WESTOWER CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
Three Months ended December 31, 1998
As at December 31,1998 and September 30, 1998
- 3 -
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from________________________to_____________________
COMMISSION FILE NUMBER 1-132963
WESTOWER CORPORATION
(Name of registrant as specified in its charter)
WASHINGTON 1623 91-1825860
(State or jurisdiction of (Primary Standard Industrial (I.R.S.
Employer
Incorporation or Organization) Classification Code Number) Identification
Number)
Westower Corporation
7001 NE 40th Avenue
Vancouver, Washington 98661
(360) 750-9355
(Address and telephone number of principal executive offices and principal place
of business)
Check whether the issuer:
(1) filed all reports required to be filed by Section 13 or 15 (d) of the
Exchange Act during the preceding 12 months ( or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days
YES /X/ No / /
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes common
equity, as of the latest practicable date:
8,267,000 as of January 31, 1999
<PAGE>
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
<S> <C>
ITEM 1 - UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATMENTS
Unaudited Condensed Consolidated Balance Sheets
at December 31, 1998 and September 30, 1998 (audited) 3
Unaudited Condensed Consolidated Statements of Income
for the three-month period ended December 31, 1998 and 1997 4
Unaudited Condensed Consolidated Statement of Stockholders' Equity
for the three-month period ended December 31, 1998 5
Unaudited Condensed Consolidated Statements of Cash Flows
for the three-month period ended December 31, 1998 and 1997 6
Notes to the Unaudited Condensed Consolidated Financial Statements
as of December 31, 1998 and 1997 7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8
IEM 3 Quantitative and Qualitative disclosures about market risk n/a
PART II - OTHER INFORMATION 11
ITEM 1 - LEGAL PROCEEDINGS
ITEM 2 - CHANGES IN SECURITIES
ITEM 3 - DEFAULTS UPON SENIOR SECURITES
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5 - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
</TABLE>
<PAGE>
WESTOWER CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
As at December 31,1998 and September 30, 1998
<TABLE>
<CAPTION>
(audited)
December 31, September 30,
1998 1998
---------------- ---------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 4,862,000 $ 9,331,000
Accounts receivable, net 20,729,000 13,289,000
Costs and estimated earnings in excess of
billings on uncompleted contracts 3,697,000 5,078,000
Inventory 2,489,000 2,151,000
Related party advances and receivables 971,000 956,000
Income tax receivable 220,000 220,000
Other current assets 2,908,000 1,203,000
----------------- ---------------
Total current assets 35,876,000 32,228,000
PROPERTY AND EQUIPMENT, net 9,230,000 7,574,000
INTANGIBLE ASSETS, net 32,812,000 19,721,000
OTHER ASSETS 21,451,000 2,771,000
----------------- ---------------
TOTAL ASSETS $ 99,369,000 $ 62,294,000
================= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 7,439,000 $ 7,053,000
Other current liabilities 1,389,000 2,810,000
Billings in excess of costs and estimated
earnings on uncompleted contracts 391,000 1,435,000
Income taxes payable 2,350,000 2,116,000
Deferred income taxes 612,000 428,000
Stockholder advances and notes payable to related parties 1,060,000 228,000
Note payable 582,000 1,089,000
Current portion of long-term debt
and capital lease obligations 1,819,000 2,419,000
----------------- ---------------
Total current liabilities 15,642,000 17,578,000
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS, excluding current portion 38,117,000 14,991,000
DEFERRED INCOME TAXES 2,944,000 2,962,000
----------------- ---------------
Total liabilities 56,703,000 35,531,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock ($.01 par value, 10,000,000 shares
authorized, 8,254,000 and
7,047,000 shares issued
and outstanding at December
31, 1998 and September 30, 1998
respectively)
83,000 70,000
Additional paid-in-capital 37,769,000 22,610,000
Accumulated other comprehensive income (loss) (641,000) (581,000)
Retained earnings 5,455,000 4,664,000
----------------- ---------------
Total stockholders' equity 42,666,000 26,763,000
----------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 99,369,000 $ 62,294,000
================= ===============
</TABLE>
See accompanying notes to these financial statements
<PAGE>
WESTOWER CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months ended December 31, 1998 and 1997
1998 1997
---------------- -----------
<TABLE>
<S> <C> <C>
CONTRACT AND OTHER
REVENUES EARNED $ 24,988,000 $ 11,957,000
COSTS OF REVENUES EARNED 18,144,000 8,756,000
------------- ----------
(exclusive of depreciation shown below)
Gross profit 6,844,000 3,201,000
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 4,258,000 1,720,000
DEPRECIATION AND AMORTIZATION 589,000 71,000
MERGER RELATED EXPENSES 77,000 -
------- --------
OPERATING INCOME 1,920,000 1,410,000
OTHER INCOME (EXPENSE)
Other income (expense) - (8,000)
Interest income 53,000 50,000
Interest and financing expense (572,000) (26,000)
--------- ---------
Total other income (expense) (519,000) 16,000
--------- ---------
INCOME BEFORE PROVISION
FOR INCOME TAXES 1,401,000 1,426,000
PROVISION FOR INCOME TAXES 610,000 500,000
---------------- -----------------
NET INCOME $ 791,000 $ 926,000
================ ================
EARNINGS PER SHARE:
BASIC EARNINGS $ 0.10 $ 0.16
========== ======
DILUTED EARNINGS $ .09 $ 0.15
====== ===========
</TABLE>
See accompanying notes to these financial statements
<PAGE>
WESTOWER CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three Months ended December 31, 1998
<TABLE>
<CAPTION>
Accumulated
Additional Other Com- Com-
Common Stock Paid-in Retained prehensive prehensive
Shares Amount Capital Earnings Income (loss) Income Total
----------- ----------- ------------- --------------- --------------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, September 30, 1998 7,047,000 $ 70,000 $ 22,610,000 $ 4,664,000 $ (581,000) $ 26,763,000
Net income 791,000 $ 791,000
Foreign currency translation
adjustment (60,000) (60,000)
--------
Total comprehensive income $ 731,000 731,000
=========
Proceeds from warrants 819,000 9,000 7,282,000 7,291,000
exercised, net
Stock issuances for
business acquisitions 388,000 4,000 7,857,000 7,861,000
Stock compensation expense 20,000 20,000
BALANCE, December 31,
1998 8,254,000 $ 83,000 $ 37,769,000 $ 5,455,000 $ (641,000) $42,666,000
=========== =========== ============= =============== ============== ===========
</TABLE>
See accompanying notes to these financial statements
<PAGE>
WESTOWER CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For Three Months ended December 31, 1998 and 1997
<TABLE>
<S> <C> <C>
1998 1997
---------------- -----------
CASH FROM OPERATING ACTIVITIES
Net income $ 791,000 $ 926,000
Adjustments to reconcile net income to
net cash from operating activities
Depreciation and amortization 589,000 71,000
Gain on sale of assets - (125,000)
Non-cash interest and financing expense 117,000 -
Earnings from equity investment (33,000) -
Stock compensation expense 20,000
Changes in operating assets and liabilities,
net of effect of acquisitions
Accounts receivable (4,010,000) (1,284,000)
Costs and estimated earnings in excess of billings
on uncompleted contracts 1,381,000 (477,000)
Inventory and other current assets (1,935,000) (232,000)
Trade accounts payable (258,000) (1,444,000)
Billings in excess of costs and estimated earnings
on uncompleted contracts (1,044,000) 780,000
Other current liabilities (1,808,000) 663,000
Current and deferred income taxes 400,000 96,000
---------------- -----------------
Net cash flows used in operating activities (5,790,000) (1,026,000)
----------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisitions, net of cash acquired (6,252,000) (311,000)
Increase in other assets (18,736,000) -
Purchases of property, plant and equipment (689,000) (525,000)
Proceeds from sale of assets - 302,000
---------------- -----------------
Net cash flows used in investing activities (25,677,000) (534,000)
----------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock issuances, net 7,291,000 7,514,000
Proceeds from long-term debt - 104,000
Repayments to related parties (915,000) (9,000)
Advances to related parties - (196,000)
Borrowings (repayments) on line of credit, net (1,357,000) 115,000
Proceeds from credit facility 24,000,000 -
Repayments of long-term debt (1,983,000) (326,000)
----------------- ------------------
Net cash flow from financing activities 27,036,000 7,202,000
---------------- -----------------
EFFECT OF EXCHANGE RATES ON CASH (38,000) (169,000)
----------------- ------------------
NET INCREASE (DECREASE) CASH EQUIVALENTS (4,469,000) 5,473,000
CASH AND CASH EQUIVALENTS,
beginning of period 9,331,000 1,748,000
---------------- ------------------
CASH AND CASH EQUIVALENTS,
end of period $ 4,862,000 $ 7,221,000
=============== ================
</TABLE>
See accompanying notes to these financial statements
<PAGE>
WESTOWER CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
Westower Corporation ( the "Company") designs builds and maintains wireless
communications transmitting and receiving facilities for providers of wireless
communications services. The Company also owns and leases communications towers.
The Company operates throughout the U.S. and Canada.
The unaudited condensed consolidated financial statements and notes thereto at
December 31, 1998 and September 30, 1998 (audited), and for the three-month
period ended December 31, 1998 and 1997, reflect the October 28, 1997 merger
with Western Telecom Construction Ltd., an Alberta corporation, the May 29, 1998
merger with MJA Communications Corp., a Florida corporation, and the August 31,
1998 merger with Standby Services, Inc., a Texas corporation. All companies
design, fabricate and construct wireless transmitting and receiving facilities
and shelters for communications providers. The Company issued 835,000 shares of
its common stock for all the common shares of Western Telecom Construction Ltd.,
397,000 shares of its common stock for all of the common shares of MJA
Communications Corp., and 544,000 shares of its common stock for all of the
common shares of Standby Services, Inc. All of these mergers were accounted for
as or similar to a pooling-of-interests. Accordingly, the unaudited condensed
consolidated financial statements and notes thereto at December 31, 1998 and
September 30, 1998 (audited), and for the three-month period ended December 31,
1998 and 1997, have been restated to include the results of these mergers.
On October 27, 1998, the Company changed its fiscal year-end from February 28 to
September 30. The three-month period ended December 31, 1998 is the Company's
first quarter in its fiscal year ended September 30, 1999. All prior information
has been restated to conform with a September 30 year end.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and in accordance with the instructions for 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 for 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
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements for the seven month Transition Period
ended September 30, 1998 and the notes thereto included in the Company's Form
10-KSB.
Consolidation -- The consolidated financial statements include the accounts of
the Company and its wholly owned domestic and Canadian subsidiaries. Investments
in subsidiaries in which the Company exercises significant influence but which
it does not control are accounted for using the equity method. Investment in a
60% owned affiliated company is accounted for on the equity basis of accounting.
All material intercompany accounts and transactions have been eliminated in
consolidation.
Foreign Currency Translation -- All asset and liability accounts of Canadian
operations are translated into U.S. dollars at current exchange rates. Revenues
and expenses are translated using the average exchange rate during the period.
Foreign currency translation adjustments are reported as a component of
comprehensive income and stockholders' equity in the consolidated balance sheet.
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 unaudited condensed
consolidated financial statements. Examples of estimates subject to possible
revision based upon the outcome of future events include costs and estimated
earnings on uncompleted contracts, depreciation of property and equipment,
accrued income tax liabilities, and purchase price allocations for acquisitions.
Actual results could differ from those estimates.
Reclassification -- Certain prior year amounts have been reclassified to conform
to the current year presentation and did not impact previously reported
stockholders' equity or cash flow.
Note 2 - Inventory
Inventory is stated at the lower of cost and estimated net realizable value
using the first-in, first-out method. Inventory consists of materials purchased
for future construction not associated with specific jobs.
Note 3 - Property And Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
<S> <C> <C>
Buildings $ 1,770,000 $ 1,795,000
Vehicles 3,316,000 2,540,000
Equipment 2,134,000 1,580,000
Communications towers 1,908,000 1,401,000
Furniture and fixtures 1,053,000 943,000
Leasehold improvements 109,000 81,000
----------------- ------------------
10,290,000 8,340,000
Less accumulated depreciation (1,849,000) (1,562,000)
------------------ -------------------
8,441,000 6,778,000
Land 789,000 796,000
----------------- ------------------
$ 9,230,000 $ 7,574,000
================ =================
</TABLE>
Note 4 - Acquisitions
During the three months ended December 31, 1998, the Company consummated the
following 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 October 30, 1998 the Company completed the acquisition of Teletronics
Management Services, Inc. ("Teletronics"). The acquisition was effected by
exchanging 188,000 shares of common stock valued at approximately $3.8 million,
based on the publicly traded price, $1.8 million in cash, including
distributions payable to former shareholders in the amount of $800,000, and the
assumption of certain liabilities, for all outstanding shares of Teletronics.
The acquisition was accounted for using the purchase method for business
combinations resulting in goodwill of approximately $5.0 million.
On November 10, 1998 the Company completed the acquisition of Summit
Communications, LLC ("Summit"), a Mississippi limited liability company which
engages in operations similar to those of the Company. The merger was effected
by exchanging 200,000 shares of common stock valued at approximately $4.1
million, based on the publicly traded price, $4.4 million in cash, and the
assumption of certain liabilities, for all membership interests in Summit. The
former members of Summit may also receive an additional 100,000 shares of common
stock, based on certain performance criteria during the three years following
the date of acquisition. The acquisition was accounted for using the purchase
method for business combinations resulting in goodwill of approximately $8.0
million. Additional shares of common stock issued will be recorded as an
adjustment of the purchase price and will increase recorded goodwill.
The following is a summary of all consideration exchanged for acquisitions that
were accounted for as purchases:
Three Months
Ended
December 31,
1998
________________
Shares issued 388,000
Value of shares $ 7,861,000
Cash 6,252,000
------------------
Total purchase price $ 14,113,000
================
The assets and liabilities of the acquired entities were recorded at their
estimated fair market values at the dates of acquisition. The initial
allocations of fair market values are preliminary and are subject to adjustments
during the first year following the acquisition. The initial allocations were as
follows:
December 31,
1998
----------
Non-compete agreements $ 136,000
Tangible assets 4,739,000
Goodwill 13,046,000
Liabilities assumed and deferred tax liabilities (3,808,000)
-------------
Total purchase price $ 14,113,000
=============
Included in the operating results for the three month period ended December 31,
1998 are revenues of $4,895,000 and operating income of $934,000 from the dates
of acquisition.
Note 5 - Intangible Assets
Intangible assets consist of the following:
December 31, September 30,
1998 1998
_________________________________
Goodwill $ 27,085,000 $ 14,039,000
Communications tower purchase contracts 5,857,000 5,661,000
Non-compete agreements 355,000 219,000
-------- -----------
33,297,000 19,919,000
Less accumulated amortization (485,000) (198,000)
-------- ------------
$ 32,812,000 $ 19,721,000
======= ==========
Note 6 - Other Assets
Other assets consist of the following:
December 31, September 30,
1998 1998
____________ ____________
Deposits on tower purchase contracts $ 17,236,000 $ -
Equity investment in joint venture 755,000 217,000
Deposit on business purchase 650,000 -
Other noncurrent assets, net 2,810,000 2,554,000
----------- --------------
$ 21,451,000 $ 2,771,000
---------- --------------
During the three months ended December 31, 1998, the Company paid $16.5 million
as a deposit to acquire certain communications towers, subject to regulatory
approval. Subsequent to December 31, 1998, the approval was received and the
Company completed the acquisition of the communications towers. During the three
months ended December 31, 1998, the Company paid $736,000 as a deposit to
acquire additional towers. Equity investment in joint venture represents the
Company's cash investment and the Company's equity earnings from this
investment. Deposit on business purchase represents a deposit on a purchase of a
business that the Company is currently negotiating. There can be no assurance
that the Company will be successful in completing this negotiation, in which
case the deposit is refundable.
Note 7 - Long -Term Debt
During the three months ended December 31, 1998, the Company borrowed $24
million under its credit facility with Bank Boston N.A. Interest was set for
three months at approximately 5.5%.
Note 8 - Common Stock
On October 15, 1997, the Company issued 1,200,000 shares of common stock and
1,380,000 warrants to purchase common stock in a public offering. The Company
received proceeds, net of costs, of $7,493,000 from its public offering. During
the three months ended December 31, 1998, the Company received net proceeds of
$7,291,000 on the exercise of 819,000 warrants, at $9.00 per share of common
stock.
Note 9 - Earnings Per Share
The numerators and denominators of basic and fully diluted earnings per share
are as follows:
Three Months Three Months
Ended Ended
December 31, December 31,
1998 1997
___________ _____________
Numerator - Net income as reported $ 791,000 $ 926,000
=============== ================
Denominator - Weighted average number
of shares outstanding:
Basic weighted average
number of shares 7,839,000 5,906,000
Effect of dilutive stock
options and warrants 782,000 129,000
--------------- ----------------
Diluted weighted average
number of shares 8,621,000 6,035,000
=============== ================
For the three months ended December 31, 1998, shares associated with convertible
debt were excluded from the computation of diluted earnings per share because
inclusion would have had an anti-dilutive effect on earnings per share. All
other potential common shares have been included in the diluted earnings per
share calculation. All potential common shares were included in the calculation
of diluted earnings per share for the three months ended December 31, 1997.
Note 10 - Segment Information
The Company's operations are comprised of a number of communication tower
construction entities that were recently acquired. While management assesses the
operating results of each of these entities separately, as these entities and
its existing operations exhibit similar financial performance and have similar
economic characteristics, they have been aggregated as one segment.
The following table summarizes contract and other revenues and long-lived assets
related to the respective countries in which the Company operates.
As at and for the Three Months Ended December 31, 1998
________________________________________________
Total United States Canada
Contract and Other Revenues $ 24,988,000 $ 19,079,000 $ 5,909,000
Long-lived Assets $ 9,230,000 $ 5,064,000 $ 4,166,000
As at and for the Three Months Ended December 31, 1997
___________________________________________________________
Total United States Canada
Contract and Other Revenues $ 11,957,000 $ 6,122,000 $ 5,835,000
Long-lived Assets $ 2,707,000 $ 1,001,000 $ 1,706,000
Long-lived assets are comprised of property, plant and equipment and excludes
intangible assets.
<PAGE>
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Statements contained herein that are not historical facts are forward-looking
statements ("forward-looking statements") within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which are intended to be covered by the safe
harbors created by those sections. Such forward-looking statements are
necessarily estimates reflecting the best judgment of the Company's management
based upon current information and involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such risks, uncertainties and other factors
include, but are not limited to, those set forth in the Company's Annual Report
on Form 10-KSB for the transition period ended September 30, 1998 and appearing
from time to time in filings made by the Company with the Securities and
Exchange Commission. These risks, uncertainties and other factors should not be
construed as exhaustive and the Company does not undertake, and specifically
disclaims any obligation, to update any forward-looking statements to reflect
occurrences or unanticipated events or circumstances after the date of such
statements.
GENERAL AND COMPANY STRATEGY
Historically, Westower Corporation and its subsidiaries (the "Company")
principally has been engaged in building towers for wireless carriers, who have
traditionally owned and operated their own transmission tower assets. While the
Company continues to provide infrastructure building and implementation services
to wireless carriers, the Company's focus has been directed increasingly toward
developing sources of recurring revenues, specifically building towers for its
own account (build-to-suit), acquiring towers from carriers and other owners,
maximizing revenues from existing towers, and entering into long-term
maintenance contracts with other tower owners. The Company's focus on sources of
recurring revenues is intended, in part, to capitalize on recent trends by
several carriers who have begun to evaluate opportunities to outsource the
ownership and operation of their wireless infrastructure either by selling their
existing tower sites to independent third party tower owners and operators, who
would then lease tower space back to the carriers, and/or entering into
build-to-suit arrangements, whereby an independent third party builds, owns and
leases towers to the wireless carriers, often with multiple tenants on any given
tower. The Company believes that its historical competency of tower design and
construction makes the Company one of the leading candidates for carrier
outsourcing.
The Company believes owning towers and leasing tower space to wireless carriers
and other users will provide more stable long-term recurring revenues. In
addition to the Company's plan to pursue opportunities to acquire existing sites
and towers from carriers seeking to outsource their wireless infrastructure, the
Company believes that, at the present time, utilizing its infrastructure
building and implementation resources to construct towers for its own account is
a more cost-effective method of expanding its portfolio of owned towers. In the
first fiscal quarter of the fiscal year ending September 30, 1999, the Company
began focusing on opportunities to provide sources of recurring revenues. The
Company's build-to-suit program offers a turnkey solution to wireless carriers
and is designed to reduce carriers' capital expenditures and overhead associated
with the traditional methods of acquiring and owning their wireless networks. As
of February 12, 1999, 210 towers were under written or oral commitments from
three wireless carriers. In addition to the towers subject to build-to-suit
commitments, as of February 12, 1999, the Company owned or had contracts to
acquire 145 towers. There can be no assurance that the Company will successfully
enter into additional significant build-to-suit agreements with any wireless
carrier or group of carriers or that it will be able to reach definitive
agreements with the owners of towers not currently under written contract or
develop the towers in a cost-effective manner, that implementation of its
existing build-to-suit agreements will result in the Company's ownership of all
of the towers originally contemplated by those agreements or that the Company
will complete the development of any of the towers currently being developed for
its own account. As the Company increasingly focuses its resources on tower
ownership, revenues from third parties generated by its infrastructure building
and implementation services operations are likely to decline. Management
believes that the decline in revenues from its infrastructure building and
implementation services operations will be offset over time by the recurring
revenue stream expected from tower ownership, revenues from future tower
acquisitions by the Company, revenues from towers the Company is currently
developing and building for its own account and revenues from the towers the
Company will develop and build for its own account in the future.
RESULTS OF OPERATIONS
The Company's revenues for the three-month period ended December 31, 1998
increased approximately 109% to $24,988,000 from $11,957,000 for the same
three-month period in the previous year. Management believes the increase in
revenues was primarily due to an increased rollout of wireless infrastructure
building and implementation activities during the 1998 period and the results of
business acquisitions completed after December 31, 1997 and accounted for as
purchases.
Gross profit, excluding depreciation, for the three-month period ended December
31, 1998 increased approximately 114% to $6,844,000 from $3,201,000 for the same
three-month period in the prior year. Gross profit as a percentage of revenue
increased to 27.4% for the first three months of fiscal 1999 from 26.8% for the
same three months of fiscal 1998. The increase in gross profit is primarily due
to the increase in revenues coupled with a slightly improved margin.
Selling general and administrative expenses for the three-month period ended
December 31, 1998 increased approximately 148% to $4,258,000 from $1,720,000 for
the same three-month period in the prior year. As a percentage of revenues,
selling general and administrative expenses increased to 17.0% in the first
three months of fiscal 1999 compared to 14.4% in the same three months of fiscal
1998. The increase in selling general and administrative expenses is
attributable to the increase in revenues that required additional management and
administrative resources and an increase in staffing of the Company for the
build-to-suit and tower leasing programs, both of which did not exist in the
comparable period in the prior year.
Interest and financing expenses for the three-month period ended December 31,
1998 increased approximately 2100% to $572,000 from $26,000 for the same
three-month period in the prior year. The increase is due to borrowings made,
the proceeds of which have been used to acquire companies and towers (See "
Liquidity and Capital Resources").
Income taxes for the three-month period ended December 31, 1998 increased
approximately 22% to $610,000 from $500,000 for the same three-month period in
the prior year. The Company's effective tax rate for the first quarter of fiscal
1999 was approximately 43% compared to 35% in the same quarter of fiscal 1998.
The increase is primarily the result of non-deductible amortization expense of
goodwill recognized in business combinations accounted for as purchases.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had cash of $4,862,000 a decrease from
September 30, 1998, of $4,469,000. Working capital was $20,234,000.
The Company used $5,790,000 of cash in its operations during the three months
ended December 31, 1998. Net income plus non-cash operating expenses was
$1,484,000 and $7,274,000 is reflected in the changes in non-cash operating
assets and liabilities. During the three months ended December 31, 1998, the
Company used cash of $6,252,000, net of acquired cash, to acquire businesses,
and $689,000 to purchase property and equipment.
In October 1997, the Company sold 1,200,000 Units in its initial public offering
of securities and received net proceeds of approximately $7,493,000. Each unit
consisted of one share of common stock and one warrant to purchase a share of
common stock for $9.00 During the seven month transition period ended September
30, 1998, 559,000 warrants were exercised resulting in net proceeds of
$4,788,000. During the three months ended December 31, 1998, nearly all of the
remaining warrants were exercised resulting in net proceeds of $7,291,000.
In May 1998, the Company issued $15,000,000 principal amount of 7% subordinated
convertible notes ("Subordinated Debt"). Net proceeds were $14,850,000. The
notes are convertible into 599,000 shares of Common Stock at $25.03 per share
until April 30, 2007. In connection with the Subordinated Debt, the Company
granted warrants to purchase 40,000 shares of Common Stock at $23 per share
until April 30, 2007. The Company has used the proceeds to purchase and build
communications towers for lease to others, and to acquire other enterprises.
On October 30, 1998, the Company completed the acquisition of Teletronics
Management Services, Inc. ("Teletronics"). The acquisition was effected by
exchanging 188,076 shares of common stock valued at approximately $3.8 million,
$1.8 million in cash, including $800,000 in distributions payable to former
shareholders, and the assumption of certain liabilities, for all outstanding
shares of Teletronics. The acquisition was accounted for using the purchase
method for business combinations, resulting in goodwill of approximately $5.0
million.
On October 22, 1998, the Company exercised its right to acquire certain
communications towers for $9.2 million, subject to regulatory approval. During
the three months ended December 31, 1998, the Company paid $736,000 towards the
purchase price.
On November 10, 1998 the Company completed the acquisition of Summit
Communications, LLC ("Summit"), a Mississippi limited liability company which
engages in operations similar to those of the Company. The merger was effected
by exchanging 200,000 shares of common stock valued at approximately $4.1
million, $4.4 million in cash, and the assumption of certain liabilities, for
all membership interest in Summit. The former members of Summit may also receive
an additional 100,000 shares of common stock, based on certain performance
criteria during the three years following the date of acquisition. The
acquisition was accounted for using the purchase method for business
combinations, resulting in goodwill of approximately $8.0 million.
In December 1998, the Company paid $16.5 million as a deposit to acquire certain
communications towers. Closing was subject to regulatory approval. In January
1999, approval was received and the Company completed the transaction. At
December 31, 1998, the $16.5 million payment was included in "Other Assets" on
the Company's balance sheet.
On June 9, 1998, the Company signed a credit agreement with BankBoston, N.A.
whereby BankBoston, N.A. committed to providing $75,000,000 principal amount of
senior secured revolving credit (the "Credit Facility"). The Credit Facility
allows the Company to purchase or construct communications towers for use by
third parties. The Company's ability to utilize the Credit Facility is
determined by, among other criteria, its cash flows generated from operations
and from tower leasing. During the three months ended December 31, 1998, the
Company borrowed $24 million under the Credit Facility.
The Company's future cash requirements for fiscal 1999 and beyond will depend
primarily upon the level of wireless infrastructure building and implementation
undertaken by the Company, the level of working capital needed to generate the
revenues associated with such business plan, and acquisition opportunities. The
Company believes that revenues from operations and amounts available under the
Credit Facility noted above and other capital resources available to the Company
will be adequate to satisfy its working capital requirements at least through
the next twelve months.
To date, the Company has derived substantially all of its revenues from sales in
the United States and Canada, and inflation has not had a significant effect on
the Company's business. The Company does not currently expect inflation to
adversely affect it in the future unless inflation increases significantly in
the United States or Canada. To date, the Company's activities in Brazil have
been denominated in Canadian currency.
The Company is currently in negotiation with certain tower construction
companies concerning acquisition by Westower. The Company is also in negotiation
with certain third parties concerning the acquisition of wireless communication
towers, and with a financial institution to arrange financing for the wireless
communication tower purchases, should the negotiations conclude successfully.
None of the negotiations are finalized and there is no assurance that the
Company will be successful in concluding these negotiations or if the Company is
successful, that the acquisitions will not be dilutive to existing shareholders.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the Year 2000 as it relates
to information systems. In September 1998, independent consultants completed a
review of the Company's software and hardware. Pursuant to recommendations made
by the consultants, the Company replaced a few personal computers. The Company's
total expenditure to date for the Year 2000 compliance is less that $50,000. The
Year 2000 is not expected to have a material impact on the Company's current
information systems because its current software is either already Year 2000
compliant or required changes are not expected to be significant. The Company
has not conducted a survey of its customers or vendors to ascertain their Year
2000 readiness. Based on the nature of the Company's business, and the existence
of alternate vendors, however, the Company anticipates that it is not likely to
experience material business interruption due to the potential adverse impact of
the Year 2000 on its vendors. As a result, the Company does not anticipate that
incremental expenditures to address Year 2000 compliance will be material to the
Company's liquidity, financial position or results of operations over the next
few years.
ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". Among other
provision, SFAS No. 133 requires that entities recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Gains and losses resulting from changes in the
fair values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. SFAS No. 133
becomes effective for the Company beginning October 1, 1999. Management has not
yet evaluated the effects that the adoption of SFAS No. 133 will have on its
reported financial position or results of operations.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None
ITEM 2 - CHANGES IN SECURITES
During the three months ended December 31, 1998, the Company
issued 200,000 shares of common stock as partial consideration
for all of the membership interests in Summit, and 188,076
shares of common stock as partial consideration for all of the
shares of Teletronics. In respect of both issuance, the
Company relied on the exemption from registration as provided
in Section 4(2) of the Securities Act of 1933, as amended.
ITEM 3 - DEFAULTS UPON SENIOR SECURITES
None
ITEM 4 - SUMBISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibit is contained in
this report.
27. Financial Data Schedule
(b) Reports on Form 8-K. The following reports on Form
8-K were filed during the quarter ended December 31,
1998:
1. Form 8-K dated September 25, 1998 relating
to Item 5 (Other Events) and Item 7
(Exhibits) relating to the acquisition of
CNG Communications, Inc.
2. Form 8-K dated October 27, 1998 relating to
Item 4 (Changes in the Registrant's
Certifying Accountant), Item 7 (Exhibits)
and Item 8 (Change in Fiscal Year).
3. Form 8-K dated October 30, 1998 relating to
Item 5 (Other Events) and Item 7 (Exhibits)
relating to the acquisition of Teletronics
Management Services, Inc.
4. Form 8-K/A (Amendment No. 1) dated August
31, 1998 relating to Item 7 (Financial
Statements, Pro Forma Financial Information
and Exhibits) containing audited financial
statements of Standby Services, Inc. and pro
forma financial information, and Form 8-K/A
(Amendment No. 2) dated August 31, 1998
relating to Item 5 (Other Events) and Item 7
(Exhibits).
5. Form 8-K/A (Amendment No. 1) dated August
31, 1998 relating to Item 5 (Other Events)
and Item 7 (Financial Statements, Pro Forma
Financial Information and Exhibits)
containing audited financial statements of
CORD Communications, Inc. and pro forma
financial information, and Form 8-K/A
(Amendment No. 2) relating to Item 7
(Financial Statements, Pro Forma Financial
Information and Exhibits) containing audited
financial statements of CORD Communications,
Inc. and pro forma financial information.
6. Form 8-K dated November 10, 1998 relating to
Item 2 (Acquisition or Disposition of
Assets) and Item 7 (Financial Statements,
Pro Forma Financial Information and
Exhibits), relating to the acquisition of
Summit Communications, LLC , and Form 8-K/A
(Amendment No. 1) relating to Item 5 (Other
Events) and Item 7 (Financial Statements,
Pro Forma Financial Information and
Exhibits) containing audited financial
statements of Summit Communications, LLC and
pro forma financial information.
Signature: ____________________________________________________________
Signature: ____________________________________________________________
Signature: ____________________________________________________________
Westower Corporation
Registrant
Date: ____________________________________________________________
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