SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
September 17, 1999 (September 17, 1999)
AMERICAN TOWER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 001-14195 65-0723837
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
116 Huntington Avenue
Boston, Massachusetts 02116
(Address of Principal Executive Offices) (Zip Code)
(617) 375-7500
(Registrant's telephone number, including area code)
Item 5. Other Events.
This report is being filed by American Tower Corporation (the Company) to
include the most recent financial statement information of the following
entities acquired by the Company during 1998 and 1999:
UNIsite, Inc. and Subsidiaries
OmniAmerica, Inc. and Subsidiaries
Telecom Towers, L.L.C.
Telecom Towers MidAtlantic L.P.
Telecom Southwest Towers, L.P.
Telecom Towers of the West, L.P.
Wauka Communications, Inc. and Subsidiary
American Tower Corporation and Subsidiaries (Old ATC)
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(c) Exhibits.
23.1 Consent of KPMG LLP
23.2 Consent of KPMG LLP
23.3 Consent of Ernst & Young LLP
23.4 Consent of Ernst & Young LLP
23.5 Consent of KPMG LLP
23.6 Consent of Arthur Anderson LLP
23.7 Consent of KPMG LLP
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 hereunto duly authorized.
AMERICAN TOWER CORPORATION
(Registrant)
Date: September 17, 1999 By: /s/ Justin D. Benincasa
Name: Justin D. Benincasa
Title: Vice President and Corporate
Controller
2
INDEX TO FINANCIAL STATEMENTS
Page
----
UNISITE, INC. AND SUBSIDIARIES
Independent Auditors Report.............................................. F-3
Consolidated Balance Sheets as of December 31, 1998 and 1997 and June 30,
1999 (unaudited)........................................................ F-4
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996 and the six months ended June 30, 1999 and 1998 (un-
audited)................................................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996 and the six months ended June 30, 1999 and 1998 (un-
audited)................................................................ F-6
Consolidated Statements of Redeemable Convertible Preferred Stock and
Stockholders' Deficit for the years ended December 31, 1998, 1997 and
1996 and the six months ended June 30, 1999............................. F-7
Notes to Consolidated Financial Statements............................... F-8
OMNIAMERICA, INC. AND SUBSIDIARIES
Reports of Independent Auditors.......................................... F-19
Consolidated Balance Sheets as of June 30, 1998 and 1997................. F-21
Consolidated Statements of Earnings for the years ended June 30, 1998 and
1997.................................................................... F-22
Consolidated Statements of Stockholders' Equity for the years ended June
30, 1998 and 1997....................................................... F-23
Consolidated Statements of Cash Flows for the years ended June 30, 1998
and 1997................................................................ F-24
Notes to Consolidated Financial Statements............................... F-26
Consolidated Balance Sheet as of December 31, 1998 (unaudited)........... F-44
Consolidated Statements of Operations for the six months ended December
31, 1998 and 1997
(unaudited)............................................................. F-45
Consolidated Statements of Cash Flows for the six months ended December
31, 1998 and 1997
(unaudited)............................................................. F-46
Notes to Unaudited Consolidated Financial Statements..................... F-48
TELECOM TOWERS, L.L.C.
Reports of Independent Auditors.......................................... F-52
Balance Sheets as of December 31, 1998 and 1997.......................... F-54
Statements of Operations for the year ended December 31, 1998 and the pe-
riod from September 30, 1997 (inception) to December 31, 1997........... F-55
Statements of Members' Equity for the year ended December 31, 1998 and
the period from
September 30, 1997 (inception) to December 31, 1997..................... F-56
Statements of Cash Flows for the year ended December 31, 1998 and the pe-
riod from September 30, 1997 (inception) to December 31, 1997........... F-57
Notes to Consolidated Financial Statements............................... F-58
TELECOM TOWERS MID-ATLANTIC LIMITED PARTNERSHIP
Reports of Independent Auditors.......................................... F-66
Consolidated Balance Sheets as of July 31, 1998 and December 31, 1997.... F-68
Consolidated Statements of Operations for the seven months ended July 31,
1998 and year ended December 31, 1997 .................................. F-69
Consolidated Statements of Partners' Capital for the seven months ended
July 31, 1998 and year ended December 31, 1997 ......................... F-70
Consolidated Statements of Cash Flows for the seven months ended July 31,
1998 and year ended December 31, 1997 .................................. F-71
Notes to Consolidated Financial Statements............................... F-72
TELECOM SOUTHWEST TOWERS LIMITED PARTNERSHIP
Report of Independent Auditors........................................... F-79
F-1
Page
-----
Balance Sheets as of July 31, 1998 and December 31, 1997 ............... F-80
Statements of Operations for the seven months ended July 31, 1998 and
year ended December 31, 1997 .......................................... F-81
Statements of Partners' Capital for the seven months ended July 31, 1998
and year ended
December 31, 1997 ..................................................... F-82
Statements of Cash Flows for the seven months ended July 31, 1998 and
for the year ended
December 31, 1997...................................................... F-83
Notes to Financial Statements........................................... F-84
TELECOM TOWERS OF THE WEST, LIMITED PARTNERSHIP
Report of Independent Auditors.......................................... F-91
Consolidated Balance Sheets as of July 31, 1998 and December 31, 1997 .. F-92
Consolidated Statements of Operations for the seven months ended July
31, 1998 and year ended December 31, 1997.............................. F-93
Consolidated Statements of Partners' Capital for the seven months ended
July 31, 1998 and year ended December 31, 1997......................... F-94
Consolidated Statements of Cash Flows for seven months ended July 31,
1998 and year ended December 31, 1997.................................. F-95
Notes to Consolidated Financial Statements.............................. F-96
WAUKA COMMUNICATIONS, INC. AND SUBSIDIARY
Report of Independent Public Accountants................................ F-103
Consolidated Balance Sheets as of October 26, 1998 and December 31,
1997................................................................... F-104
Consolidated Statements of Operations for the period ended October 26,
1998 and year ended December 31, 1997 ................................. F-105
Consolidated Statements of Shareholder's Equity for the period ended
October 26, 1998 and year ended December 31, 1997...................... F-106
Consolidated Statements of Cash Flows for the period ended October 26,
1998 and year ended December 31, 1997 ................................. F-107
Notes to Consolidated Financial Statements.............................. F-108
AMERICAN TOWER CORPORATION AND SUBSIDIARIES (OLD ATC)
Independent Auditors' Report............................................ F-115
Consolidated Balance Sheets as of December 31, 1996 and 1997 and March
31, 1998 (unaudited)................................................... F-116
Consolidated Statements of Operations for the years ended December 31,
1995, 1996 and 1997 and three months ended March 31, 1997 and 1998
(unaudited).......................................................... F-117
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995, 1996 and 1997 and three months ended March 31,
1998 (unaudited)..................................................... F-118
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997 and three months ended March 31, 1997 and 1998
(unaudited).......................................................... F-119
Notes to Consolidated Financial Statements.............................. F-120
F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors
UNIsite, Inc.:
We have audited the accompanying consolidated balance sheets of UNIsite, Inc.
and subsidiaries as of December 31, 1997 and 1998, and the related consolidated
statements of operations, redeemable convertible preferred stock and
stockholders' deficit and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes 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 UNIsite, Inc. and
subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Tampa, Florida
March 31, 1999
F-3
UNISITE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------- June 30,
1997 1998 1999
------------ ----------- -----------
(unaudited)
ASSETS
CURRENT ASSETS:
CURRENT ASSETS:
Cash and cash equivalents.......... $ 58,105,086 23,795,375 6,925,772
Trade accounts receivable.......... 267,048 2,399,970 2,383,628
Due from NWI Partnership........... 154,668 759,147 --
Prepaid expenses and other current
assets............................ 72,835 544,679 529,391
------------ ----------- -----------
Total current assets............. 58,599,637 27,499,171 9,838,791
Systems and equipment, net........... 3,159,470 34,854,873 45,306,370
Debt issuance costs, net............. 2,870,541 2,701,181 2,515,116
Investment in NWI Partnership........ 1,181,792 955,305 --
Other assets......................... 93,836 238,456 552,752
------------ ----------- -----------
$ 65,905,276 66,248,986 58,213,029
============ =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable..................... $ 540,445 5,426,712 5,494,421
Accrued liabilities.................. 976,951 1,986,389 2,270,849
Current portion of long-term
obligations......................... 200,722 687,825 173,638
------------ ----------- -----------
Total current liabilities........ 1,718,118 8,100,926 7,938,908
Long-term obligations, less current
portion............................... 133,486 188,256 65,714
Deferred site revenues, less current
portion............................... -- -- 1,519,812
Subordinated debentures................ 35,799,452 41,701,951 44,892,922
Put warrants........................... 4,400,000 4,400,000 4,400,000
Redeemable convertible preferred stock
at liquidation value,
$1 par value; authorized 233,908
shares; issued and
outstanding 127,092 shares in 1997 and
133,569 shares in
1998 and 1999......................... 46,218,235 52,997,107 54,882,597
Stockholders' deficit:
Common stock, $.01 par value;
authorized 1,000,000 shares, 33,964
shares issued and outstanding....... 339 339 339
Additional paid-in capital........... 2,565,517 2,875,517 2,875,517
Accumulated deficit.................. (24,929,871) (44,015,110) (58,362,780)
------------ ----------- -----------
Total stockholders' deficit...... (22,364,015) (41,139,254) (55,486,924)
Commitments, contingencies and related
party transactions
------------ ----------- -----------
$ 65,905,276 66,248,986 58,213,029
============ =========== ===========
See accompanying notes to consolidated financial statements.
F-4
UNISITE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended June
Year Ended December 31, 30,
-------------------------------------- -----------------------
1996 1997 1998 1998 1999
------------ ----------- ----------- ---------- -----------
(unaudited) (unaudited)
REVENUES:
Rental revenues, net.. $ 46,921 387,242 2,215,895 593,644 2,653,673
Service and
construction
revenues............. 394,156 596,622 2,197,612 617,081 754,214
------------ ----------- ----------- ---------- -----------
441,077 983,864 4,413,507 1,210,725 3,407,887
------------ ----------- ----------- ---------- -----------
EXPENSES:
Cost of services...... 15,359 16,932 671,652 66,409 563,551
Direct site expenses.. 336,312 55,538 942,549 151,475 2,109,044
Selling, general and
administrative....... 10,073,255 7,542,300 11,453,140 5,855,298 4,877,758
Write-off of tower
sites................ 30,281 326,575 594,358 -- 270,000
Depreciation and
amortization......... 655,780 1,097,067 1,869,869 588,051 1,871,433
------------ ----------- ----------- ---------- -----------
Total costs and
expenses........... 11,110,987 9,038,412 15,531,568 6,661,233 9,691,786
------------ ----------- ----------- ---------- -----------
Equity in net loss of
NWI Partnership...... 162,700 252,308 226,487 71,466 --
------------ ----------- ----------- ---------- -----------
Operating loss...... (10,832,610) (8,306,856) (11,344,548) (5,521,974) (6,283,899)
OTHER:
Interest income....... 338,583 276,816 2,331,060 1,208,298 360,868
Interest expense...... (8,581) (258,938) (6,319,506) (3,025,416) (3,557,681)
Gain (loss) on sale of
assets............... (15,380) 31,075 26,933 26,933 --
Aborted financing and
merger expenses...... -- -- -- -- (381,477)
------------ ----------- ----------- ---------- -----------
314,622 48,953 (3,961,513) (1,790,185) (3,578,290)
------------ ----------- ----------- ---------- -----------
Net loss before
extraordinary
item............... (10,517,988) (8,257,903) (15,306,061) (7,312,159) (9,862,189)
Extraordinary item--loss
on early extinquishment
of credit facility..... -- -- -- -- (2,599,991)
------------ ----------- ----------- ---------- -----------
Net loss............ (10,517,988) (8,257,903) (15,306,061) (7,312,159) (12,462,180)
Accretion of dividends
on redeemable
convertible preferred
stock.................. 1,240,032 1,887,478 3,779,178 1,889,589 1,885,490
------------ ----------- ----------- ---------- -----------
Net loss attributable to
common stock........... $(11,758,020) (10,145,381) (19,085,239) (9,201,748) (14,347,670)
============ =========== =========== ========== ===========
See accompanying notes to consolidated financial statements.
F-5
UNISITE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, Six months ended June 30,
------------------------------------- ---------------------------
1998 1999
1996 1997 1998 (unaudited) (unaudited)
------------ ---------- ----------- ------------ -------------
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss.............. $(10,517,988) (8,257,903) (15,306,061) (7,312,159) (12,462,180)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Equity in loss of
partnership........ 162,700 252,308 226,487 71,466 --
Loss on sale of
assets and write-
off of tower
sites.............. 163,056 295,500 594,358 26,933 270,000
Aborted high-yield
financing costs.... -- -- -- -- 381,477
Extraordinary item--
loss on early
retirement of
credit facility.... -- -- -- -- 2,599,991
Stock based
compensation....... -- -- 310,000 -- --
Issuance of
preferred stock for
services:
Related party..... -- 261,205 -- -- --
Vendor............ -- 100,500 -- -- --
Depreciation and
amortization....... 655,780 1,097,067 1,869,869 588,051 1,871,433
Noncash interest
expense............ -- 199,452 6,221,859 2,824,824 3,320,996
Changes in operating
assets and
liabilities:
Trade accounts
receivable....... (48,841) (218,207) (2,132,922) (707,037) (179,167)
Due from NWI
Partnership...... (394,002) 239,334 (604,479) (226,579) 759,147
Prepaid expenses
and other........ (6,012) (47,308) (616,464) (445,340) (1,088,438)
Accounts payable
and accrued
liabilities...... 419,223 521,315 5,895,705 1,920,916 (680,979)
------------ ---------- ----------- ------------ -------------
Net cash used in
operating
activities...... (9,566,084) (5,556,737) (3,541,648) (3,258,925) (5,207,720)
------------ ---------- ----------- ------------ -------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Capital expenditures.. (3,671,059) (513,946) (33,508,630) (8,567,891) (10,658,577)
Investment in
partnership.......... (1,596,800) -- -- -- --
Repayment of loan to
officer.............. 50,000 -- -- -- --
Cash balances assumed
in acquisition of
NWI.................. -- -- -- -- 1,864,574
Proceeds from sale of
assets............... -- 607,677 -- 40,050 --
------------ ---------- ----------- ------------ -------------
Net cash provided
by (used in)
investing
activities...... (5,217,859) 93,731 (33,508,630) (8,527,841) (8,794,003)
------------ ---------- ----------- ------------ -------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Payment of principal
on long-term
obligations.......... (4,726) (155,463) (109,127) (97,602) (636,729)
Issuance of
subordinated
debentures and put
warrants............. -- 40,000,000 -- -- --
Payment of debt
issuance costs....... -- (2,870,541) (150,000) -- (2,231,151)
Proceeds from issuance
of preferred stock... 20,641,181 19,999,806 2,999,694 2,999,694 --
Proceeds from the
exercise of stock
options.............. 45,900 25,125 -- -- --
------------ ---------- ----------- ------------ -------------
Net cash provided
by financing
activities...... 20,682,355 56,998,927 2,740,567 2,902,092 (2,867,880)
------------ ---------- ----------- ------------ -------------
Net increase (decrease)
in cash and cash
equivalents........... 5,898,412 51,535,921 (34,309,711) (8,884,674) (16,869,603)
Cash and cash
equivalents at
beginning of the
period................ 670,753 6,569,165 58,105,086 58,105,086 23,795,375
------------ ---------- ----------- ------------ -------------
Cash and cash
equivalents at end of
the period............ $ 6,569,165 58,105,086 23,795,375 49,220,412 6,925,772
============ ========== =========== ============ =============
SUPPLEMENTAL CASH FLOW
INFORMATION:
Conversion of accounts
payable to note
payable.............. $ -- 310,000 -- -- --
============ ========== =========== ============ =============
Conversion of long-
term obligations and
related accrued
interest to preferred
stock................ $ 2,088,033 -- -- -- --
============ ========== =========== ============ =============
Acquisition of systems
and equipment
financed through
long-term
obligations.......... $ 184,397 -- 651,000 -- --
============ ========== =========== ============ =============
See accompanying notes to consolidated financial statements.
F-6
UNISITE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' DEFICIT
Stockholders' Deficit
Redeemable ---------------------------------------------------
Convertible Common stock Additional Total
Preferred ------------- paid-in Accumulated stockholders'
stock Shares Amount capital deficit deficit
----------- ------ ------ ---------- ----------- -------------
Balance as of December
31, 1995............... $ -- 33,349 $333 2,494,498 (3,026,470) (531,639)
Stock options
exercised............. 540 5 45,895 -- 45,900
Proceeds from the
issuance of redeemable
convertible preferred
stock................. 22,729,214 -- -- -- -- --
Accretion of dividends
on redeemable
convertible preferred
stock................. 1,240,032 -- -- -- (1,240,032) (1,240,032)
Net loss............... -- -- -- -- (10,517,988) (10,517,988)
----------- ------ ---- --------- ----------- -----------
Balance as of December
31, 1996............... 23,969,246 33,889 338 2,540,393 (14,784,490) (12,243,759)
Stock options
exercised............. -- 75 1 25,124 -- 25,125
Proceeds from the
issuance of redeemable
convertible preferred
stock................. 20,361,511 -- -- -- -- --
Accretion of dividends
on redeemable
convertible preferred
stock................. 1,887,478 -- -- -- (1,887,478) (1,887,478)
Net loss............... -- -- -- -- (8,257,903) (8,257,903)
----------- ------ ---- --------- ----------- -----------
Balance as of December
31, 1997............... 46,218,235 33,964 339 2,565,517 (24,929,871) (22,364,015)
Proceeds from the
issuance of redeemable
convertible preferred
stock................. 2,999,694 -- -- -- -- --
Accretion of dividends
on redeemable
convertible preferred
stock................. 3,779,178 -- -- -- (3,779,178) (3,779,178)
Stock based
compensation.......... -- -- -- 310,000 -- 310,000
Net loss............... -- -- -- -- (15,306,061) (15,306,061)
----------- ------ ---- --------- ----------- -----------
Balance as of December
31, 1998............... 52,997,107 33,964 339 2,875,517 (44,015,110) (41,139,254)
Accretion of dividends
on redeemable
convertible preferred
stock (unaudited)..... 1,885,490 -- -- -- (1,885,490) (1,885,490)
Net loss (unaudited)... -- -- -- -- (12,462,180) (12,462,180)
----------- ------ ---- --------- ----------- -----------
Balance as of June 30,
1999 (unaudited)....... $54,882,597 33,964 $339 2,875,517 (58,362,780) (55,486,924)
=========== ====== ==== ========= =========== ===========
See accompanying notes to consolidated financial statements.
F-7
UNISITE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) Description of Business
UNIsite, Inc. and subsidiaries (collectively referred to as the "Company") is
an owner and operator of wireless communications towers in the United States
and a provider of antenna space on those towers to the wireless industry. The
Company builds multi-tenant towers generally under build-to-suit contracts and
selectively acquires towers through a strategic acquisition program. The
Company develops and manages tower networks and leases antenna space to a
variety of wireless service providers, including AT&T Wireless, Bell South
Mobility, Nextel, OmniPoint, Sprint PCS, Sky Tel and Pagenet. The Company also
offers a broad range of development services, including network design, site
acquisition, zoning and other regulatory approvals, tower construction and
antenna installation and proprietary analysis of radio frequency interference
and power density.
As discussed in note 2, on June 28, 1999 the Company entered into an agreement
providing for the merger of the Company with a wholly-owned subsidiary of
American Tower Corporation ("ATC"). This merger had not occurred as of June 30,
1999 and is anticipated to close on or before January 31, 2000.
The Company is currently headquartered in Tampa, Florida.
(b) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
UNIsite, Inc. and all majority owned subsidiaries. Significant intercompany
balances and transactions have been eliminated in consolidation.
As discussed in note 3, prior to January 4, 1999 the Company owned a 49.9%
investment in National Wireless Infrastructure, L.P. ("NWI" / the
"Partnership"). The Company's investment in NWI was accounted for under the
equity method of accounting. On January 4, 1999, the Company acquired the
remaining 50.1% interest in NWI. Accordingly, the financial position and
results of operations of NWI are consolidated in the Company's interim
unaudited consolidated financial statements subsequent to January 4, 1999.
(c) Presentation of Unaudited Interim Consolidated Financial Statements
The interim consolidated financial statements and summary notes thereto of the
Company as of June 30, 1999 and for the six month periods ended June 30, 1998
and 1999 are unaudited and should be read in conjunction with the audited
consolidated financial statements and notes thereto for the three year period
ended December 31, 1998 contained herein. In the opinion of the Company, all
adjustments necessary for a fair presentation of such interim consolidated
financial statements have been included. Such adjustments consist of normal
recurring items. Interim results are not necessarily indicative of results for
a full year. The interim consolidated financial statements and notes thereto
are presented as permitted by the Securities and Exchange Commission ("SEC")
and do not contain certain information included in the Company's audited
consolidated financial statements and notes thereto.
(d) Cash Equivalents
Cash equivalents totaled approximately $57,930,000, $16,394,000 and $6,348,000
at December 31, 1997 and 1998 and June 30, 1999, respectively. For purposes of
the consolidated statements of cash flows, the Company considers all highly
liquid debt securities with original maturities of three months or less at the
date of purchase to be cash equivalents. Approximately $10,000,000 in cash
equivalent balances at December 31, 1998 and approximately $0 in cash balances
at June 30, 1999 are restricted, securing a stand-by letter of credit required
pursuant to a customer relationship.
F-8
UNISITE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(e) Systems and Equipment
Systems and equipment are stated at cost less accumulated depreciation. Both
external and internal costs of tower sites and related equipment are
capitalized in the undeveloped tower sites account. Internal costs represent
both direct labor costs and an allocation of specific indirect costs. When a
site is placed in service, the related costs are transferred to the tower sites
account and depreciated over its estimated useful life.
Costs related to the acquisition potential tower sites are capitalized in
undeveloped tower sites. The feasibility of such sites are continually
evaluated. If a site is determined to not be feasible, then the accumulated
costs are expensed.
Depreciation and amortization is computed using the straight-line method based
upon the following estimated useful lives:
Computer systems.......... 3 years
Software.................. 3--5 years
Furniture and equipment... 3--7 years
Leasehold improvements.... Term of lease
Tower sites............... Lesser of 20 years or term of rental agreement
(f) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted 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 deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
(g) Revenue Recognition
Rental revenue is generated from the leasing of tower antenna space to wireless
communication entities. Under certain circumstances, the Company provides free
rent at inception of the lease. In such circumstances, revenue is recognized on
a straight-line basis over the initial term of the lease. Rental revenue is
presented net of any amounts reimbursed with owners of towers pursuant to
contractual arrangements. Such contractual reimbursements totaled approximately
$224,000, $1,129,000, $250,000 and $1,191,000 during the years ended December
31, 1997 and 1998, and the unaudited six month periods ended June 30, 1998 and
1999, respectively.
Service revenues include radio frequency interference analysis, site
application and management fees. These revenues are recognized in the period
during which the related service is provided. The Company also builds towers
and installs antennas for customers under cost plus agreed-upon margin
arrangements. Construction revenues are recognized upon completing construction
projects.
(h) Stock-Based Compensation
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation, which permits entities to
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 also allows entities
to
F-9
UNISITE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
continue to apply the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and provide pro forma net
income (loss) and pro forma earnings (loss) per share disclosures for employee
stock option grants made as if the fair-value-based method defined in SFAS No.
123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma net loss disclosure
provisions of SFAS No. 123.
(i) Impairment of Long-Lived Assets
The Company accounts for its long-lived assets in accordance with Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of. This Statement
requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount
of an asset to future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. During all periods presented herein the Company is of
the opinion that no such impairment exists.
(j) Comprehensive Income (Loss)
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income, effective January 1, 1998.
SFAS 130 defines comprehensive income as the change in equity of an enterprise,
except those resulting from stockholder transactions. During the periods
presented herein changes in the Company's equity structure were limited to the
issuance of common stock, net losses and the accretion of dividends on
preferred stock. Accordingly, comprehensive income (loss) as defined by
SFAS 130 was equal to the Company's net loss as reported on its consolidated
statement of operations.
(k) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period to prepare the accompanying consolidated financial statements
in conformity with generally accepted accounting principles. Actual results
could differ from those estimates.
(l) Related Party Transactions
During the years ended December 31, 1996, 1997 and 1998, the Company paid
approximately $634,000, $118,000, $329,000, respectively, to various related
parties for legal and financial consulting services.
(2) Pending Business Combination--American Tower
On June 28, 1999 an Agreement and Plan of Merger (the Agreement) was entered
into by and between the Company and ATC. The Agreement provides for the
conversion of all outstanding common and preferred stock of the Company for the
right to receive a share of a trust to be established before the effective date
of the Merger (the Merger Trust). The merger consideration will be paid to the
Merger Trust and is calculated as follows: (1) $25,000,000, plus (2) $300,000
multiplied by the number of completed tower sites owned by the Company as of
the date of closing, reduced by adjustments for (3) certain outstanding
indebtedness, and increased / reduced for (4) an adjustment for working
capital. Closing is conditioned upon various actions by both parties. The
merger is scheduled to close on the earlier of January 31, 2000 or the date
that the Company has ownership of 600 completed tower sites.
F-10
UNISITE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ATC has provided the Company with certain interim financing as discussed in
note 6 below.
(3) Systems and Equipment
Systems and equipment are summarized as follows:
December 31,
---------------------- June 30,
1997 1998 1999
----------- ---------- -----------
(unaudited)
Computer hardware and software....... $ 3,202,456 4,018,050 4,275,143
Tower sites.......................... 746,979 30,587,112 41,482,804
Undeveloped tower sites.............. 616,871 3,325,334 5,062,759
Furniture and equipment.............. 297,293 333,897 332,903
Leasehold improvements............... 64,887 278,123 278,123
----------- ---------- ----------
Total systems and equipment........ 4,928,486 38,542,516 51,431,732
Less accumulated depreciation and
amortization........................ 1,769,016 3,687,643 6,125,362
----------- ---------- ----------
$ 3,159,470 34,854,873 45,306,370
=========== ========== ==========
(4) Investment in NWI Partnership
NWI was formed on May 6, 1996 and is engaged in leasing sites owned by the
United States Postal Service ("USPS") to wireless operators. Through January 4,
1999, the Company was the general partner and owned a 49.9% interest. The
Company is obligated to provide services to market, develop, operate, manage
and maintain the sites. Through January 4, 1999, the USPS was the limited
partner, and owned a 50.1% interest. USPS was obligated to make certain tower
sites available to the Partnership. The Partnership was capitalized with
initial contributions of approximately $1.6 million from each partner.
F-11
UNISITE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following condensed statements summarize the financial information of NWI
as of December 31, 1997 and 1998, and for the three year period ended December
31, 1998:
Condensed Balance Sheets
1997 1998
---------- ---------
Cash and other current assets........................ $2,071,262 2,027,400
Tower sites, net..................................... 2,525,549 2,528,602
---------- ---------
Total assets....................................... $4,596,811 4,556,002
========== =========
Accounts payable and other liabilities............... $ 296,716 209,809
Deferred revenue..................................... 1,777,108 1,674,611
Due to the Company................................... 154,668 759,147
Partners' capital.................................... 2,368,319 1,912,435
---------- ---------
Total liabilities and partners' capital............ $4,596,811 4,556,002
========== =========
Condensed Statements of Operations
1996 1997 1998
--------- -------- ----------
Revenues, net............................ $ 18,626 284,105 498,287
Operating expenses....................... (431,103) (873,784) (1,027,259)
Interest, net............................ 86,425 84,050 73,458
--------- -------- ----------
Net loss............................... $(326,052) (505,629) (455,514)
========= ======== ==========
Effective January 4, 1999 the Company acquired USPS limited partnership
interest in the Partnership for a nominal amount. The acquisition was accounted
for under the purchase method of accounting and the net assets of NWI were
recorded at their estimated fair values. Negative goodwill of approximately
$957,000 existed at the date of the acquisition, representing USPS' capital
account. This amount was recorded as a reduction of long-term assets (completed
tower sites).
Operations of the partnership are consolidated with that of the Company
subsequent to the date of acquisition (January 4, 1999). In connection with the
acquisition, the Partnership entered into agreements with USPS for ground
leases with respect to Partnership-owned tower sites and for the exclusive
right to market existing and potential antenna sites on USPS properties.
Management believes these agreements are reflected at fair value amounts.
(5) Subordinated Debentures
On December 17, 1997, the Company consummated a private placement of
$40,000,000 of 13% subordinated debentures due 2004. Interest is payable
semiannually beginning on June 15, 2000. The Company has the right to call a
portion of the notes at a premium of 13% in the event of a public offering of
the Company's common stock prior to December 15, 1999. The Company also has the
right to call the notes beginning three years after issuance at a premium of
13% in 2000, 6.5% in 2001, 3.25% in 2002 and none thereafter. Upon a change in
control of the Company, as defined in the debenture agreement, the holders of
the debentures have the right to put the debentures to the Company at a premium
of 1%.
F-12
UNISITE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The debentures include detachable put warrants which give the warrant holders
the right to purchase 19,864 shares of the Company's common stock for $.01 per
share, exercisable immediately. In the event that the Company has not
consummated a public offering of its common stock which produces proceeds of at
least $50 million within five years of the issue date, a holder of the warrants
has the option, for a period of two years, to require the Company to purchase
the warrants at a price equal to the fair market value of the shares of common
stock which would be issued if the warrant were exercised.
The warrants were valued at their estimated fair value at date of issue of
$4,400,000. The debentures were recorded at $35,600,000, and the resulting
discount is being accreted as additional interest expense over the term of the
debentures using the effective yield method.
(6) Long-Term Obligations
In connection with the pending ATC business combination discussed in note 2,
the Company has been provided interim financing from ATC in the form of a
promissory note in an amount not to exceed $50,000,000. The merger agreement
provides that the borrowings can be increased to $60,000,000 upon mutual
agreement by the partners to the merger agreement. Interest is accrued monthly
on outstanding borrowings at an interest rate representing the greater of 5% or
the minimum applicable federal rate for a similar note under Section 1274(d) of
the Internal Revenue Code. Outstanding principal balances shall be paid in
entirety, with accrued interest, upon the earlier of June 30, 2000 or any
termination of the ATC merger. In certain circumstances, outstanding principal
balances are payable nine months after termination of the merger agreement. No
amounts are outstanding as of June 30, 1999.
During the six months ended June 30, 1999, the Company investigated various
financing alternatives to fund its continued growth whereby the Company closed
a senior secured credit facility with a group of banks and other financial
institutions on March 31, 1999. The credit facility provided for up to $50
million of borrowing on a revolving basis, with availability subject to a
borrowing base. As a result of the pending ATC business combination, the
Company elected to retire this credit facility commitment. The Company has
recorded as an extraordinary item in its statement of operations for the six-
month period ended June 30, 1999, the loss related to the extinguishment of the
credit facility. Additionally, the Company has reported as a component of other
expense during that same period, approximately $381,000 in costs related to its
aborted financing efforts.
(7) Stock Option Plan
The Company has a stock option plan (the "Option Plan") pursuant to which the
Company's Board of Directors may grant stock options to officers, key employees
and consultants. The Plan authorizes grants of options to purchase up to 60,000
shares of authorized but unissued common stock. Stock options are granted with
an exercise price equal or greater than the estimated fair value of the stock
at the date of grant. Fair market value of each option grant was determined by
reference to the relationship between the value of the common stock and common
stock equivalents as compared to the value of the redeemable convertible
preferred stock, both of which were based on the estimated value of the
Company.
Option grants have been classified by the Company into three categories:
founders performance options, time vested employee options and performance
based employee options. Stock options generally have 10-year terms. Time vested
options become exercisable in up to four annual installments (most grants have
been in three annual installments), beginning one year from the date of grant,
subject to continued employment or engagement as a consultant. Founders'
performance options become vested and exercisable after ten years from
issuance, but vesting is accelerated upon occurrence of a merger, consolidation
or initial public offering based upon formulas contained in the option
agreements. Performance based employee options vest based upon either
F-13
UNISITE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the attainment of specified market capitalization thresholds by the Company, or
at the discretion of the Board of Directors and or the Chief Executive Officer.
With respect to performance based employee options for which no time vesting
criteria exists, a measurement date as defined by APB Opinion No. 25 is not
achieved until the underlying performance milestone is met. As of December 31,
1998, the Company had achieved certain performance milestones which resulted in
the Company recognizing compensation expense in 1998 amounting to approximately
$310,000. The Company does not believe that any further milestones were met
during the six-month period ended June 30, 1999.
At December 31, 1998, there were 12,525 additional shares available for grant
under the Option Plan. The per share weighted-average fair value of stock
options granted during 1996, 1997 and 1998 was $75.26, $39.80 and $122.32,
respectively, on the date of grant as estimated using the minimum value option-
pricing model with the following weighted-average assumptions:
1996 1997 1998
------- ------- -------
Expected dividend yield.............................. 0% 0% 0%
Expected option life................................. 6 years 6 years 6 years
Risk free interest rate.............................. 5.9% 6.0% 5.5%
The Company applies APB Opinion No. 25 in accounting for its Option Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements, other than as indicated above. Had the
Company determined compensation cost based on the fair value at the grant date
for its stock options under SFAS No. 123, the Company's net loss would have
been increased to the pro forma amounts indicated below:
1996 1997 1998
------------ ---------- -----------
Net loss:
As reported......................... $(10,517,988) (8,257,903) (15,306,061)
Pro forma........................... (10,678,192) (8,912,183) (15,671,179)
Stock option activity during the periods indicated is as follows:
Weighted
Number average
of exercise
shares price
------- --------
Balance as of December 31, 1995............................ 4,141 $102
Granted.................................................. 34,975 264
Exercised................................................ (540) 151
Forfeited................................................ (10,018) 258
------- ----
Balance as of December 31, 1996............................ 28,558 198
Granted.................................................. 15,245 135
Exercised................................................ (75) 335
Forfeited................................................ (5,555) 279
------- ----
Balance at December 31, 1997............................... 38,173 189
Granted.................................................. 13,951 425
Exercised................................................ -- --
Forfeited................................................ (4,649) 247
------- ----
Balance as of December 31, 1998............................ 47,475 $260
======= ====
F-14
UNISITE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Exercisable and outstanding stock option information is summarized as follows:
Weighted-average
remaining
contractual life
of
Exercise Shares Shares outstanding
price outstanding exercisable options (years)
--------- ----------- ----------- ----------------
$ 85 4,644 2,106 $8.42
$ 140 17,122 12,049 7.66
$218-$224 2,475 281 9.35
$ 268 8,370 8,370 6.70
$ 335 3,388 3,021 7.52
$ 468 11,476 467 9.61
------ ------ -----
47,475 26,294 $8.11
====== ====== =====
(8) Redeemable Preferred Stock
The Company has authorized and issued Class A, Class B and Class C preferred
stock. All classes of preferred stock have liquidation preferences over the
Company's common stock and voting rights which are equal to the number of
shares of common stock into which they are convertible. Each share of preferred
stock is convertible into such number of shares of common stock as is
determined by dividing the liquidation value (original price plus accumulated
and unpaid dividends) of each share of convertible preferred stock by the
conversion price per share at the time of conversion. The conversion price per
share is the original issue price adjusted for any dilution that may occur from
future offerings. The conversion price exceeded the estimated fair value of
common stock at the date if issuance.
Under certain conditions, each share of preferred stock automatically converts
into fully paid and non-assessable shares of common stock of the Company (i) at
the time of any initial public offering of the Company's common stock, (ii) on
the date on which the Company obtains the consent of the holders of a majority
of the then outstanding shares of preferred stock or (iii) at such time as
fewer than 25% of the aggregate number of shares of convertible preferred stock
issued remain outstanding.
At any time after December 17, 2005, the holders of at least 50% of the shares
of Class A and Class B preferred stock combined, or the holders of at least 50%
of the shares of Class C preferred stock, shall have the right to require the
Company to repurchase all of the shares of preferred stock then held by that
group of holders at the amount paid at issuance plus any accumulated and unpaid
dividends. Payment of any repurchase pursuant to this agreement shall be by 50%
cash at the closing plus a promissory note for 50% of the redemption price
under terms of the redemption agreement.
Dividends accrue based on the original issue price and accumulated and unpaid
dividends of the preferred stock. The dividend rate for Class A and Class B
preferred stock is 8.0%, and for Class C preferred stock is 8.5%. All
accumulated and unpaid dividends are payable upon the earliest to occur of (i)
January 15, 2001, (ii) a voluntary or involuntary liquidation or dissolution of
the Company, (iii) a merger or consolidation of the Company, (iv) the sale of
all or substantially all of the assets of the Company, or (v) the consummation
of a public offering of the Company's common stock. Under certain conditions,
no dividends will be paid on the Class C preferred stock if a public offering
of the Company's common stock is consummated within two years of the issuance
of Class C preferred stock.
In January 1996, the Company entered into an agreement with several
institutional and individual investors who committed to purchase 63,433 shares
of Class A preferred stock over a period of time at $268 per share.
F-15
UNISITE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During 1996, the Company issued 63,433 shares of Class A preferred stock under
this agreement in exchange for cash of $14,912,011 and the conversion of
$2,088,033 of principal and interest outstanding under the Company's 10%
convertible notes payable.
In June 1996, the Company issued 17,102 shares of Class B preferred stock at
$335 per share. Net cash proceeds received under the sale of Class B preferred
stock amounted to $5,729,170. Under certain conditions specified in the
agreement to sell those shares, the Company may repurchase up to 11,878 of the
Class B preferred shares at liquidation value (original price plus accrued
dividends).
During 1997, the Company issued 3,073 shares of Class A preferred stock to an
officer of the Company and 300 shares of Class B preferred stock to a
consulting firm. These shares were issued in exchange for services and,
accordingly, the fair value of the shares was recognized as expense in the
accompanying consolidated statement of operations.
The Company issued 43,184 shares of Class C preferred stock in December 1997
and in February 1998; 6,477 shares in February 1998 at approximately $463 per
share. Net cash proceeds received under the sale of Class C preferred stock
amounted to $19,999,806 in 1997 and $2,999,694 in 1998.
Total cumulative unpaid dividends on redeemable convertible preferred stock
amounted to $3,127,510, $6,906,688, and $8,792,178 as of December 31, 1997,
1998 and June 30, 1999, respectively.
(9) Income Taxes
The Company has not recognized any tax benefits for its net operating losses.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities as of December 31, 1997 and 1998 are
as follows:
1997 1998
---------- -----------
Deferred tax assets:
Net operating loss carryforwards.................... $6,786,349 11,588,698
Accounts payable and accrued liabilities, due to tax
filing on cash basis............................... 509,680 1,688,519
Basis differences related to the investment in NWI.. 328,107 204,300
---------- -----------
Total gross deferred tax assets................... 7,624,136 13,481,517
Less valuation allowance............................ (7,559,386) (11,944,904)
---------- -----------
Net deferred tax assets........................... 64,750 1,536,613
---------- -----------
Deferred tax liability--
Systems and equipment due to differences in
depreciation and amortization...................... 64,750 1,536,613
---------- -----------
Net deferred taxes................................ $ -- --
========== ===========
The valuation allowance for deferred tax assets increased by $3,902,251,
$3,065,701 and $4,385,518 during the years ended December 31, 1996, 1997 and
1998, respectively, primarily due to increases in net operating loss
carryforwards.
At December 31, 1998, the Company has net operating loss ("NOL") carryforwards
of $34 million which are available to offset future federal taxable income, if
any. Such amounts expire in varying increments through 2016. The potential
future use of the Company's NOL's may be limited if the pending business
combination is completed (note 2).
F-16
UNISITE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(10) Lease Agreements
(a) Lessor
The Company has leases for the rental of Company-owned tower space which extend
through 2013. Future minimum lease payments to be received by the Company under
such agreements for each of the next five years is as follows (as of December
31, 1998):
Year ending Amount
----------- ----------
1999.............................. $3,647,000
2000.............................. 3,742,000
2001.............................. 3,813,000
2002.............................. 3,886,000
2003.............................. 3,963,000
(b) Lessee
The Company leases office space and certain office equipment under operating
leases expiring at various dates through 2002. The Company also leases land on
its owned Tower sites under operating leases. Land leases generally are for 20-
year periods, although select leases extend for longer periods of time (last
expiration date August 2083). Such leases contain various renewal options.
Rental expense under operating leases was approximately $354,000, $261,000,
$1,109,000, $243,000 and $1,093,000 during the years ended December 31, 1996,
1997 and 1998, and the unaudited six month periods ended June 30, 1998 and
1999, respectively.
Future minimum lease payments under noncancelable operating leases as of
December 31, 1998 (with initial or remaining lease terms in excess of one year)
were as follows:
Amount
----------
1999.............................. $1,946,000
2000.............................. 1,970,000
2001.............................. 1,996,000
2002.............................. 1,983,000
2003.............................. 2,058,000
==========
(11) Concentrations of Risk and Significant Customers
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of trade accounts receivable. The Company
performs on-going credit evaluations of its customers and generally does not
require collateral. The Company maintains reserves for potential credit losses.
Revenues are concentrated among specific customers. Additionally, rental
revenue is generated through the use of systems and equipment either owned by
the Company or managed through a concentrated number of inventory providers.
As of December 31, 1998 and June 30, 1999, approximately 55% and 44% of the
Company's accounts receivable was due from Omni Point. Omni Point accounted for
approximately 37% of the Company's consolidated revenues during 1998 and
approximately 48% of the Company's consolidated revenues during the six-month
period ended June 30, 1999. Two other customers (Nextel and Sprint PCS)
accounted for approximately 14% and 18% of 1998's consolidated revenues,
respectively. As of December 31, 1997,
F-17
UNISITE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
approximately 27% of the Company's accounts receivable balances were due from
Nextel and approximately 20% were due from Cox Communications. Consolidated
revenues during 1996 and 1997 were concentrated with Nextel, Sprint PCS and
Destineer. Specific percentages of 1996 and 1997 consolidated revenue are not
presented herein as they are not considered meaningful in light of the growth
in the Company's consolidated revenues during 1998.
During the year ended December 31, 1998 and the six month period ended June 30,
1999, rental revenue on equipment managed through two inventory providers, GTE
Mobil Net and MCI, accounted for approximately 39% and 27% of consolidated
revenues, respectively.
F-18
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Stockholders and Board of Directors
OmniAmerica, Inc. (formerly Specialty Teleconstructors, Inc.)
We have audited the accompanying consolidated balance sheet of OmniAmerica,
Inc. and subsidiaries (formerly Specialty Teleconstructors, Inc.) as of June
30, 1998, and the related consolidated statements of earnings, stockholders'
equity, and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of OmniAmerica, Inc. and subsidiaries (formerly Specialty Teleconstructors,
Inc.) at June 30, 1998, and the consolidated results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Dallas, Texas
September 16, 1998
F-19
INDEPENDENT AUDITORS' REPORT
The Board of Directors
OmniAmerica, Inc. (formerly Specialty Teleconstructors, Inc.):
We have audited the accompanying consolidated balance sheet of OmniAmerica,
Inc. and subsidiaries (formerly Specialty Teleconstructors, Inc.) as of June
30, 1997, and the related consolidated statements of earnings, stockholders
equity, and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides 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 OmniAmerica
Inc. and subsidiaries (formerly Specialty Teleconstructors, Inc.) as of June
30, 1997, and the results of their operations and their cash flows for the year
then ended, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Albuquerque, New Mexico
August 29, 1997
F-20
OMNIAMERICA, INC. AND SUBSIDIARIES
(formerly Specialty Teleconstructors, Inc.)
CONSOLIDATED BALANCE SHEETS
June 30,
-------------------------
1998 1997
------------ -----------
ASSETS (Substantially Pledged)
Current assets:
Cash and cash equivalents................................................. $ 4,349,324 $ 989,720
Available for sale securities............................................. -- 769,850
Contracts receivable, less allowance for doubtful accounts of
$390,230 and $355,000 in 1998 and 1997, respectively..................... 17,349,853 14,740,479
Costs and estimated earnings in excess of billings on uncompleted
contracts (note 3)....................................................... 3,747,671 2,233,289
Components inventory...................................................... 3,430,868 2,664,239
Prepaid income taxes...................................................... 287,849 407,477
Other current assets...................................................... 891,148 283,760
------------ -----------
Total current assets...................................................... 30,056,713 22,088,814
Property and equipment, net (note 4)....................................... 50,847,107 8,429,906
Goodwill, net of amortization of $808,250 and $43,383 in 1998 and 1997,
respectively.............................................................. 87,993,151 1,512,555
Investment in unconsolidated subsidiary (note 5)........................... 7,889,650 --
Other assets, net.......................................................... 2,536,804 331,989
------------ -----------
$179,323,425 $32,363,264
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................................... $ 8,802,734 $ 4,021,694
Lines of credit (note 8).................................................. -- 3,387,910
Notes payable to stockholder (note 14).................................... 80,000 2,000,000
Billings in excess of costs and estimated earnings on uncompleted
contracts (note 3)....................................................... 758,932 597,939
Accrued expenses.......................................................... 2,171,429 790,975
Current installments of notes and capital leases payable (note 8)......... 474,696 573,798
Deferred income taxes (note 11)........................................... -- 384,600
------------ -----------
Total current liabilities................................................. 12,287,791 11,756,916
Deferred income taxes (note 11)............................................ 213,378 90,000
Notes and capital leases payable, excluding current installments (note 8).. 31,631,459 2,012,081
------------ -----------
Total liabilities......................................................... 44,132,628 13,858,997
------------ -----------
Stockholders' equity:
Common stock, $.01 par value. Authorized 100,000,000 shares;
issued 15,070,294 and 7,876,554 shares in 1998 and 1997, respectively
(notes 9, 10 and 15)..................................................... 150,703 78,765
Additional paid-in capital................................................ 129,131,297 12,015,667
Treasury stock, at cost, 100,000 shares................................... (1,387,500) --
Note receivable from officer and director (note 14)....................... (600,000) --
Retained earnings......................................................... 7,896,297 6,409,835
------------ -----------
Total stockholders' equity................................................ 135,190,797 18,504,267
Commitments and contingencies (notes 6, 13, 15 and 17).....................
------------ -----------
$179,323,425 $32,363,264
============ ===========
See accompanying notes to consolidated financial statements.
F-21
OMNIAMERICA, INC. AND SUBSIDIARIES
(formerly Specialty Teleconstructors, Inc.)
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended June 30,
-----------------------------
1998 1997
----------- -----------
Revenues earned:
Installation services........................... $53,038,988 $57,250,485
Component sales................................. 8,501,147 8,376,315
Tower leasing................................... 1,258,936 --
----------- -----------
Total revenues earned........................... 62,799,071 65,626,800
----------- -----------
Cost of revenues earned:
Cost of installation services................... 45,684,581 48,298,454
Cost of component sales......................... 5,589,902 5,113,096
Cost of tower leasing........................... 659,281 --
----------- -----------
Total cost of revenues earned................... 51,933,764 53,411,550
----------- -----------
Gross profit on revenues earned.................. 10,865,307 12,215,250
Compensation expense for cashless option
exercises (note 10)............................. 719,000 --
Selling, general and administrative expenses..... 8,233,490 5,915,808
----------- -----------
Earnings from operations........................ 1,912,817 6,299,442
----------- -----------
Other income (expenses):
Interest income................................. 157,015 181,516
Interest expense................................ (623,723) (429,615)
Equity in earnings of unconsolidated
subsidiary..................................... 219,569 --
Other, net...................................... 143,434 (20,101)
----------- -----------
(103,705) (268,200)
----------- -----------
Earnings before income taxes.................... 1,809,112 6,031,242
Income taxes..................................... 832,000 343,500
----------- -----------
Net earnings.................................... $ 977,112 $ 5,687,742
=========== ===========
Shares of common stock used in computing earnings
per share:
Basic........................................... 9,274,676 7,110,282
Diluted......................................... 9,562,121 7,467,990
Net earnings per common share:
Basic........................................... $ .11 $ .80
=========== ===========
Diluted......................................... $ .10 $ .76
=========== ===========
Pro forma information (note 12):
Net earnings.................................... $ 5,687,742
Pro forma adjustment for 1997 and 1996 income
taxes of acquired entity previously filing as
an S Corporation............................... 2,140,500
-----------
Pro forma net earnings after adjustment for
income taxes of acquired entity................. $ 3,547,242
===========
Pro forma net earnings per common share:
Basic........................................... $ .50
===========
Diluted......................................... $ .47
===========
See accompanying notes to consolidated financial statements.
F-22
OMNIAMERICA, INC. AND SUBSIDIARIES
(formerly Specialty Teleconstructors, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 30, 1998 and 1997
Note
receivable
from
Common stock Additional officer
-------------------- paid-in Treasury and Retained
Shares Amount capital stock director earnings Total
---------- --------- ------------- ------------ ---------- ----------- -------------
Balance at June 30,
1996................... 6,872,308 $ 68,723 $ 5,344,298 $ -- $ -- $ 5,032,817 $ 10,445,838
Issuance of common stock
and warrants to acquire
common stock, net...... 668,985 6,690 3,686,003 -- -- -- 3,692,693
Acquisitions (note 15):
Data Cell Systems,
Inc................... 93,400 934 664,576 -- -- -- 665,510
Paramount Communication
Systems, Inc.......... 186,047 1,860 1,728,324 -- -- -- 1,730,184
Specialty Constructors
Coatings, Inc......... 55,814 558 592,466 -- -- -- 593,024
Distributions of prior S
Corporation earnings... -- -- -- -- -- (4,310,724) (4,310,724)
Net earnings............ -- -- -- -- -- 5,687,742 5,687,742
---------- --------- ------------- ------------ ---------- ----------- -------------
Balance at June 30,
1997................... 7,876,554 78,765 12,015,667 -- -- 6,409,835 18,504,267
Issuance of common
stock, net............. 322,892 3,229 2,886,720 -- -- -- 2,889,949
Acquisitions (note 15):
Ellis Tower............ 120,848 1,209 1,796,410 -- -- -- 1,797,619
OmniAmerica............ 6,750,000 67,500 112,432,500 -- -- -- 112,500,000
Purchase of treasury
stock.................. -- -- -- (1,387,500) -- -- (1,387,500)
Return of prior S
Corporation earnings
distribution........... -- -- -- -- -- 509,350 509,350
Note receivable from
officer and director
(note 14).............. -- -- -- -- (600,000) -- (600,000)
Net earnings............ -- -- -- -- -- 977,112 977,112
---------- --------- ------------- ------------ ---------- ----------- -------------
Balance at June 30,
1998................... 15,070,294 $ 150,703 $ 129,131,297 $ (1,387,500) $ (600,000) $ 7,896,297 $ 135,190,797
========== ========= ============= ============ ========== =========== =============
See accompanying notes to consolidated financial statements.
F-23
OMNIAMERICA, INC. AND SUBSIDIARIES
(formerly Specialty Teleconstructors, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30,
-----------------------
1998 1997
----------- ----------
Cash flows from operating activities:
Net earnings......................................... $ 977,112 $5,687,742
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Provision for uncollectible receivables.............. 225,000 355,000
Depreciation of property and equipment............... 2,282,084 1,496,830
Amortization......................................... 799,867 134,185
Compensation expense for cashless option exercises... 719,000 --
Equity in earnings of unconsolidated subsidiary...... (219,569) --
Gain on sale of equipment............................ -- (10,489)
Changes in certain assets and liabilities, net of
acquisitions:
Contracts receivable................................ (1,869,714) (4,636,796)
Prepaid income taxes................................ 119,628 (344,726)
Costs and estimated earnings in excess of billings
on uncompleted contracts........................... (1,514,382) (945,959)
Components inventory................................ (680,417) (1,769,594)
Other current assets................................ (292,647) (172,919)
Trade accounts payable.............................. 4,109,132 808,416
Billings in excess of costs and estimated earnings
on uncompleted contracts........................... (335,738) 355,359
Accrued expenses.................................... 473,530 (444,544)
Current income taxes................................ -- (578,200)
Deferred income taxes............................... (261,222) (210,300)
----------- ----------
Net cash provided by (used in) operating
activities........................................ 4,531,664 (275,995)
----------- ----------
Cash flows from investing activities:
Purchases of property and equipment, net............. (22,182,316) (3,609,094)
Acquisition costs recorded as goodwill............... (3,499,319) --
Acquisitions, net of cash acquired................... 1,665,555 (80,263)
Purchases of other assets............................ (382,450) --
Proceeds from sale of available for sale securities.. 769,850 --
Purchases of available for sale securities, net...... -- (473,815)
----------- ----------
Net cash used in investing activities.............. (23,628,680) (4,163,172)
----------- ----------
Cash flows from financing activities:
Lines of credit, net................................. (3,387,910) 1,255,910
Borrowings from notes payable........................ 29,162,211 661,500
Payment of deferred financing fees................... (1,340,000) --
Principal payments on notes payable.................. (750,480) (783,110)
Borrowings from notes payable to stockholder......... -- 2,000,000
Principal payments on notes payable to stockholder... (1,410,650) (500,000)
Proceeds from sale of common stock and warrants to
acquire common stock, net........................... 1,570,949 3,692,693
Acquisition of treasury stock........................ (1,387,500) --
Distributions of prior S Corporation earnings........ -- (4,310,724)
----------- ----------
Net cash provided by financing activities.......... 22,456,620 2,016,269
----------- ----------
Net increase (decrease) in cash and cash
equivalents....................................... 3,359,604 (2,422,898)
Cash and cash equivalents at beginning of year........ 989,720 3,412,618
----------- ----------
Cash and cash equivalents at end of year.............. $ 4,349,324 $ 989,720
=========== ==========
F-24
OMNIAMERICA, INC. AND SUBSIDIARIES
(formerly Specialty Teleconstructors, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
Years Ended June 30,
---------------------
1998 1997
---------- ----------
Supplemental disclosure of cash flow information:
Interest paid........................................... $ 623,723 $ 478,177
========== ==========
Income taxes paid....................................... $1,220,587 $1,318,977
========== ==========
Acquisition of vehicles in exchange for notes payable... $1,108,545 $1,208,056
========== ==========
Note receivable from stockholder in exchange for common
stock.................................................. $ 600,000 --
========== ==========
Return of prior S Corporation earnings distribution..... $ 509,350 --
========== ==========
Acquisitions of net assets of Ellis Tower and OmniAmerica Holdings in exchange
for cash and common stock of the Company in the year ended June 30, 1998 and
Paramount, Data Cell, and Coatings in exchange for cash and common stock of the
Company in the year ended June 30, 1997 and the related fair value of assets
acquired and liabilities assumed at the date of the acquisition were as
follows:
1998 1997
------------ ----------
Contracts receivable................................ $ 1,175,989 $1,348,404
Costs and estimated earnings in excess of billings
on uncompleted contracts........................... -- (169,674)
Components inventory................................ 86,212 204,888
Other current assets................................ 314,741 --
Property and equipment.............................. 21,408,424 934,550
Goodwill............................................ 87,069,134 1,593,397
Investment in unconsolidated subsidiary............. 7,670,081 --
Other assets........................................ 482,365 100,066
Trade accounts payable.............................. (671,908) (475,809)
Billings in excess of costs and estimated earnings
on uncompleted contracts........................... (496,731) --
Accrued expenses.................................... (906,924) (6,883)
Notes and capital leases payable.................... -- (459,957)
Common stock issued................................. (114,297,619) (2,988,719)
============ ==========
See accompanying notes to consolidated financial statements.
F-25
OMNIAMERICA, INC. AND SUBSIDIARIES
(formerly Specialty Teleconstructors, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
(1) Organization, Description of Business and Basis of Presentation
On September 14, 1998, Specialty Teleconstructors, Inc. ("STI"), through a
merger with a wholly-owned subsidiary of STI, changed its name from STI to
OmniAmerica, Inc. ("OmniAmerica" or the "Company") and changed its state of
incorporation from Nevada to Delaware.
The Company is headquartered in Cedar Crest, New Mexico and was formed as a
holding company to combine the operations of its principal operating
subsidiaries, OmniAmerica Towers, Inc., OmniAmerica Development Corporation,
OmniAmerica Holdings Corporation, South Atlantic Tower Corporation, Specialty
Constructors, Inc., Specialty Constructors Coatings, Inc., Specialty
Management, Inc., OmniTower, Ltd., Microwave Tower Service, Inc., Novak &
Lackey Construction Company, Inc., and Specialty Combined Resources, Inc. The
Company is a leading provider of wireless communications and broadcast tower
services to the United States communications industry. The Company's tower
services include owning, leasing, managing and developing multi-use
telecommunications sites for radio and television broadcasting, paging,
cellular, personal communications services and other wireless technologies;
providing wireless infrastructure building and implementation services
primarily for providers of wireless communication services in the United
States; and manufacturing and selling wireless infrastructure components used
in the construction and maintenance of wireless communication transmitting and
receiving facilities. The Company's customers are located throughout the
country.
Effective March 31, 1997, a subsidiary of the Company merged with Novak &
Lackey Construction Co., Inc. ("N&L") and on June 30, 1997, a subsidiary of the
Company merged with Microwave Tower Service, Inc. ("MTS"). Both transactions
were accounted for as pooling of interests business combinations. Accordingly,
the Company's consolidated financial statements prior to these transactions
have been restated to reflect the combined operations (see note 15) for all
periods presented.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the financial statements of the
Company and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Investment in a 33 1/3% owned affiliated company is accounted for on the equity
basis of accounting and accordingly, the respective statements of earnings
includes the Company's proportionate share of the affiliate's income since its
date of acquisition during fiscal 1998.
(b) Revenue Recognition
Revenues from installation services are recognized on the percentage-of-
completion method. Contract costs include all direct material and labor costs
and those indirect costs related to contract performance. Selling, general and
administrative costs are charged to expense as incurred. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined.
Costs and estimated earnings in excess of billings on uncompleted contracts
represents revenues recognized in excess of amounts billed. Billings in excess
of costs and estimated earnings on uncompleted contracts represents billings in
excess of revenues recognized.
Revenues from the sale of components are recognized upon shipment to the
customer.
Revenues from tower leasing are recognized ratably as earned over the
respective tower lease terms.
F-26
OMNIAMERICA, INC. AND SUBSIDIARIES
(formerly Specialty Teleconstructors, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(c) Statements of Cash Flows
For purposes of statements of cash flows, the Company considers all highly
liquid debt instruments with original maturities of three months or less to be
cash equivalents.
(d) Available for Sale Securities
Investment securities consist of stocks, municipal bonds and mutual funds. In
accordance with Statement of Financial Accounting Standard (SFAS) No. 115, the
Company's investments are classified as available for sale. Available for sale
securities are recorded at fair value based on the market value as provided by
brokers/dealers. Unrealized holding gains and losses, net of the related tax
effect, are reported as a separate component of stockholders' equity. Realized
gains and losses from the sale of available for sale securities are determined
on a specific identification basis.
A decline in the market value of any available for sale security below cost
that is deemed to be other than temporary results in a reduction in carrying
amount to fair value. The impairment is charged to earnings and a new cost
basis for the security is established. Premiums and discounts are amortized or
accreted over the life of the related security as an adjustment to yield using
the effective interest method. Dividend and interest income are recognized when
earned.
As of June 30, 1997, the cost of the Company's available for sale securities
approximated market value. Such securities were liquidated during 1998.
(e) Components Inventory
Components inventory is stated at the lower of cost or market. Cost is
determined using the first-in, first-out method.
(f) Property and Equipment
Property and equipment are stated at cost. Depreciation on property and
equipment is provided on a straight-line basis over the estimated useful lives
of the assets. Leasehold improvements are amortized on a straight-line basis
over the shorter of the lease term or estimated useful life of the asset.
(g) Business and Credit Concentrations
Customers comprising 10 percent or greater of the Company's revenues earned are
summarized as follows:
1998 1997
---- ----
Sprint............................................................. 15% --
Western Wireless................................................... -- 20%
AT&T............................................................... -- 12%
The Company generally does not require collateral from its customers and has
provided adequate provisions for possible credit losses for 1998 and 1997.
(h) Distributions
Distributions to the previous subchapter S Corporation stockholder in 1997 were
made at the discretion of the Board of Directors for payment of income taxes.
In 1998, the excess amount of this distribution over actual income taxes was
returned to the Company.
F-27
OMNIAMERICA, INC. AND SUBSIDIARIES
(formerly Specialty Teleconstructors, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(i) Goodwill
The excess of purchase price over the fair value of net assets acquired is
amortized on a straight-line basis over the estimated benefit period of
approximately 30 years.
(j) Deferred Financing Costs
Deferred financing costs incurred in connection with the Company's senior
secured revolving credit facility and variable term note is being amortized
over the term of the related debt on a straight-line basis.
(k) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
July 1, 1996. This statement requires that long-lived assets and certain
identifiable intangible assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
(l) Income Taxes
The Company uses the asset and liability method to account for income taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted 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 deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(m) Advertising Costs
Advertising costs, all of which are non-direct response advertising, are
expensed as incurred. Advertising expense was approximately $153,000 and
$133,000 during the years ended June 30, 1998 and 1997, respectively.
(n) Stock Option Plan
Prior to July 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees, and related interpretations. As
such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
July 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in fiscal
1996 and future years as if the fair-value-based method defined in SFAS No. 123
had been applied. The Company has elected to continue to apply the provisions
of APB No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
F-28
OMNIAMERICA, INC. AND SUBSIDIARIES
(formerly Specialty Teleconstructors, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(o) Uses of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
(p) Earnings Per Share
In 1998, the Company adopted SFAS No. 128, Earnings per Share. In accordance
with this SFAS, basic earnings per common share is computed by dividing net
income applicable to common stock by the weighted average number of common
shares outstanding. Dilutive earnings per share is computed by dividing net
income applicable to common stock by the total of the weighted average number
of common shares outstanding and the additional dilutive effect of stock
options and warrants during the period. The dilutive effect of outstanding
stock options and warrants is computed using the average market price of the
Company's common stock for the period. The earnings per share for 1997 has been
restated to conform to this change.
The following is the reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for net income and other
related disclosures required by SFAS No. 128:
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Year ended June 30, 1998:
Basic earnings per share:
Income available to common
stockholders....................... $ 977,112 9,274,676 $.11
====
Effect of dilutive shares:
Options............................. -- 287,445
---------- ---------
Dilutive earnings per share:
Income available to common
stockholders plus assumed
conversions........................ $ 977,112 9,562,121 $.10
========== ========= ====
Year ended June 30, 1997:
Basic earnings per share:
Income available to common
stockholders....................... $5,687,742 7,110,282 $.80
====
Effect of dilutive shares:
Options and warrants................ -- 357,708
---------- ---------
Dilutive earnings per share:
Income available to common
stockholders plus assumed
conversions........................ $5,687,742 7,467,990 $.76
========== ========= ====
F-29
OMNIAMERICA, INC. AND SUBSIDIARIES
(formerly Specialty Teleconstructors, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Proforma earnings per share after
adjustment for income taxes of
acquired entity previously filing as
an S Corporation:
Basic............................... $3,547,242 7,110,282 $.50
========== ========= ====
Diluted............................. $3,547,242 7,467,990 $.47
========== ========= ====
(q) Financial Instruments
SFAS No. 107, Disclosures About Fair Values of Financial Instruments, requires
the fair value of financial instruments be disclosed. In addition to available
for sale securities carried at fair value, the Company's financial instruments
are contracts receivable, accounts payable, lines of credit and notes payable.
The carrying amounts of these items, because of their nature, approximate fair
value.
(r) New Accounting Standards
Effective July 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income and SFAS No. 131, Financial Reporting for Segments of a
Business Enterprise. Under the provisions of SFAS No. 130, there are currently
no items other than net income which would be classified as part of
comprehensive income.
(s) Reclassifications
Certain prior year amounts have been reclassified to conform to current year
presentation.
(3) Costs and Estimated Earnings on Uncompleted Contracts
1998 1997
------------ ------------
Costs incurred on uncompleted contracts......... $ 23,877,446 $ 16,682,266
Estimated earnings.............................. 10,033,415 6,321,822
Less billings to date........................... (30,922,122) (21,368,738)
------------ ------------
$ 2,988,739 $ 1,635,350
============ ============
Included in the accompanying balance sheets:
Costs and estimated earnings in excess of
billings on uncompleted contracts............ $ 3,747,671 $ 2,233,289
Billings in excess of costs and estimated
earnings on uncompleted contracts............ (758,932) (597,939)
------------ ------------
$ 2,988,739 $ 1,635,350
============ ============
F-30
OMNIAMERICA, INC. AND SUBSIDIARIES
(formerly Specialty Teleconstructors, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(4) Property and Equipment
Property and equipment consists of the following:
Estimated
Useful
lives (years) 1998 1997
------------- ----------- -----------
Tower assets......................... 30 $34,918,139 $ --
Land................................. 3,528,681 398,204
Buildings............................ 15-40 4,932,786 1,812,275
Vehicles............................. 3-7 6,406,562 5,103,442
Furniture and fixtures............... 3-10 1,794,439 1,468,646
Equipment............................ 3-10 4,556,502 2,774,246
Leasehold improvements............... 5 156,053 58,827
----------- -----------
56,293,162 11,615,640
Less accumulated depreciation........ (5,446,055) (3,185,734)
----------- -----------
$50,847,107 $ 8,429,906
=========== ===========
(5) Investment in Unconsolidated Subsidiary
As a result of the Company's merger with OmniAmerica Holdings in April 1998
described in note 15 below, the Company holds a 33 1/3% interest in Kline Iron
and Steel Co., Inc. ("Kline"), a company which fabricates structural and tower
steel products, domestically and internationally, and is accounted for under
the equity method. Summarized historical financial information of Kline as of
and for the year ended June 30, 1998:
1998
-----------
Current Assets................................................... $29,595,156
Total Assets..................................................... 33,448,072
Stockholders' Equity............................................. 5,625,935
Revenues......................................................... 65,345,299
Net Earnings..................................................... 2,389,023
(6) Leases
The Company leases its main office building from an executive officer and
leases office space for several regional offices and various equipment and
vehicles from unrelated parties. These leases are operating leases that expire
over the next four years. The main office building lease contains a renewal
option for five years and requires the Company to pay all executory costs such
as maintenance and insurance. Rental expense for operating leases was
approximately $490,000 and $365,000 for the years ending June 30, 1998 and
1997, respectively.
Future minimum lease payments under non-cancelable operating leases at June 30,
1998 are:
Year ending June 30
-------------------
1999............................................................. $ 464,857
2000............................................................. 247,931
2001............................................................. 151,263
2002............................................................. 103,482
2003............................................................. 112,816
Thereafter....................................................... 2,554,075
----------
Total minimum lease payments................................. $3,634,424
==========
F-31
OMNIAMERICA, INC. AND SUBSIDIARIES
(formerly Specialty Teleconstructors, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(7) Tower Leasing Revenue
The Company receives rental revenue from its tenants for use of its towers.
Certain leases with tenants include renewal options and/or escalation clauses.
Future minimum tower leasing revenues under tower leases in effect at June 30,
1998 are as follows:
Year ending June 30
-------------------
1999............................................................. $ 4,341,131
2000............................................................. 3,731,309
2001............................................................. 2,953,908
2002............................................................. 2,356,235
2003............................................................. 1,802,980
Thereafter....................................................... 4,409,387
-----------
$19,594,950
===========
(8) Notes and Capital Leases Payable
Notes and capital leases payable consist of the following:
1998 1997
----------- ----------
Variable rate term note payable to Chase Manhattan
Bank, interest at LIBOR plus 2% (7.675% at June 30,
1998) payable monthly, matures June 30, 2001;
secured by substantially all assets of the
Company............................................ $30,000,000 $ --
Note payable in monthly installments of $6,675,
including interest at U.S. Treasury Index plus 3.5%
(9.125% at June 30, 1998) with the balance due
March 2005; secured by a building and guaranteed by
a principal stockholder of the Company............. 776,410 784,436
7.3% capital lease payable in monthly installments
of $56,297 with the balance due September 2001,
secured by vehicles................................ 697,937 --
8.5% note payable in monthly installments of
$12,068, including interest, with the balance due
July 1999; secured by vehicles..................... 350,177 492,893
11% note payable in monthly installments of
approximately $29,795, including interest, with the
balance due at various dates in 2000; secured by
vehicles........................................... -- 835,968
Other............................................... 281,631 472,582
----------- ----------
Total notes and capital leases payable.......... 32,106,155 2,585,879
Less current installments........................... 474,696 573,798
----------- ----------
Notes and capital leases payable, excluding
current installments........................... $31,631,459 $2,012,081
=========== ==========
F-32
OMNIAMERICA, INC. AND SUBSIDIARIES
(formerly Specialty Teleconstructors, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The aggregate maturities of notes and capital leases payable are as follows:
Year ending June 30
-------------------
1999............................................................. $ 474,696
2000............................................................. 467,374
2001............................................................. 30,343,948
2002............................................................. 77,377
2003............................................................. 9,100
Thereafter....................................................... 733,660
-----------
$32,106,155
===========
The Company entered into a bank senior secured revolving credit facility of
$45,000,000 with Chase Manhattan Bank on June 30, 1998. There were no draws
from this credit facility as of June 30, 1998. The credit facility is to be
secured by substantially all the Company's assets, and borrowings are limited
to certain EBITDA ratios along with specific capitalization and interest
ratios. Interest is based on Company directed Eurodollar or ABR variable rate
of interest. The line of credit balance as of June 30, 1997 was repaid in 1998.
(9) Warrants
In connection with its initial public offering in November 1994, the Company
issued 1,000,000 shares of common stock and warrants to acquire 500,000 shares
of common stock. Warrants issued with the Company's common stock were
exercisable for $6.00 per share. Additionally, in connection with the public
offering, the Company issued warrants to the underwriters to purchase 50,000
units, each consisting of two shares of common stock and one warrant to acquire
a share of common stock. The exercise price was 120 percent of the initial
public offering price of $10.125 per unit, or $12.15 per unit. Pursuant to the
warrant agreements, the Company was entitled to redeem all outstanding
warrants, or repurchase those not redeemed at $.05 per share, upon the
Company's common stock market closing price reaching specified levels. These
levels were attained and, on February 20, 1997, the Company filed a
registration statement which included a notice to the warrant holders of record
that the Company intended to redeem all unexercised warrants on March 26, 1997
(the "Redemption Date"). All but 330 of the outstanding warrants, including all
of the underwriter units, were exercised prior to the Redemption Date,
resulting in the issuance of 649,670 shares of the Company's common stock.
Proceeds to the Company, net of issuance costs of approximately $289,000, were
$3,607,000. Following the Redemption Date, the Company redeemed the 330 then
outstanding warrants at $.05 each.
(10) Stock Option Plans
In November 1997, the Company's Board of Directors resolved and the
shareholders approved an Incentive Stock Option Plan (the 1997 Plan) pursuant
to which the Company may grant stock options to officers and key employees. The
1997 Plan may be terminated at any time by the Board of Directors, subject to
shareholder approval. Stock options are granted with an exercise price equal to
the stock's fair market value at the date of grant. All stock options have 10-
year terms and generally vest and become fully exercisable after 3 years from
the date of grant.
In May 1995, the Company's Board of Directors resolved and the shareholders
approved an Incentive Stock Option Plan (the 1995 Plan) pursuant to which the
Company may grant stock options to officers and key employees. The 1995 Plan
may be terminated at any time by the Board of Directors, subject to shareholder
approval. Stock options are granted with an exercise price equal to the stock's
fair market value at the date of
F-33
OMNIAMERICA, INC. AND SUBSIDIARIES
(formerly Specialty Teleconstructors, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
grant. All stock options have 10-year terms and generally vest and become fully
exercisable after 3 years from the date of grant.
In May 1995, the Company's Board of Directors resolved and the shareholders
approved an Outside Directors' Stock Option Plan (Directors Plan) pursuant to
which the Company may grant stock options to non-employee directors of the
Company. The Directors Plan will terminate in May 2004. The Directors Plan
authorizes grants of options to purchase up to 50,000 shares of authorized but
unissued common stock. Stock options are granted with an exercise price equal
to the stock's fair market value at the date of grant. All stock options have
10-year terms and vest and become fully exercisable after 3 years from the date
of grant.
At June 30, 1998, there were 15,000 additional shares available for grant under
the 1997 Plan, 163 additional shares available for grant under the 1995 Plan
and 2,000 additional shares available under the Directors Plan. The per share
weighted-average fair value of stock options granted during 1998 and 1997 was
$12.58 and $6.98 on the date of grant using the Black Scholes option-pricing
model with the following weighted-average assumptions: 1998--expected
volatility of 63 percent, expected dividend yield 0 percent, risk-free interest
rate of 5.22 percent, and an expected life of 3 years; 1997--expected
volatility of 82 percent, expected dividend yield 0 percent, risk-free interest
rate of 6.82 percent, and an expected life of 3 years.
On July 24, 1998, the Company's Board of Directors resolved and the
shareholders approved an Incentive Stock Option Plan (the 1998 Plan) pursuant
to which the Company may grant stock options to key employees. The effective
date of the 1998 Plan was September 14, 1998 and shall terminate ten years
later. A maximum of 675,000 shares were designated.
The Company applies APB Opinion No. 25 in accounting for its stock option plans
and, accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net income would have been reduced to the pro forma
amounts indicated below:
1998 1997
-------- ----------
Net income.................................. As reported $977,112 $5,687,742
Pro forma $ 95,427 $4,212,742
Earnings per common share:
Basic..................................... As reported $ .11 $ .80
Pro forma $ .01 $ .59
Diluted................................... As reported $ .10 $ .76
Pro forma $ .01 $ .56
Pro forma net income reflects only options granted in 1998, 1997 and 1996.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options'
vesting period and compensation cost for options granted prior to July 1, 1995
is not considered.
F-34
OMNIAMERICA, INC. AND SUBSIDIARIES
(formerly Specialty Teleconstructors, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock option activity for all plans during the periods indicated is as follows:
Weighted-
Number of average
Shares exercise price
--------- --------------
Balance at June 30, 1996......................... 323,645 $ 4.14
Granted........................................ 337,500 12.96
Exercised...................................... (23,125) 3.71
Forfeited...................................... (4,175) 4.52
Expired........................................ --
--------
Balance at June 30, 1997......................... 633,845 8.85
Granted........................................ 321,700 12.58
Exercised...................................... (239,836) 5.10
Forfeited...................................... (47,933) 6.98
Expired........................................ --
--------
Balance at June 30, 1998......................... 667,776 $12.13
========
The following tables summarize information about fixed stock options
outstanding at June 30, 1998:
Options Outstanding
-------------------------------
Weighted-average Weighted-
Number remaining average
Range of exercise prices outstanding contractual life exercise price
------------------------ ----------- ---------------- --------------
$3.0625 to $4.5625............. 54,925 1.00 $ 4.13
$6 to $9....................... 48,000 1.38 7.13
$10 to $12.50.................. 295,851 2.50 12.07
$13.00 to $15.50............... 269,000 1.77 14.72
-------
667,776 $12.13
=======
Options Exercisable
--------------------------
Weighted-
Number average
Range of exercise prices Outstanding exercise price
------------------------ ----------- --------------
$3.0625 to $4.5625.............................. 54,925 $ 4.13
$6 to $9........................................ 39,000 6.69
$10 to $12.50................................... 101,001 11.88
$13.00 to $15.50................................ 168,332 14.74
-------
363,258 $11.47
=======
In 1998, approximately 23,500 options were exercised by employees and an
outside director on the cashless method, which resulted in the Company
recognizing a one-time non-cash compensation expense of $719,000.
F-35
OMNIAMERICA, INC. AND SUBSIDIARIES
(formerly Specialty Teleconstructors, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(11) Income Taxes
Income tax expense (benefit) consists of:
Current Deferred Total
---------- --------- --------
Year ended June 30, 1998:
U.S. federal................................ $ 973,000 $(249,000) $724,000
State and local............................. 143,000 (35,000) 108,000
---------- --------- --------
Total..................................... $1,116,000 $(284,000) $832,000
========== ========= ========
Year ended June 30, 1997:
U.S. federal................................ $ 411,500 $(201,800) $209,700
State and local............................. 98,700 35,100 133,800
---------- --------- --------
Total..................................... $ 510,200 $(166,700) $343,500
========== ========= ========
Income tax expense differs from the amounts computed by applying the U.S.
federal income tax rate of 34 percent to earnings before income taxes as a
result of the following factors:
1998 1997
-------- -----------
Computed "expected" tax............................. $615,000 $ 2,050,600
Reduction for income taxable to Subchapter S
shareholder (MTS).................................. -- (1,895,900)
Deferred taxes established in connection with
acquisition of prior Subchapter S Corporation
(MTS).............................................. -- 90,000
Non-deductible goodwill expense..................... 58,100 --
Non-deductible compensation expense for cashless
option exercises................................... 38,900 --
Non-deductible meals and entertainment.............. 32,300 --
State income taxes, net of federal tax benefit...... 90,400 63,100
Other............................................... (2,700) 35,700
-------- -----------
Total............................................... $832,000 $ 343,500
======== ===========
F-36
OMNIAMERICA, INC. AND SUBSIDIARIES
(formerly Specialty Teleconstructors, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at June 30, 1998 and
1997 are presented below:
1998 1997
--------- ---------
Deferred Tax Liabilities:
Adjustment for conversion from cash basis to accrual
basis tax reporting................................. $(213,200) $(385,700)
Investment in unconsolidated subsidiary.............. (167,600) --
Amortization of goodwill and depreciation for
financial reporting purposes in excess of tax
amounts............................................. (270,300) 21,400
Deferred taxes established in connection with
acquisition of prior Subchapter S Corporation
(MTS)............................................... (90,000) (90,000)
Other................................................ -- (20,300)
--------- ---------
Total deferred tax liability........................ (741,100) (474,600)
--------- ---------
Deferred Tax Assets:
Allowance for doubtful accounts...................... 152,200 --
Start up costs....................................... 244,000 --
Accrued expenses..................................... 65,300 --
Net operating loss................................... 336,800 --
Other................................................ 29,522 --
Less valuation allowance............................. (300,100) --
--------- ---------
Total deferred tax asset............................ 527,722 --
--------- ---------
Net deferred tax liability.......................... $(213,378) $(474,600)
========= =========
A subsidiary of the Company has a net operating loss of $893,000 as of its
acquisition date. This net operating loss is subject to limitation by Internal
Revenue Code Section 382 and the separate return limitation year rules. The net
operating loss will begin to expire in the year 2012. A valuation allowance has
been established against the net deferred tax asset resulting from the net
operating loss due to the limitations imposed on the utilization of the loss.
All of the valuation allowance for deferred tax assets will reduce goodwill
when the tax benefit is recognized in the future.
(12) Pro Forma Income Taxes
For financial reporting purposes, a pro forma provision for income taxes has
been reflected in the consolidated statements of earnings to present taxes on
the results of operations of MTS for the year ended June 30, 1997 on the basis
that is required upon their change in tax status from an S Corporation to a C
Corporation. This amount, $2,140,500, is equal to the required Federal and
state income tax provisions that would have been recorded if MTS had not
elected S Corporation status and was subject to and liable for Federal and
state income taxes as a C Corporation prior to its termination of S Corporation
status. MTS terminated its S Corporation status upon merging with a wholly-
owned subsidiary of the Company on June 30, 1997.
(13) Profit-sharing Plans
In November 1996, the Company established a profit sharing plan pursuant to
Section 401(k) of the Internal Revenue Code, whereby participants may
contribute a percentage of compensation, but not in excess of the maximum
allowed under the code. The plan provides for a matching contribution by the
Company, which amounted to approximately $50,800 and $9,000 for the years ended
June 30, 1998 and 1997, respectively.
In 1989, MTS, a wholly-owned subsidiary, established a discretionary profit
sharing and money purchase pension plan. The plans cover all non-union
employees who have met certain service requirements.
F-37
OMNIAMERICA, INC. AND SUBSIDIARIES
(formerly Specialty Teleconstructors, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Contributions to the profit sharing plan are discretionary and determined based
on operating results of MTS. For the money purchase pension plan, MTS was
required to contribute 8% of eligible compensation annually. Effective, October
31, 1997, the plans were terminated in accordance with the provisions of
Employee Retirement Income Security Act of 1974, and all participants became
immediately vested in their accounts. Contributions were approximately $-0- and
$173,000 in 1998 and 1997, respectively.
(14) Related Party Transactions
(a) Leases
The Company leases its main office building from Michael R. Budagher (a
principal stockholder, an officer and director of the Company).
(b) Budagher's Tower Co. ("BTC")
The Company uses contract labor provided by BTC, a corporation which is wholly-
owned by Michael R. Budagher's brother. The Company incurred $252,933 and
$452,338 for contract labor services provided by BTC during the years ended
June 30, 1998 and 1997, respectively.
(c) Specialty Constructors Coatings, Inc. ("SCC")
The Company uses contract labor services provided by SCC. SCC is a corporation
which was 50 percent owned by Michael R. Budagher until March 31, 1997, when
Mr. Budagher sold his interest in SCC. On June 1, 1997, the Company acquired
SCC (note 15). The Company incurred $606,304 for contract labor services
provided by SCC during the year ended June 30, 1997.
(d) Specialty Manufacturing, Inc. ("SMI")
Prior to August 1997, the Company purchased ground kits from SMI used in
certain construction projects. SMI is owned 50 percent by Michael R. Budagher's
spouse (a stockholder) and 50 percent by Michael R. Budagher's brother (a
stockholder and employee of the Company). The Company purchases from SMI
totaled $3,768 and $29,852 during the years ended June 30, 1998 and 1997,
respectively. In August 1997, MTS acquired substantially all of the inventory
and manufacturing equipment of SMI for $134,882 in cash and the right to
receive a royalty of $2 for each ground kit sold by MTS through July 31, 2000.
The Company paid royalties to SMI in the amount of $42,348 in 1998.
(e) Change Corporation ("Change")
The Company occasionally purchases computer equipment and software from Change,
which is used for office purposes. Change is owned by Michael R. Budagher's
sister. The Company incurred $36,575 and $-0-, in 1998 and 1997, respectively,
for such purchases.
(f) Note Receivable from Officer and Director
A 7% recourse note receivable of $600,000 due December 29, 2002 is due from an
officer and director of the Company. Such note was originated for the purchase
of 50,000 shares of the Company's common stock, the source being from unissued
shares of the Company. Such balance is classified in the stockholders' equity
section of the balance sheet.
F-38
OMNIAMERICA, INC. AND SUBSIDIARIES
(formerly Specialty Teleconstructors, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(g) Notes Payable to Stockholder
The Company had notes payable to stockholder for $80,000 and $2,000,000 as of
June 30, 1998 and 1997, respectively. Such notes payable originated as a
distribution to the previous Subchapter S Corporation stockholder in 1997 for
estimated payment of income taxes. $1,410,650 was paid to this stockholder
during 1998, $509,350 of this balance was returned to the Company for the
difference between the actual income tax liability and the original $2,000,000
distribution, and $80,000 remains for anticipated remaining liability for such
income taxes. The remaining payable is secured by components inventory.
(h) Principal Stockholder Advisory and Financial Services Commitment
The Company has retained Hicks, Muse & Co. Partners ("HMCo") (owner of
approximately 45% of the Company's outstanding common stock) in 1998 to perform
certain advisory, oversight, monitoring and financial services as requested by
the Board of Directors for a period to be the lesser of April 23, 2008 or upon
HMCo owning less than 33 1/3% of the outstanding common stock of the Company.
Such annual fees shall be the greater of $180,000 or .2% of annual consolidated
net sales of the Company for oversight and monitoring services and a 1 1/2% fee
for all future acquisitions, sales, mergers, recapitalization, restructurings
or other similar transactions for which HMCo provides services. During 1998,
approximately $269,000 was paid to HMCo. Such services did not exist in 1997.
(i) Kline Tower and Steel ("Kline")
The Company purchases certain structural and tower steel products from Kline.
The Company owns 33 1/3% of the outstanding equity of Kline (note 5). During
the year ended June 30, 1998, approximately $2,569,000 of such products were
purchased from Kline and approximately $100,000 in consulting fees were paid to
Kline. The Company is obligated to pay Kline this $100,000 consulting fee each
year for the next four fiscal years. Approximately $294,000 included in trade
accounts payable was owed to Kline as of June 30, 1998. The Company did not
hold an ownership interest in Kline during 1997.
(15) Acquisitions
On August 26, 1998, the Company acquired three towers for approximately
$2,400,000.
On July 9, 1998, the Company paid $640,000 and issued 81,270 shares of
restricted common stock of the Company at a price of $30.60 per share,
determined by the closing price on or about July 9, 1998, in exchange for
substantially all of the assets and liabilities of Teleforce Communications,
LLC. ("Teleforce"). Teleforce provides site acquisition services for the
wireless communications industry. The transaction was accounted for as a
purchase. Goodwill of approximately $2,750,000 recorded in connection with the
purchase is being amortized over a period of 30 years.
On April 23, 1998, the Company issued 6,750,000 shares of restricted common
stock of the Company at a price of $16.67 per share, determined by the average
closing price on or about February 16, 1998, in connection with the merger of
OmniAmerica Holdings ("OmniAmerica Holdings"). OmniAmerica Holdings owns assets
consisting of real estate, equipment and other physical property used in the
operation of the wireless communications and broadcast transmission tower
leasing business. The source of the shares for the transaction were unissued
shares of the Company. The transaction was accounted for as a purchase.
Accordingly, the results of OmniAmerica Holdings have been included in those of
the Company since the date of the merger. Goodwill of approximately $85,000,000
recorded in connection with the acquisition is being amortized over a period of
30 years. The Company is currently completing the allocation of its purchase
price, including the valuation of
F-39
OMNIAMERICA, INC. AND SUBSIDIARIES
(formerly Specialty Teleconstructors, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
identifiable intangible assets. The refinement of the purchase price allocation
within the next year is not expected to have a material impact on the Company's
financial position or results of operations.
On October 7, 1997, a wholly-owned subsidiary of the Company purchased
substantially all the assets of Ellis Tower Co., Inc. ("Ellis Tower"), in
exchange for $449,405 in cash and 120,848 shares of the Company's common stock
at a price of $14.87 determined by the closing price on or about October 7,
1997. Ellis Tower, located in Ft. Lauderdale, Florida, provides wireless
infrastructure building services. The source of the shares for the transaction
were unissued shares of the Company. The transaction was accounted for as a
purchase. Accordingly, the results of Ellis Tower have been combined with those
of the Company since the date of the purchase. Goodwill of approximately
$1,700,000 recorded in connection with the purchase is being amortized over a
period of 15 years.
On June 30, 1997, the Company issued 2,380,000 shares of restricted common
stock of the Company at a price of $11.625 per share, determined by the closing
price on or about June 8, 1997, pursuant to the merger of MTS with a wholly-
owned subsidiary of the Company. The source of the shares for the transaction
were unissued shares of the Company. MTS, located in Salem, Oregon; Salt Lake
City, Utah; Phoenix, Arizona; Denver, Colorado; and Sacramento, California,
provides wireless infrastructure building services and manufacturing,
distribution and sales of components for wireless infrastructure. The
transaction was accounted for as a pooling of interests. Accordingly, the
Company's consolidated financial statements have been restated to include the
operations of MTS prior to the acquisition for all periods presented.
On June 1, 1997, the Company issued 55,814 shares of restricted common stock of
the Company at a price of $10.625 per share, determined by the closing price on
or about June 1, 1997, in exchange for substantially all the assets and
liabilities of Specialty Constructors Coatings, Inc. ("Coatings"). Coatings was
originally 50 percent owned by Michael R. Budagher, but Mr. Budagher's interest
was sold to the other shareholders on March 1, 1997. The source of the shares
for the transaction were unissued shares of the Company. Coatings, located in
Cedar Crest, New Mexico, provides wireless infrastructure building services,
primarily on water tank facilities. The transaction was accounted for as a
purchase. Accordingly, the results of Coatings' operations have been combined
with those of the Company since the date of acquisition. No goodwill was
recorded in connection with the purchase.
On May 28, 1997, the Company issued 186,047 shares of restricted common stock
of the Company at a price of $9.30 per share, determined by the closing price
on or about March 31, 1997, in exchange for substantially all the assets and
liabilities of Paramount Communication Systems, Inc. ("Paramount"). The source
of the shares for the transaction were unissued shares of the Company.
Paramount, located in Somerdale, New Jersey, provides wireless infrastructure
building services. The transaction was accounted for as a purchase.
Accordingly, the results of Paramount's operations have been combined with
those of the Company since the date of acquisition. Goodwill of approximately
$1,300,000 recorded in connection with the purchase is being amortized over a
period of fifteen years. In connection with the purchase, the Company entered
into a note receivable with the principal stockholder of Paramount. The note,
in the amount of $250,000, is due in three semi-annual installments beginning
May 2000 and one final installment in November 2001. Interest, at 9 percent, is
payable quarterly. Under the terms of the acquisition agreement, the Company is
obligated to loan an additional $250,000 to the stockholder of Paramount. Such
additional loan was not requested by the stockholder in 1998. The note is
secured by 93,024 shares of the Company's common stock.
On May 14, 1997, the Company issued 400,000 shares of restricted common stock
of the Company at a price of $9.25 per share, determined by the closing price
on or about March 31, 1997, pursuant to the merger of N&L with a wholly-owned
subsidiary of the Company. The source of the shares for the transaction were
F-40
OMNIAMERICA, INC. AND SUBSIDIARIES
(formerly Specialty Teleconstructors, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
unissued shares of the Company. N&L, located in Oklahoma City, OK and southern
California, provides general contract services for wireless telecommunications
companies, health care and other commercial customers. The transaction was
accounted for as a pooling of interests. Accordingly, the Company's
consolidated financial statements have been restated to include the operations
of N&L prior to the acquisition for all periods presented.
On October 31, 1996, the Company paid $160,000 and issued 93,400 shares of
restricted common stock of the Company at a price of $7.125 per share,
determined by the closing price on or about October 31, 1996, in exchange for
substantially all the assets and liabilities of Data Cell Systems, Inc. ("Data
Cell"). Data Cell provides wireless infrastructure building services. The
source of the shares for the transaction were unissued shares of the Company.
The transaction was accounted for as a purchase. Accordingly, the results of
Data Cell's operations have been combined with those of the Company since the
date of acquisition. Goodwill of approximately $380,000 recorded in connection
with the purchase is being amortized over a period of five years. Additionally,
pursuant to the purchase agreement, the Company may be required to pay
additional consideration, not to exceed $200,000, based upon the Data Cell
subsidiary achieving specified levels of pre-tax earnings during the three
years immediately following the date of acquisition. Such levels were not
attained in the years ended June 30, 1998 and 1997.
Fiscal years 1998 and 1997 also include other acquisitions which are immaterial
to the consolidated financial statements of the Company.
Separate results of the combining entities, giving effect to the N&L and MTS
poolings of interests for periods prior to such transactions are as follows for
the year ended June 30:
1997(1)
As restated
-----------
Revenues earned:
OmniAmerica.................................................. $32,303,360
Novak & Lackey............................................... 10,303,550
Microwave Tower Service...................................... 23,019,890
-----------
$65,626,800
===========
Net earnings (loss):
OmniAmerica.................................................. $ (279,257)
Novak & Lackey............................................... 390,885
Microwave Tower Service...................................... 5,576,114
-----------
$ 5,687,742
===========
Pro forma net earnings (loss) (unaudited) (see note 12)
OmniAmerica.................................................. $ (279,257)
Novak & Lackey............................................... 390,885
Microwave Tower Service...................................... 3,435,614
-----------
$ 3,547,242
===========
- --------
(1) The Company's results for the twelve months ended June 30, 1997 include
the results of N&L for the period following the consummation of the
merger.
F-41
OMNIAMERICA, INC. AND SUBSIDIARIES
(formerly Specialty Teleconstructors, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following unaudited pro forma financial information presents the combined
results of operations of the Company and OmniAmerica Holdings as if the
acquisitions had occurred as of the beginning of 1998 and 1997, after giving
effect to certain adjustments, including amortization of goodwill, additional
depreciation expense and related income tax effects. The pro forma financial
information does not necessarily reflect the operations that would have
occurred had the Company and the acquired entities constituted a single entity
during such periods nor is it an indication of future performance:
Year ended June 30,
-----------------------
1998 1997
----------- -----------
Revenues earned.................................... $67,437,136 $71,332,114
=========== ===========
Net earnings....................................... $ 1,163,107 $ 6,424,651
=========== ===========
Earnings per common share:
Basic............................................ $ .08 $ .46
=========== ===========
Diluted.......................................... $ .08 $ .45
=========== ===========
Pro forma net earnings(2).......................... $ 4,284,151
===========
Pro forma earnings per common and common equivalent
share(2)
Basic............................................ $ .31
===========
Diluted.......................................... $ .30
===========
- --------
(2) Pro forma net earnings and earnings per common and common equivalent share
are based on pooled results of the Company, giving effect to pro forma
income taxes for pooling with a Subchapter S Corporation for the year
ended June 30, 1997.
The effects of the Company's acquisition of Teleforce, Ellis Tower and Coatings
prior to the respective date of acquisition are not material to the combined
results of operations of the Company for the years ended June 30, 1998 and
1997.
(16) Contingencies
The Company is, and from time to time may be, a party to routine legal
proceedings incidental to its business. The outcome of these legal proceedings
is not expected to have a material adverse effect on the Company's business,
results of operations or financial condition, based on the Company's current
understanding of the relevant facts and law. The Company maintains general
liability insurance against risks arising out of the normal course of business.
(17) Events Subsequent to Date of Independent Auditor's Report (unaudited)
On September 29, 1998, pursuant to an asset purchase and sale agreement with
certain wholly-owned subsidiaries of Arch Communications Group, the Company
acquired 70 towers on 68 sites for approximately $20,400,000 financed primarily
with proceeds from the Chase Manhattan senior secured revolving credit
facility.
F-42
OMNIAMERICA, INC. AND SUBSIDIARIES
(formerly Specialty Teleconstructors, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On December 11, 1998 (effective November 15, 1998) the Stock Option Sub-
Committee of the Board of Directors approved the grant of 397,400 stock options
under the 1998 stock option plan to outside directors and certain officers and
employees of the Company at the price of $17.50 when the current market price
at the measurement date was $27.50 per share. This resulted in unearned
compensation of $3,974,000 which has been recorded in Stockholders' equity with
an offset to additional paid-in capital at December 31, 1998. This unearned
compensation will be amortized to compensation expense over the three year
vesting period which can be accelerated under certain terms in the agreement.
On November 16, 1998, the Company announced that it had entered into an
Agreement and Plan of Merger with American Tower Company and American Tower,
Inc. ("ATI") pursuant to which the Company will, subject to the receipt of
necessary governmental consents and other customary closing conditions, be
merged with and into ATI. In the event OmniAmerica terminates the merger
agreement because of a Superior Proposal, a termination fee of $12.0 million
must be paid to ATC.
Effective November 18, 1998, the Company amended its senior secured credit
facility with Chase Manhattan Bank to increase the amount of available credit
to $150,000,000 from $75,000,000. All other provisions remain consistent
including mandatory prepayment provisions upon consummation of the merger with
ATI.
F-43
OMNIAMERICA, INC. AND SUBSIDIARIES
(FORMERLY SPECIALTY TELECONSTRUCTORS, INC.)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31,
1998
-------------
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 95,371
Contracts receivable, net of allowance for doubtful accounts of
$390,230 at December 31, 1998................................. 21,276,836
Costs and estimated earnings in excess of billings on
uncompleted contracts......................................... 5,646,829
Components inventory........................................... 3,414,251
Prepaid income taxes........................................... --
Other current assets........................................... 647,052
-------------
Total current assets.......................................... 31,080,339
Property and equipment, net..................................... 94,767,229
Goodwill, net of amortization of $3,426,993 at December 31,
1998........................................................... 91,208,042
Investment in unconsolidated subsidiary......................... 7,931,311
Other assets, net............................................... 3,753,605
-------------
$ 228,740,526
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable......................................... $ 9,668,568
Note payable to stockholder.................................... --
Billings in excess of costs and estimated earnings on
uncompleted contracts......................................... 456,911
Accrued expenses............................................... 2,648,792
Current installments of notes and capital leases payable....... 761,103
-------------
Total current liabilities..................................... 13,535,374
Deferred income taxes........................................... 380,123
Notes and capital leases payable, excluding current
installments................................................... 76,747,787
-------------
Total liabilities............................................. 90,663,284
-------------
Stockholders' Equity:
Common stock, $.01 par value. Authorized 100,000,000 shares;
issued 15,206,299 at December 31, 1998........................ 152,063
Additional paid-in capital..................................... 135,905,279
Treasury stock, at cost, 100,000 shares........................ (1,387,500)
Note receivable from officer and director...................... (600,000)
Unearned compensation for stock options........................ (3,974,000)
Retained earnings.............................................. 7,981,400
-------------
Total stockholders' equity.................................... 138,077,242
-------------
$ 228,740,526
=============
The accompanying notes are an integral part of these consolidated financial
statements.
F-44
OMNIAMERICA, INC. AND SUBSIDIARIES
(formerly Specialty Teleconstructors, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the six months
ended December 31,
------------------------
1998 1997
----------- -----------
Revenues earned:
Installation services.............................. $33,936,012 $26,051,645
Component sales.................................... 6,340,730 3,523,635
Tower leasing...................................... 4,824,509 --
----------- -----------
Total revenues earned.............................. 45,101,251 29,575,280
----------- -----------
Cost of revenues earned:
Cost of installation services...................... 26,760,970 21,479,825
Cost of component sales............................ 5,588,579 2,047,508
Cost of tower leasing.............................. 3,080,463 --
----------- -----------
Total cost of revenues earned...................... 35,430,012 23,527,333
----------- -----------
Gross profit on revenues earned.................... 9,671,239 6,047,947
Selling, general and administrative expenses........ 6,891,398 2,158,899
----------- -----------
Earnings from operations........................... 2,779,841 3,889,048
Other income (expenses):
Interest income.................................... 44,754 61,956
Interest expense................................... (2,156,951) (150,563)
Acquisition costs.................................. (650,094) --
Equity in earnings of unconsolidated subsidiary ... 457,361 --
Other, net......................................... 85,192 61,712
----------- -----------
(2,219,738) (26,895)
----------- -----------
Earnings (loss) before income taxes................ 560,103 3,862,153
Income taxes........................................ 475,000 1,493,349
----------- -----------
Net earnings (loss)................................ $ 85,103 $ 2,368,804
=========== ===========
Shares of common stock used in computing earnings
per share:
Basic.............................................. 15,085,814 7,928,928
Diluted............................................ 15,350,503 8,156,831
Net earnings (loss) per common shares:
Basic.............................................. $ 0.01 $ 0.30
=========== ===========
Diluted............................................ $ 0.01 $ 0.29
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-45
OMNIAMERICA, INC. AND SUBSIDIARIES
(Formerly Specialty Teleconstructors, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the six months
ended December 31,
-----------------------
1998 1997
----------- ----------
Cash flows from operating activities:
Net earnings......................................... $ 85,103 $2,368,804
Adjustments to reconcile net earnings to net cash
(used in) provided by operating activities:
Depreciation of property and equipment............... 1,732,234 878,277
Amortization......................................... 2,909,962 134,277
Equity in earnings of unconsolidated subsidiary,
net................................................. (41,661) --
Changes in operating assets and liabilities, net of
acquisitions:
Contracts receivable................................ (3,551,983) (135,256)
Costs and estimated earnings in excess of billings
on uncompleted contracts........................... (1,899,158) (272,198)
Components inventory................................ 16,617 (588,696)
Prepaid income taxes................................ 287,849 145,702
Other current assets................................ 244,096 (35,067)
Trade accounts payable.............................. 865,834 36,258
Billings in excess of costs and estimated earnings
on uncompleted contracts........................... (302,021) (488,228)
Accrued expenses.................................... 477,363 44,027
Current income taxes................................ -- 1,009,316
Deferred income taxes............................... 166,745 (50,786)
----------- ----------
Net cash provided by operating activities.......... 990,980 3,046,430
----------- ----------
Cash flows from investing activities:
Purchases of property and equipment.................. (44,380,413) (561,081)
Acquisition costs recorded as goodwill............... (2,916,028)
Cash expended in acquisition of Teleforce
Communications, LLC in 1998 and Ellis Tower Company
Inc., net of cash of $ 151,701 acquired in
acquisition, in 1997 ............................... (640,000) (297,704)
Available for sale securities........................ -- 719,850
----------- ----------
Net cash used in investing activities.............. (47,936,441) (138,935)
----------- ----------
Cash flows from financing activities:
Lines of credit, net................................. -- 576,918
Deferred financing costs............................. (1,673,764) --
Principal payments on note payable to stockholder.... (80,000) (676,000)
Borrowings from notes payable........................ 44,593,007 --
Proceeds from sale of common stock, net.............. 314,480 268,862
Principal payments on notes payable to banks......... (462,215) (547,702)
Acquisition of treasury stock........................ -- (1,387,500)
----------- ----------
Net cash provided by (used in) financing
activities........................................ 42,691,508 (1,765,422)
----------- ----------
Net increase (decrease) in cash and cash
equivalents....................................... (4,253,953) 1,142,073
Cash and cash equivalents:
Beginning of period.................................. 4,349,324 989,720
----------- ----------
End of period........................................ $ 95,371 $2,131,793
=========== ==========
F-46
OMNIAMERICA, INC. AND SUBSIDIARIES
(formerly Specialty Teleconstructors, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(Unaudited)
For the six months
ended in December 31,
---------------------
1998 1997
---------- ----------
Aquisition of Teleforce Communications, LLC in fiscal
1998 and Ellis Tower Company, Inc. in fiscal 1997
Cash.................................................. $ -- $ 151,701
Contracts receivable.................................. 375,000 865,919
Components inventory.................................. -- 86,212
Other current assets.................................. -- 33,924
Property and equipment................................ -- 267,915
Goodwill.............................................. 2,751,862 1,729,280
Trade accounts payable................................ -- (383,326)
Billings in excess of costs and estimated earnings on
uncompleted contracts................................ -- (496,731)
Accrued expenses...................................... -- (7,871)
---------- ----------
$3,126,862 $2,247,023
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-47
OMNIAMERICA, INC. AND SUBSIDIARIES
(formerly Specialty Teleconstructors, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial reporting and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
disclosures normally required by generally accepted accounting principles for
complete financial statements or those normally reflected in the Company's
Annual Report on Form 10-KSB. The financial information included herein
reflects all adjustments (consisting of normal recurring adjustments) which
are, in the opinion of management, necessary to a fair presentation of results
for interim periods. Results of interim periods are not necessarily indicative
of the results to be expected for a full year. These unaudited consolidated
financial statements should be read in conjunction with the consolidated
financial statements for the year ended June 30, 1998 and the notes thereto
included in the Company's Form 10-KSB.
On September 14, 1998, Specialty Teleconstructors, Inc. ("STI"), through a
merger with a wholly-owned subsidiary of STI, changed its name from STI to
OmniAmerica, Inc ("OmniAmerica" or the "Company"), changed its state of
incorporation from Nevada to Delaware, and changed its symbol from SCTR to
XMIT.
On November 16, 1998, the Company entered into an Agreement and Plan of Merger
pursuant to which OmniAmerica, Inc. will merge with and into American Towers,
Inc. ("ATI"), a wholly-owned subsidiary of American Tower Corporation ("AMT")
in a stock for stock transaction. Each OmniAmerica, Inc. stockholder will
exchange each share of their existing common stock for 1.1 shares of AMT shares
of common stock. A total of approximately 17.7 million shares of existing AMT
shares will be exchanged for all of OmniAmerica, Inc. shares. The transaction
will be accounted for as a purchase.
New Accounting Standards
Effective July 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income and SFAS No. 131, Financial Reporting for Segments of
Business Enterprise. Under the provisions of SFAS No. 130, there are currently
no items other than net income which would be classified as part of
comprehensive income. Under the provisions of SFAS No. 131, there are no
requirements for interim financial statements in the initial year of
application.
Principles of Consolidation
Investment in a 33 1/3% owned affiliated company is accounted for on the equity
basis of accounting and accordingly, the statement of earnings includes the
Company's proportionate share of the affiliate's income since its date of
acquisition during fiscal year 1998.
Reclassification
Certain prior year amounts have been reclassified to conform to the current
year presentation.
F-48
OMNIAMERICA, INC. AND SUBSIDIARIES
(formerly Specialty Teleconstructors, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(2) Property and Equipment
Property and equipment consists of the following:
Estimated
useful
lives December 31,
(years) 1998
--------- ------------
Tower assets......................................... 30 $ 77,950,049
Land................................................. 3,528,681
Buildings............................................ 15-40 4,968,817
Vehicles............................................. 3-7 7,322,546
Furniture and fixtures............................... 3-10 2,542,523
Equipment............................................ 3-10 5,134,490
Leasehold improvements............................... 5 200,026
------------
101,647,132
Less accumulated depreciation...................... (6,879,903)
------------
$ 94,767,229
============
(3) Acquisitions
During the first six months of fiscal year 1999, the Company consummated the
following transactions (see the Form 10-KSB for additional information on these
transactions) which were accounted for by the purchase method of accounting,
and accordingly, the operating results of the acquired entities have been
included in the consolidated operating results since the date of acquisition.
On July 9, 1998, the Company paid $640,000 and issued 81,270 shares of
restricted common stock of the Company at a price of $30.60 per share,
determined by the closing price on or about July 9, 1998, in exchange for
substantially all of the assets and liabilities of Teleforce Communications,
LLC. ("Teleforce"). Teleforce provides site acquisition services for the
wireless communications industry.
On August 26, 1998, the Company acquired three towers for approximately
$2,400,000.
On September 29, 1998, pursuant to an asset purchase and sale agreement with
certain wholly-owned subsidiaries of Arch Communications Group, the Company
acquired 70 towers on 68 sites for approximately $20,400,000 financed primarily
with proceeds from the Chase Manhattan senior secured revolving credit facility
(see Form 10-KSB for additional information on this credit facility).
On February 3, 1999, the Company acquired 10 towers and the option to acquire
six additional towers from Robert J. Fetterman d/b/a RF Communications for
approximately $4,700,000.
On February 12, 1999, the Company acquired three additional towers from
affiliates of Arch Communications Group for approximately $665,000.
The results of operations for the periods presented would not have been
materially different had these transactions taken place at the beginning of the
periods.
As a result of the pending merger with ATI, the Company incurred costs of
$650,094, primarily consisting of filing fees, legal fees and underwriters
fees.
F-49
OMNIAMERICA, INC. AND SUBSIDIARIES
(formerly Specialty Teleconstructors, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(4) Investment in Unconsolidated Subsidiary
As a result of the Company's April 1998 merger with OmniAmerica Holdings
described in Form 10-KSB, the Company holds a 33 1/3% interest in Kline Iron
and Steel Co., Inc. ("Kline"), a company which fabricates structural and tower
steel products, domestically and internationally, and is accounted for under
the equity method. Summarized historical financial information of Kline for the
six-month period ended December 31, 1998 is as follows:
Revenues......................................................... $38,000,000
Gross margin..................................................... 6,645,000
Net income....................................................... 1,300,000
During the period, the Company received $300,000 in cash as a return of equity.
(5) Notes and Capital Leases Payable
Notes and capital leases payable consist of the following:
December
31,
1998
-----------
Variable rate term note payable to Chase Manhattan Bank,
interest at LIBOR plus 2% (7.5% at December 31, 1998) payable
monthly, matures June 30, 2001; secured by substantially all
assets of the Company......................................... $74,593,007
Note payable in monthly installments of $6,675, including
interest at U.S. Treasury Index plus 3.5% (9.125% at December
31, 1998) with balance due March 2005; secured by a building
and guaranteed by a principal stockholder of the Company...... $ 770,914
7.3% capital lease payable in monthly installments of $56,297
with the balance due September 2001, secured by vehicles...... $ 1,636,877
8.5% note payable in monthly installments of $12,068, including
interest, with the balance due July 1999, secured by
vehicles...................................................... 323,267
Other.......................................................... $ 184,825
-----------
Total notes and capital leases payable....................... $77,508,890
Less current installments...................................... $ 761,103
-----------
Notes and capital leases payable, excluding current
installments................................................ $76,747,787
===========
Effective November 16, 1998, the Company amended its senior secured credit
facility with Chase Manhattan Bank to increase the amount of available credit
to $150,000,000 from $75,000,000. All other provisions remain consistent
including mandatory prepayment provisions upon consummation of the merger with
ATI.
(6) Income Taxes
The Company's effective tax rate for the three and six month periods ended
December 31, 1998 are substantially higher than the federal statutory rate of
34% primarily due to the non-deductible amortization expense for goodwill
recognized in the Company's acquisition of OmniAmerica Holdings Corporation on
April 23, 1998.
F-50
OMNIAMERICA, INC. AND SUBSIDIARIES
(formerly Specialty Teleconstructors, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(7) Contingencies
The Company is, and from time to time may be, a party to routine legal
proceedings incidental to its business. The outcome of these legal proceedings
is not expected to have a material adverse effect on the Company's business,
results of operations or financial condition, based on the Company's current
understanding of the relevant facts and law. The Company maintains general
liability insurance against risks arising out of the normal course of business.
(8) Earnings Per Share
The following is the reconciliation of the numerators and denominators of the
basic and diluted EPS computations for net income and other related disclosures
required by Statement of Financial Accounting Standards No. 128, Earnings Per
Share.
For the six months ended December 31, 1998
---------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
--------------- ----------------- ----------
Basic earnings per share:
Income available to common
stockholders................... $ 85,103 15,085,814 $ 0.01
Effect of dilutive shares:
Options......................... -- 264,689
--------------- ---------------
Dilutive earnings per shares:
Income available to common
stockholders plus assumed
conversions.................... $ 85,103 15,350,503 $ 0.01
=============== =============== ==========
For the six months ended December 31, 1997
---------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
--------------- ----------------- ----------
Basic earnings per share:
Income available to common
stockholders................... $ 2,368,804 7,928,928 $ 0.30
Effect of dilutive shares:
Options......................... -- 227,903
--------------- ---------------
Dilutive earnings per shares:
Income available to common
stockholders plus assumed
conversions.................... $ 2,368,804 8,156,831 $ 0.29
=============== =============== ==========
(9) Stockholders' Equity
During the six month period ended December 31, 1998, 55,000 stock options were
exercised and approximately 81,000 shares of stock were issued as part of the
Teleforce acquisition resulting in an increase in common stock and additional
paid-in capital of approximately $2.8 million. In addition, on December 11,
1998 (effective November 15, 1998) the Stock Option Sub-Committee of the Board
of Directors approved the grant of 397,400 stock options under the 1998 stock
option plan to outside directors and certain officers and employees of the
Company at the price of $17.50 when the current market price at the measurement
date was $27.50 per share. This resulted in unearned compensation of $3,974,000
which has been recorded in Stockholders' equity with an offset to additional
paid-in capital at December 31, 1998. This unearned compensation will be
amortized to compensation expense over the three year vesting period which can
be accelerated under certain terms in the agreement.
F-51
REPORT OF INDEPENDENT AUDITORS
Members
TeleCom Towers, LLC
We have audited the accompanying consolidated balance sheets of TeleCom Towers,
LLC as of December 31, 1998 and 1997, and the related consolidated statements
of operations, members' equity and cash flows for the year ended December 31,
1998 and the period from September 30, 1997 (date of inception) to December 31,
1997. 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 did not audit the financial statements of
RCC Consultants, Inc., (a wholly-owned subsidiary of RCC Holdings, L.P., which
is a 99.99% owned subsidiary of TeleCom Towers, LLC), which statements reflect
total assets constituting 6% and total revenues constituting 49% of the
consolidated totals for 1998. These statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates
to data included for RCC Consultants, Inc., is based solely on the report of
the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes 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, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of TeleCom Towers, LLC as of
December 31, 1998 and 1997, and the consolidated results of its operations and
its cash flows for the year ended December 31, 1998 and the period from
September 30, 1997 (date of inception) to December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Vienna, Virginia
April 1, 1999
F-52
INDEPENDENT AUDITORS' REPORT
To Board of Directors and Stockholder
RCC Consultants, Inc.:
We have audited the consolidated balance sheet of RCC Consultants, Inc. and
subsidiary as of December 31, 1998, and the related consolidated statements of
operations, stockholders' equity, and cash flows (not presented herein) for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides 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 RCC Consultants,
Inc. and subsidiary as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Short Hills, New Jersey
February 24, 1999
F-53
TELECOM TOWERS, LLC
CONSOLIDATED BALANCE SHEETS
December December 31,
31, 1997 1998
----------- ------------
ASSETS
CURRENT ASSETS:
Cash................................................ $ 2,722,510 $ 6,817,051
Accounts receivable, net of allowance of $0 and
$392,000 in 1997 and 1998, respectively............ 36,680 5,357,128
Due from affiliated entity.......................... -- 442,788
Prepaid expenses and other current assets........... 20,279 514,112
----------- -----------
Total current assets.............................. 2,779,469 13,131,079
Property and equipment, net of accumulated
depreciation of $39,869 and $4,615,082 in 1997 and
1998, respectively................................... 4,953,984 22,656,492
Intangibles, net of accumulated amortization of
$119,353 and $6,150,489 in 1997 and 1998,
respectively......................................... 8,300,815 53,518,740
Escrow deposits, net.................................. 1,259,800 480,000
Deferred rent receivable.............................. 18,223 777,258
Advance to affiliated entity.......................... 350,000 --
Notes receivable affiliate............................ -- 6,250,000
Investment in joint ventures.......................... -- 2,770,428
Other assets.......................................... 84,225 157,088
----------- -----------
Total assets...................................... $17,746,516 $99,741,085
=========== ===========
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities............ $ 172,205 $ 3,740,297
Current portion of long-term debt................... -- 24,692,114
Security deposits................................... 25,020 35,177
Prepaid rents....................................... 29,041 727,729
----------- -----------
Total current liabilities......................... 226,266 29,195,317
Long-term debt, net of current portion................ 3,900,000 5,506,000
Members' equity....................................... 13,620,250 65,039,768
----------- -----------
Total liabilities and members' equity............. $17,746,516 $99,741,085
=========== ===========
See accompanying notes.
F-54
TELECOM TOWERS, LLC
STATEMENTS OF OPERATIONS
Period from
September 30,
1997 to Year Ended
December 31, December
1997 31, 1998
------------- -----------
REVENUE:
Tower revenue..................................... $ 327,549 $ 6,580,278
Consulting revenue................................ -- 6,404,000
----------- -----------
Total revenue................................... 327,549 12,984,278
Tower costs......................................... 131,749 1,311,722
Consulting costs.................................... -- 5,181,000
----------- -----------
Gross profit........................................ 195,800 6,491,556
General and administrative.......................... 1,279,148 9,765,231
Depreciation........................................ 39,869 887,528
Amortization........................................ 119,353 2,930,697
----------- -----------
Operating loss...................................... (1,242,570) (7,091,900)
OTHER INCOME (EXPENSE):
Interest income................................... 914 644,214
Interest expense.................................. (83,556) (1,462,348)
Partnership loss.................................. -- (737,442)
Miscellaneous income.............................. -- 147,050
----------- -----------
Net loss........................................ $(1,325,212) $(8,500,426)
=========== ===========
See accompanying notes.
F-55
TELECOM TOWERS, LLC
STATEMENTS OF MEMBERS' EQUITY
For the period from September 30, 1997 to December 31, 1997
and year ended December 31, 1998
Total
Accumulated Members'
Units Amount Deficit Equity
------- ----------- ----------- -----------
Initial capitalization......... 100,000 $ 6,500,000 -- $ 6,500,000
Financing and offering costs... -- (1,378,538) -- (1,378,538)
Member contributions........... -- 9,824,000 -- 9,824,000
Net loss....................... -- -- (1,325,212) (1,325,212)
------- ----------- ----------- -----------
Balance at December 31, 1997... 100,000 14,945,462 (1,325,212) 13,620,250
Member contributions........... -- 48,249,530 -- 48,249,530
Member distributions........... -- (5,654,643) -- (5,654,643)
Limited partnership
acquisition................... -- 17,172,057 -- 17,172,057
Syndication offering cost
reduction..................... -- 153,000 -- 153,000
Net loss....................... -- -- (8,500,426) (8,500,426)
------- ----------- ----------- -----------
Balance at December 31, 1998... 100,000 $74,865,406 $(9,825,638) $65,039,768
======= =========== =========== ===========
See accompanying notes.
F-56
TELECOM TOWERS, LLC
STATEMENTS OF CASH FLOWS
Period from
September 30,
1997 Year Ended
to December 31, December 31,
1997 1998
--------------- ------------
OPERATING ACTIVITIES
Net loss........................................ $ (1,325,212) $ (8,500,426)
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation.................................. 39,869 887,528
Amortization.................................. 119,353 2,930,697
Partnership loss.............................. -- 737,442
Changes in operating assets and liabilities:
Accounts receivable......................... (36,680) (5,320,448)
Prepaid expenses............................ (20,279) (493,833)
Escrow deposits............................. (1,259,800) 779,800
Due from affiliate.......................... (350,000) (6,342,788)
Deferred rent receivable.................... (18,223) (759,035)
Other assets................................ (84,225) (72,863)
Accounts payable and accrued expenses....... 172,205 3,439,092
Security deposits........................... 25,020 10,157
Prepaid rents............................... 29,041 698,688
------------ ------------
Net cash used in operating activities........... (2,708,931) (12,005,989)
INVESTING ACTIVITIES
Asset acquisitions.............................. (9,083,440) (25,624,377)
Investment in joint ventures.................... -- (1,568,980)
Purchases of towers, buildings and equipment.... (430,581) --
------------ ------------
Net cash used in investing activities........... (9,514,021) (27,193,357)
FINANCING ACTIVITIES
Member contributions............................ 16,324,000 48,249,530
Proceeds from notes payable..................... -- 546,000
Payments on debt................................ -- --
Distributions................................... -- (5,654,643)
Syndication offering costs reduction............ -- 153,000
Financing and offering costs.................... (1,378,538) --
------------ ------------
Net cash provided by financing activities....... 14,945,462 43,293,887
------------ ------------
Net increase in cash............................ 2,722,510 4,094,541
Cash at beginning of period..................... -- 2,722,510
------------ ------------
Cash at end of period........................... $ 2,722,510 $ 6,817,051
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest.......................... $ 55,704 $ 1,424,789
============ ============
NONCASH TRANSACTIONS SELLER FINANCED NOTES...... $ 3,900,000 --
============ ============
See accompanying notes.
F-57
TELECOM TOWERS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
Description of Business
TeleCom Towers, LLC (LLC or the Company) was organized as a limited liability
company in September 1997 under the laws of the State of Delaware to acquire,
operate, manage, and develop a national network of wireless communications
sites, including towers and roof-top units. Sites are located throughout
specific clusters in the United States. Pursuant to the Limited Liability
Company Operating Agreement (the Agreement), the Company issued a total of
100,000 units of equity interests to effect the formation of the Company.
TeleCom Towers, Inc. (Inc.) was granted a total of 50,100 units (50.1%
contribution percentage) in exchange for the contribution of its general
partnership interests in the following entities, with such contributions given
no value for financial reporting purposes:
General
Partner
Entity Interest
------ --------
Telecom Towers Mid-Atlantic, LP.................................. 1%
RFM Facilities Management, LP.................................. .01%
RCC Holding, LP................................................ .01%
Telecom Towers Southwest, LP..................................... 1%
Telecom Towers of the West, LP................................... 1%
A total of 49,900 units (49.9% contribution percentage) was issued to Cox
Enterprises, Inc. (Cox) in exchange for a commitment to contribute $43,000,000
in cash. As of December 31, 1998, Cox had made these contributions.
Distributions to members are made in accordance with the members' capital
contribution percentage interest as defined in the Agreement. Profits and
losses are allocated to the members based on the members' contribution
percentage. The liability of each member shall be limited to the amount of
contributions made by such member in accordance with the provisions of the
Agreement.
According to the Agreement, both parties retain the following rights and
obligations: 1) Right of first offer if the other party plans to dispose of any
or all of its equity interest, this right expires five years from the date of
formation; 2) a tag-along right to participate in a sale of the other party's
equity interest to an outside party which represents a majority of the units,
this right expires ten years from the date of formation; 3) in the event of a
sale of shares by a particular member, a drag-along right to require the non-
selling member to sell a proportionate amount of its units, which expires ten
years from the date of formation; 4) certain registration rights; 5) to the
extent that the Company does not meet certain financial goals for 1999, 2000
and 2001, Cox is entitled to receive additional units in each of the years that
the financial goals are not reached by selected limited partnerships, not to
exceed 66% of total ownership; 6) preemptive rights to purchase additional
shares to maintain the respective members' proportionate ownership in the case
of any non-public offering of new units: and 7) subject to certain other
events, put-rights to require the other member to purchase the respective
members' interest at fair market value.
The consolidated financial statements include the accounts of the Company's
wholly owned subsidiaries, Signal Tower Company and Haysville Tower, LLC and
its majority owned subsidiaries, Mountain Top Management,
F-58
TELECOM TOWERS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
RFM Facilities Management, LP and RCC Holdings, LP. RCC Holdings has no
operations of its own and was formed as a holding company for RCC Consultants,
Inc, a wholly-owned subsidiary of RCC Holdings.
The Company has an 83% interest in AlphaCom Communications, LLC, which is
inactive and, accordingly, no profit, loss, or investment has been recorded for
this entity as of December 31, 1998. The Company has a 50% ownership in Prime
TeleCom Communications, a 50% ownership in Shreveport Tower Company, and a 50%
ownership in Mid-Pacific Telecommunications Co. These investments are
considered to be joint ventures and are accordingly accounted for on the equity
method.
Acquisitions
Effective August 3, 1998, the limited partners of Telecom Southwest Towers, LP;
Telecom Towers Mid-Atlantic, LP; and Telecom Towers of the West, LP
(collectively the Partnerships) agreed to a merger of the Partnerships into the
Company, which was the general partner of the Partnerships. The limited
partners of the Partnerships received as merger consideration either cash or
Class A Units of the Company in exchange for their interest in each
Partnership. Except for cash acquired, these transactions have been excluded
from the statements of cash flows and have been accounted for using purchase
accounting.
The pro forma unaudited results of operations for the years ended December 31,
1997 and 1997, assuming the purchase of the Partnerships had been consummated
as of the beginning of each year, is as follows:
Proforma Proforma
December December
31, 1997 31, 1998
----------- -----------
(unaudited) (unaudited)
Revenues........................................ $22,100,000 $27,100,000
=========== ===========
Net loss........................................ $(3,890,000) $(9,970,000)
=========== ===========
The Company has also acquired, through various transactions, the following
tangible and intangible assets. Intangible assets include non-compete
agreements, management agreements, tenant licenses, and goodwill. The purchase
method was used to account for the acquisitions. The purchase prices of the
merger of the Partnerships and other acquisitions were allocated, in total, as
follows:
December
December 31,
31, 1997 1998
----------- -----------
Land.............................................. $ 1,800,000 $ 1,403,846
Buildings......................................... 425,000 2,517,851
Towers............................................ 2,662,000 12,213,444
Equipment......................................... 77,440 1,863,042
Intangibles....................................... 8,019,000 29,203,732
----------- -----------
$12,983,440 $47,201,915
=========== ===========
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
F-59
TELECOM TOWERS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Credit Risk
The Company operates tower transmission sites in various states and grants
credit to its customers in the normal course of business and normally does not
require collateral. Concentrations of credit risk with respect to accounts
receivable are limited due to the large number of customers in the Company's
customer base. The Company maintains an allowance for doubtful accounts based
on the expected collectibility of individual accounts receivable.
Significant Accounting Policies
Revenue Recognition
Owned site revenue is recognized on a straight-line basis over the initial term
of the license agreement. The excess of rents accrued over amounts
contractually due pursuant to the underlying licenses is recorded as deferred
rent receivable on the accompanying balance sheet. Certain license agreements
provide for reimbursement of electric charges and rent increases tied to
increases in, among other factors, the consumer price index. Managed tower site
revenue is recognized ratably over time. Consulting revenue is recognized when
services are performed.
Deferred income represents prepayments of charges by certain customers for
space on the communication towers. The income is recognized as revenue in
subsequent periods ratably over time.
Property and Equipment
Property and equipment are stated at cost. Depreciation of towers is computed
using the double declining balance method. The straight-line method is used for
equipment and buildings. Estimated useful lives are as follows: buildings,
thirty-nine years; towers, twenty years; equipment, seven years.
The Company records impairment losses on long-lived assets used in operations
when events and circumstances indicate that the assets might be impaired and
the undiscounted cash flows estimated to be generated by those assets are less
then the carrying amount of those assets. Based on management's estimation
process, no impairment losses were recorded as of December 31, 1998. As of
December 31, 1998 all fixed assets were held for use and the Company does not
plan to dispose of any such assets.
Cash
For purposes of the statement of cash flows, cash consists of cash in bank.
Intangible Assets
Intangible assets are stated at cost. Intangible assets consist of non-compete
agreements, management agreements, tenant licenses, and goodwill. Such assets
are being amortized using the straight-line method over their estimated useful
lives not to exceed fifteen years.
Escrow Deposits
The Company has deposits in escrow with various escrow agents for asset
purchase transactions in progress at December 31, 1998. Depending on the
outcome of the related negotiations, amounts will either be reclassified as
part of the purchase price, expensed to general and administrative expenses as
site investigation costs, or reclassified into cash.
F-60
TELECOM TOWERS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Financing and Offering Costs
The costs incurred in obtaining member interests in the Company have been
deducted from Members' Equity. Costs incurred in obtaining debt financing have
been capitalized and are amortized over the life of the respective loans.
Operating Expenses
Operating expenses include land lease expense, insurance expense, repairs and
maintenance expenses, real estate and personal property taxes, utilities, and
bad debt expense.
Income Taxes
No provisions have been made for federal and state taxes on the operations of
the Company. These taxes are the responsibility of the individual members who
are to include their share of the Company's income and deductions in their
respective income tax returns. Certain states do tax limited liability
corporations; however, as a result of related operations, no provision has been
recorded. Certain subsidiaries provide for income taxes under the provisions of
Statement of Accounting Standards No. 109, "Accounting for Income Taxes." At
December 31, 1998, these subsidiaries had federal net loss carryforwards for
which a valuation allowance had been established against its entirety.
Recent Pronouncements
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS 130") "Comprehensive Income". SFAS 130 requires that
an enterprise (a) classify items of other comprehensive income by their nature
in the financial statements and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the Statements of Members' Equity. For all periods presented, the
Company had no items of comprehensive income and, accordingly, the Statement
does not apply.
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise
and Related Information." SFAS 131 changes the way public companies report
segment information in annual financial statements and also requires those
companies to report selected segment information in interim financial reports
to stockholders. The Company operates in only one segment, the operation of
telecommunications towers.
In April 1998, the AICPA issued Statement of Position 98-5, Reporting on the
Costs of Start-Up Activities. This Statement of Position (SOP) provides
guidance on the financial reporting of start-up costs and organization costs.
It requires costs of start-up activities and organization costs to be expensed
as incurred. This SOP applies to all non-governmental entities and is effective
for financial statements for fiscal years beginning after December 15, 1998.
Initial application of this SOP should be reported as the cumulative effect of
a change in accounting principle. When adopting this SOP, entities are not
required to report the pro forma effects of retroactive application. The effect
of adopting SOP 98-5 is not expected to have a material effect on the financial
statements.
F-61
TELECOM TOWERS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Property and Equipment
Property, towers, and equipment consisted of the following:
December
December 31, 31,
1997 1998
------------ -----------
Land............................................ $1,816,333 $ 3,220,177
Buildings....................................... 476,665 3,135,327
Towers.......................................... 2,587,490 17,529,296
Equipment....................................... 113,365 3,311,478
Construction-in-progress........................ -- 75,296
---------- -----------
4,993,853 27,271,574
Accumulated depreciation........................ (39,869) (4,615,082)
---------- -----------
Net fixed assets................................ $4,953,984 $22,656,492
========== ===========
3. Intangible Assets
At December 31, 1998, respectively, intangible assets consisted of the
following:
December
December 31, 31,
1997 1998
------------ -----------
Goodwill........................................ $4,270,000 $52,152,676
Non-compete..................................... 154,000 2,334,000
Other intangibles............................... 3,996,168 5,182,553
---------- -----------
8,420,168 59,669,229
Accumulated amortization........................ (119,353) (6,150,489)
---------- -----------
Net intangibles................................. $8,300,815 $53,518,740
========== ===========
These intangibles resulted from acquisitions of towers made by the Company and
costs associated with the initial formation of the Company. Other intangibles
relate to costs associated with investigating site acquisitions and
development. Amortization of such amounts will begin once the sites are
acquired and in operation, unless such acquisitions fail to materialize, at
which point the related costs will be expensed as site investigation costs and
included in general and administrative expenses.
4. Long-Term Debt
The Company financed certain purchases through the issuance of seller financed
notes. The $3,900,000 in notes payable are due in one installment on the sixth
anniversary of the notes, which is September 30, 2003. The interest rate on
each note is 8.5% during the first three years and the greater of 8.5% or
prime, thereafter. Interest is payable quarterly in arrears. The notes are
secured by the assets of the Company.
In connection with the merger of the Partnerships, the Company assumed a Master
Credit Facility Agreement. The agreement establishes a credit facility
consisting of a line of credit arrangement pursuant to which the Company can
borrow up to an aggregate of $28,000,000 from the Line of Credit Commitment for
a limited period of time on a senior secured basis. The agreement provides for
a Line of Credit Draw Fee of 0.75% of advances under the agreement in addition
to other fees to be paid in immediately available funds on the
F-62
TELECOM TOWERS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
settlement date. The Partnership incurred no draw fees during the year ended
December 31, 1998. The agreement also contains a provision for a Line of Credit
Facility Fee at the rate of 0.25% per annum on the average unborrowed portion
of the Line of Credit Commitment. These fees are paid on a proportionate basis
by the various entities utilizing the line of credit. The Company incurred no
in credit facility fees during the year ended December 31, 1998.
The notes payable mature in annual installments of 75% of excess cash flows or
in accordance with the Cash Management Agreement between borrower and lender.
Interest is payable quarterly in arrears on the last business day of each
fiscal quarter. The interest rate is equal to the sum of the applicable Rate
Index plus the applicable Rate Margin. The Rate Index will be either the prime
rate or the adjusted LIBO (London Interbank Offered) Rate and the Rate Margin
will be based on the leverage ratio (using borrower's most recently delivered
quarterly financial statements acceptable to lender) of the borrower's funded
debt as of the last day of the fiscal quarter to the borrower's operating cash
flow. The notes are secured by all funds, balances or other property of the
Company.
On December 22, 1998, the Master Credit Facility Agreement was restructured
into a 364-Day Credit Agreement that provides for total borrowings of up to $50
million The Credit Agreement bears interest equal to the sum of the applicable
Rate Index plus the applicable Rate Margin. The Rate Index will be either the
prime rate, overnight Federal Funds Rate plus .5% or adjusted LIBOR. The Rate
Margin will be based on the leverage ration of the borrower's funded debt as of
the last day of the fiscal quarter to the borrower's operating cash flow. As
the Credit Agreement matures in December 1999, the entire outstanding balance
at December 31, 1998 of $24,586,114 has been classified as current. In February
1999, the Company borrowed $19,500,000 under the 364-Day Credit Agreement in
order to fund various merger-related costs, including the buyout of Mid-Pacific
(see Note 9). In connection with the merger discussed in Note 9, the
outstanding balance at February 26, 1999 of $44.1 million was repaid in full.
One of the Company's subsidiaries, RCC Holdings, LP, has obtained a separate
secured line of credit in the amount of $3,000,000. The line has a term of
three years with interest at prime plus 3% (10.75% at December 31, 1998). The
line is secured by the domestic accounts receivable of RCC. RCC is subject to
an early termination fee under the agreement whereby the lender is entitled to
a percentage of the total line based on the time of termination.
5. Description of Leasing Arrangements
The Company licenses space for communication systems on its transmission sites
to customers under generally noncanelable agreements requiring payments over
various terms. At December 31, 1998, future minimum license agreement receipts
are as follows:
Year ended December 31,
-----------------------
1999.......................................................... $ 9,415,000
2000.......................................................... 8,010,000
2001.......................................................... 6,367,000
2002.......................................................... 4,575,000
2003.......................................................... 2,809,000
Thereafter.................................................... 6,751,000
-----------
Total....................................................... $37,927,000
===========
F-63
TELECOM TOWERS, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. Commitments and Contingencies
The Company is committed for various land leases for tower sites and operating
leases for office space and equipment. Rent expense for the year ended December
31, 1998 was $912,000. Future minimum lease payments at December 31, 1998 were
as follows:
Year ended December 31,
-----------------------
1999........................................................... $1,054,588
2000........................................................... 1,012,681
2001........................................................... 883,764
2002........................................................... 704,028
2003........................................................... 559,539
Thereafter..................................................... 1,143,638
----------
Total........................................................ $5,358,238
==========
7. Related Parties
Beginning in 1998, the Company, by virtue of its general partner interest in
the related entities, was entitled to a management fee equal to 8.5% of the
gross monthly revenues of the Partnerships prior to the merger (see Note 1).
The Company was also be entitled to a 3% acquisition fee to be earned on all
capital funds invested in towers and related real estate and other assets in
the Partnerships. The Company will also be entitled to up to 4% of gross
monthly revenue of the Partnership for reimbursement of certain general partner
expenses. The Company received fees during 1998 of $687,909.
8. Investment in Joint Ventures
In connection with the merger of the Partnerships in 1998, the Company acquired
interests in Prime TeleCom Communications and Shreveport Tower Company. At
December 31, 1998, the Company is a 50% partner in Prime TeleCom
Communications, a California Limited partnership formed to operate roof top
sites and towers in the Los Angeles Metropolitan area. At December 31, 1998,
the Company is also a 50% partner in Shreveport Tower Company, a Louisiana
partnership formed to operate a tower in Shreveport, Louisiana. During 1998,
the Company acquired a 50% interest in Mid-Pacific Telecommunications Co., a
communications site operation in the Dallas/Ft. Worth area. These investments
are considered joint ventures and are accordingly recorded on the equity
method.
Summarized financial information from the unaudited financial statements of the
partnerships as of December 31, 1998 is as follows:
Shreveport
Prime TeleCom Tower Mid-Pacific
Communications Company Telecommunications Co.
-------------- ----------- ----------------------
(unaudited) (unaudited) (unaudited)
Total Assets................. $4,549,462 $382,757 $8,552,528
Total Liabilities............ 1,277,736 15,761 7,118,611
Partners' Capital............ 3,271,726 366,995 1,433,917
Total Revenue................ 1,732,277 41,756 790,070
Net Income (loss)............ (731,767) 2,260 (566,083)
Share of Income (loss)....... (454,400) -- (283,042)
F-64
TELECOM TOWERS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Subsequent Events
Effective in February 26, 1999, the Company completed an Agreement and Plan of
Merger with American Tower Corporation ("ATC") which, subject to certain
conditions including Hart-Scott-Rodino Act review, and excluding RCC
Consultants, Inc. and Prime-Telecom Communications Company, both are
subsidiaries of the Company, the beneficial interests in which were distributed
to members of the Company prior to the consummation of the merger, resulted in
the merger of the Company into ATC. Merger consideration included approximately
3.9 million shares of ATC Class A Common Stock, $60.1 million in cash and
assumption of $48.4 million in debt, of which $44.1 million was paid off at
closing. The aggregate purchase price is also subject to certain working
capital adjustments. Simultaneous with the closing of the merger, the Company
recorded a charge to earnings of $6.8 million related to certain management
agreements with founders of the Company.
In connection with the ATC merger, the Company has spun off RCC Consultants,
Inc. and Prime-Telecom Communications Company, into RCC, L.L.C. and Pacific,
L.L.C., respectively. Members of the Company received interest in the new
entities.
Also, subsequent to December 31, 1998, the Company acquired the remaining 50%
interest in Mid-Pacific Telecommunications Co. for a total purchase price of
approximately $11,700,000, which consisted of cash of $5,500,000 and
forgiveness of debt of $6,200,000.
10. Year 2000 (Unaudited)
The Company is aware of the implications associated with the "Year 2000" as it
relates to software information systems and other outside implications of the
Company's operations, including the potential impact on its customers. The
"Year 2000" is not expected to have a material impact on the Company's current
information systems because current software is either already "Year 2000"
compliant or required changes will be insignificant. As a result, the Company
does not anticipate that incremental expenditures to ensure that its
information systems are "Year 2000" compliant will be material to the Company's
liquidity, financial position or results of operations over the next few years.
Any costs that may arise will be expensed as incurred.
F-65
REPORT OF INDEPENDENT AUDITORS
Partners
TeleCom Mid-Atlantic, LP
We have audited the accompanying consolidated balance sheets of TeleCom Towers
Mid-Atlantic, LP as of July 31, 1998 and December 31, 1997, and the related
consolidated statements of operations, partners' capital, and cash flows for
the seven months ended July 31, 1998 and the year ended December 31, 1997.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the consolidated financial
statements of RCC Consultants, Inc., (a wholly owned subsidiary of RCC
Holdings, LP, which is a 99.99% owned subsidiary of TeleCom Towers Mid-
Atlantic, LP), which statements reflect total assets constituting 41% and 41%
and total revenues constituting 81% and 82% of the consolidated 1998 and 1997
totals respectively. These statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to data
included for RCC Consultants, Inc., is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes 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 and the report of other
auditors provides a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of TeleCom Towers Mid-
Atlantic, LP at July 31, 1998 and December 31, 1997, and the consolidated
results of its operations and its cash flows for the seven months ended July
31, 1998 and the year ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Vienna, Virginia
April 1, 1999
F-66
INDEPENDENT AUDITORS' REPORT
To Board of Directors and Stockholder
RCC Consultants, Inc.:
We have audited the consolidated balance sheets of RCC Consultants, Inc. and
subsidiary as of July 31, 1998 and December 31, 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows (not
presented herein) for the seven months ended July 31, 1998 and the year ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes 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 RCC Consultants,
Inc. and subsidiary as of July 31, 1998 and December 31, 1997 and the results
of their operations and their cash flows for the seven months ended July 31,
1998 and the year ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Short Hills, New Jersey
February 24, 1999
F-67
TELECOM TOWERS MID-ATLANTIC, LP
CONSOLIDATED BALANCE SHEETS
December July 31,
31, 1997 1998
----------- -----------
ASSETS
CURRENT ASSETS:
Cash................................................. $ 379,373 $ 275,661
Accounts receivable, net of allowance of $402,800 and
$726,200 in 1997
and 1998............................................ 4,907,503 4,781,769
Prepaid expenses..................................... 325,416 329,367
----------- -----------
Total current assets............................... 5,612,292 5,386,797
Property and equipment, net of accumulated depreciation
of $1,016,569 and
$1,319,167 in 1997 and 1998........................... 4,932,525 5,149,490
Intangibles, net of accumulated amortization of
$369,970 and $576,729 in 1997
and 1998.............................................. 3,195,642 2,988,883
Deferred rent receivable............................... 67,770 187,239
Other assets........................................... 131,646 126,273
----------- -----------
Total assets....................................... $13,939,875 $13,838,682
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable and accrued expenses................ $ 2,442,119 $ 2,224,172
Current portion of long-term debt.................... 417,077 652,358
Affiliate payable, net............................... 386,756 683,749
Prepaid rents........................................ 174,508 243,447
Other liabilities.................................... 20,000 --
----------- -----------
Total current liabilities.......................... 3,440,460 3,803,726
Long-term debt, net of current portion................. 6,805,958 6,386,396
Partners' capital...................................... 3,693,457 3,648,560
----------- -----------
Total liabilities and partners' capital................ $13,939,875 $13,838,682
=========== ===========
See accompanying notes.
F-68
TELECOM TOWERS MID-ATLANTIC, LP
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
December Seven Months
31, Ended July 31,
1997 1998
----------- --------------
REVENUE:
Tower revenue..................................... $ 3,406,579 $ 2,310,861
Consulting revenue................................ 14,912,000 9,563,000
----------- -----------
Total revenue....................................... 18,318,579 11,873,861
Operating expenses.................................. 13,474,106 7,623,609
----------- -----------
Gross profit........................................ 4,844,473 4,250,252
General and administrative.......................... 4,622,807 3,308,763
Depreciation........................................ 491,806 325,466
Amortization........................................ 234,752 206,759
----------- -----------
Operating income (loss)............................. (504,892) 409,264
OTHER INCOME (EXPENSE):
Interest income................................... 813 288
Interest expense.................................. (518,892) (403,308)
Other expenses.................................... (126,797) (51,141)
----------- -----------
Net loss............................................ $(1,149,768) $ (44,897)
=========== ===========
See accompanying notes.
F-69
TELECOM TOWERS MID-ATLANTIC, LP
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
For the seven months ended July 31, 1998
and year ended December 31, 1997
Total
General Limited Partners
Partner Partners Capital
-------- ----------- -----------
Balance at January 1, 1997.................. $(69,997) $ 5,273,287 $ 5,203,290
Distributions to partners................... (65) (360,000) (360,065)
Net loss.................................... (11,498) (1,138,270) (1,149,768)
-------- ----------- -----------
Balance at December 31, 1997................ (81,560) 3,775,017 3,693,457
Net loss.................................... (449) (44,448) (44,897)
-------- ----------- -----------
Balance at July 31, 1998.................... $(82,009) $ 3,730,569 $ 3,648,560
======== =========== ===========
See accompanying notes.
F-70
TELECOM TOWERS MID-ATLANTIC, LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Seven Months
December Ended July 31,
31, 1997 1998
----------- --------------
OPERATING ACTIVITIES
Net loss.......................................... $(1,149,768) $ (44,897)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation.................................... 491,806 325,466
Amortization.................................... 234,752 206,759
Changes in operating assets and liabilities:
Accounts receivable........................... 352,426 125,734
Prepaid expenses.............................. 124,020 (3,951)
Deferred rent receivable...................... (67,770) (119,469)
Other assets.................................. (93,949) 5,373
Accounts payable and accrued liabilities...... (246,938) (217,947)
Other liabilities............................. (935,000) (20,000)
Prepaid rents................................. 78,101 68,939
Due to affiliates............................. 305,427 296,993
----------- ---------
Net cash (used in) provided by operating
activities....................................... (906,893) 623,000
INVESTING ACTIVITIES
Asset acquisitions, net of cash received.......... (1,250,000) --
Purchase of property and equipment................ (871,847) (542,431)
Proceeds from sale of assets...................... 11,645 --
----------- ---------
Net cash used in investing activities............. (2,110,202) (542,431)
FINANCING ACTIVITIES
Proceeds from notes payable....................... 3,374,973 --
Payments on debt.................................. (1,513,188) (184,281)
Distributions to partners......................... (360,065) --
----------- ---------
Net cash provided by (used in) financing
activities....................................... 1,501,720 (184,281)
----------- ---------
Net decrease in cash.............................. (1,515,375) (103,712)
Cash at beginning of period....................... 1,894,748 379,373
----------- ---------
Cash at end of period............................. $ 379,373 $ 275,661
=========== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest............................ $ 518,892 $ 403,308
=========== =========
See accompanying notes.
F-71
TELECOM TOWERS MID-ATLANTIC, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1998 and December 31, 1997
1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
Description of Business
TeleCom Towers Mid-Atlantic, LP (the "Partnership" or "Mid-Atlantic"), is a
South Carolina limited partnership. The general partner is TeleCom Towers,
L.L.C., which owns a one percent (1%) interest in the Partnership. The
Partnership is a general partner in both RFM Facilities Management, LP ("RFM")
and RCC Holdings, LP ("RCC Holdings"). The consolidated financial statements of
the Partnership include the accounts of RFM and RCC Holdings. The Partnership
holds a 99.99% interest in each. RCC Holdings has no operations of its own and
was formed as the holding company for RCC Consultants, Inc. ("RCC"), a wholly-
owned subsidiary of RCC Holdings. RCC provides wireless communications
consulting services to public and private sector communication systems
operators.
The Partnership shall continue in full force and effect until December 31,
2020, unless the Partnership is sooner dissolved by the occurrence of certain
events as specified in the Partnership Agreement. As discussed in Note 10, the
Partnership was merged into its general partner on August 3, 1998.
Mid-Atlantic owns and manages telecommunication tower sites in South Carolina,
Ohio, West Virginia, Kentucky, and Kansas. RFM owns and manages
telecommunications sites in various states. Both entities license space on
towers and roof-top sites to customers for a fee under contacts that extend for
more than one year.
The liability of each partner shall be limited to the amount of capital
contributions required to be made by such partner in accordance with the
provisions of the Partnership Agreement. The general partner is responsible for
the liabilities of the Partnership beyond the capital contributed by the
limited partners.
Distributions to partners are made in accordance with the partners' percentage
interest at the time of such distribution until certain capital contributions
are repaid and a cumulative annual return is paid to the partners. Profits and
losses are allocated to the partners based on the partners' percentage interest
as adjusted per the preceding paragraph.
Acquisitions
The Partnership acquired, through various transactions, the following tangible
and intangible assets during the year ended December 31, 1997. Intangible
assets primarily include goodwill, organization costs, non-compete and
consulting agreements, and acquisition and loan costs. The purchase method was
used to account for the acquisitions. The purchase prices were allocated, in
total, as follows:
Land........................................................... $ 50,000
Buildings...................................................... 15,000
Towers......................................................... 170,000
Intangibles.................................................... 1,015,000
----------
$1,250,000
==========
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
F-72
TELECOM TOWERS MID-ATLANTIC, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Credit Risk
The Partnership operates telecommunications transmission sites in various
states and grants credit to its customers in the normal course of business and
normally does not require collateral. Concentrations of credit risk with
respect to accounts receivable is limited due to the large number of customers
in the Partnership's customer base. The Partnership maintains an allowance for
doubtful accounts based upon the expected collectibility of individual accounts
receivable.
Significant Accounting Policies
Revenue Recognition
Owned site revenue is recognized on a straight-line basis over the initial term
of the license agreement. The excess of rents accrued over amounts
contractually due pursuant to the underlying licenses are recorded as deferred
rent receivable on the accompanying balance sheet. Certain license agreements
provide for reimbursement of electric charges and rent increases tied to
increases in, among other factors, the consumer price index.
Managed site revenue is recognized ratably over time. Consulting revenue is
recognized when services are performed.
Deferred revenue represents prepayments of charges by certain customers for
space on the communication towers. The income is recognized as revenue in
subsequent periods as earned.
Property and Equipment
Property and equipment are stated at cost. Depreciation of towers is computed
using the double declining balance method. The straight-line method is used for
equipment and buildings. Estimated useful lives are as follows: buildings, 39
years; towers, 20 years; equipment, 7 years.
The Partnership records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those assets. Based on management's
estimation process, no impairment losses were recorded as of July 31, 1998. As
of July 31, 1998, all fixed assets were held for use and the Partnership does
not plan to dispose of any such assets.
Cash
For purposes of the statement of cash flows, cash consists of cash in bank.
Intangible Assets
Intangible assets are stated at cost. Intangible assets consist of non-compete
and consulting agreements, organization costs, goodwill, and acquisition and
loan costs. Such assets are being amortized using the straight line method over
their estimated useful lives not to exceed fifteen years.
Financing Costs
Costs incurred in obtaining debt financing have been capitalized and are being
amortized over the lives of the respective loans.
F-73
TELECOM TOWERS MID-ATLANTIC, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Operating Expenses
Operating expenses include land lease expense, insurance expense, repairs and
maintenance expense, real estate and personal property taxes, utilities, and
bad debt expense.
Income Taxes
No provision has been made for federal and state income taxes since the
Partnership's profits and losses are reported by the individual partners on
their respective income tax returns. RCC is a corporation which provides for
income taxes under the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." As of July 31, 1998, RCC had
federal net operating loss carry forwards of approximately $5.1 million which
may be subject to an annual limitation due to the change in ownership of RCC
that occurred in 1996. A valuation allowance has been established against the
related net deferred tax asset.
Syndication/Offering Costs
The costs incurred in offering and issuing the limited partner interests in the
Partnership have been deducted from partners' capital.
Recent Pronouncements
As of January 1, 1998, the Partnership adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130") "Comprehensive Income". SFAS 130
requires that an enterprise (a) classify items of other comprehensive income by
their nature in the financial statements and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the Statements of Partner's Capital. For all
periods presented, the Partnership had no items of comprehensive income and,
accordingly, the Statement does not apply.
As of January 1, 1998, the Partnership adopted Statement of Financial
Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 changes the way public companies
report segment information in annual financial statements and also requires
those companies to report selected segment information in interim financial
reports to stockholders. The Partnership operates in only one segment, the
operation of telecommunications towers.
In April 1998, the AICPA issued Statement of Position 98-5, Reporting on the
Costs of Start-Up Activities. This Statement of Position ("SOP") provides
guidance on the financial reporting of start-up costs and organization costs.
It requires costs of start-up activities and organization costs to be expensed
as incurred. This SOP applies to all non-governmental entities and is effective
for financial statements for fiscal years beginning after December 15, 1998.
Initial application of this SOP should be reported as the cumulative effect of
a change in accounting principle. When adopting this SOP, entities are not
required to report the pro forma effects of retroactive application. The effect
of adopting SOP 98-5 is not expected to have a material effect on the financial
statements.
F-74
TELECOM TOWERS MID-ATLANTIC, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Accounts Receivable
Mid-Atlantic and RFM accounts receivable balances as of July 31, 1998 were
primarily for tower sites licensing agreements. RCC accounts receivable
balances consist primarily of amounts billed and unbilled to customers under
time and material and site type contracts as follows:
December 31, July 31,
1997 1998
------------ ----------
Billed accounts receivable....................... $4,002,303 $3,977,037
Unbilled accounts receivable..................... 1,308,000 1,531,000
---------- ----------
5,310,303 5,508,037
Allowance for doubtful accounts.................. (402,800) (726,268)
---------- ----------
Net accounts receivable.......................... $4,907,503 $4,781,769
========== ==========
3. Property and Equipment
Property and equipment consisted of the following:
December 31, July 31,
1997 1998
------------ -----------
Land........................................... $ 528,077 $ 528,077
Buildings...................................... 720,242 721,532
Towers......................................... 3,435,975 3,501,107
Equipment, furniture, and fixtures............. 1,264,800 1,717,941
----------- -----------
5,949,094 6,468,657
Accumulated depreciation....................... (1,016,569) (1,319,167)
----------- -----------
Property and equipment, net.................... $ 4,932,525 $ 5,149,490
=========== ===========
4. Intangible Assets
Intangible assets consisted of the following:
December 31, July 31,
1997 1998
------------ ----------
Goodwill......................................... $2,887,727 $2,887,727
Acquisition and loan costs....................... 577,885 577,885
Non-compete and consulting agreement............. 100,000 100,000
---------- ----------
3,565,612 3,565,612
Accumulated amortization......................... (369,970) (576,729)
---------- ----------
Net intangibles.................................. $3,195,642 $2,988,883
========== ==========
These intangibles resulted from various acquisitions of towers made by the
Partnership. Goodwill is being amortized on a straight-line basis over fifteen
years while organization costs are amortized over five years on a straight-line
basis. Non-compete agreements are being amortized on the straight-line method
over the terms of the agreements, ranging from five to fifteen years. Loan
costs are being amortized over the life of the respective loan.
F-75
TELECOM TOWERS MID-ATLANTIC, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Long-term debt
The Partnership's General Partner, TeleCom Towers, L.L.C., has entered into a
Master Credit Facility Agreement. The agreement establishes a credit facility
consisting of a line of credit arrangement pursuant to which entities
controlled by the General Partner, including the Partnership, can borrow up to
an aggregate of $28,000,000 from the Line of Credit Commitment for a limited
period of time on a senior secured basis. The notes payable incurred by the
Partnership are provided through a separate, but related, Credit Facility
Agreement with the lender. The agreements provide for a Line of Credit Draw Fee
of 0.75% of advances under the agreements in addition to other fees to be paid
in immediately available funds on the settlement date. The Partnership incurred
approximately $0 and $121,000 in draw fees during the seven months ended July
31, 1998 and the year ended December 31, 1997. The agreements also contain a
provision for a Line of Credit Facility Fee at the rate of 0.25% per annum on
the average unborrowed portion of the Line of Credit Commitment. These fees are
paid on a proportionate basis by the various entities utilizing the line of
credit. The Partnership incurred $1,189 and $1,917 in credit facility fees
during the seven months ended July 31, 1998 and the year ended December 31,
1997.
The notes payable mature in annual installments of 75% of excess cash flows or
in accordance with the Cash Management Agreement between borrower and lender.
Interest is payable quarterly in arrears on the last business day of each
fiscal quarter. The interest rate is equal to the sum of the applicable Rate
Index plus the applicable Rate Margin. The Rate Index will be either the prime
rate or the adjusted LIBO (London Interbank Offered) Rate and the Rate Margin
will be based on the leverage ratio (using borrower's most recently delivered
quarterly financial statements acceptable to lender) of the borrower's funded
debt as of the last day of the fiscal quarter to the borrower's operating cash
flow. The notes are secured by all funds, balances or other property of the
Partnership.
RCC has a obtained a separate secured line of credit in the amount of
$3,000,000. The line has a term of three years with interest at prime plus 3%.
The line is secured by the domestic accounts receivable of RCC. RCC is subject
to an early termination fee under the agreement whereby the lender is entitled
to a percentage of the total line based on the time of termination.
Balances at July 31, 1998 were as follows:
Due date: Interest Rate:
--------- --------------
April 2000 Prime plus 3% $1,166,000
April 2002 9.25% 2,247,031
June 2002 9.25% 641,250
March 2003 9.25% 721,500
July 2004 9.25% 2,262,973
----------
7,038,754
Less current
maturities.. (652,358)
Long-term
portion..... $6,386,396
F-76
TELECOM TOWERS MID-ATLANTIC, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The approximate maturities of the notes payable for the five years subsequent
to July 31, 1998, are as follows:
Year Amount
---- ----------
December 31, 1998.............................................. $ 232,796
December 31, 1999.............................................. 767,061
December 31, 2000.............................................. 2,262,835
December 31, 2001.............................................. 1,415,002
December 31, 2002.............................................. 1,363,232
Thereafter..................................................... 997,828
----------
Total........................................................ $7,038,754
==========
6. Description of Leasing Arrangements
Mid-Atlantic and RFM license space for communication systems on their towers to
customers under noncancellable agreements requiring monthly, quarterly or
annual payments over various terms. Certain of the agreements contain various
options. At July 31, 1998, future minimum license agreement receipts were as
follows:
Year Amount
---- -----------
December 31, 1999............................................. $ 3,852,000
December 31, 2000............................................. 3,172,000
December 31, 2001............................................. 2,372,000
December 31, 2002............................................. 1,451,000
December 31, 2003............................................. 680,000
Thereafter.................................................... 997,000
-----------
Total....................................................... $12,524,000
===========
7. Commitments
Mid-Atlantic and RFM are committed to various land leases for tower sites. RCC
is obligated under operating leases for office space and equipment. Land lease
expense for the seven months ended July 31, 1998 and the year ended December
31, 1997 was $149,262 and $239,697, respectively. Rental expense for the office
space and equipment for the seven months ended July 31, 1998 and the year ended
December 31, 1997 totaled approximately $525,000 and $891,665, respectively. At
July 31, 1998, future minimum lease payments were as follows:
Year Amount
---- ----------
December 31, 1998.............................................. $ 378,239
December 31, 1999.............................................. 825,179
December 31, 2000.............................................. 798,752
December 31, 2001.............................................. 686,029
December 31, 2002.............................................. 520,992
Thereafter..................................................... 771,533
----------
Total........................................................ $3,980,724
==========
8. Related Parties
In the normal course of business, the Partnership advances and receives funds
to and from affiliated parties for certain shared expenses. Amounts are repaid
on a regular and timely basis. The Partnership had a payable to these
affiliates of $683,549 and $36,758 at July 31, 1998 and December 31, 1997,
respectively.
F-77
TELECOM TOWERS MID-ATLANTIC, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Partnership, in accordance with its limited partnership agreement, is
obligated to pay the general partner a management fee equal to 8.5% of the
gross monthly revenues. The management fee expense recognized for the seven
months ended July 31, 1998 and the year ended December 31, 1997 was $188,204
and $269,786, respectively. The Partnership is also obligated to pay a 3%
acquisition fee on all capital funds invested in towers and related real estate
and other assets, as well as up to 4% of gross monthly revenue, to the general
partner for reimbursement of certain general partner expenses. Acquisition fees
are capitalized as incurred by the Partnership. No acquisition fees were
incurred or capitalized during the seven months ended July 31, 1998 or the year
ended December 31, 1997. Expense reimbursement fees totaled $88,570 and $76,357
for the seven months ended July 31, 1998 and the year ended December 31, 1997.
9. Equity Program Description
In 1996 RCC Holdings and RFM established an equity participation program
("Equity Program") for the employees of RCC. At the time this Equity Program
was established, RCC was wholly owned by RCC Holdings, and RFM was affiliated
with RCC Holdings. The Partnership and TeleCom Towers, Inc., a Texas
corporation ("TTI"), were the general partners of RFM. The objective of the
Equity Program is to reward employees for the success of RCC Holdings and RFM
as if they were owners of the Partnership. The Equity Program generally
provides that each employee will receive a designated percentage (as set forth
in the award agreement) of amounts distributed to TTI from the proceeds of RCC
Holdings and RFM. Employee--participants vest their benefits over a period of
five years of service with RCC, beginning after May 1, 1996; however,
participants will be 100% vested upon death or permanent disability. All
payments are to be made out of the general assets of either RCC Holdings or
RFM.
An event which would trigger the Partnership's obligations under the Equity
Program has not occurred, and no such event is presently anticipated or
contemplated. Therefore, the Partnership has not recorded a charge for the
Equity Program.
10. Subsequent Event
Effective August 3, 1998, the limited partners of the Partnership consummated a
merger of the Partnership into TeleCom Towers, L.L.C. which is the general
partner of the Partnership. The limited partners of the Partnership received as
merger consideration either cash or Class A Units of TeleCom Towers, L.L.C. in
exchange for their interest in the Partnership which was then liquidated. On
February 26, 1999, TeleCom Towers, L.L.C. was acquired by American Tower
Corporation.
11. Year 2000 (Unaudited)
The Partnership is aware of the implications associated with the "Year 2000" as
it relates to software information systems and other outside implications on
the Partnership's operations, including the potential impact on its customers.
The "Year 2000" is not expected to have a material impact on the Partnership's
current information systems because current software is either already "Year
2000" compliant or required changes will be insignificant. As a result, the
Partnership does not anticipate that incremental expenditures to ensure that
its information systems are "Year 2000" compliant will be material to the
Partnership's liquidity, financial position or results of operations over the
next few years. Any costs that may arise will be expensed as incurred.
F-78
REPORT OF INDEPENDENT AUDITORS
Partners
TeleCom Southwest Towers, LP
We have audited the accompanying balance sheets of TeleCom Southwest Towers, LP
as of July 31, 1998 and December 31, 1997, and the related statements of
operations, partners' capital, and cash flows for the seven months ended July
31, 1998 and the year ended December 31, 1997. These financial statements are
the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes 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 financial statements referred to above present fairly, in
all material respects, the financial position of TeleCom Southwest Towers, LP
at July 31, 1998 and December 31, 1997, and the results of its operations and
its cash flows for the seven months ended July 31, 1998 and the year ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Vienna, Virginia
April 1, 1999
F-79
TELECOM SOUTHWEST TOWERS, LP
BALANCE SHEETS
December 31, July 31,
1997 1998
------------ ----------
ASSETS
CURRENT ASSETS:
Cash................................................ $ 20,821 $ 355,993
Accounts receivable, net of allowance of $15,500 and
$37,400 in 1997 and 1998........................... 75,080 61,004
Prepaid expenses.................................... 24,496 11,740
Affiliate receivable................................ 11,186 24,133
---------- ----------
Total current assets.............................. 131,583 452,870
Property and equipment, net of accumulated
depreciation of $859,782 and $1,077,426 in 1997 and
1998................................................. 4,131,451 3,954,305
Intangibles, net of accumulated amortization of
$897,157 and $1,160,431 in 1997 and 1998............. 4,027,976 3,814,702
Deferred rent receivable.............................. 36,524 144,727
Escrow deposits....................................... 50,200 --
Investment in joint ventures.......................... 292,322 304,803
---------- ----------
Total assets...................................... $8,670,056 $8,671,407
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable and accrued expenses............... $ 36,232 $ 288,902
Current portion of long-term debt................... 631,834 833,574
Prepaid rents....................................... 77,749 142,047
---------- ----------
Total current liabilities......................... 745,815 1,264,523
Long-term debt, net of current portion................ 6,823,803 6,373,260
Partners' capital..................................... 1,100,438 1,033,624
---------- ----------
Total liabilities and partners' capital........... $8,670,056 $8,671,407
========== ==========
See accompanying notes.
F-80
TELECOM SOUTHWEST TOWERS, LP
STATEMENTS OF OPERATIONS
Seven
Year Ended Months Ended
December 31, July 31,
1997 1998
------------ ------------
REVENUE:
Tower revenue...................................... $2,062,011 $1,392,781
---------- ----------
Total revenue.................................... 2,062,011 1,392,781
Operating expenses................................... 374,535 264,606
---------- ----------
Gross profit......................................... 1,687,476 1,128,175
General and administrative........................... 463,176 329,586
Depreciation......................................... 358,477 217,644
Amortization......................................... 481,314 263,274
---------- ----------
Operating Income..................................... 384,509 317,671
OTHER INCOME (EXPENSE):
Interest income.................................... 4,259 99
Interest expense................................... (640,741) (396,865)
Loss on disposition of assets...................... (29,158) --
Miscellaneous income............................... 21,704 --
Partnership share of income (loss) in joint
venture........................................... (5,814) 12,281
---------- ----------
Net loss............................................. $ (265,241) $ (66,814)
========== ==========
See accompanying notes.
F-81
TELECOM SOUTHWEST TOWERS, LP
STATEMENTS OF PARTNERS' CAPITAL
For the seven months ended July 31, 1998
and year ended December 31, 1997
Total
General Limited Partners'
Partner Partners Capital
-------- ---------- ----------
Balance at January 1, 1997.................... $ (6,718) $1,556,639 $1,549,921
Distributions................................. (4,242) (180,000) (184,242)
Net loss...................................... (2,652) (262,589) (265,241)
-------- ---------- ----------
Balance at December 31, 1997.................. (13,612) 1,114,050 1,100,438
Net loss...................................... (668) (66,146) (66,814)
-------- ---------- ----------
Balance at July 31, 1998...................... $(14,280) $1,047,904 $1,033,624
======== ========== ==========
See accompanying notes.
F-82
TELECOM SOUTHWEST TOWERS, LP
STATEMENTS OF CASH FLOWS
Year Ended Seven Months
December 31, Ended July 31,
1997 1998
------------ --------------
OPERATING ACTIVITIES
Net loss......................................... $ (265,241) $ (66,814)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation................................... 358,477 217,644
Amortization................................... 481,314 263,274
Loss on disposition of assets.................. 29,158 --
Partnership income (loss)...................... 5,814 (12,281)
Changes in operating assets and liabilities:
Accounts receivable.......................... (30,983) 14,076
Prepaid expenses............................. (20,370) 12,756
Due from affiliates.......................... (50,000) (12,947)
Deferred rent receivable..................... (36,524) (108,203)
Accounts payable and accrued liabilities..... (5,884) 252,670
Prepaid rents................................ 12,845 64,298
Other liabilities............................ (1,000) --
----------- ---------
Net cash provided by operating activities........ 477,606 624,473
INVESTING ACTIVITIES
Asset acquisitions, net of cash received......... (2,601,595) --
Purchases of property and equipment.............. (531,450) (40,498)
Contributions to investments in joint ventures... (40,496) --
Distributions from joint ventures................ 25,000 --
Proceeds from sale of assets..................... 7,500 --
----------- ---------
Net cash used in investing activities............ (3,141,041) (40,498)
FINANCING ACTIVITIES
Proceeds from debt............................... 2,996,751 --
Payments on debt................................. (336,739) (248,803)
Distributions to partners........................ (184,242) --
----------- ---------
Net cash provided by (used in) financing
activities...................................... 2,475,770 (248,803)
----------- ---------
Net (decrease) increase in cash.................. (187,665) 335,172
Cash at beginning of period...................... 208,486 20,821
----------- ---------
Cash at end of period............................ $ 20,821 $ 355,993
=========== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest........................... $ 640,741 $ 339,827
=========== =========
See accompanying notes.
F-83
TELECOM SOUTHWEST TOWERS, LP
NOTES TO FINANCIAL STATEMENTS
July 31, 1998 and December 31, 1997
1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
Description of Business
TeleCom Southwest Towers, LP (the "Partnership"), a Texas limited partnership,
owns and manages telecommunications tower sites in Eastern and Central Texas
and has joint ventures in both Louisiana and Texas, and licenses space on such
towers to customers for a fee. The general partner is TeleCom Towers, LLC,
which has a 1% interest in the Partnership. The Partnership shall continue in
full force and effect until December 31, 2020, unless the Partnership is sooner
dissolved by the occurrence of certain events as specified in the Partnership
Agreement. As discussed in Note 9, the Partnership was merged into its general
partner on August 3, 1998.
The liability of each partner shall be limited to the amount of capital
contributions required to be made by such partner in accordance with the
provisions of the Partnership Agreement. The general partner is responsible for
the liabilities of the Partnership beyond the capital contributed by the
limited partners.
Distributions to partners are made in accordance with the partners' percentage
interests at the time of such distribution until certain capital contributions
are repaid and a cumulative annual return is paid to the partners. Profits and
losses are allocated to the partners based on the partners' percentage
interests as adjusted per the preceding paragraph.
Acquisitions
The Partnership acquired, through various transactions, the following tangible
and intangible assets during the year ended December 31, 1997. Intangible
assets primarily include goodwill, organization costs, non-compete and
consulting agreements, and acquisition and loan costs. The purchase method was
used to account for the acquisitions. The purchase prices were allocated, in
total, as follows:
Land........................................................... $ 151,523
Buildings...................................................... 175,000
Towers......................................................... 429,372
Equipment...................................................... 50,000
Intangibles.................................................... 1,795,703
----------
$2,601,598
==========
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
Credit Risk
The Partnership operates telecommunications transmission sites in various
states and grants credit to its customers in the normal course of business and
normally does not require collateral. Concentrations of credit risk with
respect to accounts receivable are limited due to the large number of customers
in the Partnership's
F-84
TELECOM SOUTHWEST TOWERS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
customer base. The Partnership maintains an allowance for doubtful accounts
based upon the expected collectibility of individual accounts receivable.
Significant Accounting Policies
Revenue Recognition
Owned site revenue is recognized on a straight-line basis over the initial term
of the license agreement. The excess of rents accrued over amounts
contractually due pursuant to the underlying licenses is recorded as deferred
rent receivable on the accompanying balance sheet. Certain license agreements
provide for reimbursement of electric charges and rent increases tied to
increases in, among other factors, the consumer price index. Managed site
revenue is recognized ratably over time.
Deferred revenue represents prepayments of charges by certain customers for
space on the communication towers. The income is recognized as revenue in
subsequent periods when earned.
Property and Equipment
Property and equipment are stated at cost. Depreciation of towers is computed
using the double declining balance method. The straight-line method is used for
equipment and buildings. Estimated useful lives are as follows: buildings, 39
years; towers, 20 years; equipment, 7 years.
The Partnership records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those assets. Based on management's
estimation process, no impairment losses were recorded as of July 31, 1998. As
of July 31, 1998, all fixed assets were held for use and the Partnership does
not plan to dispose of any such assets.
Cash
For purposes of the statement of cash flows, cash consists of cash in bank.
Intangible Assets
Intangible assets are stated at cost. Intangible assets consist of non-compete
agreements, organization costs and goodwill. Such assets are being amortized
using the straight line-method over their estimated useful lives not to exceed
fifteen years.
Financing Costs
Costs incurred in obtaining debt financing have been capitalized and are being
amortized over the life of the respective loans.
Operating Expenses
Operating expenses include land lease expense, insurance expense, repairs and
maintenance expense, real estate and personal property taxes, utilities, and
bad debt expense.
F-85
TELECOM SOUTHWEST TOWERS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Income Taxes
No provision has been made for federal and state income taxes since the
Partnership's profits and losses are reported by the individual partners on
their respective income tax returns.
Syndication/Offering Costs
The costs incurred in offering and issuing the limited partner interests in the
Partnership have been deducted from partners' capital.
Recent Pronouncements
As of January 1, 1998, the Partnership adopted Statement of Financial
Accounting Standards No 130 ("SFAS130") "Comprehensive Income". SFAS 130
requires that an enterprise (a) classify items of other comprehensive income by
their nature in the financial statements and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the Statements of Partners' Capital. For all
periods presented, the Partnership had no items of comprehensive income and,
accordingly, the Statement does not apply.
As of January 1, 1998, the Partnership adopted Statement of Financial
Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 changes the way public companies
report segment information in annual financial statements and also requires
those companies to report selected segment information in interim financial
reports to stockholders. The Partnership operates in only one segment, the
operation of telecommunications towers.
In April 1998, the AICPA issued a Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities". This Statement of Position ("SOP") provides
guidance on the financial reporting of start-up costs and organization costs.
It requires costs of start-up activities and organization costs to be expensed
as incurred. This SOP applies to all non-governmental entities and is effective
for financial statements for fiscal years beginning after December 15, 1998.
Initial application of this SOP should be reported as the cumulative effect of
a change in accounting principle. When adopting this SOP, entities are not
required to report the pro forma effects of retroactive application. The effect
of adopting SOP 98-5 is not expected to have a material effect on the financial
statements.
2. Property and Equipment
Property and equipment consists of the following:
December 31, July 31,
1997 1998
------------ -----------
Land............................................... $ 319,688 $ 319,688
Buildings.......................................... 582,596 582,967
Towers............................................. 3,866,771 3,886,908
Equipment.......................................... 222,178 242,168
---------- -----------
4,991,233 5,031,731
Accumulated depreciation........................... (859,782) (1,077,426)
---------- -----------
Property and equipment, net........................ $4,131,451 $ 3,954,305
========== ===========
F-86
TELECOM SOUTHWEST TOWERS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Intangible Assets
Intangible assets consist of the following:
December 31, July 31,
1997 1998
------------ -----------
Goodwill........................................... $3,011,494 $ 3,061,494
Organization costs................................. 72,437 72,437
Non-compete and consulting agreements.............. 1,325,000 1,325,000
Acquisition and loan costs......................... 516,202 516,202
---------- -----------
4,925,133 4,975,133
Accumulated amortization........................... (897,157) (1,160,431)
---------- -----------
Net intangibles.................................... $4,027,976 $ 3,814,702
========== ===========
These intangibles resulted from various acquisitions of towers made by the
Partnership. Goodwill is being amortized on a straight-line basis over fifteen
years while organization costs are amortized over five years on a straight-line
basis. Non-compete agreements are being amortized on the straight-line method
over the terms of the agreements, ranging from five to fifteen years.
Acquisition costs are being amortized over fifteen years. Loan costs are being
amortized over the life of the respective loan.
4. Long-term Debt
The Partnership's General Partner, TeleCom Towers, LLC, has entered into a
Master Credit Facility Agreement. The agreement establishes a credit facility
consisting of a line of credit arrangement pursuant to which entities
controlled by the General Partner, including the Partnership, can borrow up to
an aggregate of $28,000,000 from the Line of Credit Commitment for a limited
period of time on a senior secured basis. The notes payable incurred by the
Partnership are provided through a separate, but related, Credit Facility
Agreement with the lender. The agreements provide for a Line of Credit Draw Fee
of 0.75% of advances under the agreements in addition to other fees to be paid
in immediately available funds on the settlement date. The Partnership incurred
approximately $0 and $160,000 in such fees during the seven months ended July
31, 1998 and the year ended December 31, 1998, respectively. The agreements
also contain a provision for a Line of Credit Facility Fee at the rate of 0.25%
per annum on the average unborrowed portion of the Line of Credit Commitment.
These fees are paid on a proportionate basis by the various entities utilizing
the line of credit. The Partnership incurred $1,459 and $7,967 in credit
facility fees during the seven months ended July 31, 1998 and the year ended
December 31, 1998, respectively.
F-87
TELECOM SOUTHWEST TOWERS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
The notes payable mature in annual installments of 75% of excess cash flows or
in accordance with the Cash Management Agreement between borrower and lender.
Interest is payable quarterly in arrears on the last business day of each
fiscal quarter. The interest rate is equal to the sum of the applicable Rate
Index plus the applicable Rate Margin. The Rate Index will be either the prime
rate or the adjusted LIBO (London Interbank Offered) Rate and the Rate Margin
will be based on the leverage ratio (using borrower's most recently delivered
quarterly financial statements acceptable to lender) of borrower's funded debt
as of the last day of the fiscal quarter to the borrower's operating cash flow.
The notes are secured by all funds, balances or other property of the
Partnership and the general partner. Balances at July 31, 1998, are as follows:
Due date: Interest Rate:
--------- --------------
June 2002 9.25% $2,395,182
September 2002 9.25% 556,025
October 2002 9.25% 556,024
December 2002 9.1875% 702,853
July 2004 9.25% 2,996,750
----------
7,206,834
Less current
maturities.. (833,574)
----------
Long-term
portion..... $6,373,260
==========
The approximate maturities of the notes payable for the five years subsequent
to July 31, 1998, are as follows:
Year Amount
---- ----------
December 31, 1998.............................................. $ 383,031
December 31, 1999.............................................. 1,078,859
December 31, 2000.............................................. 1,439,634
December 31, 2001.............................................. 1,660,389
December 31, 2002.............................................. 1,390,030
Thereafter..................................................... 1,254,891
----------
Total........................................................ $7,206,834
==========
5. Description of Leasing Arrangements
The Partnership licenses space for communication systems on its towers to
customers under noncancelable agreements requiring monthly, quarterly or annual
payments over various terms. Certain agreements contain various options. At
July 31, 1998, future minimum license agreement receipts were as follows:
Year ended Amount
---------- -----------
December 31, 1999............................................. $ 2,460,000
December 31, 2000............................................. 2,157,000
December 31, 2001............................................. 1,559,000
December 31, 2002............................................. 1,190,000
December 31, 2003............................................. 906,000
Thereafter.................................................... 2,303,000
-----------
Total....................................................... $10,575,000
===========
F-88
TELECOM SOUTHWEST TOWERS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. Commitments
The Partnership is committed to various land leases for tower sites. Land lease
expense for the seven months ended July 31, 1998 and the year ended December
31, 1997, was $66,387 and $105,274, respectively. At July 31, 1998, future
minimum lease payments were as follows:
Year ended Amount
---------- --------
December 31, 1998................................................ $ 24,290
December 31, 1999................................................ 56,927
December 31, 2000................................................ 52,471
December 31, 2001................................................ 50,671
December 31, 2002................................................ 49,671
Thereafter....................................................... 167,354
--------
Total.......................................................... $401,384
========
7. Related Parties
In the normal course of business, the Partnership advances and receives funds
to and from affiliated parties for certain shared expenses. The affiliated
parties repay such amounts on a regular and timely basis. The Partnership had
receivables due from these affiliates of $24,133 and $11,186 at July 31, 1998
and December 31, 1997, respectively.
The Partnership, in accordance with its limited partnership agreements, is
obligated to pay the general partner a management fee equal to 8.5% of the
gross monthly revenues. The management fee expense recognized for the seven
months ended July 31, 1998 and the year ended December 31, 1997, was $112,829
and $176,985, respectively. The Partnership is also obligated to pay a 2.5%
acquisition fee on the purchase price of all acquisitions. The Partnership is
also obligated to pay up to 4% of gross monthly revenue to the general partner
for reimbursement of certain general partner expenses. Acquisition fees are
capitalized as incurred by the Partnership. Acquisition fees capitalized as
incurred during the seven months ended July 31, 1998 and the year ended
December 31, 1997 were $0 and $66,250, respectively. Expense reimbursement fees
totaled $53,096 and $52,657 for the seven months ended July 31, 1998 and the
year ended December 31, 1997, respectively.
8. Investments in Joint Ventures
The Partnership is a 50% partner in Shreveport Tower Company, a Louisiana
partnership formed to operate a tower in Shreveport, Louisiana. The Company is
also a 50% partner in Castle Rock Tower Company, a Texas partnership formed to
operate towers in Texas. These investments are considered joint ventures and
are accordingly recorded on the equity method.
Summarized financial information from the unaudited financial statements of
these partnerships as of July 31, 1998, is as follows:
Shreveport Castle Rock
Tower Tower
Company Company
----------- -----------
(unaudited) (unaudited)
Total Assets......................................... $371,130 $330,751
Total Liabilities.................................... 6,301 28,971
Partners' Capital.................................... 364,829 301,780
Total Revenue........................................ 22,524 51,639
Net Income........................................... 93 24,467
Partnership's Share of Income........................ 47 12,234
F-89
TELECOM SOUTHWEST TOWERS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
9. Subsequent Event
Effective August 3, 1998, the limited partners of the Partnership consummated a
merger of the Partnership into TeleCom Towers, L.L.C. which is the general
partner of the Partnership. The limited partners of the Partnership received as
merger consideration either cash or Class A Units of TeleCom Towers, L.L.C. in
exchange for their interest in the Partnership which was then liquidated. On
February 26, 1999, TeleCom Towers, L.L.C. was acquired by American Tower
Corporation.
10. Year 2000 (Unaudited)
The Partnership is aware of the implications associated with the "Year 2000" as
it relates to software information systems and other outside implications on
the Partnership's operations, including the potential impact on its customers.
The "Year 2000" is not expected to have a material impact on the Partnership's
current information systems because current software is either already "Year
2000" compliant or required changes will be insignificant. As a result, the
Partnership does not anticipate that incremental expenditures to ensure that
its information systems are "Year 2000" compliant will be material to the
Partnership's liquidity, financial position or results of operations over the
next few years. Any costs that may arise will be expensed as incurred.
F-90
REPORT OF INDEPENDENT AUDITORS
Partners
TeleCom Towers of the West, LP
We have audited the accompanying consolidated balance sheets of TeleCom Towers
of the West, LP as of July 31, 1998 and December 31, 1997, and the related
consolidated statements of operations, partners' capital, and cash flows for
the seven months ended July 31, 1998 and the year ended December 31, 1997.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes 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 consolidated financial position of
TeleCom Towers of the West, LP at July 31, 1998 and December 31, 1997 and the
consolidated results of its operations and its cash flows for the seven months
ended July 31, 1998 and the year ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Vienna, Virginia
April 1, 1999
F-91
TELECOM TOWERS OF THE WEST, LP
CONSOLIDATED BALANCE SHEETS
December 31, July 31,
1997 1998
------------ -----------
ASSETS
CURRENT ASSETS:
Cash................................................ $ 425,791 $ 605,040
Accounts receivable, net of allowance of $15,000 and
$67,000 in 1997 and 1998........................... 255,975 163,553
Prepaid expenses.................................... 33,073 44,205
Other current assets................................ -- 53,421
----------- -----------
Total current assets.............................. 714,839 866,219
Property and equipment, net of accumulated
depreciation of $743,916 and $1,039,020 in 1997 and
1998................................................. 4,700,217 4,660,622
Intangibles, net of accumulated amortization of
$939,261 and $1,802,984 in 1997 and 1998............. 17,665,725 17,018,167
Investment in joint venture........................... 1,520,475 1,754,321
Deferred rent receivable.............................. 119,054 226,659
Escrow deposits....................................... 550,000 335,000
Other assets.......................................... 10,877 10,525
----------- -----------
Total assets...................................... $25,281,187 $24,871,513
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable and accrued expenses............... $ 62,663 $ 460,597
Current portion of long-term debt................... 204,644 497,682
Other liabilities................................... 16,965 --
Prepaid rents....................................... 215,386 360,756
Due to related entities............................. 415,717 --
----------- -----------
Total current liabilities......................... 915,375 1,319,035
Long-term debt, net of current portion................ 10,950,632 11,008,844
Partners' capital..................................... 13,415,180 12,543,634
----------- -----------
Total liabilities and partners' capital........... $25,281,187 $24,871,513
=========== ===========
See accompanying notes.
F-92
TELECOM TOWERS OF THE WEST, LP
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Seven Months
December 31, Ended July 31,
1997 1998
------------ --------------
Owned sites revenue................................ $ 2,168,693 $1,989,143
Operating expenses................................. 372,964 364,032
------------ ----------
Operating margin................................... 1,795,729 1,625,111
General and administrative......................... 561,233 527,760
Depreciation....................................... 320,729 295,104
Amortization....................................... 893,436 863,723
------------ ----------
Operating income (loss)............................ 20,331 (61,476)
Interest income.................................... 55,065 15,328
Interest expense................................... (693,161) (611,244)
Partnership share of loss in joint venture......... (531,525) (214,154)
------------ ----------
Net loss........................................... $ (1,149,290) $ (871,546)
============ ==========
See accompanying notes.
F-93
TELECOM TOWERS OF THE WEST, LP
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
For the seven months ended July 31, 1998
and year ended December 31, 1997
Total
General Limited Partners'
Partner Partners Capital
---------- ----------- -----------
Balance at January 1, 1997............... $ (124,614) $ (135,432) $ (260,046)
Capital contributions.................... -- 16,338,000 16,338,000
Syndication and offering costs........... -- (1,513,484) (1,513,484)
Net loss................................. (11,493) (1,137,797) (1,149,290)
---------- ----------- -----------
Balance at December 31, 1996............. (136,107) 13,551,287 13,415,180
Net loss................................. (8,715) (862,831) (871,546)
---------- ----------- -----------
Balance at July 31, 1998................. $ (144,822) $12,688,456 $12,543,634
========== =========== ===========
See accompanying notes.
F-94
TELECOM TOWERS OF THE WEST, LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Seven Months
December 31, Ended July 31,
1997 1998
------------ --------------
OPERATING ACTIVITIES
Net loss......................................... $ (1,149,290) $(871,546)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation................................... 320,729 295,104
Amortization................................... 893,436 863,723
Partnership loss............................... 531,525 214,154
Changes in operating assets and liabilities:
Accounts receivable.......................... (307,170) 211,476
Prepaid expenses............................. (30,835) (11,132)
Deferred rent receivable..................... (148,500) (226,659)
Other assets................................. (6,207) (53,069)
Accounts payable and accrued liabilities..... (121,565) 397,934
Due to related entities...................... (2,820,070) (415,717)
Prepaid rents................................ 88,064 145,370
Other liabilities............................ 16,965 (16,965)
------------ ---------
Net cash provided by operating activities........ (2,732,918) 532,673
INVESTING ACTIVITIES
Asset acquisitions, net of cash received......... (12,851,347) --
Net assets acquired, net of cash received........ (5,874,798) --
Intangibles...................................... -- (1,165)
Purchase of property and equipment............... (2,247,389) (255,509)
Contributions to investments in joint ventures... (750,000) (448,000)
------------ ---------
Net cash used in investing activities............ (21,723,534) (704,674)
FINANCING ACTIVITIES
Proceeds from debt............................... 9,871,526 400,000
Payments on debt................................. (16,250) (48,750)
Contributions from limited partners.............. 16,338,000 --
Syndication and offering costs................... (1,513,484) --
------------ ---------
Net cash provided by financing activities........ 24,679,792 351,250
------------ ---------
Net increase in cash............................. 223,340 179,249
Cash at beginning of period...................... 202,451 425,791
------------ ---------
Cash at end of period............................ $ 425,791 $ 605,040
============ =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest........................... $ 693,161 $ 522,890
============ =========
See accompanying notes
F-95
TELECOM TOWERS OF THE WEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1998 and December 31, 1997
1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
Description of Business
TeleCom Towers of the West, LP (the "Partnership"), a Texas limited
partnership, operates in the communications industry. The Partnership operates
tower sites in various states, primarily New York, California, Arkansas and
northern Louisiana. The Partnership shall continue in full force and effect
until December 31, 2020, unless the Partnership is sooner dissolved by the
occurrence of certain events as specified in the Partnership Agreement. As
discussed in Note 9, the Partnership was merged into its general partner on
August 3, 1998.
The liability of each partner shall be limited to the amount of capital
contributions required to be made by such partner in accordance with the
provisions of the Partnership Agreement. The general partner is responsible for
the liabilities of the Partnership beyond the capital contributed by the
limited partners.
Distributions to partners are made in accordance with the partners' percentage
interests at the time of such distribution until certain capital contributions
are repaid and a cumulative annual return is paid to the partners. Profits and
losses are allocated to the partners based on the partners' percentage
interests as adjusted per the preceding paragraph.
The consolidated financial statements include the accounts of Signal Tower
Company, Inc., (Signal), a wholly-owned subsidiary, acquired in March 1997.
Acquisitions
The Partnership acquired, through various transactions, the following tangible
and intangible assets during the year ended December 31, 1997. Intangible
assets primarily include goodwill, organization costs, non-compete and
consulting agreements, and acquisition and loan costs. The purchase method was
used to account for the acquisitions. The purchase prices were allocated, in
total, as follows:
Land.......................................................... $ 526,000
Buildings..................................................... 501,000
Towers........................................................ 2,915,000
Intangibles................................................... 8,909,347
-----------
$12,851,347
===========
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
Credit Risk
The Partnership operates tower transmission sites in various states and grants
credit to its customers in the normal course of business and normally does not
require collateral. Concentrations of credit risk with respect to accounts
receivable are limited due to the large number of customers in the
Partnership's customer base. The Partnership maintains an allowance for
doubtful accounts based upon the expected collectibility of individual accounts
receivable.
F-96
TELECOM TOWERS OF THE WEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Significant Accounting Policies
Revenue Recognition
Owned site revenue is recognized on a straight-line basis over the initial term
of the license agreement. The excess of rents accrued over amounts
contractually due pursuant to the underlying licenses is recorded as deferred
rent receivable on the accompanying balance sheet.
Certain license agreements provide for reimbursement of electric charges and
rent increases tied to increases in, among other factors, the consumer price
index. Managed site revenue is recognized ratably over time.
Deferred revenue represents prepayments of charges by certain customers for
space on the communication towers. The income is recognized as revenue in
subsequent periods as earned.
Property and Equipment
Property and equipment are stated at cost. Depreciation of towers is computed
using the double declining balance method. The straight-line method is used for
equipment and buildings. Estimated useful lives are as follows: buildings, 39
years; towers, 20 years; equipment, 7 years.
The Partnership records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those assets. Based on management's
estimation process, no impairment losses were recorded as of July 31, 1998. As
of July 31, 1998, all fixed assets were held for use and the Partnership does
not plan to dispose of any such assets.
Cash
For purposes of the statement of cash flows, cash consists of cash in bank.
Intangible Assets
Intangible assets are stated at cost. Intangible assets consist of non-compete
agreements, organization costs and goodwill. Such assets are being amortized
using the straight line-method over their estimated useful lives not to exceed
fifteen years.
Escrow Deposits
The Partnership has deposits in escrow with various escrow agents for asset
purchase transactions in progress at July 31, 1998. Depending on the outcome of
the related negotiations amounts will either be reclassified as part of the
purchase price, expensed to general and administrative expenses as site
investigation costs, or reclassified into cash.
Financing Costs
Costs incurred in obtaining debt financing have been capitalized and are being
amortized over the life of the respective loans.
F-97
TELECOM TOWERS OF THE WEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Operating Expenses
Operating expenses include land lease expense, insurance expense, repairs and
maintenance expense, real estate and personal property taxes, utilities, and
bad debt expense.
Income Taxes
No provision has been made for federal and state income taxes since the
Partnership's profits, losses, deductions and credits are reported by the
individual partners on their respective income tax returns. Signal is a
corporation which provides for income taxes under the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes." At
July 31, 1998, Signal had federal net loss carryforwards for which a valuation
allowance has been established against its entirety.
Syndication/Offering Costs
The costs incurred in offering and issuing the limited partner interests in the
Partnership have been deducted from partners' capital.
Recent Pronouncements
As of January 1, 1998, the Partnership adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130") "Comprehensive Income". SFAS 130
requires that an enterprise (a) classify items of other comprehensive income by
their nature in the financial statements and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the Statements of Partner's Capital. For all
periods presented, the Partnership had no items of comprehensive income and,
accordingly, the Statement does not apply.
As of January 1, 1998, the Partnership adopted Statement of Financial
Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 changes the way public companies
report segment information in annual financial statements and also requires
those companies to report selected segment information in interim financial
reports to stockholders. The Partnership operates in only one segment, the
operation of telecommunications towers.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities". This Statement of Position ("SOP") provides
guidance on the financial reporting of start-up costs and organization costs.
It requires costs of start-up activities and organization costs to be expensed
as incurred. This SOP applies to all non-governmental entities and is effective
for financial statements for fiscal years beginning after December 15, 1998.
Initial application of this SOP should be reported as the cumulative effect of
a change in accounting principle. When adopting this SOP, entities are not
required to report the pro forma effects of retroactive application. The effect
of adopting SOP 98-5 is not expected to have a material effect on the financial
statements.
F-98
TELECOM TOWERS OF THE WEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Property and Equipment
Property and equipment consists of the following:
December 31, July 31,
1997 1998
------------ -----------
Land........................................... $ 549,399 $ 549,399
Buildings...................................... 643,181 644,825
Towers......................................... 4,045,323 4,242,346
Equipment...................................... 206,230 263,072
----------- -----------
5,444,133 5,699,642
Accumulated depreciation....................... (743,916) (1,039,020)
----------- -----------
Property and equipment, net.................... $ 4,700,217 $ 4,660,622
=========== ===========
3. Intangible Assets
Intangible assets consist of the following:
December 31, July 31,
1997 1998
------------ -----------
Goodwill....................................... $16,392,223 $16,406,475
Acquisition and loan costs..................... 1,857,763 1,859,676
Non-compete and consulting agreements.......... 355,000 555,000
----------- -----------
18,604,986 18,821,151
Accumulated amortization....................... (939,261) (1,802,984)
----------- -----------
Net intangibles................................ $17,665,725 $17,018,167
=========== ===========
These intangibles resulted from various acquisitions of towers made by the
Partnership. Goodwill is being amortized on a straight-line basis over fifteen
years while organization costs are amortized over five years on a straight-line
basis. Non-compete agreements are being amortized on the straight-line method
over the terms of the agreements, ranging from five to fifteen years.
Acquisition costs are being amortized over fifteen years. Loan costs are being
amortized over the life of the respective loan.
4. Long-term Debt
The Partnership's General Partner, TeleCom Towers, LLC, has entered into a
Master Credit Facility Agreement. The agreement establishes a credit facility
consisting of a line of credit arrangement pursuant to which entities
controlled by the General Partner, including the Partnership, can borrow up to
an aggregate of $28,000,000 from the Line of Credit Commitment for a limited
period of time on a senior secured basis. The notes payable incurred by the
Partnership are provided through a separate, but related, Credit Facility
Agreement with the lender. The agreements provide for a Line of Credit Draw Fee
of 0.75% of advances under the agreements in addition to other fees to be paid
in immediately available funds on the settlement date. The Partnership incurred
$0 and $270,000 in such fees during the seven months ended July 31, 1998 and
the year ended December 31, 1997, respectively. The agreements also contain a
provision for a Line of Credit Facility Fee at the rate of 0.25% per annum on
the average unborrowed portion of the Line of Credit Commitment. These fees are
paid on a proportionate basis by the various entities utilizing the line of
credit. The Partnership incurred $0 and $7,967 in credit facility fees during
the seven months ended July 31, 1998 and the year ended December 31, 1997,
respectively.
F-99
TELECOM TOWERS OF THE WEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The notes payable mature in annual installments of 75% of excess cash flows or
in accordance with the Cash Management Agreement between borrower and lender.
Interest is payable quarterly in arrears on the last business day of each
fiscal quarter. The interest rate is equal to the sum of the applicable Rate
Index plus the applicable Rate Margin. The Rate Index will be either the prime
rate or the adjusted LIBO (London Interbank Offered) Rate and the Rate Margin
will be based on the leverage ratio (using borrower's most recently delivered
quarterly financial statements acceptable to lender) of borrower's funded debt
as of the last day of the fiscal quarter to the borrower's operating cash flow.
The notes are secured by all funds, balances or other property of the
Partnership and the general partner. Balances at July 31, 1998, are as follows:
Due date: Interest Rate:
--------- --------------
July 2004 9.25% $9,871,526
July 2003 9.25% 1,235,000
July 2004 9.1875% 400,000
----------
11,506,526
Less current maturities.................................. (497,682)
-----------
Long-term portion........................................ $11,008,844
===========
The approximate maturities of the notes payable for the five years subsequent
to July 31, 1998, are as follows:
Year Amount
---- -----------
December 31, 1998............................................. $ 155,894
December 31, 1999............................................. 783,220
December 31, 2000............................................. 1,369,921
December 31, 2001............................................. 2,018,319
December 31, 2002............................................. 2,611,717
Thereafter.................................................... 4,567,455
-----------
Total....................................................... $11,506,526
===========
5. Description of Leasing Arrangements
The Partnership licenses space for communication systems on its towers to
customers under noncancellable agreements requiring monthly, quarterly or
annual payments over various terms. Certain agreements contain various options.
At July 31, 1998, future minimum license agreement receipts were as follows:
Year Amount
---- -----------
December 31, 1999............................................. $ 4,053,000
December 31, 2000............................................. 3,327,000
December 31, 2001............................................. 2,733,000
December 31, 2002............................................. 1,845,000
December 31, 2003............................................. 1,220,000
Thereafter.................................................... 5,559,000
-----------
Total....................................................... $18,737,000
===========
F-100
TELECOM TOWERS OF THE WEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Commitments
The Partnership is committed to various land leases for tower sites. Land lease
expense for the seven months ended July 31, 1998 and the year ended December
31, 1997, was $72,266 and $65,449, respectively. At July 31, 1998, future
minimum lease payments were as follows:
Year Amount
---- --------
December 31, 1998................................................ $ 48,010
December 31, 1999................................................ 106,082
December 31, 2000................................................ 96,475
December 31, 2001................................................ 83,914
December 31, 2002................................................ 73,665
Thereafter....................................................... 305,645
--------
Total.......................................................... $713,791
========
7. Related Parties
In the normal course of business, the Partnership advances and receives funds
to and from affiliated parties for certain shared expenses. The affiliated
parties repay such amounts on a regular and timely basis. At December 31, 1997
amounts due to related parties was $415,717. There were no amounts due (to)
from these related parties at July 31, 1998.
The Partnership, in accordance with its limited partnership agreements, is
obligated to pay the general partner a management fee equal to 8.5% of the
gross monthly revenues. The management fee expense recognized for the seven
months ended July 31, 1998 and the year ended December 31, 1997, was $166,742
and $127,373, respectively. The Partnership is also obligated to pay a 3%
acquisition fee on all capital funds invested in towers and related real estate
and other assets, as well as up to 4% of gross monthly revenue, to the general
partner for reimbursement of certain general expenses. Acquisition fees are
capitalized as incurred by the Partnership. Acquisition fees capitalized as
incurred during the seven months ended July 31, 1998 and the year ended
December 31, 1997 were $0 and $800,136, respectively. Expense reimbursement
fees totaled $78,468 and $69,533 for the seven months ended July 31, 1998 and
the year ended December 31, 1997, respectively.
8. Investments in Joint Ventures
The Partnership is a 50% partner in Prime TeleCom Communications, a California
limited partnership formed to operate rooftop sites and towers in the Los
Angeles Metropolitan area. This investment is considered a joint venture and is
accordingly accounted for on the equity method.
Summarized financial information of this joint venture from the unaudited
financial statements as of July 31, 1998, and December 31, 1997 are as follows:
December 31, July 31,
1997 1998
------------ ----------
(unaudited)
Total Assets.................................... $ 3,060,364 $1,427,281
Total Liabilities............................... 1,071,414 708,670
Partners' Capital............................... 1,988,950 718,611
Total Revenue................................... 1,237,039 955,559
Net Loss........................................ (1,063,050) (428,308)
Partnership's Share of Loss..................... (531,525) (214,154)
F-101
TELECOM TOWERS OF THE WEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Subsequent Event
Effective August 3, 1998, the limited partners of the Partnership consummated a
merger of the Partnership into TeleCom Towers, L.L.C., which is the general
partner of the Partnership. The limited partners of the Partnership received as
merger consideration either cash or Class A Units of TeleCom Towers, L.L.C. in
exchange for their interest in the Partnership. On February 26, 1999, TeleCom
Towers, L.L.C. was acquired by American Tower Corporation.
10. Year 2000 (Unaudited)
The Partnership is aware of the implications associated with the "Year 2000" as
it relates to software information systems and other outside implications on
the Partnership's operations, including the potential impact on its customers.
The "Year 2000" is not expected to have a material impact on the Partnership's
current information systems because current software is either already "Year
2000" compliant or required changes will be insignificant. As a result, the
Partnership does not anticipate that incremental expenditures to ensure that
its information systems are "Year 2000" compliant will be material to the
Partnership's liquidity, financial position or results of operations over the
next few years. Any costs that may arise will be expensed as incurred.
F-102
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Wauka Communications, Inc.:
We have audited the accompanying consolidated balance sheets of WAUKA
COMMUNICATIONS, INC. (a Georgia corporation) AND SUBSIDIARY as of October 26,
1998 and December 31, 1997 and the related consolidated statements of
operations, shareholders' deficit, and cash flows for the period ended October
26, 1998 and the year ended December 31, 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes 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 Wauka
Communications, Inc. and subsidiary as of October 26, 1998 and December 31,
1997 and the results of their operations and their cash flows for the period
ended October 26, 1998 and the year ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
Atlanta, Georgia
November 25, 1998
F-103
WAUKA COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
OCTOBER 26, 1998 AND DECEMBER 31, 1997
1998 1997
----------- -----------
ASSETS
CURRENT ASSETS:
Cash............................................ $ 292,881 $ 387,514
Accounts receivable, net of allowance for
doubtful accounts of $20,075 and $0 in 1998
and 1997, respectively....................... 31,911 148,003
Due from affiliates............................. 0 23,416
Prepaids and other current assets............... 23,916 47,418
----------- -----------
Total current assets.......................... 348,708 606,351
----------- -----------
PROPERTY AND EQUIPMENT, net (Note 2)............. 17,170,278 10,287,523
----------- -----------
INTANGIBLE ASSETS, net of accumulated
amortization of $290,549 and $196,752 in 1998
and 1997, respectively (Note 2)................. 1,146,598 1,170,395
----------- -----------
DUE FROM AFFILIATES 0 756,735
----------- -----------
NOTES RECEIVABLE (Note 2)........................ 446,194 0
----------- -----------
OTHER ASSETS..................................... 4,195 3,400
----------- -----------
Total assets.................................. $19,115,973 $12,824,404
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt............ $ 55,672 $ 83,964
Margin loan payable (Note 3).................... 0 1,279,270
Accounts payable 393,429 287,423
Accrued expenses................................ 159,534 374,204
Deferred revenue................................ 372,144 178,729
----------- -----------
Total current liabilities..................... 980,779 2,203,590
----------- -----------
LONG-TERM DEBT, excluding current portion........ 9,488,147 7,083,120
----------- -----------
DUE TO SHAREHOLDERS.............................. 4,872,977 2,593,105
----------- -----------
DUE TO AFFILIATES................................ 4,239,686 1,498,928
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 8 and 9)
SHAREHOLDERS' DEFICIT (Note 5):
Common stock, $1 par value; 1,000 shares
authorized, issued, and outstanding in 1998 and
1997........................................... 1,000 1,000
Paid-in capital 3,600,000 800,000
Accumulated deficit............................. (4,066,616) (1,355,339)
----------- -----------
Total shareholders' deficit................... (465,616) (554,339)
----------- -----------
Total liabilities and shareholders' equity.... $19,115,973 $12,824,404
=========== ===========
The accompanying notes are an integral part of these consolidated balance
sheets.
F-104
WAUKA COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED OCTOBER 26, 1998
AND THE YEAR ENDED DECEMBER 31, 1997
1998 1997
----------- ----------
REVENUES:
Tower rental......................................... $ 4,412,439 $3,031,832
Construction income.................................. 230,702 2,644,059
Land rental income................................... 113,238 166,593
Other................................................ 211,109 370,718
----------- ----------
Total revenues....................................... 4,967,488 6,213,202
----------- ----------
OPERATING EXPENSES:
Direct............................................... 2,065,473 1,695,417
Construction costs................................... 101,538 2,378,151
Corporate, general, and administrative 1,499,866 1,208,936
Nonrecurring charges (Note 6)........................ 2,020,000 0
Depreciation and amortization........................ 985,533 571,310
----------- ----------
Total operating expenses........................... 6,672,410 5,853,814
----------- ----------
OPERATING (LOSS) INCOME............................... (1,704,922) 359,388
----------- ----------
OTHER EXPENSE:
Interest expense, net................................ (996,864) (741,556)
Other................................................ (9,491) (131)
----------- ----------
(1,006,355) (741,687)
----------- ----------
NET LOSS.............................................. $(2,711,277) $ (382,299)
=========== ==========
The accompanying notes are an integral part of these consolidated statements.
F-105
WAUKA COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE PERIOD ENDED OCTOBER 26, 1998
AND THE YEAR ENDED DECEMBER 31, 1997
Additional Total
Common Paid-In Accumulated Shareholders'
Stock Capital Deficit Deficit
------ ---------- ----------- -------------
BALANCE, December 31, 1996........ $1,000 $ 800,000 $ (973,040) $ (172,040)
Net loss......................... 0 0 (382,299) (382,299)
------ ---------- ----------- -----------
BALANCE, December 31, 1997........ 1,000 800,000 (1,355,339) (554,339)
Conversion of affiliate payables
to additional paid-in capital
(Note 5)........................ 0 2,800,000 0 2,800,000
Net loss......................... 0 0 (2,711,277) (2,711,277)
------ ---------- ----------- -----------
BALANCE, October 26, 1998......... $1,000 $3,600,000 $(4,066,616) $ (465,616)
====== ========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
F-106
WAUKA COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD ENDED OCTOBER 26, 1998
AND THE YEAR ENDED DECEMBER 31, 1997
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ $(2,711,277) $ (382,299)
----------- -----------
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization expense.............. 985,533 571,310
Gain on disposal of land, property, and equipment.. (16,570) (7,313)
Changes in operating assets and liabilities:
Accounts receivable and due to affiliate.......... 139,508 13,394
Prepaids and other current assets................. 23,502 (38,049)
Accounts payable and accrued expenses............. (108,664) 482,797
Deferred revenue.................................. 193,420 47,120
----------- -----------
Total adjustments................................ 1,216,729 1,069,259
----------- -----------
Net cash (used in) provided by operating
activities...................................... (1,494,548) 686,960
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment, net............ (7,948,921) (6,853,829)
Proceeds from sale of property and equipment........ 191,000 20,800
Additions to other assets and intangibles........... (70,795) (53,872)
Decrease (increase) in due from affiliates.......... 756,735 (468,054)
Issuance of notes receivable........................ (446,194) 0
----------- -----------
Net cash used in investing activities............ (7,518,175) (7,354,955)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayment) borrowings under margin loan............ (1,279,270) 192,632
Net borrowings under line of credit................. 2,522,750 6,477,250
Payments on long-term debt.......................... (146,016) (113,155)
Advances from shareholders.......................... 2,279,868 223,270
Advances from affiliates............................ 5,540,758 255,438
----------- -----------
Net cash provided by financing activities........ 8,918,090 7,035,435
----------- -----------
NET (DECREASE) INCREASE IN CASH...................... (94,633) 367,440
CASH, beginning of period............................ 387,514 20,074
----------- -----------
CASH, end of period.................................. $ 292,881 $ 387,514
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.............................. $ 689,900 $ 394,900
=========== ===========
Noncash transfer of property and equipment to
affiliates, net.................................... $ 0 $ 458,796
=========== ===========
Noncash conversion of note due to affiliate to
additional paid-in capital......................... $ 2,800,000 $ 0
=========== ===========
The accompanying notes are an integral part of these consolidated statements.
F-107
WAUKA COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 26, 1998 AND DECEMBER 31, 1997
1. ORGANIZATION AND NATURE OF OPERATIONS
On June 17, 1996, the shareholders acquired all the assets of Wauka
Communications, Inc. (a Georgia corporation) (the "Company") under the terms of
a stock purchase and sale agreement. The Company is headquartered in Roswell,
Georgia, and owns real property. The acquired assets consisted primarily of
separate tracts of land. The purchase price was approximately $800,000 and was
funded by the shareholders based on their ownership percentage. The transaction
was accounted for as a purchase in accordance with Accounting Principles Board
Opinion No. 16 and accordingly the purchase price has been allocated to the
assets based on their estimated fair value as of the acquisition dates. The
excess of the cost over the estimated fair value of the net tangible assets
acquired has been allocated to goodwill.
On June 30, 1998, shareholders of the Company contributed their 100% ownership
interest of Grid Towers LLC ("Grid") to the Company. The transaction has been
accounted for in a manner similar to a pooling of interests. Grid owns
communications towers throughout Georgia on which customers lease space for
radio transmitters and antennas. The Company's primary customers are national
and multiregional cellular, personal communication services, specialized mobile
radio, and pager companies; local radio stations; two-way radio users; and VHS
and UHF television stations. As a result of the contribution of interest, Grid
is a wholly owned subsidiary of the Company.
Additionally, effective October 26, 1998, the Company sold substantially all of
its assets and the business related to these assets to American Tower
Corporation (Note 9).
The accompanying consolidated financial statements represent the Company's
financial position and result of operations to the date immediately preceding
the sale.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared on the
accrual basis of accounting. The consolidated financial statements reflect the
assignment of the member's interest in Grid in a manner similar to a pooling of
interest and include the accounts of the Company and its wholly owned
subsidiary. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Revenue Recognition
Usage fees, rental income, and management fees are recognized monthly as
earned. Construction income is recognized using the percentage-of-completion
method. All construction projects had been completed and the related revenue
recognized by October 26, 1998. Deferred revenue represents prepayments of
usage fees relating to periods subsequent to October 26, 1998.
F-108
WAUKA COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 26, 1998 AND DECEMBER 31, 1997
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the following useful lives:
December
October 26, 31,
Lives 1998 1997
----------- ----------- -----------
Land...................................... $ 172,000 $ 579,913
Buildings and improvements................ 15-30 years 4,125,432 2,324,398
Towers and equipment...................... 10 years 13,770,078 7,323,024
Machinery and equipment................... 3-10 years 215,212 127,604
Construction in progress.................. 446,620 600,818
----------- -----------
Accumulated depreciation.................. (1,559,064) (668,234)
----------- -----------
$17,170,278 $10,287,523
=========== ===========
Depreciation expense was $891,735 and $468,219 for the period ended October 26,
1998 and the year ended December 31, 1997, respectively.
Maintenance and repairs are charged to expense as incurred. Major additions and
improvements of existing facilities are capitalized. For retirements or sales
of property, the Company removes the original cost and the related accumulated
depreciation from the accounts and the resulting gain or loss is reflected in
other income.
Fair Value of Financial Instruments
The fair value of financial instruments classified as current assets or
liabilities, including cash, accounts receivable, and accounts payable,
approximate carrying value due to the short-term maturity of the instruments.
The fair value of short-term and long-term debt amounts approximate carrying
value and are based on their effective interest rates compared to current
market rates.
Income Taxes
The Company utilizes the liability method of accounting for income taxes, as
set forth in the Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." Under the liability method, deferred taxes are
determined based on the difference between the financial and tax bases of
assets and liabilities using enacted tax rates in effect in the year in which
the differences are expected to reverse. The Company does not have any
significant deferred tax assets or liabilities.
Through June 1998, Grid, as a limited liability company, was treated as a
partnership for income tax purposes. Accordingly, federal income taxes or net
earnings of Grid are payable by its members (Note 6).
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
F-109
WAUKA COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 26, 1998 AND DECEMBER 31, 1997
Intangible Assets
Intangible assets at October 26, 1998 and December 31, 1997 consist of the
following:
1998 1997
---------- ----------
Goodwill.......................................... $ 990,933 $ 990,933
Customer base..................................... 386,320 316,320
Organizational costs.............................. 7,671 7,671
Deferred loan costs............................... 52,223 52,223
---------- ----------
1,437,147 1,367,147
Accumulated amortization.......................... (290,549) (196,752)
---------- ----------
$1,146,598 $1,170,395
========== ==========
These assets are being amortized on a straight-line basis over the expected
periods to be benefited, 15 years for goodwill, 10 years for customer base, and
5 years for organizational costs. Loan costs associated with the establishment
of the Company's line of credit are amortized over seven years, the term of
agreement. The Company assesses the recoverability of these intangible assets
by determining whether the amortization of the balance over its remaining life
can be recovered through undiscounted future operating cash flows of the
acquired assets. The amount of impairment, if any, is measured based on
projected undiscounted future operating cash flows.
Notes Receivable
During the period ended October 26, 1998, the Company issued notes receivable
in the original amount of $398,329 to a customer related to the construction of
two tower sites. Under the agreements, the Company receives 50% of the fees
collected from tower customers to be applied to recovery of construction costs
plus 9% interest annually on the outstanding balance. The Company estimates
that the notes will be paid within one year.
Recent Accounting Pronouncements
In 1998, the provisions of SFAS No. 130, "Reporting Comprehensive Income," and
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," were issued. Neither statement had any impact on the Company's
financial statements as the Company does not have any "comprehensive income"-
type earnings (losses) and its financial statements reflect how the "key
operating decisions maker" views the business. The Company will continue to
review these statements over time.
3. MARGIN LOAN PAYABLE
At December 31, 1997, the Company had $1,279,270 outstanding on a margin loan
payable to an investment bank. The outstanding balance was secured by 140,000
shares of NexTel Communications, Inc. stock which is owned by a shareholder of
the Company. The loan accrued interest at the investment bank's margin interest
call rate, less .625% (7.125% at December 31, 1997). In October 1998, the
margin loan was repaid in full. Interest expense recognized on this loan was
approximately $59,000 and $83,000 for the period ended October 26, 1998 and the
year ended December 31, 1997, respectively.
F-110
WAUKA COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 26, 1998 AND DECEMBER 31, 1997
4. LONG-TERM DEBT
Long-term debt at October 26, 1998 and December 31, 1997 consists of the
following:
1998 1997
---------- ----------
Term note payable to an individual bearing interest at
12%, monthly principal and interest payments of $9,828,
maturing July 1, 2005, secured by a tower located in
Macon, Georgia, and all of the related customer
contracts.............................................. $ 543,819 $ 585,393
Mortgage note payable to an individual bearing interest
at 10.5%, repaid in 1998............................... 0 41,737
Mortgage note payable to an individual bearing interest
at 10.5%, repaid in 1998............................... 0 19,211
Various mortgage notes payable to individuals, including
a related party; bearing interest from 8% to 10.5%;
repaid in 1998......................................... 0 43,493
Borrowings under line of credit with a bank, bearing
interest at 9.375%, payable in monthly installments
commencing July 1, 1999, secured by all assets of the
Company as well as an assignment of license agreements
and guarantees of members and affiliates of the
Company................................................ 9,000,000 6,477,250
---------- ----------
9,543,819 7,167,084
Less current maturities................................. (55,672) (83,964)
---------- ----------
$9,488,147 $7,083,120
========== ==========
Interest expense recognized on long-term debt was approximately $781,000 and
$395,000 for the period ended October 26, 1998 and the year ended December 31,
1997, respectively.
Aggregate maturities of long-term debt during the years ended December 31
subsequent to October 26, 1998 are as follows:
1999........................................................... $ 55,672
2000........................................................... 62,796
2001........................................................... 70,756
2002........................................................... 79,728
2003........................................................... 88,872
Thereafter..................................................... 9,185,995
----------
Total........................................................ $9,543,819
==========
During 1997, the Company entered into a line of credit agreement with a bank
for capital expenditure purposes. Interest is fixed at a rate of 9.375% until
May 31, 1999, at which time the rate becomes variable. Interest is payable
monthly. The principal balance will be due in 60 equal monthly installments
commencing on July 1, 1999 through June 1, 2004 and is secured by all assets of
the Company as well as an assignment of license agreements and guarantees of
members and affiliates of the Company. At October 26, 1998, the Company had no
availability to borrow under the agreement.
In connection with the merger (Note 9), American Tower Corporation repaid the
$9,000,000 of borrowings under the line of credit and assumed the $543,819 term
note as of the merger date.
F-111
WAUKA COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 26, 1998 AND DECEMBER 31, 1997
5. RELATED-PARTY TRANSACTIONS
Due to Shareholders
At October 26, 1998 and December 31, 1997, the Company had advances payable to
shareholders totaling approximately $4,214,000 and $2,075,000, respectively,
which are included in due to shareholders on the accompanying balance sheets.
The principal balances accrue interest at 9% and are due on demand. Accrued
interest on these advances payable is approximately $500,000 and $518,000 at
October 26, 1998 and December 31, 1997, respectively, and is also included in
due to shareholders on the accompanying balance sheet. Interest expense
recognized on these advances was approximately $107,000 and $189,000 for the
period ended October 26, 1998 and the year ended December 31, 1997,
respectively. The advances payable and related accrued interest have been
classified as long-term liabilities at October 26, 1998 and December 31, 1997.
In connection with the merger (Note 9), American Tower Corporation paid all
outstanding amounts including principal and interest on these advances.
Grid-Site Services, Inc.
The members of the Company are shareholders in Grid-Site Services, Inc. ("Grid-
Site"), an S corporation. Grid-Site owns several tower sites which the Company
manages. Under a management agreement, the Company remits 70% of the revenues
earned from those sites to Grid-Site. During the period ended October 26, 1998
and the year ended December 31, 1997, the Company remitted approximately
$566,000 and $594,000, respectively, to Grid-Site. At October 26, 1998 and
December 31, 1997, the Company had amounts due to Grid-Site of approximately
$61,000 and $22,000, respectively. These amounts are included in due from
affiliates (current) and accounts payable on the respective accompanying
balance sheets.
Grid Properties LLC
The shareholders of the Company are members in Grid Properties, LLC ("Grid
Properties") a limited liability company. Grid Properties owns the land on
which a number of the Company's towers are located. The Company leases this
land from Grid Properties. During the period ended October 26, 1998 and the
year ended December 31, 1997, the Company recognized approximately $245,000 and
$158,000, respectively, in site rental expense related to these leases. At
October 26, 1998 and December 31, 1997, the Company had amounts due to and due
from Grid Properties of approximately $1,000,000 and $757,000, respectively,
included in due from affiliates on the accompanying balance sheets. At October
26, 1998 and December 31, 1997, future minimum payments under these leases
totaled approximately $8,582,000 and $2,067,000, respectively. Management
believes that the agreements are at market rates based on similar transactions
entered into with third parties. In connection with the merger (Note 9),
American Tower Corporation paid approximately $1,000,000 to Grid Properties LLC
on October 26, 1998.
Due to Affiliates
At October 26, 1998 and December 31, 1997, the Company had advances payable to
various related parties totaling $2,520,000 and $1,354,000, respectively, which
are included in due to affiliates in the accompanying balance sheets. The
principal balances accrue interest at 9% and are due on demand. Accrued
interest on these advances payable is approximately $659,000 and $145,000 at
October 26, 1998 and December 31, 1997, respectively, and is also included in
due to affiliates on the accompanying balance sheets. Interest expense
recognized on these advances was $142,000 and $103,000 for the period ended
October 26, 1998 and the year
F-112
WAUKA COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 26, 1998 AND DECEMBER 31, 1997
ended December 31, 1997, respectively. The advances payable and related accrued
interest have been classified as long-term liabilities at October 26, 1998 and
December 31, 1997. In connection with the merger (Note 9), American Tower
Corporation paid all outstanding amounts including principal and interest on
these advances.
During the period ended October 26, 1998, the shareholders of the Company, who
are also shareholders of the affiliates, converted $2,800,000 in payables to
affiliates to additional paid-in capital.
Transfers of Property, Equipment, and Intangibles Between Affiliates
During the year ended December 31, 1997, the Company transferred approximately
$459,000 worth of land to Grid Properties as partial payment on amounts due to
the Company's members. This property was transferred at the Company's recorded
value; no gain or loss was recognized on the transfer.
6. NONRECURRING CHARGES
For the period ended October 26, 1998, the Company paid a one-time bonus to
employees in the amount of $2,020,000 related to the merger with American Tower
Corporation (Note 9).
7. INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of deferred tax assets and liabilities as of October 26, 1998 are as
follows:
Deferred tax assets:
Net operating loss carryforwards............................. $1,088,974
Receivables.................................................. 7,629
Other accruals............................................... 255,040
Valuation allowance.......................................... (766,253)
----------
Total deferred tax assets................................... 585,390
Deferred tax liabilities:
Depreciation and amortization................................ (585,390)
----------
Net deferred taxes.......................................... $ 0
==========
At October 26, 1998, the Company has available approximately $2,866,000 of
unused operating loss carryforwards which expire in 2013 unless utilized.
Management has recorded a valuation allowance of approximately $766,000 in 1998
on these operating loss carryforwards, the majority of which contain
limitations on utilization.
A reconciliation of the income tax provision computed at statutory tax rates to
the income tax provision for the period ended October 26, 1998 is as follows:
Income tax benefit at statutory rate................................ (34)%
State income taxes, net of federal benefit.......................... (2)
Deferred tax valuation allowance.................................... 36
---
0%
===
F-113
WAUKA COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 26, 1998 AND DECEMBER 31, 1997
The Company recorded no federal or state income tax benefit for the period
ended October 26, 1998 and the year ended December 31, 1997. A limited
liability company is treated as a partnership for income tax purposes.
Therefore, through June 1998, the income tax benefits generated by Grid were
treated as a partnership for income tax purposes. Accordingly, federal income
taxes or net earnings of Grid are payable by its members.
8. COMMITMENTS AND CONTINGENCIES
The Company leases land for tower sites and corporate office space under
various noncancelable operating leases. Lease and rental costs charged to
expense during the period ended October 26, 1998 and the year ended December
31, 1997 were approximately $845,000 and $527,000, respectively.
At October 26, 1998, future minimum payments under operating leases for the
years ended December 31 were as follows:
1999.......................................................... $ 1,166,731
2000.......................................................... 1,160,570
2001.......................................................... 1,102,458
2002.......................................................... 974,530
2003.......................................................... 661,500
Thereafter.................................................... 9,452,474
-----------
Total....................................................... $14,518,263
===========
9. LEASES
The Company has operating leases on certain parcels of land. Lease terms range
from 1 to 99 years. At October 26, 1998, future minimum revenues under these
leases for the years ended December 31 are as follows:
1999............................................................. $110,052
2000............................................................. 107,352
2001............................................................. 102,372
2002............................................................. 79,004
2003............................................................. 40,548
Thereafter....................................................... 294,113
--------
Total.......................................................... $733,441
========
10. SUBSEQUENT EVENTS
Effective October 26, 1998, the Company sold substantially all of its assets
and the business related to these assets under the terms of an asset purchase
and merger agreement with American Tower Corporation, which included the assets
of Grid Site Services, Inc., an affiliated company. The combined purchase price
consideration was approximately $64 million, including the assumption of
working capital.
F-114
INDEPENDENT AUDITORS' REPORT
The Board of Directors
American Tower Corporation:
We have audited the accompanying consolidated balance sheets of American Tower
Corporation and subsidiaries as of December 31, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes 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 American Tower
Corporation and subsidiaries as of December 31, 1996 and 1997 and the results
of their operations and their cash flows for each of the years in the three-
year period ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Houston, Texas
January 23, 1998
F-115
AMERICAN TOWER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
December 31, December 31, March 31,
1996 1997 1998
------------ ------------ -----------
(unaudited)
Current assets:
Cash and cash equivalents.............. $ 92 $ 996 $ 1,111
Accounts receivable, net of allowance
for doubtful accounts of $104, $175
and $174 respectively................. 816 1,021 1,084
Prepaid expenses and other current
assets................................ 793 719 984
Assets held for sale................... 700 -- --
------- -------- --------
Total current assets.................. 2,401 2,736 3,179
Land.................................... 5,301 6,234 6,239
Rental towers and related fee based as-
sets, net of accumulated depreciation
of $3,984, $8,362 and $9,730, respec-
tively................................. 61,556 112,412 125,788
Other assets, net of accumulated
amortization of $836, $951 and $1,268,
respectively........................... 6,269 7,432 7,785
------- -------- --------
Total assets.......................... $75,527 $128,814 $142,991
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................... $ 720 $ 2,810 $ 688
Accrued interest payable............... 598 1,061 4
Deferred revenues and other current
liabilities........................... 978 2,125 3,277
Current portion of long-term debt...... 1,075 1,000 1,000
------- -------- --------
Total current liabilities............. 3,371 6,996 4,969
Long-term debt, less current portion.... 49,771 74,478 90,139
Other liabilities....................... 450 190 184
Deferred income taxes................... 6,337 6,767 6,957
------- -------- --------
Total liabilities..................... 59,929 88,431 102,249
Commitments and contingencies
Redeemable preferred stock $.01 par
value.
Authorized 5,000,000 shares; 22,500
shares issued and outstanding......... 4,000 4,052 4,067
Stockholders' equity:
Common stock, $.01 par value.
Authorized 250,000 shares; 75,331,
149,549 and 149,549 shares issued and
outstanding, respectively............. 1 2 2
Additional paid-in capital............. 12,051 36,426 36,426
Retained earnings (accumulated
deficit).............................. (454) (97) 247
------- -------- --------
Total stockholders' equity............ 11,598 36,331 36,675
------- -------- --------
Total liabilities and stockholders'
equity............................... $75,527 $128,814 $142,991
======= ======== ========
See accompanying notes to consolidated financial statements.
F-116
AMERICAN TOWER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
Year Ended Three Months Ended
December 31, March 31,
------------------------ --------------------
1995 1996 1997 1997 1998
------ ------- ------- --------- ---------
(unaudited)
Total revenues................ $8,277 $12,366 $20,006 $ 4,581 $ 6,260
Operating expenses:
Direct tower costs........... 1,868 2,849 4,138 856 1,305
Selling, general and
administrative.............. 1,601 2,049 3,183 723 862
Depreciation and
amortization................ 1,908 2,709 4,903 1,027 1,755
------ ------- ------- --------- ---------
Total operating expenses.... 5,377 7,607 12,224 2,606 3,922
------ ------- ------- --------- ---------
Operating income.............. 2,900 4,759 7,782 1,975 2,338
Interest expense.............. 3,068 3,808 5,439 1,285 1,791
Other expenses................ 414 150 514 33 --
------ ------- ------- --------- ---------
Income (loss) before income
taxes and extraordinary
item......................... (582) 801 1,829 657 547
Income tax (expense) benefit.. 217 (303) (801) (288) (188)
------ ------- ------- --------- ---------
Income (loss) before
extraordinary item........... (365) 498 1,028 369 359
Extraordinary loss, net of tax
benefit of $117, $272, and
$371, respectively........... 207 451 619 -- --
------ ------- ------- --------- ---------
Net income (loss)............. (572) 47 409 369 359
Accretion of preferred stock.. -- -- 52 -- 15
------ ------- ------- --------- ---------
Net income (loss) available to
common stockholders.......... $ (572) $ 47 $ 35 $ 369 $ 344
====== ======= ======= ========= =========
See accompanying notes to consolidated financial statements.
F-117
AMERICAN TOWER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
Common Stock
-------------
Total
Additional Accumulated stockholders'
Shares Value paid-in capital deficit equity
------- ----- --------------- ----------- -------------
Balances at December 31,
1994................... 67,500 $ 1 $ 7,424 $ 71 $ 7,496
Allocation of redeemable
preferred stock
proceeds to warrants... -- -- 500 -- 500
Net loss................ -- -- -- (572) (572)
------- --- ------- ---- -------
Balances at December 31,
1995................... 67,500 1 7,924 (501) 7,424
Shares of common stock
issued in acquisition.. 6,481 -- 4,127 -- 4,127
Conversion of warrants
to common stock........ 1,350 -- -- -- --
Net income.............. -- -- -- 47 47
------- --- ------- ---- -------
Balances at December 31,
1996................... 75,331 1 12,051 (454) 11,598
Conversion of warrants
to common stock........ 24,265 -- -- -- --
Conversion of warrants
with put feature to
common stock........... 12,462 -- 174 -- 174
Sale of common stock,
net of issuance costs.. 36,049 1 23,201 -- 23,202
Common stock issued in
connection with tower
acquisition............ 1,442 -- 1,000 -- 1,000
Net income.............. -- -- -- 409 409
Accretion of redeemable
preferred stock........ -- -- -- (52) (52)
------- --- ------- ---- -------
Balances at December 31,
1997................... 149,549 $ 2 36,426 (97) 36,331
Net income (unaudited)
....................... -- -- -- 359 359
Accretion of redeemable
preferred stock
(unaudited) ........... -- -- -- (15) (15)
------- --- ------- ---- -------
Balances at March 31,
1998 (unaudited) ...... 149,549 $ 2 $36,426 $247 $36,675
======= === ======= ==== =======
See accompanying notes to consolidated financial statements
F-118
AMERICAN TOWER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended Three Months Ended
December 31, March 31,
--------------------------- --------------------
1995 1996 1997 1997 1998
------- -------- -------- --------- ---------
(unaudited)
Cash flows from operating
activities:
Net income (loss).......... $ (572) $ 47 $ 409 $ 369 $ 359
Adjustments to reconcile
net income (loss) to net
cash
provided by operating
activities:
Depreciation and
amortization............. 1,908 2,709 4,903 1,027 1,755
Accretion of debt
discounts................ 202 808 121 109 111
Deferred income taxes..... (334) 31 430 288 190
Deferred loan costs
written-off.............. 324 -- 990 -- --
Changes in assets and
liabilities:
Increase in accounts
receivable, net.......... (203) (218) (205) (709) (63)
(Increase) decrease in
prepaid expenses and
other current assets..... (109) (111) 74 (239) (265)
Increase (decrease) in
accounts payable......... 59 231 2,090 194 (2,122)
Increase (decrease) in
accrued interest
payable.................. 14 59 463 67 (1,057)
Increase (decrease) in
deferred revenues and
other.................... 332 (417) 1,061 143 1,152
------- -------- -------- --------- ---------
Total adjustments........ 2,193 3,092 9,927 880 (299)
------- -------- -------- --------- ---------
Net cash provided by
operating activities.... 1,621 3,139 10,336 1,249 60
------- -------- -------- --------- ---------
Cash flows from investing
activities:
Payments for purchases of
towers and related
assets.................... (7,351) (14,249) (56,075) (11,795) (15,484)
Proceeds from the sale of
land...................... 24 -- -- -- --
Payments for purchases of
land...................... (500) (1,124) (933) (100) (5)
------- -------- -------- --------- ---------
Net cash used in
investing activities.... (7,827) (15,373) (57,008) (11,895) (15,489)
------- -------- -------- --------- ---------
Cash flows from financing
activities:
Proceeds from borrowings on
long-term debt............ 4,646 39,850 70,800 11,262 15,544
Proceeds from issuance of
common stock.............. -- -- 23,202 -- --
Proceeds from issuance of
preferred stock........... 4,133 367 -- -- --
Payments of long-term
debt...................... (1,680) (28,736) (45,633) -- --
Payments of deferred loan
costs and interest rate
cap....................... (98) (1,060) (793) -- --
------- -------- -------- --------- ---------
Net cash provided by
(used in) financing
activities.............. 7,001 10,421 47,576 11,262 15,544
------- -------- -------- --------- ---------
Net increase (decrease)
in cash and cash
equivalents............. 795 (1,813) 904 616 115
Cash and cash equivalents at
beginning of period........ 1,110 1,905 92 92 996
------- -------- -------- --------- ---------
Cash and cash equivalents at
end of period.............. $ 1,905 $ 92 $ 996 $ 708 $ 1,111
======= ======== ======== ========= =========
Supplemental disclosure of
cash flow information--cash
paid during the period for
interest................... $ 2,915 $ 2,925 $ 3,902 $ 656 $ 1,919
======= ======== ======== ========= =========
See accompanying notes to consolidated financial statements.
F-119
AMERICAN TOWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997 and March 31, 1997 and 1998 (unaudited)
(1)Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying consolidated financial statements reflect the financial
position, results of operations, and cash flows of American Tower Corporation
and its wholly-owned subsidiaries, collectively referred to as ATC or the
Company. All significant intercompany transactions and balances have been
eliminated.
(b) Description of Business
The primary business of the Company is the leasing of antenna and transmitter
space on communication towers to companies using or providing cellular
telephone, paging, microwave and specialized mobile radio services. The Company
currently owns and operates communication tower sites located primarily in the
western, eastern and southern United States.
(c) Interim Financial Information
The unaudited financial statements for the three months ended March 31, 1997
and 1998 are presented for comparative purposes only and have been prepared on
a basis substantially consistent with that of the audited financial statements
included herein. In the opinion of management, such unaudited financial
statements include all adjustments, which are of a normal and recurring nature,
considered necessary for a fair presentation. Operating results for the three-
month periods ended March 31, 1997 and 1998 are not necessarily indicative of
the results that may be expected for a full year.
(d) Cash Equivalents
Cash equivalents consist of short-term investments with an original maturity of
three months or less.
(e) Rental Towers and Related Fee Based Assets
Rental towers and related fee based assets are stated at cost. Depreciation on
rental towers and related fee based assets is calculated on the straight-line
method over the estimated useful lives of the assets which range from 3 to 25
years.
(f) Other Assets
Other assets include licenses and permits which are amortized on a straight-
line basis over their expected period of benefit, 25 years, and a noncompete
agreement with a stockholder which is being amortized on a straight-line basis
over its seven year term. Also included are deferred loan costs associated with
various debt issuances which are amortized over the terms of the related debt
based on the amount of outstanding debt using the interest method.
(g) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, on January 1, 1996. This statement
requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount
of an asset to future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or the fair value less costs of disposal. Adoption of this
statement did not have a material impact on the Company's financial position,
results of operations, or liquidity.
F-120
AMERICAN TOWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(h) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(i) Fair Value of Financial Instruments
SFAS No. 107, Disclosure about Fair Value of Financial Instruments requires the
Company to disclose estimated fair values for its financial instruments. Fair
value estimates are made at discrete points in time based on relevant market
information. These estimates may be subjective in nature and involve
uncertainties and matters of significant judgment and therefore, cannot be
determined with precision.
The Company believes that the carrying amounts of its financial instrument
current assets and current liabilities approximate the fair value of such items
due to their short-term nature. The carrying amount of long-term debt
approximates its fair value because the interest rates approximate market.
(j) Revenue Recognition
Revenues are recognized as tower services are provided. Amounts billed or
received prior to services being performed are deferred until such time as the
revenue is earned.
(k) Stock Option Plan
On January 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-
Based Compensation, which permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 allows entities to continue to apply the provisions
of Accounting Principles Board (APB) Opinion No. 25 and provide pro forma net
income disclosures as if the fair-value-based method defined in SFAS No. 123
had been applied. The Company has elected to continue to apply the provisions
of APB Opinion No. 25 and provide the pro forma disclosure requirements of SFAS
No. 123.
(l) Interest Rate Cap Agreements
The Company was party to a financial instrument to reduce its exposure to
fluctuations in interest rates. The purchase price of the interest rate cap
agreements was capitalized and included in prepaid expenses in the accompanying
consolidated balance sheets and amortized over the life of the agreements using
the straight-line method. The interest rate cap agreements expired in December
1997.
(m) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect reported amounts of 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.
(n) Reclassifications
Certain reclassifications have been made to prior period amounts in order to
conform to the current presentation.
(2)Rental Towers and Related Fee Based Assets
Asset Acquisitions
In December 1995, the Company acquired in a single transaction substantially
all of the tower sites and locations of CSX Realty Development Corporation
(CSX) for $9,750,000 which was funded through cash and
F-121
AMERICAN TOWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
seller financed debt. In addition during 1995, the Company acquired 81 other
tower sites in several unrelated transactions.
In October 1996, the Company acquired in a single transaction substantially all
of the tower sites and locations of Prime Communications Sites Holdings LLC and
its subsidiary (Prime) for approximately $15.3 million which was funded through
borrowings under the Company's credit facility, seller financed debt and the
issuance of common stock of the Company to the seller. In addition, during 1996
the Company acquired four other tower sites in two unrelated transactions.
In July 1997, the Company acquired in a single transaction 32 tower sites for
approximately $11.8 million which was funded through borrowings under the
Company's credit facility. In addition, during 1997 the Company acquired 89
tower sites in several unrelated transactions totaling $25.2 million. The
purchase price for all acquisitions has been allocated to the land, towers and
related fee based assets and licenses and permits based on their respective
estimated fair values.
The following unaudited pro forma information represents the consolidated
results of operations of the Company as if the 1997 acquisitions had occurred
on January 1, 1996, and the 1996 acquisitions had occurred on January 1, 1995
(in thousands):
1995 1996 1997
------- ------- -------
Rental revenue.................................... $10,575 $17,290 $21,578
Operating income.................................. $ 3,737 $ 7,835 $ 9,039
Net loss.......................................... $(1,442) $(2,002) $ (326)
The pro forma information is not necessarily indicative of operating results
that would have occurred if each acquisition had been consummated as of the
respective dates, nor is it necessarily indicative of future operating results.
The actual results of operations of the acquired assets are included in the
Company's consolidated financial statements only from the date of acquisition.
Tower Disposal
On January 13, 1997, the Company entered into a binding letter agreement with a
related shareholder and director to sell 45 communication towers for a purchase
price of $700,000. The closing of this transaction occurred during March 1997.
At the closing, the Company sold the communication towers to the shareholder in
exchange for a $700,000 reduction in payments owed under the subordinated note
payable to the shareholder issued in October 1994. See note 6 for further
discussion. Due to the agreement, the related assets have been reflected as
assets held for resale on the December 31, 1996 balance sheet.
(3)Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in
thousands):
December 31,
------------- March 31,
1996 1997 1998
------ ------ -----------
(unaudited)
Prepaid land leases................................... $ 619 $637 $727
Other current assets.................................. 174 82 257
------ ------ ----
$ 793 $719 $984
====== ====== ====
F-122
AMERICAN TOWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(4)Other Assets
Other assets consisted of the following (in thousands):
December 31,
------------- March 31,
1996 1997 1998
------ ------ -----------
(unaudited)
Deferred loan costs, net.............................. $1,009 $ 751 $719
Licenses and permits, net............................. 4,428 5,898 6,289
Noncompete costs, net................................. 623 538 502
Other assets.......................................... 209 245 275
------ ------ ------
$6,269 $7,432 $7,785
====== ====== ======
(5)Deferred Revenues and Other Current Liabilities
Deferred revenues and other current liabilities consisted of the following (in
thousands):
December 31,
------------- March 31,
1996 1997 1998
------------- -----------
(unaudited)
Deferred revenues..................................... $ 201 $ 1,125 $1,799
Deferred compensation contracts....................... 300 150 150
Accrued expenses and other............................ 477 850 1,328
----- ------- ------
$ 978 $ 2,125 $3,277
===== ======= ======
(6)Long-term Debt
On October 11, 1996, the Company entered into a senior credit facility (the
Credit Facility) in connection with the acquisition of the communication towers
from Prime as discussed in note 2. The Credit Facility was extinguished during
1997 in connection with the Company entering into a new Senior Credit
Agreement, discussed in further detail below.
The Credit Facility included a $23 million revolving line of credit, which
included a sub-allotment for letters of credit, and a $37 million term loan
facility. The Company utilized the proceeds of the term loan to (i) repay $21.6
million of principal and interest to its existing senior lenders, (ii) prepay
in full $6.1 million of principal and interest to its senior subordinated
lender, and (iii) to fund $8.6 million of the purchase price for the Prime
acquisition.
The Credit Facility incurred interest at LIBOR plus 275 basis points for
interest periods ranging up to five months; thereafter, the credit facility
incurred interest at LIBOR plus an applicable margin, not to exceed 275 basis
points, based upon a defined leverage ratio, for interest periods of one, three
or six months. The term loan and the revolving Credit Facility required
principal amortization with quarterly payments totaling $5.6 million in 1999.
The Credit Facility contained restrictions on payment of dividends, and set
forth minimum operating cash flows, as defined, to be attained by the Company.
Immediately prior to entering into the Credit Facility in October 1996, the
Company owed its senior lenders $21.5 million under a term loan, revolving line
of credit and acquisition line of credit facilities which had been amended and
extended in December 1995. The outstanding balance of the prior senior
agreement bore interest at LIBOR plus 275 basis points. In conjunction with
entering into the Credit Facility, the Company expensed
F-123
AMERICAN TOWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$451,000, net of taxes, of deferred loan and other financing costs associated
with prior credit facilities. In conjunction with the amendment of the
Company's senior credit agreement in December 1995, the Company expensed
$207,000, net of taxes, of deferred loan and other financing costs associated
with prior credit facilities. Such deferred loan and other financing costs
written off in 1995 have been reflected as extraordinary losses in the
consolidated statements of operations.
On June 30, 1997, the Company entered into a new senior credit agreement (the
Credit Agreement). The Credit Agreement includes a $100 million revolving line
of credit, which includes a sub-allotment for letters of credit and a $25
million term loan facility. In connection with entering into the Credit
Agreement, the Company expensed $619,000, net of taxes, of deferred loan and
other financing costs associated with the prior credit facility. These deferred
loan and other financing costs written off in 1997 have been reflected as
extraordinary loss in the consolidated statements of operations.
Seller Acquisition Financing
In connection with the acquisition of the towers and related sites in October
1996 as more fully discussed in note 2 and above, the Company issued an
aggregate of $2.5 million of subordinated term notes to certain
sellers. Payment terms required (i) a single installment on October 11, 2004 or
(ii) immediate payment upon an initial public offering. The subordinated term
notes incurred interest at 11% payable quarterly commencing January 1997.
During 1997 these notes were fully repaid.
Long-term debt consists of the following (in thousands):
December 31,
---------------- March 31,
1996 1997 1998
------- ------- -----------
(unaudited)
Term note payable, due in quarterly payments
beginning in September 1999, interest at a base
rate, as defined................................ $ -- $70,800 $86,350
Term note payable, due in quarterly payments
beginning in January 1999, interest at 8.38%
until May 1997 at which time interest is LIBOR
plus a maximum of 2.75%. Balance repaid during
1997............................................ 39,850 -- --
Seller financing, noninterest-bearing secured
note payable, due in annual installments
commencing December 20, 1996 through December
20, 2000........................................ 6,313 5,313 5,313
Subordinated note payable to shareholder,
interest payable in quarterly installments at
10.5% per annum; payment of principal due in
annual installments beginning November 15, 2001;
original principal reduced by value of stock
warrant (see note 9). Balance repaid during
1997............................................ 3,000 -- --
Subordinated notes payable, interest payable in
quarterly installments at 11.0% per annum;
single installment due October 2004. Balance
repaid during 1997.............................. 2,561 -- --
Noninterest-bearing unsecured note payable,
maturing in 1999................................ 500 500 500
Note payable, due in quarterly installments
commencing January 1, 1995 bearing interest at
10%. Balance repaid during 1997................. 300 -- --
Other............................................ 43 34 34
Discounts associated with noninterest-bearing
obligations..................................... (1,671) (1,169) (1,058)
Discount assigned to stock warrants (see note
9).............................................. (50) -- --
------- ------- -------
Total long-term debt........................... 50,846 75,478 91,139
Less current portion............................. 1,075 1,000 1,000
------- ------- -------
Long-term debt excluding current portion....... $49,771 $74,478 $90,139
======= ======= =======
F-124
AMERICAN TOWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company was party to a financial instrument in order to reduce its
exposure to fluctuations in interest rates. The agreement provided for the
third parties to make payments to the Company whenever a defined floating
interest rate exceeded 10 percent per annum. No such payments were made in
1995 or 1996. Payments on the interest rate cap agreements were based on the
notional principal amount of the agreements; no funds were actually borrowed
or are to be repaid as of December 31, 1996. The unamortized portion of the
purchase price was approximately $107,000 and $50,000 at December 31, 1995 and
1996, respectively. $5,000,000 under this interest rate cap agreement expired
in 1995 and the remaining $9,000,000 agreement expired in December 1997.
The aggregate annual maturities of long-term debt (not reduced for discount
rates on noninterest-bearing obligations) for each of the five years
subsequent to December 31, 1997 are as follows (in thousands):
Year ending
December 31,
------------
1998................................. $ 1,000
1999................................. 2,250
2000................................. 6,457
2001................................. 5,000
2002................................. 8,300
Thereafter........................... 53,640
-------
$76,647
=======
(7)Federal Income Taxes
Income tax expense for the years ended December 31, 1995, 1996, and 1997
consisted of the following (in thousands):
1995 1996 1997
------ ---- ----
Current.................................................... $ -- $-- $--
Deferred................................................... (217) 303 801
------ ---- ----
$(217) $303 $801
====== ==== ====
Income tax expense at December 31, 1995, 1996 and 1997 differed from the
amounts computed by applying the U.S. federal income tax rate of 34% to income
before taxes and extraordinary items as follows (in thousands):
1995 1996 1997
----- ---- ----
Computed "expected" tax expense (benefit).................. $(198) $272 $622
State taxes................................................ 29 28 30
Adjustment of prior taxes.................................. -- -- 112
Other...................................................... (48) 3 37
----- ---- ----
Total.................................................... $(217) $303 $801
===== ==== ====
At December 31, 1997, the Company had net operating loss carryforwards (NOLs)
of approximately $14,285,000 for U.S. Federal income tax purposes. The NOLs,
if unused, will expire between 2008 and 2012. The portion of the NOLs which
existed prior to October 15, 1994 are subject to annual limitations imposed by
the Internal Revenue Code under Section 382. The current NOL balance is
subject to limitations should a change in ownership occur.
F-125
AMERICAN TOWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1996
and 1997 are as follows (in thousands):
1996 1997
------ ------
Deferred tax assets:
Net operating loss carryforward.............................. $3,472 $5,357
Accrued liabilities.......................................... 64 92
Other........................................................ 72 67
------ ------
Net deferred tax assets..................................... 3,608 5,516
------ ------
Deferred tax liability--rental towers and related fee based
assets, principally due to differences in basis for financial
reporting purposes and tax purposes.......................... 9,945 12,283
------ ------
Net deferred tax liability.................................. $6,337 $6,767
====== ======
There is no valuation allowance at December 31, 1996 and 1997 recorded against
the deferred tax assets. It is the opinion of management that the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies will more likely than not result in the realization of the
deferred tax assets.
(8)Redeemable Preferred Stock
In December 1995, the Company completed a private placement offering to its
existing security holders to sell up to 22,500 newly created shares of Series A
Redeemable Preferred Stock, $0.01 par value (Series A Preferred Stock), at $200
per share. Net proceeds to the Company were approximately $4,500,000.
The shares of Series A Preferred Stock were sold together with 10-year warrants
to purchase a total of 22,500 shares of common stock at a nominal exercise
price. The Company determined the warrants to have an estimated fair value of
$500,000 at the offering date which was recorded as additional paid-in capital
and a reduction of the outstanding Series A Preferred Stock. As of December 31,
1997, all of these warrants had been exercised.
Each share of Series A Preferred Stock has a liquidation preference of $200 per
share. The Company at its option can redeem any or all the outstanding shares
of preferred stock for $200 per share. The Company is required to redeem all
such shares at a price of $200 per share upon the occurrence of (i) a public
offering or (ii) a change of control. The preferred shares have no voting or
dividend rights.
(9)Stockholders' Equity
In conjunction with the acquisition of Bowen-Smith Holdings, Inc., the Company
issued warrants to the senior subordinated debt holder for 12,462 shares of
common stock with an exercise price of $.01 per share. This warrant was
immediately exercisable into common stock of the Company. The Company
determined this warrant to have an estimated market value of $600,000 at the
acquisition date which was recorded as additional paid-in capital and a
reduction of the outstanding principal of the senior subordinated note payable.
The Company recorded accretion of the debt discount of $75,000 and $59,000 for
the years ended December 31, 1995 and 1996, respectively. As discussed further
in note 6, the Company prepaid the senior subordinated debt holder in
connection with the October 1996 amendment and extension of the Company's
senior credit facility. The remaining unamortized debt discount of $450,000 was
included as an extraordinary loss on the consolidated statement of operations
for the year ended December 31, 1996. The senior subordinated warrant holder
could require the Company to purchase the stock warrants beginning in October
2002. The put amount was defined in the warrant agreement with the senior
subordinated lender. At December 31, 1996, the accompanying consolidated
financial statements include an accrual for $174,000 related to the put feature
of the warrants granted to the senior subordinated lender. These warrants were
exercised and the put retired on June 30, 1997.
F-126
AMERICAN TOWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During 1994, a warrant was also issued to a stockholder for 3,115 shares of
common stock with a nominal exercise price. Due to certain restrictions as to
the exercisability of this warrant, it was determined to have a value of
$75,000. This amount is reduced against the principal amount of the
subordinated note payable to stockholder. The Company recorded accretion of the
debt discount of $12,000 for each of the years ended December 31, 1995 and
1996. This warrant was exercised in 1997 in connection with the retirement of
the subordinated note payable to stockholder.
In June 1997, the Company completed a private placement offering of 36,049
shares of common stock with Clear Channel Communications, Inc. whereby the
Company raised proceeds of $23 million, net of issuance costs of approximately
$2 million.
(10)Stock Option Plan
In 1995, the Company adopted a stock option plan (the Plan) pursuant to which
the Company's Board of Directors may grant stock options to officers and key
employees. The Plan authorizes grants of options to purchase up to 9,231 shares
of common stock. Stock options are granted with an exercise price equal to the
stock's fair market value at the date of grant. All stock options have 10-year
terms and vest and become fully exercisable after a range of 3 to 4 years from
the date of grant.
At December 31, 1997, there were 2,731 additional shares available for grant
under the Plan. The per share weighted-average value of stock options granted
during 1995, 1996, and 1997 was $37, $192, and $233, respectively, on the date
of grant, using the Black Scholes model with the following assumptions: risk-
free interest rate of 5.71% for the 1995 options, 6.58% for the 1996 options,
and 6.50% for the 1997 options, expected life of 8 years, expected volatility
of 0%, and an expected dividend yield of 0%.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net income would have been reduced to the pro forma
amounts indicated below (in thousands):
1995 1996 1997
----- ---- ----
Net income (loss)
As reported................................................ $(572) $ 47 $377
Pro forma.................................................. (579) (231) 73
At December 31, 1996, the range of exercise prices and weighted average
remaining contractual life of outstanding options was $100-$475, and 3.7 years,
respectively. At December 31, 1997, the range of exercise prices and weighted-
average remaining contractual life of outstanding options was $100--$475, and 7
years, respectively. Stock option activity during the periods indicated is as
follows:
Weighted average
Number of shares exercise price
---------------- ----------------
Balance at December 31, 1994 -- $--
Granted................................... 1,100 100
----- ----
Balance at December 31, 1995............... 1,100 100
Granted................................... 4,600 475
Forfeited................................. (500) 100
----- ----
Balance at December 31, 1996............... 5,200 432
Granted................................... 1,300 475
Forfeited................................. -- --
----- ----
Balance at December 31, 1997............... 6,500 $440
===== ====
F-127
AMERICAN TOWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1996 and 1997, the number of options exercisable was 116 and
1,805, respectively, and the weighted-average exercise price of these options
was $100 and $392 per share respectively.
(11)Related Party Transactions and Commitments
Leases
In the ordinary course of business the Company leases land and buildings under
long-term (ranging from one to ten years) operating leases. Total rent expense
relating to land and building leases was approximately $459,000, $665,000,
$1,285,000, $307,000 and $457,000 for the years ending December 31, 1995, 1996
and 1997 and the three months ended March 31, 1997 and 1998, respectively.
Minimum future lease payments for the years ending December 31, are as follows
(in thousands):
1998................................................................ $ 1,517
1999................................................................ 1,363
2000................................................................ 1,223
2001................................................................ 1,271
2002................................................................ 829
Thereafter.......................................................... 4,237
-------
Total minimum lease payments...................................... $10,440
=======
Related Party Transactions
The Company has entered into consulting agreements with three shareholders. The
total management payments under these agreements was $300,000 for each of the
years ended December 31, 1996 and 1997, respectively, and future minimum
payments required by these management agreements are $300,000 and $262,500 for
the years ended December 31, 1998 and 1999, respectively.
The Company was subject to a management agreement, which was terminated during
1997, with a private investment firm which is a significant shareholder of the
Company. The Company paid $127,000 and $342,725 to this investment firm during
the years ended December 31, 1996 and 1997, respectively. The Company's
president and chairman, as well as another director are the principal executive
officers in the private investment firm.
The Company leases land for certain of its tower sites from an entity owned by
a shareholder. During the years ended December 31, 1996 and 1997, rental
expense relating to these land leases totaled $35,000 and $63,000,
respectively. Additionally, prior to 1997, the Company leased its office
facility from the same entity. Annual expense for the office facility
approximated $48,000 per year. The same shareholder is President of a tower
fabrication and construction company. The Company has acquired the majority of
its new towers from this entity, and during the years ended December 31, 1996
and 1997, the Company made payments of $1,710,000 and $3,057,000 respectively,
to this entity.
F-128
AMERICAN TOWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(12)Supplemental Disclosure of Noncash Activities
The Company had the following noncash financing and investing activities (in
thousands):
1995 1996 1997
------ ----- -----
Notes payable issued for tower acquisitions............. $8,164 2,361 --
Common stock issued for acquisitions.................... -- 4,127 1,000
Reduction of note payable in connection with disposal of
towers................................................. -- -- 700
Put accrual written-off................................. -- -- 174
Notes payable issued for noncompete agreements.......... 160 -- --
Accrued acquisition costs............................... 150 -- --
Accrued debt refinancing costs.......................... 100 -- --
(13)Merger Agreement
In December 1997, the Company entered into a Merger Agreement with American
Tower Systems Corporation (ATS) which, subject to certain conditions, will
result in the merger of the Company into ATS. The merger is scheduled to be
completed during the first half of 1998.
F-129