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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(Mark One):
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998.
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
COMMISSION FILE NUMBER: 333-46025
AMERICAN TOWER SYSTEMS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 65-0598206
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
116 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02116
(Address of principal executive offices)
TELEPHONE NUMBER (617) 375-7500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days:
Yes No X
<TABLE>
<CAPTION>
OUTSTANDING AT
CLASS OF COMMON STOCK APRIL 30, 1998
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<S> <C>
Class A Common Stock......................................... 36,351,266 shares
Class B Common Stock......................................... 9,320,576 shares
Class C Common Stock......................................... 3,295,518 shares
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Total........................................................ 48,967,360 shares
</TABLE>
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AMERICAN TOWER SYSTEMS CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
<C> <S> <C>
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
December 31, 1997 and March 31, 1998........................ 1
Consolidated Statements of Operations
Three months ended March 31, 1997 and 1998.................. 2
Consolidated Statements of Cash Flows
Three months ended March 31, 1997 and 1998.................. 3
Notes to Consolidated Financial Statements................... 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................. 11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.......................................... 18
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.................. 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................... 19
SIGNATURES................................................. 20
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION.
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN TOWER SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................ $ 4,595,500 $ 6,799,598
Accounts receivable, net of allowance for
doubtful accounts of $125,000 and $355,000,
respectively ................................... 3,238,877 5,742,112
Unbilled receivables............................. 3,028,378
Prepaid and other current assets................. 789,677 1,336,825
Deferred income taxes............................ 62,560 62,560
------------ ------------
Total current assets........................... 8,686,614 16,969,473
------------ ------------
PROPERTY AND EQUIPMENT, net........................ 117,617,776 156,827,010
UNALLOCATED PURCHASE PRICE, net.................... 108,192,255 221,532,005
OTHER INTANGIBLE ASSETS, net....................... 8,424,406 7,656,737
NOTES RECEIVABLE................................... 10,700,000 1,000,000
DEPOSITS AND OTHER LONG-TERM ASSETS................ 1,734,845 5,081,670
INTEREST RECEIVABLE--STOCKHOLDER NOTES RECEIVABLE.. 674,277
DEFERRED INCOME TAXES.............................. 123,272,646
------------ ------------
TOTAL.............................................. $255,355,896 $533,013,818
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt................ $ 110,391 $ 112,409
Accounts payable................................. 3,738,230 2,581,420
Accrued expenses................................. 4,492,064 9,417,069
Accrued interest................................. 913,624 2,148,666
Unearned income.................................. 1,752,248 2,556,715
Due to Parent (tax liability).................... 125,210,000
------------ ------------
Total current liabilities...................... 11,006,557 142,026,279
------------ ------------
LONG-TERM DEBT..................................... 90,066,269 157,037,420
DEFERRED INCOME TAXES.............................. 417,628
OTHER LONG-TERM LIABILITIES........................ 32,750 32,550
------------ ------------
Total long-term liabilities.................... 90,516,647 157,069,970
------------ ------------
MINORITY INTEREST IN SUBSIDIARIES.................. 625,652 600,240
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock; $0.01 par value; 20,000,000
shares authorized; no shares issued or outstand-
ing.............................................
Class A Common Stock; $.01 par value; 200,000,000
shares authorized; 29,667,883 and 36,351,266
shares issued and outstanding, respectively..... 296,679 363,513
Class B Common Stock; $.01 par value; 50,000,000
shares authorized; 4,670,626 and 9,320,576
shares issued and outstanding, respectively..... 46,706 93,206
Class C Common Stock; $.01 par value; 10,000,000
shares authorized; 1,295,518 and 3,295,518
shares issued and outstanding, respectively..... 12,955 32,955
Notes receivable, due from stockholders.......... (49,375,000)
Additional paid-in capital....................... 155,710,741 286,589,686
Accumulated deficit.............................. (2,860,041) (4,387,031)
------------ ------------
Total stockholders' equity..................... 153,207,040 233,317,329
------------ ------------
TOTAL.............................................. $255,355,896 $533,013,818
============ ============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
1
<PAGE>
AMERICAN TOWER SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1997 1998
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<S> <C> <C>
REVENUES:
Tower rental and management (includes revenue from
related parties of $81,000 and $325,700 in 1997 and
1998, respectively)................................ $1,364,751 $ 9,492,616
Site acquisition services........................... 5,275,021
Video, voice and data transmission.................. 3,142,184
Other............................................... 918 15,367
---------- -----------
Total operating revenues.......................... 1,365,669 17,925,188
---------- -----------
OPERATING EXPENSES:
Operating expenses excluding depreciation and
amortization and corporate general and
administrative expenses:
Tower rental and management........................ 537,535 4,899,329
Site acquisition services.......................... 4,543,579
Video, voice and data transmission................. 2,051,587
Depreciation and amortization....................... 504,024 5,802,052
Corporate general and administrative expense........ 280,097 541,220
---------- -----------
Total operating expenses.......................... 1,321,656 17,837,767
---------- -----------
INCOME FROM OPERATIONS................................ 44,013 87,421
---------- -----------
OTHER INCOME (EXPENSE):
Interest expense.................................... (95,504) (2,430,202)
Interest income and other, net...................... 24,872 864,946
Minority interest in net earnings (loss) of
subsidiaries....................................... (80,374) (79,379)
---------- -----------
TOTAL OTHER EXPENSE................................... (151,006) (1,644,635)
---------- -----------
LOSS BEFORE INCOME TAX BENEFIT........................ (106,993) (1,557,214)
INCOME TAX BENEFIT.................................... 49,039 30,224
---------- -----------
NET LOSS.............................................. $ (57,954) $(1,526,990)
========== ===========
BASIC AND DILUTED PRO FORMA NET LOSS PER COMMON
SHARE................................................ (.03)
===========
PRO FORMA BASIC AND DILUTED COMMON SHARES
OUTSTANDING.......................................... 48,967,360
===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
2
<PAGE>
AMERICAN TOWER SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1997 1998
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<S> <C> <C>
CASH FLOWS FROM (USED FOR) OPERATING ACTIVITIES...... $ 216,267 $(1,737,163)
---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of property and equipment and
construction...................................... (3,086,725) (12,690,475)
Payments for acquisitions.......................... (71,068,578)
Advances of notes receivable....................... (6,000,000)
Repayment of notes receivable...................... 2,000,000
Deposits and other long-term assets................ (259,332) (4,076,296)
---------- ------------
Cash used for investing activities................... (3,346,057) (91,835,349)
---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under loan agreement.................... 67,000,000
Repayments of other notes payable.................. (28,521) (26,831)
Net proceeds from private placement equity
offering.......................................... 30,023,237
Contributions from Parent.......................... 2,543,171 28,684,995
Cash transfers to Parent........................... (29,800,000)
Distributions to minority interest................. (104,790) (104,791)
---------- ------------
Cash provided by financing activities................ 2,409,860 95,776,610
---------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS......................................... (719,930) 2,204,098
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD....... 2,373,360 4,595,500
---------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD............. $1,653,430 $ 6,799,598
========== ============
NON-CASH TRANSACTIONS:
Contribution of fixed assets from Parent........... $ 4,729,047
============
Issuance of common stock for acquisition........... $ 48,000,000
============
Increase in tax basis and due to Parent from
corporate restructuring........................... $125,210,000
============
Issuance of notes receivable to stockholders....... $ 49,375,000
============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
3
<PAGE>
AMERICAN TOWER SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial statements included herein have been prepared by American
Tower Systems Corporation (ATS or the Company), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission (the
Commission). Although certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, the Company believes that the disclosures are adequate
to make the information presented not misleading and reflect all adjustments
(consisting only of normal recurring adjustments) which are necessary for a
fair presentation of results of operations for such periods. Results of
interim periods may not be indicative of results for the full year. These
financial statements should be read in conjunction with the consolidated
financial statements for the year ended December 31, 1997 and the notes
thereto included in the Company's Form 10-K.
Accounting Policies--In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (FAS) No. 130, "Reporting
Comprehensive Income," which became effective for the Company for periods
beginning after December 15, 1997. FAS No. 130 establishes standards for
reporting and displaying comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general purpose financial
statements. FAS No. 130 requires that a company (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in-capital in the equity section of the balance
sheet. Reclassification of financial statements for earlier periods provided
for comparative purposes is required. The Company has adopted this statement
in the first quarter of 1998. Comprehensive income does not differ from net
income.
Reclassifications--Certain reclassifications have been made to the 1997
financial statements to conform to the 1998 presentation.
2. BUSINESS AND CORPORATE STRUCTURE
ATS is a majority owned subsidiary of American Radio Systems Corporation
(ARS, American Radio or the Parent). American Tower Systems (Delaware), Inc.
(ATSI) is a wholly-owned subsidiary of ATS and one of the two operating
subsidiaries of ATS. American Tower Systems, L.P. (ATSLP), is an indirect
wholly-owned subsidiary of ATS, which conducts all of the business of ATS
other than that conducted by ATSI. ATSI and ATSLP are collectively referred to
as the Operating Subsidiaries.
CBS Merger: In September 1997, American Radio entered into a merger
agreement as amended and restated in December 1997, as amended (the CBS Merger
Agreement) pursuant to which a subsidiary of CBS will be merged (the CBS
Merger) into American Radio. As a consequence of the consummation of the CBS
Merger, all of the shares of ATS owned by ARS will be distributed to ARS
common stockholders and holders of options to acquire ARS Common Stock or upon
conversion of shares of ARS 7% Convertible Exchangeable Preferred Stock (the
Convertible Preferred Stock). As a consequence of the CBS Merger, ATS will
cease to be a subsidiary of, or to be otherwise affiliated with, American
Radio and will operate as an independent publicly traded company. Pursuant to
the provisions of the CBS Merger Agreement, ATS will enter into an agreement
(the ARS-ATS Separation Agreement) with CBS and ARS providing for, among other
things, the orderly separation of ARS and ATS, the allocation of certain tax
liabilities to ATS, certain closing date adjustments relating to ARS, the
lease to ARS by ATS of space on certain towers previously owned by ARS and
transferred to ATS, and certain indemnification obligations (including with
respect to securities law matters) of ATS.
ATS's principal obligation is to reimburse CBS on a "make-whole" (after tax)
basis for the tax liabilities to be incurred by ARS in excess of $20.0 million
attributable to the distribution of the Common Stock to the ARS security
holders and certain related transactions. In light of the significant increase
in the trading levels of
4
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AMERICAN TOWER SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the Class A Common Stock, ATS and CBS have agreed that ARS will treat the
distribution on its tax return on a more conservative basis than originally
contemplated in order to avoid the possibility of significant interest and
penalties for which ATS would be responsible. Assuming the "fair market value"
of ARS's stock interest in ATS was equal to $23.00 per share, the last
reported sale price of such stock in the "when-issued" market on April 30,
1998, the total estimated tax reimbursement ATS would be required to make
would be between approximately $315.0 and $345.0 million, depending on
applicable state tax rates. Such estimate gives effect to deductions of
approximately $93.0 million, based on such closing price, available to ARS as
a consequence of stock option cancellations contemplated by the CBS Merger.
The tax reimbursement would change by between approximately $20.5 and $22.5
million, again depending on applicable state tax rates, for each $1.00 change
in the "fair market value" of the Common Stock under the tax reporting
position to be followed. The estimates described above are based on a number
of assumptions and interpretations of various applicable income tax rules and
are subject to change.
ARS has agreed that it will pursue, for the benefit and at the cost of ATS,
a refund claim, attributable to the "make whole" provision, estimated at
approximately $90.0 million, based on the assumed "fair market value" set
forth above. Any such refund claim will, in fact, be based on the actual
amount of tax paid. In light of existing tax law, there can, of course, be no
assurance that any such refund claim will be successful.
ARS and CBS have agreed that in computing the amount of taxable gain that is
recognized by ARS in connection with the distribution of the Common Stock, ARS
shall, subject to certain limitations, if so requested by ATS, report the
amount so realized based on the "fair market value" of such stock as
determined based on an appraisal prepared by a mutually agreed upon appraiser.
Any such appraisal is not, of course, binding on the Internal Revenue Service
or other taxing authorities.
In connection with an inter-corporate taxable transfer of assets entered
into in January 1998 by ATS in contemplation of the separation of ATS and ARS,
a portion of the tax with respect to which ATS is obligated to indemnify CBS
was incurred. Such transfer resulted in an increase in the tax bases of ATS's
assets of approximately $330.0 million. ATS will have potential depreciation
and amortization deductions over the next 15 years of $22.0 million per year
and recorded a deferred tax asset and corresponding liability due to ARS of
approximately $125.0 million to reflect these transactions.
The ARS-ATS Separation Agreement will provide for closing date balance sheet
adjustments based upon the working capital (current assets less defined
liabilities) and specified debt levels of ARS. ATS will benefit from or bear
the cost of such adjustments. ATS's preliminary estimate of such adjustments
is that it will not be required to make a payment of more than $20.0 million
and that, in addition, it will be required to reimburse CBS for the tax
consequences of any such payment which would result in additional liability to
ATS of approximately $13.0 million (assuming a $20.0 million adjustment)
payment under the tax reporting method to be followed and as to which a refund
claim will be filed. Since the amounts of working capital and debt are
dependent upon the uncertainty, among other things, of recent operating
results and cash capital expenditures, as well as CBS Merger expenses and the
interpretation of certain provisions of the CBS Merger Agreement as to which
certain issues between ATS and CBS exists, ATS is unable to state definitively
what payments, if any, will be owed by ATS to CBS.
ATS is actively negotiating a commitment from a major investment banking
firm with respect to a preferred stock financing (the Interim Financing) which
provides for the issuance and sale by ATS of up to $400.0 million of preferred
stock (the Interim Preferred Stock). ATS plans to draw on such commitment and
sell Interim Preferred Stock to finance its obligation to CBS with respect to
tax reimbursement, unless a public offering is consummated prior to the time
the tax reimbursement is due to CBS. Consummation of the Interim Financing is
subject to the negotiation and execution of a definitive preferred stock
purchase agreement (the Interim Financing Agreement) and satisfaction of the
closing conditions to be set forth therein. ATS intends to redeem the Interim
Preferred Stock, to the extent issued, out of the proceeds of a public
offering of Class A Common Stock to be
5
<PAGE>
AMERICAN TOWER SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
registered under the Securities Act of 1933, as amended (Securities Act) if,
as is likely, the tax reimbursement is due prior to the consummation of such
public offering or, if not, to use such public offering proceeds directly to
reimburse CBS for such tax liability. Any remaining proceeds are intended to
be used to fund any closing date balance sheet adjustments (or repay bank
borrowings incurred for such purpose). Any public offering would have a
dilutive effect on ATS's then existing stockholders, particularly since the
proceeds will be used to satisfy a liability and not to finance the
acquisition of a revenue producing property. Further, any public offering
would be subject to market conditions and other factors. There can be no
assurance that any such financing would be available on terms favorable to
ATS.
The CBS Merger has been approved by the stockholders of ARS who held
sufficient voting power to approve such action. Consummation of the CBS Merger
is subject to, among other things, the approval by the Federal Communications
Commission (FCC) of the transfer of control of ARS's FCC licenses with respect
to its radio stations to CBS. Subject to the satisfaction of such conditions,
the CBS Merger is expected to be consummated in the Spring of 1998.
The foregoing is a description of the rights and obligations of ARS and ATS
in the event the CBS Merger is consummated. Although the ARS-ATS Separation
Agreement will be effective and operational if the merger of a subsidiary of
ARS into ARS (the Tower Merger) is consummated, in the event the CBS Merger is
not subsequently consummated, ARS and ATS have reserved the right to alter the
terms of the agreement to provide for a sharing of the rights and obligations
in a manner that may be more or less favorable to ATS. Because ARS and ATS
believe that the CBS Merger will be consummated, no determination has been
made of what the rights and obligations of ARS and ATS should be in the event
it were not.
3. PRO FORMA LOSS PER COMMON SHARE DATA
Pro forma loss per common share is computed using the number of shares of
common stock expected to be outstanding as a consequence of the CBS Merger.
These shares include shares transferable by ARS upon exercise or cancellation
pursuant to the CBS Merger of ARS options (each ARS option in effect
represents the right to receive $44.00 per share in cash and one ATS share);
such cancellation will occur upon closing of the CBS Merger. Shares issuable
upon exercise of ATS and ATSI options have been excluded from the computation
as the effect is anti-diliutive. Had ATS and ATSI options been included in the
computation, shares for the diluted computation would have increased by
approximately 5.3 million shares.
4. INCOME TAXES
The Company provides for income taxes at the end of each interim period
based on the estimated effective tax rate for the full fiscal year for each
tax reporting corporate entity. Cumulative adjustments to the tax benefit
(provision) are recorded in the interim period in which a change in the
estimated annual effective rate is determined. Through January 1998, the
Company participated in a tax sharing agreement with ARS. The tax sharing
agreement was terminated in connection with the corporate restructuring
described in Note 2, pursuant to which the Company and its subsidiaries will
now prepare and file income tax returns on a separate consolidated basis.
5. UNALLOCATED PURCHASE PRICE
The excess of purchase price over the estimated fair value of net assets
acquired has been preliminarily recorded as unallocated purchase price and is
being amortized over an estimated aggregate useful life of fifteen years using
the straight-line method. The consolidated financial statements reflect the
preliminary allocation of certain purchase prices as the appraisals for some
acquisitions have not yet been finalized. The Company is
6
<PAGE>
AMERICAN TOWER SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
currently conducting studies to determine the purchase price allocations and
expects that upon final allocation, the average estimated useful life will
approximate fifteen years. The final allocation of purchase price is not
expected to have a material effect on the Company's consolidated results of
operations, liquidity or financial position.
6. ATS STOCK PURCHASE AGREEMENT
On January 22, 1998, the Company consummated the transactions contemplated
by the stock purchase agreement (the ATS Stock Purchase Agreement), dated as
of January 8, 1998, with Steven B. Dodge, Chairman of the Board, President and
Chief Executive Officer of ARS and ATS, and certain other officers and
directors of ARS (or their affiliates or family members or family trusts),
pursuant to which those persons purchased 8.0 million shares of ATS Common
Stock at a purchase price of $10.00 per share for an aggregate purchase price
of $80.0 million, including 4.0 million shares by Mr. Dodge for $40.0 million.
Payment of the purchase price was in the form of cash aggregating
approximately $30.6 million and in the form of notes aggregating approximately
$49.4 million due on the earlier of the consummation of the CBS Merger or, in
the event the CBS Merger Agreement is terminated, December 31, 2000. The notes
bear interest at the six-month London Interbank Rate, as measured from time to
time, plus 1.5% per annum, and are secured by shares of ARS Common Stock
having a fair market value of not less than 175% of the principal amount of
and accrued and unpaid interest on the notes. The notes are prepayable at any
time at the option of the debtor and will be due and payable, at the option of
the Company, in the event of certain defaults as described in the notes.
7. LOAN AGREEMENTS
In October 1997, ATSI entered into a new loan agreement with a syndicate of
banks (the Loan Agreement), which replaced the previously existing credit
agreement. All amounts outstanding under the previous agreement were repaid
with proceeds from the Loan Agreement. In connection with the inter-corporate
transfer of assets described in Note 2, the Loan Agreement was amended in
January 1998 to make the Operating Subsidiaries jointly and severally liable
as co-borrowers. The following discussion is based on the terms and conditions
of the Loan Agreement as amended and restated on December 31, 1997, in January
1998 and March 27, 1998.
The Loan Agreement provides the Operating Subsidiaries with a $250.0 million
loan commitment based on the maintainance of certain operational ratios, and
an additional $150.0 million loan at the discretion of the Operating
Subsidiaries. The Loan Agreement may be borrowed, repaid and reborrowed
without reducing the availability until June 2005 except as specified in the
Loan Agreement; thereafter, availability decreases in an amount equal to 50%
of excess cash flow, as defined in the Loan Agreement, for the fiscal year
immediately preceding the calculation date. In addition, the Loan Agreement
requires commitment reductions in the event of sale of ATSI's common stock or
debt instruments, and/or permitted asset sales, as defined in the Loan
Agreement.
The Loan Agreement contains certain financial and operational covenants and
other restrictions with which ATSI must comply, whether or not any borrowings
are outstanding, including among others, maintenance of certain financial
ratios, limitations on acquisitions, additional indebtedness and capital
expenditures, as well as restrictions on cash distributions unless certain
financial tests are met, and the use of borrowings. The obligations of the
Operating Subsidiaries under the Loan Agreement are collateralized by a first
priority security interest in substantially all of the assets of the Operating
Subsidiaries. ATS and its subsidiaries pledged all of ATSI's stock and equity
interests of ATSLP to the banks as security for the Operating Subsidiaries
obligations under the Loan Agreement. ATS is in the process of negotiating
amended and restated loan agreements (the New Credit Facilities) with its
senior lenders, pursuant to which the Company expects that the existing
maximum borrowing will be increased from $400.0 million to $900.0 million,
subject to compliance with certain financial ratios, and
7
<PAGE>
AMERICAN TOWER SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ATS (the Parent) will be able to borrow an additional $150.0 million. In
connection with the refinancing, the Company expects to recognize an
extraordinary loss of approximately $1.4 million, net of a tax benefit of $0.9
million, during the second quarter of 1998. See Management's Discussion and
Analysis for a description of the New Credit Facilities.
8. ACQUISITIONS
There were no acquisitions during the first three months of 1997. During the
first three months of 1998, the Company consummated the transactions described
below.
General: The following acquisitions have all been accounted for by the
purchase method of accounting, and, accordingly, the operating results of the
acquired entities have been included in consolidated operating results since
the date of acquisition. The purchase price has been allocated to the assets
acquired, principally intangible assets, and the liabilities assumed based on
their estimated fair values at the dates of acquisition. The excess of
purchase price over the estimated fair value of the net assets acquired has
been recorded as unallocated purchase price. The financial statements reflect
the preliminary allocation of certain purchase prices as the appraisals for
certain acquisitions have not yet been finalized. The Company does not expect
the final appraisals will have a material effect on the financial position,
results of operations or liquidity of the Company.
In January 1998, the Company consummated an agreement to acquire all of the
outstanding stock of Gearon & Co. Inc. (Gearon), a company based in Atlanta,
Georgia, for an aggregate purchase price of approximately $80.0 million. The
purchase price consisted of approximately $32.0 million in cash and assumed
liabilities and the issuance of approximately 5.3 million shares of Class A
Common Stock. Gearon is engaged in site acquisition, development, construction
and facility management of wireless network communication facilities on behalf
of its customers and owned or had under construction approximately 40 tower
sites. Following consummation, the Company granted options to acquire up to
1,400,000 shares of Class A Common Stock at an exercise price of $13.00 to
employees of Gearon.
In January 1998, the Company consummated the acquisition of OPM-USA- Inc.
(OPM), a company which owned approximately 90 towers at the time of
acquisition. In addition, OPM is in the process of developing an additional
160 towers that are expected to be constructed during the next 12 to 18
months. The purchase price, which is variable and based on the number of
towers completed and the forward cash flow of the completed OPM towers, could
aggregate up to $105.0 million, of which approximately $21.3 million was paid
at the closing. The Company had also agreed to provide the financing to OPM to
enable it to construct the 160 towers in an aggregate amount not to exceed
$37.0 million (less advances as of consummation aggregating approximately $5.7
million, excluding accrued interest).
In January 1998, the Company consummated the acquisition of a communications
site with six towers in Tucson, Arizona for approximately $12.3 million.
In January 1998, the Company consummated the acquisition of a tower near
Palm Springs, California for approximately $0.75 million.
In January 1998, ARS transferred to ATS 14 communications sites currently
used by ARS and various third parties (with an ARS net book value of
approximately $4.7 million), and ARS and ATS entered into leases or subleases
of space on the transferred towers. Two additional communications sites will
be transferred and leases entered into following acquisition by ARS of the
sites from third parties.
In February 1998, the Company acquired 11 communications tower sites in
northern California for approximately $11.8 million.
8
<PAGE>
AMERICAN TOWER SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In March 1998, the Company acquired a tower in Sacramento, California for
approximately $1.2 million.
The following unaudited pro forma summary for the three months ended March
31, 1997 and 1998 presents the consolidated results of operations as if the
acquisitions had occurred as of January 1, 1997 after giving effect to certain
adjustments, including depreciation and amortization of assets and interest
expense on any debt incurred to fund the acquisitions. These unaudited pro
forma results have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had the acquisitions been
made as of January 1, 1997 or of results which may occur in the future.
In thousands, except per share data:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1998
------------------ ------------------
<S> <C> <C>
Net revenues......................... $18,629 $19,012
Net loss............................. (2,818) (3,736)
Basic and diluted net loss per common
share............................... $ (0.06) $ (0.08)
</TABLE>
9. PENDING TRANSACTIONS
In December 1997, the Company entered into a merger agreement with American
Tower Corporation (ATC) pursuant to which ATC will merge with and into ATS
(the ATC Merger), which will be the surviving corporation. Pursuant to the
merger, ATS expects to issue an aggregate of approximately 30.0 million shares
of ATS Class A Common Stock (including shares issuable upon exercise of
options to acquire ATC Common Stock which will become options to acquire ATS
Class A Common Stock). ATC is engaged in the business of acquiring, developing
and leasing wireless communications sites to companies using or providing
cellular telephone, paging, microwave and specialized mobile radio services.
At December 31, 1997, ATC owned and operated approximately 775 communications
towers located in 31 states. Consummation of the transaction is subject to,
among other things, the expiration or earlier termination of the Hart-Scott
Rodino Antitrust Improvements Act of 1976, as amended (HSR Act) waiting
period, and is expected to occur in the Spring of 1998.
In January 1998, the Company entered into an agreement to purchase the
assets relating to a teleport business serving the Washington, D.C. area for a
purchase price of approximately $30.5 million. The facility is located in
northern Virginia, inside of the Washington Beltway, on ten acres.
Consummation of the transaction is expected to occur in the Spring of 1998.
ATS is negotiating certain changes in the ATS/PCS, LLC (formerly
Communications Systems Development, LLC) arrangements, including the
acquisition by ATS of the 58 communications sites in northern California
presently owned by ATS/PCS, LLC in exchange for shares of Class A Common
Stock, arrangements with respect to the development of communications sites in
other locations, a priority return of ATS's construction advances, an increase
in the percentage interest of the other member in ATS/PCS, LLC, and a
management fee to ATS.
ATS is also negotiating an agreement to acquire a company which is in the
process of constructing approximately 40 towers in the Tampa, Florida area, of
which seven are presently operational. The purchase price will be equal to the
excess of (i) ten times the "Current Run Rate Cash Flow" at the time of
closing, over (ii) the principal amount of the secured note referred to below.
The purchase price will be payable in shares of Class A Common Stock (valued
at market prices shortly prior to closing) and, at the election of the seller,
cash in an amount not to exceed 49% of the purchase price. "Current Run Rate
Cash Flow" means twelve (12) times the excess of net revenues over direct
operating expenses for the month preceding closing. ATS is obligated to
advance construction funds to the seller in an aggregate amount not to exceed
$12.0 million in the form of a
9
<PAGE>
secured note (guaranteed by the stockholders on a nonrecourse basis and
secured by the stock of the seller), of which approximately $1.0 million was
advanced through March 31, 1998. The secured note would be payable in the
event a definitive acquisition agreement is not executed or if the acquisition
were not consummated. Subject to the negotiation and execution of a definitive
agreement and to the satisfaction of certain conditions, including, depending
on the circumstances, the expiration or earlier termination of the HSR Act
waiting period, the acquisition is expected to be consummated in the Spring of
1999.
10. SUBSEQUENT EVENTS
In April 1998, ATS entered into an agreement to acquire a broadcasting tower
in the Boston, Massachusetts area for 720,000 shares of Class A Common Stock.
Subject to the satisfaction of certain conditions, including the expiration or
earlier termination of the HSR Act waiting period, the acquisition is expected
to be consummated in the second quarter of 1998.
On May 12, 1998, ATS filed a registration statement (No. 333-52481) with the
Commission with respect to an underwritten public offering (the Offering) of
an aggregate of 22,918,499 shares of ATS Class A Common Stock (including an
Underwriter's over-allotment option of 2,083,500 shares) by ATS and certain
selling stockholders. Pursuant to the consummation of the Offering, ATS will
issue and sell approximately 17,400,000 shares of ATS Class A Common Stock and
receive net proceeds estimated (based on an assumed initial public offering
price of $23.00 per share) at approximately $381.5 million (exclusive of the
Underwriter's over-allotment option). ATS will receive no proceeds from the
sale of ATS Class A Common Stock by the selling stockholders. ATS expects to
use such net proceeds to redeem the Interim Preferred Stock, the net proceeds
from the sale of which will be used principally to reimburse CBS with respect
to the taxes payable as a consequence of the separation of ARS and ATS
pursuant to the CBS Merger and to reduce bank borrowings.
The Offering is subject to various conditions, including prevailing market
conditions, and therefore may change. Further, there can be no assurances that
the Offering will be completed or that, if the Offering is completed, it will
be completed on terms favorable to ATS. The registration statement relating to
these securities has been filed with the Commission but has not yet become
effective. These securities may not be sold nor may offers to buy be accepted
prior to the time the registration statement becomes effective. This
communication shall not constitute an offer to sell or the solicitation of an
offer to buy nor shall there be any sale of these securities in any state in
which such offer, solicitation or sale would be unlawful prior to registration
or qualification under the securities laws of any such state. Copies of the
Prospectus relating to the Offering may be obtained from Credit Suisse First
Boston, Prospectus Department, 11 Madison Avenue, New York, New York 10010,
(212) 325-2000.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
This discussion contains "forward-looking statements" including statements
concerning projections, plans, objectives, future events or performance and
underlying assumptions and other statements which are other than statements of
historical fact. ATS wishes to caution readers that certain important factors
may have affected and could in the future affect ATS's actual results and
could cause ATS's actual results for subsequent periods to differ materially
from those expressed in any forward-looking statement made by or on behalf of
ATS. Such factors include (i) substantial capital requirements and leverage as
a consequence of ATS's tax reimbursement and other obligations owed to ARS
pursuant to the CBS Merger, and its ongoing acquisition and construction
activities, (ii) dependence on demand for wireless communications and
implementation of digital television, and (iii) the success of ATS's new tower
construction program. The discussion should be read in conjunction with the
American Tower Systems Unaudited Condensed Consolidated Financial Statements
and the notes thereto. As ATS was a wholly-owned subsidiary of American Radio
during the periods presented, the consolidated financial statements may not
reflect the results of operations or financial position of ATS had it been an
independent, public company during the periods. Because of ATS's relatively
brief operating history and the large number of recent acquisitions, the
following discussion, which relates solely to ATS on a historical basis and
does not include acquired companies, while presented to satisfy certain
disclosure requirements of the Commission, will not necessarily reveal any
significant developing or continuing trends.
ATS was formed in July 1995 to capitalize on the opportunity in the
communications site industry. ATS is a leading independent owner and operator
of wireless communications towers in the United States. During 1997, its
acquisition and construction activity accelerated and ATS acquired or
constructed approximately 400 sites (and related site management businesses)
and its initial site acquisition and voice, video and data transmission
businesses. Since January 1, 1998, ATS has acquired approximately 150
communication sites and a major site acquisition business for an aggregate of
approximately $127.0 million, including approximately 5.3 million shares
(valued for such purpose at $9.00 per share) and has acquisitions pending
(including the ATC Merger) for approximately 950 towers and a third teleport.
Management expects that acquisitions consummated to date and the major
acquisition now pending (the ATC Merger) will have a material impact on future
revenues, expenses and income from continuing operations. In addition, the
impact of the construction program of ATS is not reflected to any significant
extent in the historical financial information because most of that activity
is of more recent origin and is expected to accelerate substantially in 1998.
Management believes that potential investors should be aware of the dramatic
changes in the nature and scope of ATS's business in reviewing the ensuing
discussion of comparative historical results.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (DOLLARS IN THOUSANDS)
As of March 31, 1998, ATS operated approximately 880 communications sites
principally in the Northeast and Mid-Atlantic regions, Florida and California.
As of March 31, 1997, ATS operated approximately 270 communications sites,
principally in the Northeast and Mid-Atlantic regions and Florida. See the
Notes to the Consolidated Financial Statements for a description of the
acquisitions consummated in 1998. These transactions have significantly
affected operations for the three months ended March 31, 1998 as compared to
the three months ended March 31, 1997.
11
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, AMOUNT OF PERCENTAGE
------------------- INCREASE INCREASE
1997 1998 (DECREASE) (DECREASE)
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Tower rental and management revenues............... $ 1,365 $ 9,493 $ 8,128 595.5 %
Site acquisition service revenues.................. 5,275 5,275
Video, voice and data transmission revenues........ 3,142 3,142
Other.............................................. 1 15 14 1,400.0 %
-------- --------- ------- -------
Total operating revenues........................... 1,366 17,925 16,559 1,212.2 %
-------- --------- ------- -------
Tower rental and management expenses............... 538 4,899 4,361 810.6 %
Site acquisition service expenses.................. 4,544 4,544
Video, voice and data transmission expenses........ 2,052 2,052
-------- --------- ------- -------
Operating expenses excluding depreciation and amor-
tization
and corporate general and administrative expenses.. 538 11,495 10,957 2,036.6 %
-------- --------- ------- -------
Depreciation and amortization...................... 504 5,802 5,298 1,051.2 %
Corporate general and administrative expenses...... 280 541 261 93.2 %
Interest expense, net.............................. 71 1,565 1,494 2,104.2 %
Minority interest in net earnings (loss) of subsid-
iaries............................................ 80 79 (1) (1.3)%
Income tax benefit................................. 49 30 (19) (38.8)%
-------- --------- ------- -------
Net loss........................................... $ (58) $ (1,527) $ 1,469 2,532.8 %
======== ========= ======= =======
</TABLE>
As noted above, ATS consummated numerous acquisitions in 1997 and 1998, many
of which were of a material size. Except as explained below, substantially all
of the increases indicated in the above table were attributable to the impact
of these communications sites and related business acquisitions, principally
those that occurred in 1997 and 1998. The increase in site acquisition service
revenues and expenses is attributable to the Gearon acquisition that occurred
in January 1998, and to a substantially lesser extent, the impact of a May
1997 acquisition of two similar businesses. The increase in video, voice and
data transmission revenues and expenses is attributable to an acquisition that
occurred in October 1997. The increase in depreciation and amortization is
primarily attributable to the increase in depreciable and amortizable assets
resulting from the 1997 and 1998 acquisitions, and, to a substantially lesser
extent, completed construction projects. The increase in corporate general and
administrative expense is primarily attributable to the higher personnel costs
associated with supporting ATS's greater number of tower properties and growth
strategy. The increase in interest expense, net, relates to higher borrowing
levels which were used to finance 1998 and, to a substantially lesser extent,
1997 acquisitions. The minority interest in net earnings of subsidiaries
represents the elimination of the minority stockholders' earnings of
consolidated subsidiaries. The effective tax rate benefit for the three months
ended March 31, 1998 was approximately 2% as compared to 46% for the three
months ended March 31, 1997. The effective rate benefit in 1998 is due to the
effect of non-deductible items, principally amortization of goodwill, on
certain stock acquisitions for which no tax benefit was recorded.
LIQUIDITY AND CAPITAL RESOURCES
ATS's liquidity needs arise from its acquisition-related activities, debt
service, working capital and capital expenditures. Historically, ATS has met
its operational liquidity needs with internally generated funds and has
financed the acquisition of tower related properties, including related
working capital needs, with a combination of contributions from American Radio
and bank borrowings. For the three months ended March 31, 1998, cash flows
used for operating activities were $1.7 million, as compared to $.2 million of
cash flows from operating activities in 1997. The change is primarily
attributable to working capital investments related to communications site
acquisitions and growth.
Cash flows used for investing activities were $91.8 million for the three
months ended March 31, 1998 as compared to $3.3 million for the three months
ended March 31, 1997. The increase in 1998 is due to the acquisition and
construction activity in 1998 as compared to 1997.
12
<PAGE>
Cash flows provided by financing activities were $95.8 million for the three
months ended March 31, 1998 as compared to $2.4 million in 1997. The increase
in 1998 is due principally to the impact of borrowings under the Loan
Agreement and proceeds from the sale of common stock pursuant to the ATS Stock
Purchase Agreement.
CBS Merger: In September 1997, American Radio entered into the CBS Merger
Agreement pursuant to which a subsidiary of CBS will be merged into American
Radio. As a consequence of the consummation of the CBS Merger, all of the
shares of ATS owned by ARS will be distributed to ARS common stockholders and
holders of options to acquire ARS Common Stock or upon conversion of shares of
ARS Convertible Exchangeable Preferred Stock. As a consequence of the CBS
Merger, ATS will cease to be a subsidiary of, or to be otherwise affiliated
with, American Radio and will operate as an independent publicly traded
company. Pursuant to the provisions of the CBS Merger Agreement, ATS will
enter into the ARS-ATS Separation Agreement with CBS and ARS providing for,
among other things, the orderly separation of ARS and ATS, the allocation of
certain tax liabilities to ATS, certain closing date adjustments relating to
ARS, the lease to ARS by ATS of space on certain towers previously owned by
ARS and transferred to ATS, and certain indemnification obligations (including
with respect to securities law matters) of ATS.
ATS's principal obligation is to reimburse CBS on a "make-whole" (after tax)
basis for the tax liabilities in excess of $20.0 million to be incurred by ARS
attributable to the distribution of the Common Stock to the ARS security
holders and certain related transactions. In light of the significant increase
in the trading levels of the Class A Common Stock, ATS and CBS have agreed
that ARS will treat the distribution on its tax return on a more conservative
basis than originally contemplated in order to avoid the possibility of
significant interest and penalties for which ATS would be responsible.
Assuming the "fair market value" of ARS's stock interest in ATS was equal to
$23.00 per share, the last reported sale price of such stock in the "when-
issued" market on April 30, 1998, the total estimated tax reimbursement ATS
would be required to make would be between approximately $315.0 and $345.0
million, depending on applicable state tax rates. Such estimate gives effect
to deductions of approximately $93.0 million, based on such closing price,
available to ARS as a consequence of stock option cancellations contemplated
by the CBS Merger. The tax reimbursement would change by between approximately
$20.5 and $22.5 million, again depending on applicable state tax rates, for
each $1.00 change in the "fair market value" of the Common Stock under the tax
reporting position to be followed. The estimates described above are based on
a number of assumptions and interpretations of various applicable income tax
rules and are subject to change.
ARS has agreed that it will pursue, for the benefit and at the cost of ATS,
a refund claim, attributable to the "make whole" provision, estimated at
approximately $90.0 million, based on the assumed "fair market value" set
forth above. Any such refund claim will, in fact, be based on the actual
amount of tax paid. In light of existing tax law, there can, of course, be no
assurance that any such refund claim will be successful.
ARS and CBS have, agreed that in computing the amount of taxable gain that
is recognized by ARS in connection with the distribution of the Common Stock,
ARS shall, subject to certain limitations, if so requested by ATS, report the
amount so realized based on the "fair market value" of such stock as
determined based on an appraisal prepared by a mutually agreed upon appraiser.
Any such appraisal is not, of course, binding on the Internal Revenue Service
or other taxing authorities.
In connection with an inter-corporate taxable transfer of assets entered
into in January 1998 by ATS in contemplation of the separation of ATS and ARS,
a portion of the tax with respect to which ATS is obligated to indemnify CBS
was incurred. Such transfer resulted in an increase in the tax bases of ATS's
assets of approximately $330.0 million. ATS will have potential depreciation
and amortization deductions over the next 15 years of $22.0 million per year
and recorded a deferred tax asset and corresponding liability due to ARS of
approximately $125.0 million to reflect these transactions.
The ARS-ATS Separation Agreement will provide for closing date balance sheet
adjustments based upon the working capital (current assets less defined
liabilities) and specified debt levels of ARS. ATS will benefit
13
<PAGE>
from or bear the cost of such adjustments. ATS's preliminary estimate of such
adjustments is that it will not be required to make a payment of more than
$20.0 million and that, in addition, it will be required to reimburse CBS for
the tax consequences of any such payment which would result in additional
liability to ATS of approximately $13.0 million assuming a $20.0 million
adjustment payment under the tax reporting method to be followed and as to
which a refund claim will be filed. Since the amounts of working capital and
debt are dependent upon the uncertainty, among other things, of recent
operating results and cash capital expenditures, as well as CBS Merger
expenses and the interpretation of certain provisions of the CBS Merger
Agreement as to which certain issues between ATS and CBS exists, ATS is unable
to state definitively what payments, if any, will be owed by ATS to CBS.
ATS is actively negotiating a commitment from a major investment banking
firm with respect to a preferred stock financing (the Interim Financing) which
provides for the issuance and sale by ATS of up to $400.0 million of preferred
stock (the Interim Preferred Stock). ATS plans to draw on such commitment and
sell Interim Preferred Stock to finance its obligation to CBS with respect to
tax reimbursement, unless a public offering is consummated prior to the time
the tax reimbursement is due to CBS. Consummation of the Interim Financing is
subject to the negotiation and execution of a definitive preferred stock
purchase agreement (the Interim Financing Agreement) and satisfaction of the
closing conditions to be set forth therein. ATS intends to redeem the Interim
Preferred Stock, to the extent issued, out of the proceeds of a public
offering of Class A Common Stock to be registered under the Securities Act if,
as is likely, the tax reimbursement is due prior to the consummation of such
public offering or, if not, to use such public offering proceeds directly to
reimburse CBS for such tax liability. Any remaining proceeds are intended to
be used to fund any closing date balance sheet adjustments (or repay bank
borrowings incurred for such purpose). Any public offering would have a
dilutive effect on ATS's then existing stockholders, particularly since the
proceeds will be used to satisfy a liability and not to finance the
acquisition of a revenue producing property. Further, any public offering
would be subject to market conditions and other factors. There can be no
assurance that any such financing would be available on terms favorable to
ATS.
The foregoing is a description of the rights and obligations of ARS and ATS
in the event the CBS Merger is consummated. Although the ARS-ATS Separation
Agreement will be effective and operational if the merger of a subsidiary of
ARS into ARS (the Tower Merger) is consummated, in the event the CBS Merger is
not subsequently consummated, ATS and ARS have reserved the right to alter the
terms of the agreement to provide for a sharing of the rights and obligations
in a manner that may be more or less favorable to ATS. Because ARS and ATS
believe that the CBS Merger will be consummated, no determination has been
made of what the rights and obligations of ARS and ATS should be in the event
it were not.
On May 12, 1998, ATS filed a registration statement (No. 333-52481) with the
Commission with respect to the Offering of an aggregate of 22,918,499 shares
of ATS Class A Common Stock (including an Underwriter's over-allotment option
of 2,083,500 shares) by ATS and certain selling stockholders. Pursuant to the
consummation of the Offering, ATS will issue and sell approximately 17,400,000
shares of ATS Class A Common Stock and receive net proceeds estimated (based
on an assumed initial public offering price of $23.00 per share) at
approximately $381.5 million (exclusive of the Underwriter's over-allotment
option). ATS will receive no proceeds from the sale of ATS Class A Common
Stock by the selling stockholders. ATS expects to use such net proceeds to
redeem the Interim Preferred Stock, the net proceeds from the sale of which
will be used principally to reimburse CBS with respect to the taxes payable as
a consequence of the separation of ARS and ATS pursuant to the CBS Merger and
to reduce bank borrowings.
The Offering is subject to various conditions, including prevailing market
conditions, and therefore may change. Further, there can be no assurances that
the Offering will be completed or that, if the Offering is completed, it will
be completed on terms favorable to ATS. The registration statement relating to
these securities has been filed with the Commission but has not yet become
effective. These securities may not be sold nor may offers to buy be accepted
prior to the time the registration statement becomes effective. This
communication shall not constitute an offer to sell or the solicitation of an
offer to buy nor shall there be any sale of these securities in any state in
which such offer, solicitation or sale would be unlawful prior to registration
or qualification under
14
<PAGE>
the securities laws of any such state. Copies of the Prospectus relating to
the Offering may be obtained from Credit Suisse First Boston, Prospectus
Department, 11 Madison Avenue, New York, New York 10010, (212) 325-2000.
Stock Purchase Agreement: In January 1998, ATS issued 8,000,000 shares of
Common Stock at a purchase price of $10.00 per share, for an aggregate
purchase price of $80.0 million, of which an aggregate of 4,487,500 shares of
Class B Common Stock and 450,000 shares of Class A Common Stock were issued in
exchange for an aggregate of $49.4 million of notes secured by ARS Common
Stock having a market value of not less than 175% of the principal amount and
accrued and unpaid interest on such notes. The notes will be paid out of the
proceeds of the CBS Merger. These transactions will increase ATS's ability to
fund acquisitions and meet its liquidity and capital resource needs.
Loan Agreement: In October 1997, ATS entered into the Loan Agreement, which
provides ATS with a $250.0 million loan commitment based on ATS maintaining
certain operational ratios and an additional $150.0 million loan at the
discretion of ATS, which is available through June 2005. Following the closing
of the Loan Agreement and repayment of amounts outstanding under the previous
agreement, ATS incurred an extraordinary loss in the fourth quarter of 1997 of
approximately $1.2 million which was recorded net of the applicable income tax
benefit of $0.7 million, representing the write-off of deferred financing fees
associated with the previous facility. The terms of the Loan Agreement are
discussed in the Notes to the Consolidated Financial Statements on the Form
10-K and Note 7. As of March 31, 1998, ATS had approximately $157.1 million of
total long-term debt, of which approximately $155.5 million represented
borrowings outstanding under the Loan Agreement.
In order to facilitate future growth and, in particular, to finance its
construction program, ATS and the Operating Subsidiaries have received
commitments for, and are in the process of negotiating, the New Credit
Facilities with its senior lenders, pursuant to which the existing maximum
borrowing of the Operating Subsidiaries would be increased from $400.0 million
to $900.0 million, subject to compliance with financial ratios, and ATS (the
parent company) would be able to borrow an additional $150.0 million. The New
Credit Facilities with ATS would provide for a $150.0 million term loan
maturing at the earlier of (i) eight and one-half years or (ii) December 31,
2006, amortizing quarterly in an amount equal to 2.5% of the principal amount
outstanding at June 30, 2001 at the end of each quarter between such date and
June 30, 2006, both inclusive, and the balance in two equal installments on
September 30 and December 31, 2006. The ATS New Credit Facility would be fully
drawn at closing and would provide for interest rates determined, at the
option of ATS, of either the LIBOR Rate (as to be defined) plus 3.50% or the
Base Rate (as to be defined) plus 2.5%. The New Credit Facilities with the
Operating Subsidiaries provide for $900.0 million credit facilities maturing
at the earlier of (a) eight years or (b) June 30, 2006 consisting of the
following: (i) a $250.0 million multiple-draw term loan, (ii) a $400.0 million
reducing revolving credit facility and (iii) a $250.0 million 354-day
revolving credit facility that converts to a term loan facility thereafter.
The interest rate provisions are similar to those in the Loan Agreement,
except that the range over the Base Rate is between 0.00% and 1.250% and the
range over the LIBOR Rate is between 0.750% and 2.250%. Borrowings under the
Operating Subsidiaries' New Credit Facilities are conditioned upon compliance
with certain financial ratios and are required to be repaid, commencing June
30, 2001, in increasing quarterly amounts designed to amortize the loans at
maturity.
The loans to ATS and the Operating Subsidiaries will be cross-guaranteed and
cross-collateralized by substantially all of the assets of the consolidated
group. The Operating Subsidiaries will be required to pay quarterly commitment
fees equal to 0.375% or 0.250% per annum, depending on their consolidated
financial leverage, on the aggregate unused portion of the aggregate
commitment (other than, until taken down, the 364-day facility on which it is
0.125% until so taken down). Other proposed provisions of the Operating
Subsidiaries' New Credit Facilities are comparable to the Loan Agreement,
although the financial and other covenants are somewhat more favorable to the
Operating Subsidiaries in certain respects, including an increase of the Total
Debt (of the Operating Subsidiaries) to Annualized Operating Cash flow ratio
from 6.0:1 to 6.5:1 and the inclusion of a Total Debt (of ATS and the
Operating Subsidiaries) to Annualized Operating Cash flow ratio of 8.0:1. The
New Credit Facility of ATS will prohibit the payment of cash dividends and the
redemption, purchase
15
<PAGE>
or other acquisition of equity securities, except to the extent of the net
proceeds of the proposed public offering used to redeem the Interim Preferred
Stock. There can, of course, be no assurance that the New Credit Facilities
will be executed on terms satisfactory to ATS. In connection with the
refinancing, ATS expects to recognize an extraordinary loss of approximately
$1.4 million, net of a tax benefit of $0.9 million, during the second quarter
of 1998.
A substantial portion of ATS's cash flow from operations is required for
debt service. Accordingly, ATS's leverage could make it vulnerable to a
downturn in the operating performance of its tower properties or in economic
conditions. ATS believes that its cash flows from operations will be
sufficient to meet its debt service requirements for interest and scheduled
payments of principal under the proposed loan agreements. If such cash flow
were not sufficient to meet such debt service requirements, ATS might be
required to sell equity securities, refinance its obligations or dispose of
one or more of its properties in order to make such scheduled payments. There
can be no assurance that ATS would be able to effect any of such transactions
on favorable terms.
ATS historically has had sufficient cash from its operations to meet its
working capital needs, including normal capital expenditures, but excluding
financing of acquisitions and construction, and believes that it has
sufficient financial resources available to it, including borrowings under the
Loan Agreement, to finance operations for the foreseeable future.
ATS intends to finance its obligations under pending acquisitions out of
borrowings under the Loan Agreement or the New Credit Facilities. ATS
estimates such obligations aggregate approximately $363.6 million, including
the repayment of approximately $125.0 million of debt in connection with the
ATC Merger.
During the three months ended March 31, 1998, ATS built approximately 50
towers and had additional capital expenditures of approximately $12.7 million.
During 1998, ATS (including ATC and other acquired companies) plans to build
or commence construction of approximately 550 towers (most of which are on a
build to suit basis) at an estimated aggregate cost of approximately $110.0
million, including a contract presently being negotiated with a wireless
service company to provide more than 200 towers (of which more than 160 will
be newly constructed) for an estimated cost of approximately $32.0 million,
although there can be no assurance that such negotiations will result in a
definitive agreement.
If additional substantial acquisition or construction opportunities become
available, ATS may require additional financing during 1998. Any such
financing could take the form of an increase in the maximum borrowing levels
under the New Credit Facilities (which would be dependent on the ability to
meet certain leverage ratios), the issuance of debt or senior equity
securities (which could have the effect of increasing its consolidated
leverage ratios) or equity securities (which, in the case of Common Stock or
securities convertible into or exercisable for Common Stock, would have a
dilutive effect on the proportionate ownership of ATS of its then existing
common stockholders). There can be no assurance that any such financing would
be available on favorable terms.
Management expects that the consummated acquisitions, the consummation of
the ATC Merger and current and future construction activities will have a
material impact on liquidity. Management believes that the acquisition
activities, once integrated, will have a favorable impact on liquidity and
will offset the initial effects of the funding requirements. Management also
believes that the construction activities may initially have an adverse effect
on the future liquidity of ATS as newly constructed towers will initially
decrease overall liquidity, although, as such sites become more fully
operational and achieve higher utilization, they should generate cash flow,
and in the long-term, increase liquidity.
YEAR 2000
ATS is aware of the issues associated with the Year 2000 as it relates to
information systems. The Year 2000 is not expected to have a material impact
on ATS's current information systems because its software is
16
<PAGE>
either already Year 2000 compliant or required changes are not expected to be
material. Based on the nature of ATS's business, ATS anticipates it is not
likely to experience material business interruption due to the impact of Year
2000 compliance on its customers and vendors. As a result, ATS does not
anticipate that incremental expenditures to address Year 2000 compliance will
be material to ATS's liquidity, financial position or results of operations
over the next few years.
INFLATION
The impact of inflation on ATS's operations has not been significant to
date. However, there can be no assurance that a high rate of inflation in the
future will not have material adverse effect on ATS's operating results.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (FAS) No. 130, "Reporting Comprehensive
Income," which became effective for the Company for periods beginning after
December 15, 1997. FAS No. 130 establishes standards for reporting and
displaying comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general purpose financial statements. FAS No. 130
requires that a company (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance
of other comprehensive income separately from retained earnings and additional
paid-in-capital in the equity section of the balance sheet. Reclassification
of financial statements for earlier periods provided for comparative purposes
is required. The Company has adopted this statement in the first quarter of
1998. Comprehensive income does not differ from net income.
In June 1997, the FASB released FAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information" (FAS 131). FAS 131 established
standards for reporting information about the operating segments in its annual
report and interim reports. ATS will adopt this standard for its full year
1998 financial information.
In February 1998, the FASB released FAS No. 132, "Employer's Disclosures
about Pensions and Other Postretirement Benefits" (FAS 132), which ATS will be
required to adopt in 1998. FAS 132 will require additional disclosure
concerning changes in ATS's pension obligations and assets and eliminates
certain other disclosures no longer considered useful. Adoption of this
standard will have no effect on reported consolidated results of operations or
financial position.
17
<PAGE>
PART II. OTHER INFORMATION.
ITEM 1.--LEGAL PROCEEDINGS.
In the normal course of business, the Company is subject to certain suits
and other matters. Management believes that the eventual resolution of any
pending matters, either individually or in the aggregate, will not have a
material effect on financial position, liquidity or results of operations.
ITEM 2.--CHANGES IN SECURITIES AND USE OF PROCEEDS.
On January 22, 1998, the Company acquired all of the outstanding stock of
Gearon & Co, Inc. (Gearon) for an aggregate purchase price of $80.0 million.
The purchase price consisted of approximately $32.0 million in cash and
assumed liabilities and the issuance of 5,333,333 shares of Class A Common
Stock valued at $9.00 per share or $48.0 million.
On January 22, 1998, the Company sold 8,000,000 shares of Common Stock
(1,350,000 Class A, 4,649,950 Class B and 2,000,000 of Class C) at a purchase
price of $10.00 per share for an aggregate purchase price of $80.0 million.
Payment of the purchase price of 3,062,500 shares was in the form of cash of
approximately $30.6 million and an aggregate 4,487,500 shares of Class B
Common Stock and 450,000 shares of Class A Common Stock were issued in
exchange for $49.4 million of notes due at the earlier of consummation of the
CBS Merger or, in the event the CBS Merger Agreement is terminated, December
31, 2000. The notes bear interest at the six-month London Interbank Rate, as
measured from time to time, plus 1.5% per annum, and are secured by shares of
ARS Common Stock having a fair market value of not less than 175% of the
principal amount and unpaid interest on the notes. The notes are prepayable at
any time at the option of the debtor and will be due and payable, at the
option of the Company, in the event of certain defaults as described in the
notes.
All of the shares referred to in the foregoing paragraphs were issued by ATS
in reliance on the exemption from registration provided by Section 4(2) of the
Securities Act. Each holder represented that it was acquiring its shares for
investment purposes and not with a view to distribution within the meaning of
the Securities Act. The stock certificates issued to all such holders bore
restrictive legends. No commission or other remuneration will be paid or given
by ATS directly or indirectly in connection with any of the foregoing
transactions.
18
<PAGE>
ITEM 6.--EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Listed below are the exhibits which are filed as part of this Form 10-Q
(according to the number assigned to them in Item 601 of Regulation S-K). Each
exhibit marked by a (*) is incorporated by reference to ATS's Registration
Statement on Form S-4 (File No. 333-46025) as declared effective by the
Securities and Exchange Commission on February 17, 1998. Each exhibit marked
by a (+) is incorporated by reference to ATS's Registration Statement on Form
S-1 (File No. 333-50111) as declared effective by the Securities and Exchange
Commission on May 8, 1998. Each exhibit marked by a (++) is incorporated by
reference to ATS's Registration Statement on Form S-1 (File No. 333-52481)
filed on May 12, 1998. Exhibit numbers in parenthesis refer to the exhibit
number in the applicable Registration Statement.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT EXHIBIT FILE NO.
----------- ----------------------------------- ----------------------------
<C> <S> <C>
2.1 Amendment No. 1 to Agreement and
Plan of Merger, dated as of January
22, 1998, among ATS, American Tower
Systems (Delaware), Inc., a
Delaware corporation (formerly
known as American Tower Systems,
Inc.) ("ATSI"), Gearon & Co., Inc.,
a Georgia corporation, and J.
Michael Gearon, Jr................. (*2.2)
3(i).1 Certificate of Amendment to
Restated Certificate of
Incorporation of ATS,
as filed with the Secretary of
State of the State of Delaware on
April 28, 1998..................... (++3(i).3)
10.1 Assumption Agreement, dated as of
January 22, 1998, by and among ATS,
ATSI, American Tower Systems, L.P.,
a Delaware limited partnership,
Toronto Dominion (Texas), Inc., as
Administrative Agent and the Banks
parties thereto.................... (*10.4)
10.2 American Tower Systems Corporation
1997 Stock Option Plan, dated as of
November 5, 1997, as amended and
restated on April 28, 1998......... (+10.26)
10.3 American Tower Systems Corporation
Stock Purchase Agreement, dated as
of January 8, 1998, by and among
ATS and the Purchasers............. (*10.27)
10.4 Employment Agreement, dated as of
January 22, 1998, by and between
ATSI and J. Michael Gearon, Jr..... (*10.28)
10.5 Asset Purchase Agreement, dated as
of January 23, 1998, by and among
ATSI, Midcontinent Media, Inc., a
South Dakota corporation
("Midcontinent"), Midcontinent
Teleport Co., a South Dakota
corporation and a wholly-owned
subsidiary of Midcontinent ("MTC"),
Wit Communications, Inc., a
Delaware corporation and a wholly-
owned subsidiary of MTC, ("Wit")
and Washington International
Teleport, Inc., a Delaware
corporation and a wholly-owned
subsidiary of Wit.................. (*10.29)
27 Financial Data Schedule............ Filed herewith as Exhibit 27
</TABLE>
(b) Reports on Form 8-K.
1. Form 8-K (Items 5 and 7) on March 20, 1998.
2. Form 8-K (Items 5 and 7) on May 1, 1998.
19
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
American Tower Systems Corporation
By: /s/ Joseph L. Winn
Date: May 15, 1998 -----------------------------------
Joseph L. Winn
Treasurer & Chief Financial Officer
(Duly Authorized Officer)
By: /s/ Justin D. Benincasa
Date: May 15, 1998 -----------------------------------
Justin D. Benincasa
Vice President & Corporate
Controller
(Duly Authorized Officer)
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 6,800
<SECURITIES> 0
<RECEIVABLES> 9,125
<ALLOWANCES> 355
<INVENTORY> 0
<CURRENT-ASSETS> 16,969
<PP&E> 162,366
<DEPRECIATION> 5,539
<TOTAL-ASSETS> 533,014
<CURRENT-LIABILITIES> 142,026
<BONDS> 157,150
0
0
<COMMON> 490
<OTHER-SE> 233,317
<TOTAL-LIABILITY-AND-EQUITY> 533,014
<SALES> 0
<TOTAL-REVENUES> 17,925
<CGS> 0
<TOTAL-COSTS> 17,297
<OTHER-EXPENSES> 541
<LOSS-PROVISION> 109
<INTEREST-EXPENSE> 2,430
<INCOME-PRETAX> (1,557)
<INCOME-TAX> 30
<INCOME-CONTINUING> (1,557)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,527)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
