount is paid in full, at the applicable interest rates in accordance with the provisions of the PNC Facility. The PNC Note is subject to mandatory prepayment upon default under the terms of the agreement and may be voluntarily prepaid, in whole or in part, on the terms and conditions set forth in the PNC Facility. Upon the occurrence of an event of default due to bankruptcy or BCI’s inability to pay, the PNC Note shall immediately become due and payable, without notice. Other uncured defaults under the PNC Facility or any related document shall cause the PNC Note to be declared immediately due and payable, without notice, in accordance with the terms of the PNC Facility. Notwithstanding the foregoing, all outstanding principal and interest are due and payable on April 17, 2011. The balance outstanding at June 30, 2009 was $3.0 million and the amount additionally available on the line of credit was $7.7 million.
BCI was not in compliance with its Fixed Charge Coverage Ratio for its second fiscal quarter. BCI entered into an Amendment with PNC which waived compliance with the ratio, increased the interest rates and provided that during the term of the PNC Facility as amended, BCI would observe the following financial covenants:
1. | Minimum Undrawn Availability: BCI cannot cause, suffer or permit Undrawn Availability plus cash on deposit at PNC to be less than (1) Two Million Two Hundred Fifty Thousand ($2,250,000) Dollars as of March 31, 2009, or (2) Three Million Five Hundred Thousand ($3,500,000) Dollars as of June 30, 2009; |
2. | Fixed Charge Coverage Ratio: BCI must cause to be maintained at all times a Fixed Charge Coverage Ratio of not less than (1) 1.00 to 1.00 from July 1, 2009 through September 30, 2009, (2) 1.10 to 1.00 from October 1, 2009 through June 30, 2010, tested quarterly on a building four (4) quarter basis, and (3) 1.10 to 1.00 thereafter, tested quarterly on a rolling four (4) quarter basis; |
3. | Minimum EBITDA: BCI cannot cause, suffer or permit EBITDA to be less than (1) Two Million Six Hundred Twenty- Two Thousand ($2,622,000) Dollars for the trailing twelve months ending March 31, 2009, or (2) One Million Five Hundred Thousand ($1,500,000) Dollars for the fiscal quarter ending June 30, 2009. |
As a result of our operating results, we breached the minimum EBITDA covenants noted above. To correct this issue, on September 25, 2009 the Company and PNC entered into a Second Amendment to Revolving Credit and Security Agreement (the “Second Amendment”) to amend the PNC Facility. Pursuant to the terms of the Second Amendment, PNC waived compliance by BCI with the minimum EBITDA covenants, and therefore BCI is in complete compliance with all terms and conditions of the PNC Facility as of the date of this Annual Report. Going forward, there is no longer a minimum undrawn availability covenant or a minimum EBITDA covenant, but BCI must maintain compliance with the Fixed Charge Coverage Ratio noted above.
9. | Long-Term Debt |
Long-term debt at June 30, 2009 and 2008 consisted of the following:
June 30, | ||||||||
2009 | 2008 | |||||||
Note payable to J&J Leasing due February 2010, at Prime Rate | $ | 438 | $ | 1,021 | ||||
Notes payable to finance companies related to insurance | ||||||||
premiums, payable in monthly installments of $70 thousand, | ||||||||
interest ranging from 3.19% to 5.02% annually, due | ||||||||
November 2009 through April 2010 | 287 | 316 | ||||||
Notes payable to finance companies, payable in monthly | ||||||||
installments of $5 thousand, interest ranging from 4.99% | ||||||||
to 12.79%, due December 2009 through June 2010. | 70 | 263 | ||||||
Capital Leases (Note 10) | 312 | 423 | ||||||
1,107 | 2,023 | |||||||
Less current portion | (895 | ) | (1,251 | ) | ||||
$ | 212 | $ | 772 |
F-20
BERLINER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2009
($ amount in thousands except per share and share amounts)
Note Purchase Agreement
On December 29, 2006, we entered into a Note Purchase Agreement (the “Note Purchase Agreement”) with Sigma Opportunity Fund, LLC (“Sigma”) for the issuance and sale of a 7% Senior Subordinated Secured Convertible Note due on December 29, 2008, in the original principal amount of $3.0 million (the “Note”) convertible at $1.10 per share (subject to adjustment) and a warrant to purchase up to 1.5 million shares of our common stock with a strike price of $0.01 (the “Warrant”).
On February 2, 2007, we entered into a Joinder Agreement to the Note Purchase Agreement with Pacific Asset Partners, LLC (“Pacific”) and Operis Partners I, LLC (“Operis”) and issued a second 7% Senior Subordinated Secured Convertible Note due on December 29, 2008 in the original principal amount of $1.0 million and a warrant to purchase up to 500,000 shares of our common stock (with a fair value of $0.4 million) to Pacific, and a third 7% Senior Subordinated Secured Convertible Note due on December 29, 2008 in the original principal amount of $0.5 million and a warrant to purchase up to 250,000 shares of our common stock (with a fair value of $0.2 million) to Operis, all on substantially the same terms as the Note and Warrant issued to Sigma.
On February 15, 2007, we entered into a Joinder Agreement to the Note Purchase Agreement with Sigma Berliner, LLC (“Sigma Berliner”) to issue a fourth 7% Senior Subordinated Secured Convertible Note due on December 29, 2008 in the original principal amount of $1.5 million (the “Sigma Berliner Note”) and a warrant to purchase up to 750,000 shares of our common stock (with a fair value of $0.6 million) to Sigma Berliner, also on substantially the same terms as the Note and Warrant issued to Sigma.
Pursuant to the Note Purchase Agreement, we agreed to register the shares of common stock issuable upon conversion of the Note and upon exercise of the Warrant and the Additional Warrants (collectively, the “Registrable Shares”) for resale under the Securities Act. We agreed to file with the SEC a Registration Statement with respect to the Registrable Shares, which was filed with the SEC on March 19, 2007, and to cause the Registration Statement to become effective on or before June 15, 2007.
We were unable to have the Registration Statement declared effective by the Securities and Exchange Commission prior to June 15, 2007. Therefore, pursuant to the Note Purchase Agreement, we became subject to liquidated damages equal to 2% of the aggregate purchase price paid by each purchaser for each of the first six months that we failed to meet the requirement. On September 27, 2007, we signed a Waiver and Amendment to Note Purchase Agreement (the “Waiver”) with the noteholders to lower the conversion price of the Notes from $1.10 to $1.00 per share. The reduction in the conversion price resulted in finance charges of $0.7 million, which was reflected in our balance sheet as other long-term liabilities and was subsequently reclassified as Additional paid-in capital. Pursuant to the Waiver, we have agreed to continue to use our best efforts to register the shares underlying the Notes and the associated warrants, and to maintain the effectiveness of any registration statement we file with respect to these shares. Effective December 4, 2008, we registered with the SEC 896,756 of these shares of common stock for resale by the security holders on a delayed or continuous basis, which does not completely fulfill our obligations.
In connection with the Note Purchase Agreement, on February 8, 2007 we amended our certificate of incorporation to increase the number of shares of our authorized common stock from 20,000,000 shares to 100,000,000 shares.
In connection with the Sigma note, the Pacific note, the Operis note and the Sigma Berliner note, we recorded debt discounts equal to the fair value of the warrants associated with such notes as follows:
Loan | ||||||||||||
Face | Warrants | Debt | ||||||||||
Amount | Issued | Discount | ||||||||||
Sigma note | $ | 3,000 | 1,500,000 | $ | 753 | |||||||
Pacific note | 1,000 | 500,000 | 376 | |||||||||
Operis note | 500 | 250,000 | 188 | |||||||||
Sigma Berliner note | 1,500 | 750,000 | 564 | |||||||||
$ | 6,000 | 3,000,000 | $ | 1,881 |
F-21
BERLINER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2009
($ amount in thousands except per share and share amounts)
We reduced the carrying value of these notes on the books accordingly with the corresponding entries to paid-in capital. We have accreted these amounts over the lives of the notes, charging interest expense whereby the notes’ balances will equal the face amounts at December 29, 2008.
On June 25, 2008, the Noteholders converted the full principal amounts of the Notes into common stock of the Company at a conversion price of $1.00 per share. The Company paid each Noteholder cash payments representing interest payments the Noteholders would have received had they converted on the Notes’ maturity date, December 29, 2008. Upon conversion, (a) Sigma received 3,000,000 shares of common stock and a cash payment of $0.2 million, (b) Operis received 500,000 shares of common stock and a cash payment of $0.1 million, (c) Pacific received 1,000,000 shares of common stock and a cash payment of $0.1 million, and (d) Sigma Berliner received 1,500,000 shares of common stock and a cash payment of $0.1 million.
In connection with the conversion of the Notes, we charged the unamortized balance of deferred finance fees in the amount of $0.2 million and the unaccreted balance of the warrants issued in connection with the Notes in the amount of $0.5 million to amortization of deferred financing fees and accretion of debt discount.
10. | Capitalized Leases |
We have entered into capital leases for certain automobiles and trucks. As of June 30, 2009 and 2008, the total cost of the vehicles was approximately $0.7 million, and the related accumulated depreciation was approximately $0.3 million and $0.2 million, respectively.
The following is a schedule of future minimum lease payments under capital leases as of June 30, 2009:
2010 | $ | 144 | ||
2011 | 127 | |||
2012 | 88 | |||
2013 | 3 | |||
Thereafter | - | |||
362 | ||||
Amounts representing interest | 50 | |||
Future minimum lease payments | $ | 312 |
11. | Commitments and Contingencies |
Operating Leases
We lease office and warehouse space under various operating leases. Rent expense for the years ended June 30, 2009 and 2008 was approximately $1.2 million and $0.8 million, respectively.
Minimum future amounts due under operating leases are as follows:
2010 | $ | 1,242 | ||
2011 | 1,235 | |||
2012 | 1,029 | |||
2013 | 835 | |||
2014 | 801 | |||
Thereafter | 1,966 | |||
$ | 7,108 |
F-22
BERLINER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2009
($ amount in thousands except per share and share amounts)
We have entered into a six year Lease Agreement for approximately 70,000 square feet of office and warehouse space in Fairlawn, New Jersey, which will commence upon the landlord meeting certain contingencies, including construction of new office facilities to our satisfaction. We expect that the lease will commence on October 1, 2009, and the above table includes rental payments for this location from that date going forward.
12. | Legal Proceedings |
We are involved in legal proceedings from time to time, none of which we believe, if decided adversely to us, would have a material adverse effect on our business, financial condition or results of operations.
13. | Employee Benefit Plan |
Berliner maintains a defined contribution plan under Section 401(k) of the Internal Revenue Code. Under the plans, employees may elect to defer a percentage of their salary, subject to defined limitations. Berliner retains the right to provide for a discretionary matching contribution in addition to discretionary contributions based upon participants’ salaries. We accrued for voluntary matching or discretionary contributions totaling $92 thousand and $0.2 million for the years ended June 30, 2009 and 2008, respectively.
14. | Related Party Transactions |
Pursuant to the provisions of the Note Purchase Agreement described in Note 9, so long as the Note remains outstanding or Sigma beneficially owns at least 5% of our outstanding common stock, Sigma has the right to nominate one director to our Board of Directors. On December 29, 2006, Sigma nominated, and our Board of Directors appointed, Thom Waye to serve as a member of our Board of Directors as a Class III director, with his term expiring at the 2008 annual meeting. Mr. Waye was re-elected at the 2008 annual meeting with a term expiring at the 2011 annual meeting. We are obligated to use our best efforts to cause Mr. Waye, as well as all reasonably suited future designees, to continue to serve on our Board of Directors. During the year ended June 30, 2008, we paid Sigma $0.4 million in interest on the Note. We paid Mr. Waye $23 thousand and $17 thousand during the years ended June 30, 2009 and 2008, respectively, for his service as a director pursuant to our standard non-employee director compensation program. In addition, during fiscal 2008 we issued 25,000 shares of our common stock to each of Mr. Waye and all of our outside independent directors. The value of the stock issued to each director was $28 thousand at the time of issuance.
On February 15, 2007, we entered into a Joinder Agreement to the Note Purchase Agreement with Sigma Berliner, an affiliate of Sigma and Thom Waye, and issued a fourth 7% Senior Subordinated Secured Convertible Note due on December 29, 2008 in the original principal amount of $1.5 million and a warrant to purchase up to 750,000 shares of our common stock to Sigma Berliner, on substantially the same terms as the Note and Warrant issued to Sigma. This transaction was the result of Sigma exercising a right that Sigma negotiated as part of the December 29, 2006 transaction, at a time at which it was not an affiliate of Berliner. During the year ended June 30, 2008, we paid Sigma Berliner $0.2 million in interest on the Note.
15. | Stockholders’ Equity |
Common and Preferred Stock
As of June 30, 2009, pursuant to the Amendment to our Amended and Restated Certificate of Incorporation dated February 8, 2007, we are authorized to issue 102,000,000 shares, consisting of (i) 100,000,000 shares of common stock, par value $0.00002 per share, and (ii) 2,000,000 shares of preferred stock, par value $0.00002 per share.
F-23
BERLINER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2009
($ amount in thousands except per share and share amounts)
Stock Options
At June 30, 2009, we sponsored two stock option plans, the 1999 Omnibus Securities Plan (the “1999 Plan”) and the 2001 Equity Incentive Plan (the “2001 Plan”), collectively (the “Plans”). We have elected to account for those Plans under SFAS 123R.
The Plans provide for the grant of incentive stock options and non-qualified stock options. The terms of the options are set by our Board of Directors. The options expire no later than ten years after the date the stock option is granted. The number of shares authorized for grants under the Plans is 15% of the total outstanding common stock as computed by the Company as fully diluted, provided that no more than 4 million options can be “incentive” stock options. The 2001 Plan provides for the grant of a maximum of 40,000 incentive stock options that expire no later than ten years after the date the stock option is granted.
The following table represents stock options under our Plans as of June 30, 2009:
F-24
BERLINER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2009
($ amount in thousands except per share and share amounts)
2001 Plan | 1999 Plan | Non-Plan | ||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||
Average | Average | Average | ||||||||||||||
Number | Exercise | Number | Exercise | Number | Exercise | |||||||||||
of Shares | Price | of Shares | Price | of Shares | Price | |||||||||||
Balance at June 30, 2007 | 16,891 | $ | 1,387.50 | 1,408,051 | $ | 3.26 | 18,704 | $ | 6,786.00 | |||||||
Options granted at fair value | - | - | 354,230 | 1.06 | - | - | ||||||||||
Options exercised | - | - | (126,875 | ) | 0.55 | - | - | |||||||||
Options cancelled | - | - | (221,721 | ) | 0.59 | - | - | |||||||||
Outstanding at June 30, 2008 | 16,891 | $ | 1,387.50 | 1,413,685 | $ | 3.37 | 18,704 | $ | 6,786.00 | |||||||
Exercisable at June 30, 2008 | 16,891 | $ | 1,387.50 | 782,072 | $ | 5.17 | 18,704 | $ | 6,786.00 | |||||||
Options granted at fair value | - | - | 958,326 | 1.42 | - | - | ||||||||||
Options cancelled | - | - | (203,629 | ) | 1.09 | - | - | |||||||||
Outstanding at June 30, 2009 | 16,891 | $ | 1,387.50 | 2,168,382 | $ | 2.72 | 18,704 | $ | 6,786.00 | |||||||
Exercisable at June 30, 2009 | 16,891 | $ | 1,387.50 | 1,141,451 | $ | 3.96 | 18,704 | $ | 6,786.00 |
The intrinsic values of options exercised, outstanding and exercisable as of and for the year ending June 30, 2009 were as follows:
Options exercised | $ | 0 | ||
Options outstanding | $ | 285,890 | ||
Options exercisable | $ | 282,628 |
Stock-based compensation expense included in the consolidated statement of operations for the years ended June 30, 2009 and 2008 was approximately $0.6 million and $0.2 million, respectively. As of June 30, 2009, there was approximately $0.5 million of total unrecognized stock-based compensation cost related to options granted under our Plans that will be recognized over four years.
At June 30, 2009, the range of exercise prices, weighted average exercise price and weighted average remaining contractual life for options outstanding were as follows:
F-25
BERLINER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2009
($ amount in thousands except per share and share amounts)
Options Outstanding and Exercisable | ||||||||||||||||||||
Weighted | ||||||||||||||||||||
Weighted | Average | |||||||||||||||||||
Number | Average | Remaining | ||||||||||||||||||
of | Exercise | Contractual | ||||||||||||||||||
Option Price Range | Shares | Exercisable | Price | Life | ||||||||||||||||
2001 Plan | $ | 1,387.50 | 16,891 | 16,891 | $ | 1,387.50 | 1.53 Years | |||||||||||||
1999 Plan | $ | 0.30 | to | $ | 0.81 | 633,600 | 621,725 | $ | 0.49 | 6.90 Years | ||||||||||
$ | 0.90 | to | $ | 1.48 | 1,531,198 | 516,142 | $ | 1.32 | 8.46 Years | |||||||||||
$ | 7.05 | 167 | 167 | $ | 7.05 | 5.05 Years | ||||||||||||||
$ | 8.01 | 250 | 250 | $ | 8.01 | 4.67 Years | ||||||||||||||
$ | 16.50 | 2,000 | 2,000 | $ | 16.50 | 1.43 Years | ||||||||||||||
$ | 3,000.00 | 1,167 | 1,167 | $ | 3,000.00 | 0.27 Years | ||||||||||||||
Non-Plan | $ | 3,600.00 | 637 | 637 | $ | 3,600.00 | 0.69 Years | |||||||||||||
$ | 6,900.00 | 18,067 | 18,067 | $ | 6,900.00 | 0.76 Years |
During the year ended June 30, 2009, we issued 958,326 options to 80 individuals with vesting as follows:
Weighted | ||||||||
Number | Average | |||||||
Vesting Period | of Shares | Fair Value | ||||||
25% per year after one year | 82,000 | $ | 0.67 | |||||
25% Immediate and 25% per year thereafter | 876,326 | 0.89 | ||||||
958,326 | 0.87 |
The value of this stock based on quoted market values at the time of grant was $1.4 million.
The following table summarizes information about unvested stock option transactions:
2001 Plan | 1999 Plan | Non-Plan | ||||||||||||||||||
Weighted | Weighted | |||||||||||||||||||
Average | Average | |||||||||||||||||||
Number | Number | Exercise | Fair | Number | ||||||||||||||||
of Shares | of Shares | Price | Value | of Shares | ||||||||||||||||
Balance at June 30, 2007 | - | 906,625 | $ | 0.86 | $ | 0.59 | - | |||||||||||||
Options granted at fair value | - | 354,230 | 1.06 | 0.81 | - | |||||||||||||||
Options vested | - | (432,257 | ) | 0.76 | 0.55 | - | ||||||||||||||
Options cancelled | - | (196,985 | ) | 0.57 | 0.37 | - | ||||||||||||||
Outstanding at June 30, 2008 | - | 631,613 | 1.14 | 0.81 | - | |||||||||||||||
Options granted at fair value | - | 958,326 | 1.42 | 0.87 | - | |||||||||||||||
Options vested | - | (419,739 | ) | 1.26 | 0.81 | - | ||||||||||||||
Options cancelled | - | (143,269 | ) | 1.16 | 0.95 | - | ||||||||||||||
Outstanding at June 30, 2009 | - | 1,026,931 | $ | 1.34 | $ | 0.85 | - |
F-26
BERLINER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2009
($ amount in thousands except per share and share amounts)
Stock Warrants
At June 30, 2009, we had issued warrants to purchase up to 1,003,572 shares of our common stock. The following table summarizes those warrant grants:
Number of | Grant | Strike | |||||||||||
Issued to | Shares | Date | Price | Note | |||||||||
Punk, Ziegel & Company, L.P. | 100,000 | June 21, 2006 | $ | 1.00 | A | ||||||||
Punk, Ziegel & Company, L.P. | 214,286 | December 29, 2006 | 0.70 | A | |||||||||
Sigma Capital Advisors, LLC | 150,000 | December 29, 2006 | 0.55 | B | |||||||||
Sigma Capital Advisors, LLC | 25,000 | February 15, 2007 | 0.55 | B | |||||||||
Punk, Ziegel & Company, L.P. | 214,286 | February 15, 2007 | 0.70 | A | |||||||||
Digital Communication Services, Inc. | 300,000 | February 28, 2007 | 0.73 | C | |||||||||
1,003,572 |
A - - Part of advisory services fee.
B – Warrants issued relating to the issuance of 7% Senior Subordinated Secured Convertible Notes. See Note 9.
C – Warrants issued related to the acquisition of Digitcom.
During the year ended June 30, 2009, warrants to purchase 200,000 shares were exercised. These warrants were issued relating to the acquisition of Digitcom. During the year ended June 30, 2008, warrants to purchase 3,000,000 shares were exercised. These warrants were issued relating to the issuance of 7% Senior Subordinated Secured Convertible Notes which were converted on June 25, 2008. See Note 9.
16. | Selected Segment Financial Data |
Statement of Financial Accounting Standards No. 131, Disclosures About Segments of an Enterprise and Related Information established standards for reporting information about operating segments in annual financial statements of public business enterprises and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. Operating segments are components of an enterprise about which separate financial information is available and regularly evaluated by the chief operating decision maker(s) of an enterprise. We do not assign assets to our segments.
We have organized our company into two operating segments based upon the types of customers served, services provided and the economic characteristics of each segment. Our operating segments are:
Infrastructure equipment construction and technical service: This segment includes radio frequency and network design and engineering, radio transmission base station modification, in-building network design, engineering and construction, project management, specialty communication services, configured solutions as well as design, installation and construction of wireless telecommunications system towers.
Site acquisition and zoning: Generally we act as an intermediary between telecommunications companies and owners of real estate and other facilities. We identify appropriate properties, negotiate the transactions and handle the administrative details.
We evaluate the performance of our operating segments based on several factors, of which the primary financial measure is segment operating income. Segment operating income is presented herein because our chief operating decision makers evaluate and measure each business unit’s performance based on its segment operating income.
F-27
BERLINER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2009
($ amount in thousands except per share and share amounts)
Years ended June 30, | ||||||||||||||||||||||||
2009 | 2008 | |||||||||||||||||||||||
Infrastructure | Site | Infrastructure | Site | |||||||||||||||||||||
Construction | Acquisition | Total | Construction | Acquisition | Total | |||||||||||||||||||
Revenue | $ | 44,897 | $ | 9,594 | $ | 54,491 | $ | 98,563 | $ | 29,809 | $ | 128,372 | ||||||||||||
Cost of revenue | 33,960 | 4,826 | 38,786 | 64,643 | 18,809 | 83,452 | ||||||||||||||||||
Gross margin | 10,937 | 4,768 | 15,705 | 33,920 | 11,000 | 44,920 | ||||||||||||||||||
Selling, general and administrative expenses | 17,409 | 3,064 | 20,473 | 20,885 | 4,818 | 25,703 | ||||||||||||||||||
Depreciation and amortization | 1,229 | 56 | 1,285 | 914 | 276 | 1,190 | ||||||||||||||||||
Gain on sale of fixed assets | (8 | ) | - | (8 | ) | (8 | ) | (3 | ) | (11 | ) | |||||||||||||
Operating (loss) income | $ | (7,693 | ) | $ | 1,648 | $ | (6,045 | ) | $ | 12,129 | $ | 5,909 | $ | 18,038 |
17. | Reorganization of Old Berliner, Inc. |
On February 4, 2009 (the “Closing Date”), pursuant to the Agreement and Plan of Reorganization, dated September 9, 2008 (the “Agreement”), between the Company and Old Berliner, the Company completed its exchange of 13,104,644 newly issued shares of the Company’s common stock (the “Issued Shares”) for substantially all the assets of Old Berliner, which consist of 13,104,644 shares of common stock of the Company. From and after the Closing Date, Old Berliner did not engage in any business, and promptly liquidated and dissolved as a corporation on March 26, 2009 and distributed all of its assets and liabilities to the Old Berliner Liquidating Trust (the “Trust”). The beneficiaries of the Trust are the former shareholders of Old Berliner. Each beneficiary’s percentage interest in the Trust is identical to the percentage interest that such beneficiary had in Old Berliner prior to its dissolution. Rich Berliner, the Company’s Chief Executive Officer, owns 57.4% of the beneficial interests in the Trust, which represents beneficial ownership of approximately 28.5% of the outstanding common stock of the Company. Mr. Nicholas Day, General Counsel of the Company and the former Secretary of Old Berliner, is the trustee of the Trust (the “Trustee”), and in his capacity as Trustee he has the sole power to vote and to sell or dispose of the shares of our common stock owned by the Trust. The Trust will distribute the assets to the beneficiaries of the Trust, the former shareholders of Old Berliner, as soon as practicable.
Pursuant to the Agreement, the Company did not assume any liabilities or obligations of Old Berliner, but each of the Company and Old Berliner (each, in such capacity, the “Indemnifying Party”) has agreed to indemnify the other party and its successors and assigns (collectively, the “Indemnified Party”) against losses and damages incurred by any such Indemnified Party for any breach of any of the representations, warranties, covenants or agreements made by the Indemnifying Party in the Agreement.
The transactions contemplated by the Agreement are intended to qualify as a “reorganization” within the meaning of Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended, and all of the Issued Shares are intended to constitute consideration issued in connection with a reorganization.
F-28