UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended March 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from to
Commission file number 000-30110
SBA COMMUNICATIONS CORPORATION
------------------------------
(Exact name of registrant as specified in its charter)
Florida 65-0716501
- -----------------------------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
5900 Broken Sound Parkway, Boca Raton, Florida 33487
- -------------------------------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(561) 995-7670
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or for such shorter period that the registrant
was required to file such report), and (2) has been subject to such filing
requirement for the past 90 days.
Yes X No ______
-----
Number of shares of common stock outstanding at May 10, 2002
Class A Common Stock - 44,920,235 shares
Class B Common Stock - 5,455,595 shares
SBA COMMUNICATIONS CORPORATION
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001 3
Consolidated Statements of Operations for the three months ended March 31, 2002 and 2001 4
Consolidated Statement of Shareholders' Equity for the three months ended March 31, 2002 5
Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and 2001 6
Condensed Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 25
SIGNATURES 26
2
ITEM 1: UNAUDITED FINANCIAL STATEMENTS
SBA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(unaudited)
(in thousands, except par values)
March 31, 2002 December 31, 2001
-------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 32,276 $ 13,904
Restricted cash 7,500 -
Accounts receivable, net of allowance of $4,287 and $4,641 in
2002 and 2001, respectively 49,092 56,796
Prepaid and other current assets 6,665 10,254
Costs and estimated earnings in excess of billings on
uncompleted contracts 11,167 11,333
---------- ----------
Total current assets 106,700 92,287
Property and equipment, net 1,179,356 1,198,559
Goodwill, net 86,949 80,592
Other intangible assets, net 5,425 5,588
Deferred financing fees, net 26,847 27,807
Other assets 17,270 24,178
---------- ----------
Total assets $1,422,547 $1,429,011
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 38,442 $ 56,293
Accrued expenses 10,216 13,046
Current portion - long-term debt 188 365
Interest payable 9,360 21,815
Billings in excess of costs and estimated earnings
on uncompleted contracts 4,173 6,302
Other current liabilities 14,368 15,880
---------- ----------
Total current liabilities 76,747 113,701
---------- ----------
Long-term liabilities:
Long-term debt 947,223 845,088
Deferred tax liabilities, net 18,475 18,429
Other long-term liabilities 6,311 1,149
---------- ----------
Total long-term liabilities 972,009 864,666
---------- ----------
Commitments and contingencies (see Note 11)
Shareholders' equity:
Common stock-Class A par value $.01 (100,000 shares authorized,
44,897 and 43,233 shares issued and outstanding in 2002 and 2001,
respectively) 449 432
Common stock-Class B par value $.01 (8,100 shares authorized,
5,456 shares issued and outstanding in 2002 and 2001) 55 55
Additional paid-in capital 671,336 664,977
Accumulated deficit (298,049) (214,820)
---------- ----------
Total shareholders' equity 373,791 450,644
---------- ----------
Total liabilities and shareholders' equity $1,422,547 $1,429,011
========== ==========
The accompanying Condensed Notes to Consolidated Financial Statements on
pages 7 through 13 herein are an integral part of these consolidated
financial statements.
3
SBA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(unaudited)
(in thousands, except per share amounts)
For the three months ended March 31,
------------------------------------
2002 2001
---- ----
Revenues:
Site development $ 31,404 $ 32,673
Site leasing 32,540 20,283
--------- ---------
Total revenues 63,944 52,956
--------- ---------
Cost of revenues (exclusive of depreciation and amortization shown below):
Cost of site development 24,680 25,018
Cost of site leasing 11,240 7,128
--------- ---------
Total cost of revenues 35,920 32,146
--------- ---------
Gross profit 28,024 20,810
Operating expenses:
Selling, general and administrative 9,374 10,641
Restructuring charge 54,117 -
Depreciation and amortization 26,053 15,007
--------- ---------
Total operating expenses 89,544 25,648
--------- ---------
Operating loss (61,520) (4,838)
Other income (expense):
Interest income 9 3,000
Interest expense, net of amounts capitalized (13,216) (8,683)
Non-cash amortization of original issue discount and
debt issuance costs (8,002) (6,968)
Other 79 (84)
--------- ---------
Total other expenses (21,130) (12,735)
--------- ---------
Loss before provision for income taxes and
extraordinary item (82,650) (17,573)
Provision for income taxes (579) (354)
--------- ---------
Loss before extraordinary item (83,229) (17,927)
Extraordinary item, write-off of deferred financing fees - (5,069)
--------- ---------
Net loss $ (83,229) $ (22,996)
========= =========
Basic and diluted loss per common share before extraordinary item $ (1.70) $ (0.38)
Extraordinary item - (0.11)
--------- ---------
Basic and diluted loss per common share $ (1.70) $ (0.49)
========= =========
Basic and diluted weighted average number of shares of common stock 49,010 46,801
========= =========
The accompanying Condensed Notes to Consolidated Financial Statements on pages 7
through 13 herein are an integral part of these consolidated financial
statements.
4
SBA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
----------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2002
-----------------------------------------
(unaudited)
(in thousands)
Common Stock
-----------------------------------
Class A Class B Additional
------- ------- Paid-In Accumulated
Number Amount Number Amount Capital Deficit Total
------ ------ ------ ------ ---------- ----------- -------
BALANCE, December 31, 2001 43,233 $432 5,456 $55 $664,977 $(214,820) $450,644
Common stock issued in connection with
acquisitions and earn-outs 1,316 13 - - 5,635 - 5,648
Common stock issued in connection with
employee stock purchase/option plans 348 4 - - 72 - 76
Non-cash compensation - - - - 652 - 652
Net loss - - - - - (83,229) (83,229)
------ ---- ----- --- -------- --------- --------
BALANCE, March 31, 2002 44,897 $449 5,456 $55 $671,336 $(298,049) $373,791
====== ==== ===== === ======== ========= ========
The accompanying Condensed Notes to Consolidated Financial Statements
on pages 7 through 13 herein are an integral part of these consolidated
financial statements.
5
SBA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------
(unaudited)
(in thousands)
For the three months ended March 31,
------------------------------------
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (83,229) $ (22,996)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 26,053 15,007
Restructuring charge 47,609 -
Non-cash compensation expense 652 788
Provision for doubtful accounts 610 399
Amortization of original issue discount and debt issuance costs 8,002 6,968
Write-off of deferred financing fees - 5,069
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable 7,093 (8,883)
Prepaid and other current assets 22 382
Costs and estimated earnings in excess of
billings on uncompleted contracts 166 5,577
Other assets (1,066) 3,620
Accounts payable (17,851) (30,952)
Accrued expenses (5,826) (3,175)
Interest payable (12,455) 8,144
Other liabilities (1,043) 4,598
Billings in excess of costs and estimated earnings on uncompleted contracts (2,129) (1,206)
---------- ----------
Total changes in operating assets and liabilities 49,837 6,336
---------- ----------
Net cash used in operating activities (33,392) (16,660)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Tower acquisitions and other capital expenditures (46,095) (158,306)
---------- ----------
Net cash used in investing activities (46,095) (158,306)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from option exercises 75 1,433
Proceeds from senior notes payable, net of financing fees - 483,987
Borrowings under senior credit facility 98,000 30,000
Repayment of notes payable (216) (105,069)
---------- ----------
Net cash provided by financing activities 97,859 410,351
---------- ----------
Net increase in cash and cash equivalents 18,372 235,385
CASH AND CASH EQUIVALENTS:
Beginning of period 13,904 14,980
---------- ----------
End of period $ 32,276 $ 250,365
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 25,916 $ 1,358
========== ==========
Taxes $ 1,591 $ 1,229
========== ==========
NON-CASH ACTIVITIES:
Assets acquired in acquisitions $ 7,648 $ 23,470
========== ==========
Liabilities assumed in acquisitions $ - $ (2,126)
========== ==========
Stock issued for acquisitions $ (5,648) $ (10,929)
========== ==========
The accompanying Condensed Notes to Consolidated Financial Statements on pages 7
through 13 herein are an integral part of these consolidated financial
statements.
6
SBA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
1. BASIS OF PRESENTATION
---------------------
The accompanying consolidated financial statements should be read in conjunction
with the 2001 Form 10-K for SBA Communications Corporation. These financial
statements have been prepared in accordance with instructions to Form 10-Q and
Article 10 of Regulation S-X and, therefore, omit or condense certain footnotes
and other information normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States.
In the opinion of the Company's management, all adjustments (consisting of
normal recurring accruals) considered necessary for fair financial statement
presentation have been made. Certain amounts in the prior year's consolidated
financial statements have been reclassified to conform to the current year's
presentation. The results of operations for an interim period may not give a
true indication of the results for the year.
During the three months ended March 31, 2002 and 2001, the Company did not have
any changes in its equity resulting from non-owner sources and, accordingly,
comprehensive income was equal to the net loss amounts presented for the
respective periods in the accompanying Consolidated Statements of Operations.
The Company has potential common stock equivalents related to its outstanding
stock options. These potential common stock equivalents were not included in
diluted loss per share because the effect would have been anti-dilutive.
Accordingly, basic and diluted loss per common share and the weighted average
number of shares used in the computation are the same for all periods presented.
There were 4.6 million and 3.5 million options outstanding at March 31, 2002 and
2001, respectively.
2. CURRENT ACCOUNTING PRONOUNCEMENTS
---------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations. SFAS 141 addresses financial accounting and reporting for business
combinations and supercedes Accounting Principles Board Opinion ("APB") No. 16,
Business Combinations and SFAS No. 38 Accounting for Preacquisition
Contingencies of Purchased Enterprises. All business combinations in the scope
of SFAS 141 are to be accounted for under the purchase method. SFAS 141 became
effective June 30, 2001. The adoption of SFAS 141 did not have an impact on the
Company's consolidated financial statements.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. This standard eliminates the amortization of goodwill and certain
intangible assets against earnings. Instead, goodwill is subject to at least an
annual assessment for impairment by applying a fair-value-based test. Goodwill
and indefinite-lived intangible assets will be written-down against earnings
only in the periods in which the recorded value of the asset is more than its
fair value. SFAS 142 is required to be applied in fiscal years beginning after
December 15, 2001. SFAS 142 requires the Company to complete the transitional
goodwill impairment test six months from the date of adoption, which the Company
intends to do before June 30, 2002. Other intangibles will continue to be
amortized over their estimated useful lives, generally 2 to 5 years. Management
is assessing the impact based on a two-step approach to assess goodwill based on
applicable reporting units and will reassess any intangible assets, including
goodwill, recorded in connection with its previous acquisitions. The Company
recorded approximately $0.4 million of amortization on covenants not to compete
during the first quarter of 2002. Management is currently assessing, but has not
yet determined the impact adoption of SFAS 142 will have on the Company's
consolidated financial statements, however, management believes it may be
material. As of March 31, 2002, the Company had unamortized goodwill and
covenants not to compete of $92.4 million.
The following table provides a reconciliation of reported net loss for the three
months ended March 31, 2001 to adjusted net loss as if SFAS No. 142 had been
applied as of the beginning of 2001:
7
For the three months ended
March 31, 2001
------------------------------------------
(in thousands, except per share amounts)
Net loss as reported $(22,996)
Add back: Goodwill amortization 1,100
--------
Adjusted net loss $(21,896)
========
Basic and diluted loss per common share:
Net loss as reported $ (0.49)
Goodwill amortization .02
--------
Adjusted net loss per common share $ (0.47)
========
In June 2001, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued an exposure draft of a proposed
Statement of Position ("SOP") entitled Accounting for Certain Costs and
Activities Related to Property, Plant and Equipment. The proposed SOP may limit
the ability of companies to capitalize certain costs as part of property, plant
and equipment ("PP&E"). The proposed SOP would also require that each
significant separately identifiable part of PP&E with a useful life different
from the useful life of the PP&E to which it relates be accounted for separately
and depreciated over the individual component's expected useful life. The
proposed SOP would be effective for fiscal years beginning after June 15, 2002.
Management has not determined the effect this SOP, if issued as proposed, would
have on the consolidated financial statements, but believes it would not be
material.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 supercedes SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long Lived Assets to Be Disposed of.
SFAS 144 applies to all long-lived assets (including discontinued operations)
and consequently amends Accounting Principles Board Opinion No. 30, Reporting
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business. SFAS 144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001. The Company adopted SFAS 144 on January 1,
2002 (see Note 8).
3. RESTRICTED CASH
---------------
Restricted cash at March 31, 2002 of $7.5 million consists of cash equivalents
pledged as collateral to secure certain indemnification obligations of the
Company and certain of its affiliates related to surety bonds issued for the
benefit of the Company or its affiliates in the ordinary course of business. As
of March 31, 2002, such cash equivalents were not available for general working
capital. Subsequent to March 31, 2002, the Company substituted letters of credit
obtained under its senior secured credit facility as collateral in place of the
cash equivalents and $7.5 million of the cash equivalents were released to the
Company. Reduced availability under the senior secured facility as a result of
collateral substitution was $17.2 million. An additional $0.5 million of cash
equivalents pledged as collateral at March 31, 2002 is expected to be released
on or about July 2, 2002 provided the Company has fulfilled its obligations to
the surety. Accordingly, the additional $0.5 million is recorded in prepaid and
other current assets at March 31, 2002.
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
-----------------------------------------------------
Costs and estimated earnings on uncompleted contracts consist of the following:
As of As of
March 31, 2002 December 31, 2001
-------------- -----------------
(in thousands)
Costs incurred on uncompleted contracts $ 75,870 $ 64,400
Estimated earnings 19,944 14,200
Billings to date (88,820) (73,569)
---------- --------
$ 6,994 $ 5,031
---------- --------
8
As of As of
March 31,2002 December 31, 2001
------------- -----------------
(in thousands)
Costs and estimated earnings in excess of billings on
uncompleted contracts $ 11,167 $ 11,333
Billings in excess of costs and estimated earnings on
uncompleted contracts (4,173) (6,302)
-------- --------
$ 6,994 $ 5,031
======== ========
5. PROPERTY AND EQUIPMENT
----------------------
Property and equipment consists of the following:
As of As of
March 31, 2002 December 31, 2001
-------------- -----------------
(in thousands)
Towers and related components $1,257,236 $1,224,891
Construction in process 20,369 48,998
Furniture, equipment and vehicles 39,473 38,148
Land 13,752 12,275
Buildings and improvements 2,486 2,406
---------- ----------
1,333,316 1,326,718
Less: Accumulated depreciation and
amortization (153,960) (128,159)
---------- ----------
Property and equipment, net $1,179,356 $1,198,559
========== ==========
Construction in process represents costs incurred related to towers that are
under development and will be used in the Company's operations (see Note 8).
6. CURRENT AND LONG-TERM DEBT
--------------------------
As of As of
March 31, 2002 December 31, 2001
-------------- -----------------
(in thousands)
10 1/4% senior notes, unsecured, interest payable semi-annually,
balloon principal payment of $500,000 due at maturity on
February 1, 2009, presented net of fair value of swap of
$2,739 at March 31, 2002 (see Note 9). $497,261 $500,000
12% senior discount notes, net of unamortized original issue
discount of $27,202 at March 31, 2002 and $34,115 at December 31,
2001, unsecured, cash interest payable semi-annually in arrears
beginning September 1, 2003, balloon principal payment of $269,000
due at maturity on March 1, 2008. 241,798 234,885
Senior secured credit facility loans, interest at varying rates
(3.91% to 5.75% at March 31, 2002) quarterly installments based on
reduced availability beginning September 30, 2003, maturing June
15, 2007. 208,000 110,000
Notes payable, interest at varying rates (2.9% to 11.4% at
March 31, 2002). 352 568
-------- --------
947,411 845,453
Less: current maturities (188) (365)
-------- --------
Long-term debt $947,223 $845,088
======== ========
9
7. SHAREHOLDERS' EQUITY
--------------------
From time to time restricted shares of Class A common stock or options to
purchase Class A common stock have been granted under the Company's equity
participation plans at prices below market value at the time of grant.
Additionally, in 2002, the Company entered into bonus agreements with certain
executives and employees to issue shares of the Company's Class A common stock
in lieu of cash payments. The Company expects to record approximately $2.2
million of non-cash compensation expense in 2002 and $0.7 million in non-cash
compensation expense in each year from 2003 through 2006. The Company recorded
approximately $0.7 million in non-cash compensation expense in the quarter
ended March 31, 2002.
During the quarter ended March 31, 2002, the Company issued 1,315,769 shares of
its Class A common stock as a result of tower acquisitions and towers or
businesses it acquired having met or exceeded certain earnings or new tower
targets identified in the various acquisition agreements.
During January 2002, the Company's Board of Directors adopted a Shareholder
Rights Plan and declared a dividend of one preferred stock purchase right for
each outstanding share of the Company's common stock. Each of these rights,
which are currently not exercisable, will entitle the holder to purchase one
one-thousandth (1/1000) of a share of the Company's newly designated Series E
Junior Participating Preferred Stock. In the event that any person or group
acquires beneficial ownership of 15% or more of the outstanding shares of the
Company's common stock or commences or announces an intention to commence a
tender offer that would result in such person or group owning 15% or more of the
Company's common stock, each holder of a right (other than the acquirer) will be
entitled to receive, upon payment of the exercise price, a number of shares of
common stock having a market value equal to two times the exercise price of the
right. In order to retain flexibility and the ability to maximize stockholder
value in the event of transactions that may arise in the future, the Board
retains the power to redeem the Rights for a set amount. The Rights were
distributed on January 25, 2002 and expire on January 10, 2012, unless earlier
redeemed or exchanged or terminated in accordance with the Rights Agreement.
On March 28, 2002, the Board of Directors of the Company approved a proposal,
subject to shareholder approval, permitting the Company to offer employees a
one-time opportunity to exchange any or all of their outstanding options with an
exercise price in excess of $8.00 per share, for new options, with an exercise
price equal to the greater of: (1) $8.00, or (2) the fair market value of the
Company's Class A common stock on the grant date. The new options are to be
granted at least six months and one day from the cancellation of the surrendered
options. Employees will receive two new options for every three existing options
surrendered. If this proposal is approved by the shareholders of the Company at
the Company's annual meeting to be held on May 16, 2002, the Company expects to
launch a tender offer on or around May 20, 2002.
8. RESTRUCTURING CHARGE
--------------------
In February 2002, under a plan approved by the Company's Board of Directors, the
Company announced that it was further reducing its capital expenditures for new
tower development activities in 2002, suspending any material new investment for
additional towers, reducing its workforce and closing or consolidating offices.
Under current capital market conditions, the Company does not anticipate
building or buying a material number of new towers beyond those it is currently
contractually obligated to build or buy, thereby resulting in the abandonment of
a majority of its existing new tower build and acquisition construction in
process in the first quarter of 2002. In connection with this restructuring, a
portion of the Company's workforce has been reduced and certain offices have
been closed, substantially all of which were primarily dedicated to new tower
development activities. In addition, tower assets held and used in operations
were determined to be impaired and written down to their fair value. As a result
of the implementation of its plans, the Company recorded a restructuring charge
of $54.1 million in accordance with SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets and Emerging Issues Task Force 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity, including Certain Costs Incurred in a Restructuring. Additional
restructuring costs of approximately $5.0 to $8.0 million are expected during
the second quarter of 2002 to complete the restructuring plan.
Of the $54.1 million charge recorded in the three months ended March 31, 2002,
approximately $34.1 million relates to the abandonment of new tower build and
acquisition construction in process and related construction materials on
approximately 695 sites and $16.4 million relates to the impairment of
approximately 144
10
tower sites held and used in operations. The abandonment of new tower build and
acquisition construction in process resulted in the write-off of all costs
incurred to date. The impairment of operating tower assets resulted primarily
from the Company's evaluation of the fair value of its operating tower portfolio
through a discounted cash flow analysis. Towers determined to be impaired were
primarily towers with no current tenants and little or no prospects for future
lease-up. The remaining $3.6 million relates primarily to the costs of employee
separation for approximately 285 employees and exit costs associated with the
closing and consolidation of approximately 20 offices.
Approximately $6.8 million remains in accrued liabilities at March 31, 2002,
representing primarily incurred, but unpaid costs included in new tower build
construction in process, future lease obligations related to closed offices,
future ground lease obligations on canceled sites, as well as accrued employee
termination benefits. A summary of the restructuring charge and associated
accrued liabilities at March 31, 2002 is as follows:
Accrued as of
Total March 31, 2002
----- --------------
Abandonment of new tower build and acquisition
construction in process and related construction materials $34,088 $5,105
Impairment of tower assets held and used in operations 16,381 -
Employee separations and exit costs 3,648 1,653
------- ------
$54,117 $6,758
======= ======
9. DERIVATIVE FINANCIAL INSTRUMENT
-------------------------------
Effective January 2002, the Company entered into an interest rate swap agreement
to manage its exposure to interest rate movements by effectively converting a
portion of its $500 million senior notes from interest rate fixed to variable
rates. The Company accounts for the swap in accordance with Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, and its corresponding amendments under SFAS
No. 138. SFAS 133 established accounting and reporting standards for derivative
instruments, hedging activities, and exposure definition and requires the
Company to record the fair value of the swap on the balance sheet. Generally,
derivatives that are not hedges must be adjusted to fair value through income
(loss). If the derivative is a hedge, depending on the nature of the hedge,
changes in fair value will either be offset against the change in fair value of
the hedged assets, liabilities, or firm commitments through earnings, or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The Company's swap is accounted for as a fair value hedge under SFAS
No. 133. The swap qualifies for the shortcut method of recognition and,
therefore, no portion of the swap is treated as ineffective. Accordingly, the
entire change in fair value of the swap is offset against the change in fair
value of the related senior notes.
The notional principal amount of the swap is $100.0 million and the maturity
date and payment provisions match that of the underlying senior notes. The swap
matures in seven years and provides for the exchange of fixed rate payments for
variable rate payments without the exchange of the underlying notional amount.
The variable rates are based on six-month EURO plus 4.47% and are reset on a
semi-annual basis. The differential between fixed and variable rates to be paid
or received is accrued as interest rates change in accordance with the agreement
and recognized as an adjustment to interest expense. The Company recorded a
reduction of approximately $0.8 million to interest expense for the three months
ended March 31, 2002 as a result of the differential between fixed and variable
rates.
The Company formally documented the relationship between the swap and the
portion of senior notes hedged, as well as its risk-management objective and
strategy for entering into the swap transaction. The Company also formally
assesses, both at the inception of the swap and on an ongoing basis, whether the
swap is highly effective in offsetting changes in fair value of the hedged item.
If it is determined that the swap ceases to be a highly effective hedge, the
Company will discontinue hedge accounting prospectively. The Company does not
use derivative financial instruments for speculative or trading purposes.
As of March 31, 2002, the Company recorded a liability of approximately $2.7
million, representing the fair value of the swap, which is reflected in other
long-term liabilities on the consolidated balance sheet.
11
10. INCOME TAXES
------------
The components of the provision for income taxes are as follows:
For the three months ended
--------------------------
March 31, 2002 March 31, 2001
-------------- --------------
(in thousands)
Federal income tax $ 23,212 $ 7,698
State income tax (579) (353)
Foreign tax - (1)
Change in valuation allowance (23,212) (7,698)
-------- -------
$ (579) $ (354)
======== =======
The Company has taxable losses in the three months ended March 31, 2002 and
2001, and as a result net operating loss carry-forwards have been generated.
These net operating loss carry-forwards are fully reserved as management
believes it is not "more likely than not" that the Company will generate
sufficient taxable income in future periods to recognize the assets.
11. COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company is involved in various claims, lawsuits and proceedings arising in
the ordinary course of business. While there are uncertainties inherent in the
ultimate outcome of such matters and it is impossible to presently determine the
ultimate costs that may be incurred, management believes the resolution of such
uncertainties and the incurrence of such costs should not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
As part of the consideration for its acquisitions, the Company sometimes agrees
to issue additional shares of Class A common stock or pay additional cash if the
towers or businesses that are acquired meet or exceed certain earnings or new
tower targets in the 1-3 years after they have been acquired. As of March 31,
2002, the Company had an obligation to pay up to an additional approximately
$32.2 million in consideration if the earnings targets identified in various
acquisition agreements are met. At the Company's option, a majority of the
additional consideration may be paid in cash or Class A common stock. The
Company records such obligations when it becomes probable that the earnings
targets will be met.
12. SEGMENT DATA
------------
The Company operates principally in three business segments: site development
consulting, site development construction, and site leasing. The Company's
reportable segments are strategic business units that offer different services.
These business units are managed separately based on the fundamental differences
in their operations.
Revenues, gross profit, capital expenditures (including assets acquired through
the issuance of the Company's Class A common stock) and identifiable assets
pertaining to the segments in which the Company operates are presented below.
12
For the three months ended March 31,
-------------------------------------
2002 2001
---- ----
(in thousands)
Revenues:
Site development - consulting $ 7,037 $ 6,304
Site development - construction 24,367 26,369
Site leasing 32,540 20,283
-------- --------
$ 63,944 $ 52,956
======== ========
Gross profit:
Site development - consulting $ 1,617 $ 2,008
Site development - construction 5,107 5,647
Site leasing 21,300 13,155
-------- --------
$ 28,024 $ 20,810
======== ========
Capital expenditures:
Site development - consulting $ 2,062 $ 346
Site development - construction 7,167 13,579
Site leasing 42,514 154,436
Amounts not identified by segment - 874
-------- --------
$ 51,743 $169,235
======== ========
As of As of
March 31, 2002 December 31, 2001
-------------- -----------------
(in thousands)
Assets:
Site development - consulting $ 19,229 $ 24,850
Site development - construction 144,613 177,322
Site leasing 1,200,757 1,198,051
Assets not identified by segment 57,948 28,788
---------- -----------
$1,422,547 $ 1,429,011
========== ===========
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
We are a leading independent owner and operator of over 3,800 wireless
communications towers in the United States and Puerto Rico. We generate revenues
from our two primary businesses, site leasing and site development. In our site
leasing business, we lease antenna space to wireless service providers on towers
and other structures that we own or manage for others. The towers that we own
have either been constructed by us at the request of a carrier, built or
constructed based on our own initiative or acquired. In our site development
business, we offer wireless service providers assistance in developing and
maintaining their own networks.
We are continuing to shift our revenue stream from project driven revenues
more to recurring revenues through the leasing of antenna space at or on
communications towers. We intend to emphasize our site leasing business through
the leasing and management of tower sites and we believe we have well positioned
ourselves to perform many of the other types of services that wireless service
providers need in connection with the operation and maintenance of a wireless
telecommunications network. Those services include installation, maintenance and
upgrading of radio transmission equipment, antennas, cabling and other
connection equipment, electricity, backhaul, equipment shelters, data collection
and network monitoring.
Site Leasing Services
Site leasing revenues are received primarily from wireless communications
companies. Revenues from these clients are derived from numerous different site
leasing contracts. Each site leasing contract relates to the lease of space at
an individual tower site and is generally for an initial term of 5 years with
five 5-year renewable options. Almost all of our leases contain specified rent
escalators, which average 4% per year, including the option periods. Leases are
generally paid on a monthly basis and revenue from site leasing is recorded
monthly on a straight-line basis over the term of the related lease agreements.
Rental amounts received in advance are recorded in other liabilities (current
and long-term).
Cost of site leasing revenue consists of:
. payments for rental on ground and other underlying property;
. repairs and maintenance;
. utilities;
. insurance; and
. property taxes.
For any given tower, such costs are relatively fixed over a monthly or an
annual time period. As such, operating costs for owned towers do not generally
increase significantly as additional customers are added.
Our same tower revenue growth and same tower cash flow growth at March 31,
2002, on the 2,839 towers we owned as of March 31, 2001 was 20% and 24%,
respectively, based on tenant leases signed and revenues annualized as of March
31, 2002 and 2001.
Site Development Services
Site development services revenues are also received primarily from
wireless communications companies. Our site development customers engage us on a
project-by-project basis, and a customer can generally terminate an assignment
at any time without penalty. Site development projects in which we perform
consulting services include contracts on a time and materials basis or a fixed
price, or milestone, basis. Time and materials based contracts are billed at
contractual rates as the services are rendered. For those site development
contracts in which we perform work on a fixed price basis, we bill the client,
and recognize revenue, based on the completion of agreed upon phases or
milestones of the project on a per site basis. Upon the completion of each phase
on a per site basis, we recognize the revenue related to that phase. The
majority of our site development services are billed on a fixed basis. Our site
development projects generally take from 3 to 12 months to complete. Our revenue
from construction projects is recognized on the percentage-of-completion method
of accounting, determined by the percentage of cost incurred to date compared to
management's estimated total anticipated cost for each contract. This method is
used because management considers total cost to be the best available measure of
progress on the contracts. These amounts are based on estimates, and the
uncertainty inherent in the estimates initially is reduced as work on the
contracts nears completion. Revenue from our site development business may
fluctuate from period to period depending on
14
construction activities, which are a function of the timing and amount of our
clients' capital expenditures, the number and significance of active customer
engagements during a period, weather and other factors.
Cost of site development project revenue and construction revenue include
all material costs, salaries and labor costs, including payroll taxes,
subcontract labor, vehicle expense and other costs directly related to the
projects. All costs related to site development projects and construction
projects are recognized as incurred.
We have historically focused our capital expenditures on building new
towers and acquiring existing towers and related businesses. Our average
construction cost of a new tower is currently approximately $275,000 while we
believe the industry's average acquisition cost of a tower over the last two
years has been approximately $350,000. As a result of these favorable economics,
we had elected to build the majority (59%) of our towers.
While we have focused primarily on building new towers for growth, we have
also acquired 1,582 towers from inception through March 31, 2002. Our
acquisition strategy has focused on smaller acquisition opportunities from
non-carriers and small carrier transactions. We acquired towers where we
believed we could increase cash flow to substantially reduce the tower cash flow
multiple paid at acquisition through additional tenant lease up. During the
quarter ended March 31, 2002, we acquired 57 towers. The 57 tower acquisitions
were completed at an aggregate purchase price of $16.8 million (exclusive of
acquisition costs), an average price of approximately $295,000 per tower. As of
March 31, 2002, we do not have any backlog of pending tower acquisitions.
Three months ended Year ended
March 31, 2002 December 31, 2001
------------------ -----------------
Towers constructed 59 667
Towers acquired 57 677
In February 2002, under a plan approved by our Board of Directors, we
announced that we were reducing our capital expenditures for new tower
development activities in 2002, suspending any material new investment for
additional towers, reducing our workforce and closing or consolidating offices.
Under current capital market conditions, we do not anticipate building or buying
a material number of new towers beyond those we are currently contractually
obligated to build or buy, thereby resulting in the abandonment of a majority of
our existing new tower build and acquisition construction in process in the
first quarter of 2002. In connection with this restructuring, a portion of our
workforce has been reduced and certain offices have been closed, substantially
all of which were primarily dedicated to new tower development activities. In
addition, tower assets held and used in operations were determined to be
impaired and written down to their fair value. As a result of the implementation
of our plans, we recorded a restructuring charge of $54.1 million in accordance
with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets
and Emerging Issues Task Force 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity, including Certain
Costs Incurred in a Restructuring. Additional restructuring costs of
approximately $5.0 to $8.0 million are expected during the second quarter of
2002 to complete the restructuring plan, including further disposal of new tower
build and acquisition construction in process, additional employee separation,
and exit costs.
Of the $54.1 million charge recorded in the three months ended March 31,
2002, approximately $34.1 million relates to the abandonment of new tower build
and acquisition construction in process and related construction materials on
approximately 695 sites and $16.4 million relates to the impairment of
approximately 144 tower sites held and used in operations. The abandonment of
new tower build and acquisition construction in process resulted in the
write-off of all costs incurred to date. The impairment of operating tower
assets results primarily from our evaluation of the fair value of its operating
tower portfolio through a discounted cash flow analysis. Towers determined to be
impaired were primarily towers with no current tenants and little or no
prospects for future lease-up. The remaining $3.6 million relates primarily to
the costs of employee separation for approximately 285 employees and exit costs
associated with the closing and consolidation of approximately 20 offices.
We believe that if the capital markets conditions remain difficult for the
telecommunications industry, wireless service providers will choose to conserve
capital and may not spend as many dollars as currently anticipated. We believe
our revenues and gross profit from the site development consulting and
construction segments of our business may vary in response to the capital
markets. Short term, variable capital markets conditions may impact
15
carrier demand for our tower space. We believe that, over the longer term
however, site leasing revenues will continue to increase as carriers continue to
deploy new antenna sites to address issues of network capacity and quality,
increasing the recurring revenue stream we enjoy from existing tenants.
RESULTS OF OPERATIONS
As we continue to shift our revenue mix more towards site leasing,
operating results in prior periods may not be meaningful predictors of future
results. You should be aware of the dramatic changes in the nature and scope of
our business when reviewing the ensuing discussion of comparative historical
results. We expect that the acquisitions consummated to date, as well as our new
tower builds, will have a material impact on future revenues, expenses and net
loss. Revenues, cost of revenues, depreciation and amortization, and interest
expense each increased significantly in the quarter ended March 31, 2002 as
compared to the respective period in the prior year, and some or all of those
items may continue to increase significantly in future periods.
First Quarter 2002 Compared to the First Quarter 2001
Total revenues increased 20.7% to $63.9 million for the first quarter of
2002 from $53.0 million for the first quarter of 2001. Site development revenues
decreased 3.9% to $31.4 million in the first quarter of 2002 from $32.7 million
in the first quarter of 2001 due to decreases in site development construction
revenues. Site development consulting revenues increased 11.6% to $7.0 million
for the first quarter 2002 from $6.3 million for the first quarter of 2001, due
to the increased demand for site acquisition and zoning services from wireless
communications carriers. Site development construction revenues decreased 7.6%
to $24.4 million for the first quarter of 2002 from $26.4 million for the first
quarter of 2001, due to the decreased demand for construction services from
wireless communications carriers and the number of projects on which services
were rendered. Site leasing revenues increased 60.4% to $32.5 million for the
first quarter of 2002, from $20.3 million for the first quarter of 2001, due to
the increased number of tenants added to our towers, higher average rents
received and the increase in the number of towers added to our portfolio.
Total cost of revenues increased 11.7% to $35.9 million for the first
quarter of 2002 from $32.1 million for the first quarter of 2001. Site
development cost of revenues decreased 1.4% to $24.7 million for the first
quarter of 2002 from $25.0 million in the first quarter of 2001 due to the
decreased volume in site development construction revenues. Site development
consulting cost of revenues increased 26.2% to $5.4 million for the first
quarter of 2002 from $4.3 million for the first quarter of 2001 due primarily to
higher revenues and increased personnel costs. Site development construction
cost of revenues decreased 7.1% to $19.3 million for the first quarter of 2002
from $20.7 million in the first quarter of 2001 due primarily to lower revenues.
Site leasing cost of revenues increased 57.7% to $11.2 million for the first
quarter of 2002 from $7.1 million for the first quarter of 2001, due primarily
to the increased number of towers owned resulting in an increased amount of
lease payments to site owners and related site costs.
Gross profit increased 34.7% to $28.0 million for the first quarter of 2002
from $20.8 million for the first quarter of 2001, due to increased site leasing
revenues. Gross profit from site development decreased 12.2% to $6.7 million in
the first quarter of 2002 from $7.7 million in the first quarter of 2001 due to
lower site development revenues and a lower site development consulting margin.
Gross profit margin on site development consulting decreased to 23.0% for the
first quarter of 2002 from 31.9% for the first quarter of 2001, reflecting
different stages of project completions and more competitive pricing for our
services. Gross profit margin on site development construction in the first
quarter of 2002 was materially the same as in the first quarter of 2001. Gross
profit for the site leasing business increased 61.9% to $21.3 million in the
first quarter of 2002 from $13.2 million in the first quarter of 2001, and site
leasing gross profit margin improved to 65.5% in the first quarter of 2002 from
64.9% in the first quarter of 2001. The increased gross profit was due to the
substantially greater number of towers owned, the increase in the number of
tenants and the greater average revenue per tower in the 2002 period. The
increase in gross margin was due to the increase in average revenue per tower,
which was greater than the increase in average expenses. As a percentage of
total revenues, gross profit increased to 43.8% of total revenues for the first
quarter of 2002 from 39.3% for the first quarter of 2001 due primarily to
increased levels of higher margin site leasing gross profit.
Selling, general and administrative expenses decreased 11.9% to $9.4
million for the first quarter of 2002 from $10.6 million for the first quarter
of 2001. Selling, general and administrative expenses, net of non-cash
16
compensation expense, as a percentage of total revenue has also decreased from
18.5% to 13.6% for the first quarter of 2002 as compared to the first quarter of
2001. The decrease in selling, general and administrative expenses primarily
resulted from a decrease in developmental expenses as well as the reduction of
offices, elimination of personnel and elimination of other infrastructure that
had previously been necessary to support our prior level of new asset growth but
is no longer required as a result of the restructuring previously discussed.
Depreciation and amortization increased to $26.1 million for the first quarter
of 2002 as compared to $15.0 million for the first quarter of 2001. This
increase is directly related to the increased amount of fixed assets (primarily
towers) we owned in 2002 as compared to 2001.
In the first quarter of 2002, we recorded a $54.1 million restructuring
charge relating to a reduction in the scale of our new tower construction
activities and the impairment of tower assets held and used in operations. Of
the $54.1 million charge, approximately $34.1 million relates to the abandonment
of new tower build and acquisition construction in process and related
construction materials on approximately 695 sites and $16.4 million relates to
the impairment of approximately 144 tower sites held and used in operations. The
abandonment of new tower build and acquisition construction in process resulted
in the full write off of all costs incurred to date. The impairment of
operational tower assets resulted primarily from the Company's evaluation of the
fair value of its operating tower portfolio through a discounted cash flow
analysis. Towers determined to be impaired were primarily towers with no current
tenants with little or no prospects for future lease-up. The remaining $3.6
million relates primarily to the costs of employee separation for approximately
285 employees and exit costs associated with the closing and consolidation of
approximately 20 offices.
Operating loss was $(61.5) million for the first quarter 2002, as compared
to an operating loss of $(4.8) million for the first quarter of 2001. Total
other expenses increased to $(21.1) million for the first quarter of 2002, as
compared to $(12.7) million for the first quarter of 2000, primarily as a result
of increased interest expense offset by a reduction in interest income. The
increase in interest expense is primarily due to a full quarter of interest
expense on our $500.0 million 10 1/4 % senior notes in 2002 compared to a
partial quarter of interest expense on our $500.0 million 10 1/4% senior notes
in 2001. Additionally, this increase is attributable to higher amounts
outstanding under the senior credit facility. Net loss was $(83.2) million for
the first quarter of 2002 as compared to net loss of $(23.0) million for the
first quarter of 2001. This increase in net loss is primarily a result of the
$54.1 million restructuring charge previously described.
Earnings (loss) before interest, taxes, depreciation, amortization,
non-cash charges and unusual or non-recurring expenses ("EBITDA") increased
76.2% to $19.3 million for the first quarter of 2002 from $11.0 million in the
first quarter of 2001. The following table provides a reconciliation of EBITDA
to net loss:
Three months ended March 31,
----------------------------
2002 2001
---- ----
(in thousands)
EBITDA/(1)/ $ 19,302 $ 10,957
Interest expense, net of amounts capitalized (13,216) (8,683)
Amortization of original issue discount
and debt issuance costs (8,002) (6,968)
Interest income 9 3,000
Provision for income taxes (579) (354)
Depreciation and amortization (26,053) (15,007)
Other income (expense) 79 (84)
Non-cash compensation expense (652) (788)
Restructuring charge (54,117) -
Extraordinary item - (5,069)
-------- --------
Net loss $(83,229) $(22,996)
======== ========
17
/(1)/EBITDA is not intended to represent cash flows for the periods presented,
nor has it been presented as an alternative to operating income or as an
indicator of operating performance and should not be considered in isolation or
as a substitute for measures of performance prepared in accordance with
accounting principles generally accepted in the United States.
LIQUIDITY AND CAPITAL RESOURCES
SBA Communications Corporation is a holding company with no business
operations of its own. Our only significant asset is the outstanding capital
stock of our subsidiaries. We conduct all our business operations through our
subsidiaries. Accordingly, our only source of cash to pay our obligations, other
than financings, is distributions with respect to our ownership interest in our
subsidiaries from the net earnings and cash flow generated by these
subsidiaries. Even if we decided to pay a dividend on or make a distribution of
the capital stock of our subsidiaries, we cannot assure you that our
subsidiaries will generate sufficient cash flow to pay a dividend. Our ability
to pay cash or stock dividends is restricted under the terms of our senior
credit facility and the indentures related to our 10 1/4% senior notes and 12%
senior discount notes.
Net cash used in operations during the three months ended March 31, 2002
was $(33.4) million as compared to $(16.7) million in the three months ended
March 31, 2001. This increase is primarily attributable to the interest payment
required to be paid February 1, 2002 on the 10 1/4% senior notes. Net cash used
in investing activities for the three months ended March 31, 2002 was $(46.1)
million compared to $(158.3) million for the three months ended March 31, 2001.
This decrease is primarily attributable to a lower level of tower acquisition
and new build activity in 2002 versus 2001. Net cash provided by financing
activities for the three months ended March 31, 2002 was $97.9 million compared
to $410.4 million for the three months ended March 31, 2001. The decrease in net
cash provided by financing activities is primarily due to the issuance of our
$500.0 million 10 1/4% senior notes completed in February 2001.
Our balance sheet reflected positive working capital of $30.0 million as of
March 31, 2002 compared to a working capital deficit of $(21.4) million as of
December 31, 2001. This change is primarily attributable to the timing of
borrowings under our credit facility, receipts for accounts receivable, payment
of accounts payable, accrued expenses and interest payable related to our
business operations.
At March 31, 2002 we had $500.0 million outstanding on our 10 1/4% senior
notes. The 10 1/4% senior notes mature February 1, 2009. Interest on these notes
is payable on February 1 and August 1 of each year, beginning August 1, 2001.
Additionally, at March 31, 2002, we had $241.8 million outstanding on our 12%
senior discount notes, net of unamortized original issue discount of $27.2
million. The 12% senior discount notes mature on March 1, 2008. The 12% senior
discount notes accrete in value until March 1, 2003. Thereafter interest will
accrue and will be payable on March 1 and September 1 of each year, commencing
on September 1, 2003. Each of the 10 1/4% senior notes and the 12% senior
discount notes are unsecured and are pari passu in right of payment with our
other existing and future senior indebtedness. The 10 1/4% senior notes and the
12% senior discount notes place certain restrictions on, among other things, the
incurrence of debt and liens, issuance of preferred stock, payment of dividends
or other distributions, sale of assets, transactions with affiliates, sale and
leaseback transactions, certain investments and our ability to merge or
consolidate with other entities.
In June 2001, SBA Telecommunications, Inc., our principal subsidiary,
entered into a $300.0 million senior secured credit facility. The facility
provides for a $100.0 million term loan and a $200.0 million revolving loan, the
availability of which is based on compliance with certain covenants. As of March
31, 2002, SBA Telecommunications had drawn the full $100.0 million of the term
loan as well as $108.0 million of the revolver. The term loan and the revolving
loan mature June 15, 2007 and repayment of the term loan begins in September
2003. Borrowings under the senior credit facility accrue interest at the Euro
dollar rate plus a margin or a base rate plus a margin, as defined in the
agreement. At March 31, 2002, we had the $100.0 million term loan outstanding
under the senior credit facility at variable rates of 3.91% to 4.01% and $108.0
million outstanding under the revolving credit facility at variable rates of
3.99% to 5.75%. The senior credit facility requires us to maintain specified
financial ratios, including ratios regarding our consolidated debt coverage,
debt service, interest expense and fixed charges for each quarter and satisfy
certain financial condition tests including maintaining minimum consolidated
EBITDA. The senior credit facility also places certain restrictions on, among
other things, the incurrence of debt and liens, the sale of assets, capital
expenditures, transactions with affiliates, sale and lease-back transactions and
the number of towers that can be built without anchor tenants. Availability
under the senior
18
credit facility is determined by various financial covenants, financial ratios
and other conditions. As of March 31, 2002 we were in full compliance with the
covenants contained in the senior credit facility and the remaining $92.0
million under the revolver of the senior credit facility was available to us.
The senior credit facility is secured by substantially all of the assets of SBA
Telecommunications and its subsidiaries. Subsequent to March 31, 2002, we
substituted letters of credit totalling $17.2 million obtained under our secured
credit facility as collateral to secure surety bond indemnification obligations
of the company or its affiliates in the ordinary course of business.
Our cash capital expenditures for the quarter ended March 31, 2002 were
$46.1 million, and for the quarter ended March 31, 2001, were $158.3 million.
This decrease is a result of lesser investment in new tower assets. We currently
plan to make total cash capital expenditures during the year ending December 31,
2002 of $85.0 to $135.0 million. All of these planned capital expenditures are
expected to be funded by cash on hand, cash flow from operations and borrowings
under our senior credit facility. The exact amount of our future capital
expenditures will depend on a number of factors including amounts necessary to
support our tower portfolio and complete pending build to suit obligations.
In order to manage our indebtedness we may from time to time sell assets,
issue equity, or repurchase, restructure or refinance some or all of our debt.
Our ability to make scheduled payments of principal, or to pay interest on, our
debt obligations, and our ability to refinance any such debt obligations
(including the 10 1/4% senior notes or the 12% senior discount notes), or to
fund planned capital expenditures, will depend on our future performance, which,
to a certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control.
We have on file with the Securities and Exchange Commission ("SEC") shelf
registration statements on Form S-4 registering up to a total of 8.0 million
shares of Class A common stock that we may issue in connection with the
acquisition of wireless communication towers or companies that provide related
services at various locations in the United States. During the quarter ended
March 31, 2002, we issued 1.3 million shares of Class A common stock under these
registration statements in connection with one acquisition and certain
earn-outs. As of March 31,2002, we had 4.4 million shares of Class A common
stock remaining available under these shelf registration statements.
We have on file with the SEC a universal shelf registration statement
registering the sale of up to $252.7 million of any combination of the following
securities: Class A common stock, preferred stock, debt securities, depository
shares or warrants.
INFLATION
The impact of inflation on our operations has not been significant to date.
However, we cannot assure you that a high rate of inflation in the future will
not adversely affect our operating results.
CRITICAL ACCOUNTING POLICIES
We have identified the policies below as critical to our business
operations and the understanding of our results of operations. The listing is
not intended to be a comprehensive list of all of our accounting policies. In
many cases, the accounting treatment of a particular transaction is specifically
dictated by accounting principles generally accepted in the United States, with
no need for management's judgment in their application. In other cases,
management does exercise judgment in the application of accounting principles
with respect to particular transactions. The impact and any associated risks
related to these policies on our business operations is discussed throughout
Management's Discussion and Analysis of Financial Condition and Results of
Operations where such policies affect our reported and expected financial
results. For a detailed discussion on the application of these and other
accounting policies, see Note 2 in the Notes to Consolidated Financial
Statements in Item 8 of Form 10-K for the year ended December 31, 2001, filed
with the Securities and Exchange Commission. Note that our preparation of this
quarterly report on Form 10-Q requires us to make estimates and assumptions that
affect the reported amount of assets and liabilities, disclosure of contingent
assets and liabilities at the date of our financial statements, and the reported
amounts of revenue and expenses during the reporting period. There can be no
assurance that actual results will not differ from those estimates.
Revenue Recognition and Accounts Receivable
Revenue from site leasing is recorded monthly on a straight-line basis over
the term of the related lease agreements. Rental amounts received in advance are
recorded in other liabilities.
19
Site development projects in which the Company performs consulting services
include contracts on a time and materials basis or a fixed price basis. Time and
materials based contracts are billed at contractual rates as the services are
rendered. For those site development contracts in which the Company performs
work on a fixed price basis, site development billing (and revenue recognition)
is based on the completion of agreed upon phases of the project on a per site
basis. Upon the completion of each phase on a per site basis, the Company
recognizes the revenue related to that phase. Revenue related to services
performed on uncompleted phases of site development projects was not recorded by
the Company at the end of the reporting periods presented as it was not material
to the Company's results of operations. Any estimated losses on a particular
phase of completion are recognized in the period in which the loss becomes
evident. Site development projects generally take from 3 to 12 months to
complete.
Revenue from construction projects is recognized on the
percentage-of-completion method of accounting, determined by the percentage of
cost incurred to date compared to management's estimated total anticipated cost
for each contract. This method is used because management considers total cost
to be the best available measure of progress on the contracts. These amounts are
based on estimates, and the uncertainty inherent in the estimates initially is
reduced as work on the contracts nears completion. The asset "Costs and
estimated earnings in excess of billings on uncompleted contracts" represents
expenses incurred and revenues recognized in excess of amounts billed. The
liability "Billings in excess of costs and estimated earnings on uncompleted
contracts" represents billings in excess of revenues recognized.
Cost of site development project revenue and construction revenue include
all material costs, salaries and labor costs, including payroll taxes,
subcontract labor, vehicle expense and other costs directly related to the
projects. All costs related to site development projects and construction
projects are recognized as incurred. Cost of site leasing revenue include rent,
maintenance and other tower expenses. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are determined
to be probable.
We perform periodic credit evaluations of our customers. We continuously
monitor collections and payments from our customers and maintain a provision for
estimated credit losses based upon our historical experience and any specific
customer collection issues that we have identified. While such credit losses
have historically been within our expectations and the provisions established,
we cannot guarantee that we will continue to experience the same credit loss
rates that we have in the past. Our accounts receivable balance was $49.1
million, net of allowance for doubtful accounts of $4.3 million as of March 31,
2002.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives. Leasehold improvements
are amortized on a straight-line basis over the shorter of the useful life of
the improvement or the term of the lease. We perform ongoing evaluations of the
estimated useful lives of our property and equipment for depreciation purposes.
The estimated useful lives are determined and continually evaluated based on the
period over which services are expected to be rendered by the asset, industry
practice and asset maintenance policies. Maintenance and repair items are
expensed as incurred.
Asset classes and related estimated useful lives are as follows:
Towers and related components 2 - 15 years
Furniture, equipment and vehicles 2 - 7 years
Buildings and improvements 5 - 26 years
Capitalized costs incurred subsequent to when an asset is originally placed
in service are depreciated over the remaining estimated useful life of the
respective asset. Changes in an asset's estimated useful life are accounted for
prospectively, with the book value of the asset at the time of the change being
depreciated over the revised remaining useful life term. The charge of $54.1
million recorded in the first quarter of 2002 included a $16.4 asset impairment
charge. The asset impairment charge was determined through a fair value
evaluation of our tower asset portfolio as of March 31, 2002 using a discounted
cash flow analysis. The tower assets determined to be impaired where primarily
those with no current tenants and little or no lease-up potential.
20
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 supercedes SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long Lived Assets to Be Disposed of.
SFAS 144 applies to all long-lived assets (including discontinued operations)
and consequently amends Accounting Principles Board Opinion No. 30, Reporting
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business. SFAS 144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001. We adopted SFAS 144 on January 1, 2002 (see
Note 8).
Goodwill
We continually evaluate whether events and changes in circumstances warrant
revised estimates of useful lives or recognition of an impairment loss of
unamortized goodwill. The conditions that would trigger an impairment assessment
of unamortized goodwill include a significant negative trend in our operating
results or cash flows, a decrease in demand for our services, a change in the
competitive environment and other industry and economic factors.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. This standard eliminates the amortization of goodwill and certain
intangible assets against earnings. Instead, goodwill is subject to at least an
annual assessment for impairment by applying a fair-value-based test. Goodwill
and indefinite-lived intangible assets will be written-down against
earnings only in the periods in which the recorded value of the asset is more
than its fair value. SFAS 142 is required to be applied in fiscal years
beginning after December 15, 2001. SFAS 142 requires us to complete the
transitional goodwill impairment test six months from the date of adoption,
which we intend to do before June 30, 2002. Other intangibles will continue to
be amortized over their estimated useful lives, generally 2 to 5 years. We are
assessing the impact based on a two-step approach to assess goodwill based on
applicable reporting units and will reassess any intangible assets, including
goodwill, recorded in connection with its previous acquisitions. We recorded
approximately $0.4 million of amortization on covenants not to compete during
the first quarter of 2002. We are currently assessing, but have not yet
determined the impact adoption of SFAS 142 will have on the Company's
consolidated financial statements, however, we believe it may be material. As
of March 31, 2002, we had unamortized goodwill and covenants not to compete of
$92.4 million.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements
we are required to estimate our income taxes in each of the jurisdictions in
which we operate. This process involves us estimating our actual current tax
exposure together with assessing temporary differences resulting from differing
treatment of items, for tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which are included within our consolidated
balance sheet. We must then assess the likelihood that our deferred tax assets
will be recovered from future taxable income and to the extent we believe that
recovery is not likely, we must establish a valuation allowance. To the extent
we establish a valuation allowance or increase this allowance in a period, we
must include an expense within the tax provision in the statement of operations.
Significant management judgment is required in determining our provision
for income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. We have recorded a
valuation allowance of $95.2 million as of March 31, 2002, due to uncertainties
related to our ability to utilize some of our deferred tax assets, primarily
consisting of net operating losses carried forward before they expire. The
valuation allowance is based on our estimates of taxable income and the period
over which our deferred tax assets will be recoverable. In the event that actual
results differ from these estimates or we adjust these estimates in future
periods we may need to establish an additional valuation allowance which could
impact our financial position and results of operations. The net deferred tax
liability as of March 31, 2002 was $18.5 million.
21
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks that are inherent in our financial
instruments. These instruments arise from transactions entered into in the
normal course of business, and in some cases relate to our acquisition of
related businesses. We are subject to interest rate risk on our senior credit
facility and any future financing requirements. Substantially all of our
indebtedness currently consists of fixed rate debt.
The following table presents the future principal payment obligations and
weighted average interest rates associated with our long-term debt instruments
assuming our actual level of long-term debt indebtedness as of March 31, 2002:
(in thousands)
2002 2003 2004 2005 2006 Thereafter Fair Value
---- ---- ---- ---- ---- ---------- ----------
Liabilities
-----------
Long-term debt:
Fixed rate (12.0%) -- -- -- -- -- $ 269,000 $ 166,780
Fixed rate (10 1/4%) -- $ 500,000 $ 350,000
Term loan, $100.0 million
variable rates (3.91% to 4.01% at
March 31, 2002). -- $5,000 $15,000 $25,000 $25,000 $ 30,000 $ 100,000
Revolving loan, variable rate,
(3.99% to 5.75% at March 31, 2002) -- -- -- -- -- $ 108,000 $ 108,000
Notes payable, variable rates
(2.9% to 11.4% at March 31, 2002). $188 $ 164 -- -- -- -- $ 352
Interest Rate Derivatives
-------------------------
Interest rate swap:
Fixed to variable -- -- -- -- -- $ 100,000 $ (2,739)
Average pay rate 6.47%
Average receive rate 10.25%
In January 2002, we entered into an interest rate swap agreement to manage
our exposure to interest rate movements and to take advantage of a favorable
interest rate environment by effectively converting a portion of our debt from
fixed to variable rates. The notional principal amount of the interest rate swap
is $100.0 million. The maturity date of the interest rate swap matches the
principal maturity date of the 10 1/4% senior notes, the underlying debt
(February 2009). This swap involves the exchange of fixed rate payments for
variable rate payments without the exchange of the underlying principal amount.
The variable rates are based on six-month EURO rate plus 4.47% and are reset on
a semi-annual basis.
Our primary market risk exposure relates to (1) the interest rate risk on
long-term and short-term borrowings, and on our interest rate swap agreement,
(2) our ability to refinance our 10 1/4% senior notes and our 12% senior
discount notes, at maturity at market rates, and (3) the impact of interest rate
movements on our ability to meet interest expense requirements and exceed
financial covenants. We manage the interest rate risk on our outstanding
long-term and short-term debt through our use of fixed and variable rate debt.
While we cannot predict or manage our ability to refinance existing debt or the
impact interest rate movements will have on our existing debt, we continue to
evaluate our financial position on an ongoing basis.
Senior Note Disclosure Requirements
The indentures governing our 10 1/4% senior notes and our 12% senior
discount notes require certain financial disclosures for restricted subsidiaries
separate from unrestricted subsidiaries and the disclosure to be made of Tower
Cash Flow, as defined in the indentures, for the most recent fiscal quarter and
Adjusted Consolidated Cash Flow, as defined in the indentures, for the most
recently completed four-quarter period. As of March 31, 2002 we had no
unrestricted subsidiaries. Tower Cash Flow, as defined in the indentures, for
the quarter ended March 31, 2002 was $16.9 million. Adjusted Consolidated Cash
Flow for the twelve months ended March 31, 2002 was $78.3 million.
22
Disclosure Regarding Forward-Looking Statements
This quarterly report contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act. Discussions containing forward-looking statements may
be found in the material set forth in the section "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
These statements concern expectations, beliefs, projections, future plans
and strategies, anticipated events or trends and similar expressions concerning
matters that are not historical facts. Specifically, this quarterly report
contains forward-looking statements regarding:
. our ability to continue to access availability under our senior credit
facility and comply with the covenants contained in our senior credit
facility;
. our estimate that our operations will be positive free cash flow by
early 2003;
. the impact of the restructuring plan on our future financial
performance, long-term growth rates, liquidity and free cash flow
position;
. the amount of additional restructuring costs that will be recorded in
the second quarter of 2002;
. our strategy to transition the primary focus of our business from site
development services toward the o site leasing business, and the
consequent shift in our revenue stream from project driven revenues to
recurring revenues;
. anticipated trends in the site development industry and its effect on
our revenue and profits;
. our belief that our towers have significant capacity to accommodate
additional tenants;
. our beliefs regarding the future development of the site leasing
industry, including the impact of the capital markets on carrier demand,
and its effect on our site leasing revenues;
. our beliefs regarding the financial impact of the adoption of certain
accounting pronouncements, including SFAS 142;
. our estimate of non-cash compensation expense in each year from 2002
through 2006.
These forward-looking statements reflect our current views about future
events and are subject to risks, uncertainties and assumptions. We wish to
caution readers that certain important factors may have affected and could in
the future affect our actual results and could cause actual results to differ
significantly from those expressed in any forward-looking statement. The most
important factors that could prevent us from achieving our goals, and cause the
assumptions underlying forward-looking statements and the actual results to
differ materially from those expressed in or implied by those forward-looking
statements include, but are not limited to, the following:
. our inability to sufficiently increase our revenues and maintain or
decrease expenses and cash capital expenditures sufficiently to permit
us to be positive free cash flow by early 2003;
. the inability of our clients to access sufficient capital or their
unwillingness to expend capital to fund network expansion or
enhancements;
. our ability to continue to comply with covenants and the terms of our
senior credit facility and to access sufficient capital to fund our
operations;
. our ability to secure as many site leasing tenants as
planned;
. our ability to expand our site leasing business and maintain or expand
our site development business;
. our ability to complete construction of new towers on a timely and
cost-efficient basis, including our o ability to successfully address
zoning issues, carrier design changes, changing local market conditions
and the impact of adverse weather conditions;
23
. our ability to retain current lessees on newly acquired
towers;
. our ability to realize economies of scale for newly acquired towers; and
. the continued use of towers and dependence on outsourced site
development services by the wireless communications industry; and
. the assessed fair value of goodwill and indefinite-lived intangible
assets.
We assume no responsibility for updating forward-looking statements in this
quarterly report.
24
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) EXHIBITS
---
5.1 Opinion of Akerman, Senterfitt & Eidson, P.A.
--------------------------------------------------
(b) Reports on Form 8-K
---
The Company filed a report on Form 8-K on January 14, 2002. In the
report, the Company reported under Item 5, the declaration of a
dividend of one preferred share purchase right for each outstanding
share of Class A or Class B common stock outstanding.
The Company filed a report on Form 8-K on February 19, 2002. In the
report, the Company reported under Item 5, the reduction of capital
expenditures for new tower development activities in 2002 and the
suspension of any material new investment for additional towers.
The Company filed a report on Form 8-K on March 7, 2002. In the
report, the Company reported under Item 5 certain financial
results.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
May 15, 2002 /s/ John Marino
---------------
John Marino
Chief Financial Officer
(Duly Authorized Officer)
May 15, 2002 /s/ John F. Fiedor
------------------
John F. Fiedor
Chief Accounting Officer
(Principal Accounting Officer)
26