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FILED PURSUANT TO
RULE NO. 424(b)(3)
REGISTRATION NO. 333-49147
PROSPECTUS
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$325,000,000
PINNACLE HOLDINGS INC.
OFFER TO EXCHANGE ITS 10% SENIOR DISCOUNT NOTES DUE 2008,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR ANY
AND ALL OF ITS OUTSTANDING 10% SENIOR DISCOUNT NOTES DUE 2008
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME
ON JULY 30, 1998, UNLESS EXTENDED
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Pinnacle Holdings Inc., a Delaware corporation (the "Company"), hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal, to exchange (the
"Exchange Offer") up to $325,000,000 in aggregate principal amount of the
Company's new 10% Senior Discount Notes due 2008 (the "New Notes"), that have
been registered under the Securities Act of 1933, as amended (the "Securities
Act") for up to $325,000,000 in aggregate principal amount of the Company's
outstanding 10% Senior Discount Notes due 2008 (the "Original Notes"). The
Original Notes and the New Notes are sometimes referred to herein collectively
as the "Notes."
The terms of the New Notes are substantially identical in all respects
(including principal amount, interest rate and maturity) to the terms of the
Original Notes for which they may be exchanged pursuant to this Exchange Offer,
except that the New Notes will be freely transferable by holders thereof (other
than as provided in the next paragraph) and issued free of any covenant
restricting transfer absent registration. The New Notes will evidence the same
debt as the Original Notes and contain terms which are substantially identical
to the terms of the Original Notes for which they are to be exchanged. For a
complete description of the terms of the New Notes, see "Description of the
Notes". There will be no cash proceeds to the Company from the Exchange Offer.
The New Notes represent general unsecured obligations of the Company and rank
pari passu in right of payment to all current and future senior obligations of
the Company, including any Original Notes that are not exchanged in the Exchange
Offer. The operations of the Company are conducted through its subsidiaries,
and the Company's subsidiaries will not be guarantors of the Notes. Accordingly
the New Notes are effectively subordinated to indebtedness and other liabilities
of the such subsidiaries. Pinnacle Towers Inc. (the principal subsidiary and
operating company of the Company) entered into the Senior Credit Facility (as
defined herein), which is senior to the New Notes. The commitment under the
Senior Credit Facility is currently $150.0 million and the amount outstanding is
$55.2 million. Advances under the Senior Credit Facility accrue interest at the
Company's option at either LIBOR or a base rate, plus a margin. The Senior
Credit Facility is secured by a lien on substantially all of the assets of the
Company and its subsidiaries and a pledge of substantially all of the capital
stock of the subsidiaries.
The Original Notes were sold on March 17, 1998, in a transaction not
registered under the Securities Act in reliance upon the exemption provided in
the Securities Act (the "Private Offering"). Accordingly, the Original Notes may
not be offered, resold or otherwise pledged, hypothecated or transferred in the
United States unless registered under the Securities Act or unless an applicable
exemption from the registration requirements of the Securities Act is available.
The New Notes are being offered to satisfy the obligations of the Company under
the Exchange and Registration Rights Agreement relating to the Original Notes.
See "The Exchange Offer -- Purpose and Effect of
(continued on next page)
HOLDERS OF ORIGINAL NOTES SHOULD CAREFULLY CONSIDER THE MATTERS SET FORTH
UNDER "RISK FACTORS" BEGINNING ON PAGE 19.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this Prospectus is June 30, 1998
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the Exchange Offer." Every holder receiving New Notes, other than a broker-
dealer, will represent that they are not engaging in or intending to engage in a
distribution of such New Notes. The Company is making the Exchange Offer in
reliance on the position of the staff of the Commission as set forth in Exxon
Capital Holdings Corp., SEC No-Action Letter (April 13, 1989) Morgan Stanley &
Co. Inc., SEC No-Action Letter (June 5, 1991) and Shearman & Sterling, SEC
No-Action Letter (July 2, 1993). Based on these no-action letters addressed to
other parties in other transactions, New Notes issued pursuant to the Exchange
Offer in exchange for the Original Notes may be offered for resale, resold or
otherwise transferred by the holders thereof (other than any holder which is an
affiliate of the Company within the meaning of Rule 405 under the Securities
Act), without compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that such New Notes are acquired in
the ordinary course of such holders' business and such holders have no
arrangement with any person to participate in the distribution of such New
Notes. Any holder who acquired the Original Notes during the Private Offering
and who participates in the Exchange Offer for the purpose of participating in a
distribution of the New Notes may not rely on these no-action letters and would
have to comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any secondary resale. This Prospectus may not
be used by such holders to satisfy these requirements. Each broker-dealer that
receives New Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. The Letter of Transmittal states that by acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. See "The Exchange
Offer - Purpose and Effect of the Exchange Offer" and "Plan of Distribution."
Broker-dealers may use this Prospectus, as amended or supplemented, in
connection with resales of the New Notes received in exchange for the Original
Notes where such Original Notes were acquired by such broker-dealer as a result
of market making activities or other such trading. The Company has agreed that,
for a period of 180 days after the Expiration Date (as defined herein), it will
make this Prospectus available to any broker-dealer for use in connection with
any such resale.
The Notes constitute securities for which there is no established trading
market. Any Original Notes not tendered and accepted in the Exchange Offer will
remain outstanding. The Company does not currently intend to list the New Notes
on any securities exchange. To the extent that any original Notes are tendered
and accepted in the Exchange Offer, a holder's ability to sell untendered
Original Notes could be adversely affected. No assurances can be given as to the
liquidity of the trading market for either the Original Notes or the New
Notes.
The Exchange Offer is not conditioned on any minimum aggregate principal
amount of Original Notes being tendered for exchange. The Exchange Offer will
expire at 5:00 P.M., New York time, on July 30, 1998, unless extended (the
"Expiration Date"). The date of acceptance for exchange of the original Notes
will be the first business day following the Expiration Date. Original Notes
tendered pursuant to the Exchange Offer may be withdrawn at any time prior to
the Expiration Date, otherwise, such tenders are irrevocable. The Company will
pay all expenses incident to the Exchange Offer.
No interest will accrue or be payable on the New Notes prior to March 15,
2003. Thereafter, interest on the New Notes will accrue at a rate of 10% per
annum and will be payable in cash semi-annually in arrears on March 15 and
September 15 of each year, commencing September 15, 2003. If a Change of Control
(as defined under "Description of Notes - Change of Control") occurs there is no
assurance that the Company will have, or will have access to, sufficient funds
to enable it to repurchase the Notes. See "Description of Notes - Change of
Control."
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AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration Statement on Form S-4 with respect to the New Notes
being offered hereby (including all exhibits and amendments thereto the
"Registration Statement"). This Prospectus, which constitutes a part of the
Registration Statement, does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto, certain portions
of which have been omitted pursuant to the rules and regulations of the
Commission. For further information with respect to the Company and the
securities offered hereby, reference is made to the Registration Statement and
to the exhibits filed therewith. All material terms of the material contracts
or other documents referred to in this Prospectus have been summarized herein,
however, the statements made in this Prospectus relating to the terms of any
such contract or other document are not necessarily complete, and where
applicable reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement is
qualified by such reference.
At any time prior to the second anniversary of the closing of the offering of
the Original Notes, if the Company is not subject to Section 13 or 15(d) of the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"), the
Company has agreed to (i) file with the Commission to the extent permitted, and
distribute to holders of the Notes, reports, information and documents specified
in Section 13 and 15(d) of the Exchange Act and (ii) make available, upon
request, to any holder of the Notes, the information required pursuant to Rule
144A(d)(4) under the Exchange Act. Any such request should be directed to the
Secretary of the Company at 1549 Ringling Boulevard, Third Floor, Sarasota, FL
34236.
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Market data used throughout this Prospectus was obtained from industry
publications. These publications generally state that the sources used to
acquire such data are believed to be reliable, but that the accuracy and
completeness of such data is not guaranteed. Although the Company believes the
data to be reliable,it has not independently verified such data and does not
assume the responsibility for the accuracy and completeness of such published
data.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements contained elsewhere in this Prospectus. Except as otherwise indicated
by the context, references in this Prospectus to the "Company" include Pinnacle
Holdings, Inc. and its direct and indirect wholly-owned subsidiaries.
Capitalized terms used without definition in the following summary are defined
elsewhere in this Prospectus.
The Company
The Company is the leading provider of wireless communications rental tower
space in the Southeastern United States. Since commencing operations
approximately three years ago, as of June 9, 1998, the Company has completed 175
acquisitions through which it has acquired 568 towers and has constructed an
additional 42 towers in such high growth markets as Orlando, Atlanta, Birmingham
and Tampa. As a result, the Company believes it is well positioned to continue
to capitalize on the rapid consolidation of the highly fragmented tower rental
industry.
The Company leases tower space to its customers and receives rental payments
under tower leases that generally range in duration from three to five years. In
addition, a majority of the Company's leases provide for scheduled minimum rent
increases of the greater of a specified percentage (which typically ranges from
3-5%) or the change for the relevant period in the Consumer Price Index ("CPI").
The Company experiences negligible customer churn. The Company has a diversified
base of over 724 customers, only one of which accounts for more than 5% of the
Company's total revenue. The Company's customers are a broad base of wireless
communication providers, operators of private networks and government agencies
that include Nextel, Sprint PCS, Motorola, PageNet, BellSouth Mobility, PrimeCo,
AT&T Wireless, Southern Communications Services, Inc. ("Southern
Communications"), Georgia Power, Alabama Power, U.S. Coast Guard, Internal
Revenue Service, Federal Bureau of Investigation and Bureau of Alcohol, Tobacco
& Firearms.
The Company's objective is to create substantial value from its position as
the leading rental tower owner in the Southeastern United States. In order to
achieve its objective, the Company has designed and implemented a three-tiered
growth strategy of (i) capitalizing on the operating leverage of its business by
aggressively marketing available rental space on its towers, (ii) rapidly
acquiring towers in key markets and (iii) implementing a selective tower
construction program. Pursuant to this strategy, the Company recently acquired
201 towers from Southern Communications (the "Southern Towers Acquisition"). The
Company paid $83.5 million for these towers plus fees and expenses, which
complement the Company's existing inventory and significantly accelerate its
progress in achieving its objective.
The Company has rapidly executed its strategy and today owns a significant
portfolio of high quality towers that generates increasing revenue and cash
flow. The Company believes that its portfolio of strategically located rental
towers exhibits the following economic characteristics: (i) high absolute and
incremental margins; (ii) stable and predictable cash flow; (iii) a diversified
customer base; (iv) high barriers to entry; (v) low customer churn; and (vi)
attractive underlying growth. The Company believes that this portfolio provides
the core asset base from which it will continue the ongoing strategy to acquire
and construct clusters of towers in attractive, high growth markets. Further,
the Company believes it has created a stable and long-term stream of tower
rental revenue that would continue to be generated even if the Company were to
discontinue pursuing its aggressive expansion strategy. In pursuing its
strategy, the Company has incurred a significant amount of indebtedness. As of
March 31, 1998, the Company's indebtedness was approximately $233.8 million, its
stockholders' equity was approximately $20.0 million and its ratio of debt to
equity, excluding redeemable stock, was 11.7. The Company expects to spend
approximately $7.8 million over the next month to complete
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acquisitions of rental towers that the Company currently believes are probable.
In addition, the Company expects to spend approximately $46.5 million over the
subsequent six months to complete acquisitions of rental towers that the Company
currently believes are probable. The Company expects to spend approximately
$20.3 million on capital expenditures over the next seven months. The Company
anticipates that it will have to borrow substantially all of the funds needed to
finance the above.
The Company is designed to be an efficient consolidator and operator of
rental towers. The Company has created a highly focused, structured
organization in which significant resources are devoted to acquiring or
constructing strategically located sites supported by customer demand. In
addition, the Company has the capability to "instantly integrate" new towers and
initiate sales and marketing efforts immediately following the acquisition or
construction of new towers.
INDUSTRY BACKGROUND
Communications towers are primary infrastructure components for wireless
communications services such as cellular, paging, personal communications
services ("PCS"), Specialized Mobile Radio ("SMR"), wireless data transmission
and radio and television broadcasting. Wireless communications companies require
specialized wireless transmission networks in order to provide service to their
customers. Each of these networks is configured specifically to meet the
coverage requirements of the particular carrier and includes transmission
equipment such as antennae, transmitters and receivers placed at various
locations throughout the covered area. These locations, or communications sites,
are critical to the operation of wireless communications networks and consist of
towers, rooftops and other structures upon which such equipment is placed.
Wireless communications providers design their network and select their
communications sites in order to optimize available frequencies relative to
projected usage patterns, topography and service requirements.
The wireless communications industry is growing rapidly as (i) consumers
become increasingly aware of the uses and benefits of wireless communications
services, (ii) the costs of wireless communications services decline and (iii)
new wireless communications technologies continue to be developed. Changes in
U.S. federal regulatory policy have led to a significant increase in the number
of competitors in the wireless communications industry, most recently through
the auction of radio spectrum for PCS. The resulting competition, combined with
increasing reliance on wireless communications by consumers and businesses, has
increased demand for higher quality networks characterized by uninterrupted
service and improved coverage. As new carriers build out networks and existing
carriers upgrade and expand their networks to maintain competitiveness, the
demand for communications sites has increased dramatically.
During the mid-to-late 1980s, a number of independent tower owners began to
emerge, marking the beginning of the tower rental industry. These independent
tower owners focused on owning and managing towers with multiple customers by
adding customers to existing and reconstructed towers. The Company believes the
majority of these tower operators were individuals with a small number of local
rental towers offering very limited coverage areas. In the last three years,
several larger independent tower owners have emerged as demand for wireless
communications services continued to grow and as additional high frequency
licenses were awarded for new wireless communications services each requiring
networks with extensive tower infrastructure. In addition, as the demand for
towers has been increasing there has been a growing trend by municipalities to
slow the proliferation of towers. These trends have contributed to a growing
need for towers that can accommodate co-location of wireless communications
providers. In this regard, an opportunity to acquire towers and lease space to
multiple wireless communications providers was created.
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Ownership of rental towers in many parts of the United States remains highly
fragmented. Only a few independent tower owners have accumulated a large number
of towers and the Company believes it is the only one to achieve a consolidated
position in the Southeastern United States. The pace of consolidation has begun
to accelerate as larger independent owners acquire small local owners in certain
regions. In individual markets that are consolidated, the consolidating owners
have created formidable competition for new potential rental tower owners.
BUSINESS AND GROWTH STRATEGY
The Company's objective is to create substantial value from its position as
the leading rental tower owner in the Southeastern United States. In order to
achieve its objective, the Company has designed and implemented a three-tiered
growth strategy. However, there can be no assurance that the Company will
successfully implement its strategy and achieve its objective.
I. MARKETING AND DEVELOPMENT STRATEGY
The Company seeks to capitalize on the operating leverage of its business by
increasing the utilization of rental space on its towers. The Company's
customers are generally responsible for the installation of their own equipment
and the incremental utility costs associated with that equipment. Furthermore,
there are no additional monitoring, maintenance or insurance costs to the
Company associated with additional customers. Accordingly, the Company believes
that when additional rental space is available on its towers, incremental
revenue can be achieved at low incremental costs, thereby yielding significant
incremental profit margin. The implementation of the Company's marketing and
development strategy includes the following:
. Offer Strategically Located Clusters of Towers. By owning and assembling
clusters of towers in strategically attractive regions, the Company believes it
is able to offer its customers the ability to rapidly fulfill their network
expansion plans. The Company believes that the ability to offer "one stop
shopping" services to customers on a local and regional basis provides the
Company a significant competitive advantage.
. Leverage Customer Relationships. The Company believes it has established
a reputation among its customers as a highly professional, responsive tower
space provider that routinely fulfills its commitments to its customers. This
has been achieved through ongoing investment in the development of multilevel
customer relationships. The Company believes that making customers' technical
and planning personnel aware of the quality of a particular site, the ease of
doing business with one lessor, the location of other Company-owned towers and
the Company's ability to construct new sites are important factors in generating
interest in the Company's towers.
. Track FCC Filings. All FCC licensees must file applications for site
locations. Utilizing its proprietary databases and publicly available
information, the Company tracks these filings closely to identify tower
acquisition and construction opportunities which, due to the site's appeal to a
broad base of customers, the Company believes will have significant and
predictable future revenue growth. Additionally, the Company closely monitors
FCC auctions in order to identify new market entrants.
. Promote Quality and Security of Facilities. The wireless communications
equipment typically stored in a tower building is becoming increasingly
sophisticated and is critical to a wireless communications provider's ability to
generate revenue. Accordingly, the Company believes it is of vital importance to
its
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customers that their equipment be in a well-maintained and secure building.
The Company believes it has developed a reputation as a provider of high quality
and secure sites.
. Dedicate Resources to Customer Service The Company employs a group of
individuals who are entirely dedicated to assisting customers with site location
and installation logistics. Management of the Company's technical data through
effective information systems enables the customer service group to respond
quickly and accurately to customers' needs before, during and after the
installation of customers' equipment.
II. ACQUISITION STRATEGY
The Company's acquisition strategy is focused on (i) the rapid acquisition of
towers in key markets as a means to quickly gain critical mass, thereby
discouraging other tower consolidators from entering its markets and (ii) the
completion of follow-on acquisitions to assist in completing coverage of the
selected market. The Company utilizes the following primary criteria in
evaluating the attractiveness of a potential acquisition:
. Target Attractive Wireless Geographic Markets. Within its targeted
region, the Company targets population centers and transportation corridors
where there is evidence of high growth in wireless communications services. The
Southeastern United States is generally characterized by a number of attractive
demographic trends including relatively high population and economic growth
rates. Today, the Company has strong market positions in many population centers
such as Orlando, Atlanta, Birmingham, Tampa and New Orleans. Further, the
Company has established a strong market position along several key traffic
corridors within its operating region.
. Compatibility with Existing Tower Network. The Company's marketing
activities provide information as to how a potential acquisition may enhance its
existing tower network. In evaluating a potential acquisition, the Company
considers whether that acquisition will, when combined with existing tower
inventory, result in the Company owning a cluster of towers in a given area,
thereby providing the Company with a stronger market position.
. Disciplined Valuation Process. The Company seeks to acquire towers that
have existing cash flow and the potential for significant future cash flow
growth. For each potential acquisition, the Company reviews the current
population coverage of each proposed tower, the nature and quality of the
customer base, coverage of current and future major transportation corridors and
the location and desirability of competing towers. The Company also makes an
assessment of potential cash flow growth and estimates whether additional
capital expenditures will be required to add capacity to accommodate future
growth.
. The Southern Towers Acquisition. On March 4, 1998, the Company completed
the acquisition of 201 towers from Southern Communications, a subsidiary of
Southern Company, one of the largest utility holding companies in the United
States and a large Enhanced Specialized Mobile Radio ("ESMR") provider in the
United States with a network in the Southeast. The Company paid $83.5 million
plus fees and expenses for these towers, which are located in Georgia, Alabama,
Mississippi and Florida, substantially all of which were constructed within the
last four years. Prior to the acquisition, these towers were principally for the
exclusive use of Southern Communications and its affiliates. Only a limited
number of third party tenants have been given access to these towers. The towers
were generally constructed with capacity significantly exceeding Southern
Communications' specific capacity requirements. Accordingly, the Company
believes that there is substantial additional revenue potential on these towers.
Acquisitions involve a number of potential risks, including the potential
loss of customers and unanticipated events or liabilities. Because of such
risks, there can be no assurance that the Company will be
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able to successfully implement its acquisition strategy. See "Risk Factors -
Dependence on Acquisitions; Integration of Acquisitions."
III. NEW TOWER CONSTRUCTION STRATEGY
The Company's tower site construction is not speculative. Construction is
only initiated after at least one anchor customer is identified and after the
Company has determined, based on market research, that the capital outlay for
the construction project would not exceed a maximum multiple of estimated Tower
Level Cash Flow after a given period of time. The elements of the Company's
tower build program include the following:
. Disciplined Build Selection Criteria. Through its sales and marketing
efforts, the Company seeks to identify suitable tower construction sites based
on information obtained from wireless communications providers regarding their
network construction plans. The Company evaluates those plans and ensures that
an effective solution to meeting customer requirements is employed, whether the
result is selling space on an existing tower, acquiring an existing tower,
augmenting an existing tower or constructing a new tower.
. Rapid Construction/Build Implementation. After identifying an attractive
construction opportunity, the Company moves quickly to: (i) secure access to the
site by either purchasing or entering into a long-term lease for a parcel of
land; (ii) select the appropriate type of tower based on structural capacity
needs; (iii) initiate sales and marketing efforts to rent space on the tower;
and (iv) complete necessary steps to obtain zoning approvals and building
permits. The Company then oversees the construction of the tower by hired sub-
contractors.
. Effective Tower Design and Sourcing. New tower structures are available
from a variety of manufacturers. The number of customer attachments that can be
installed on any individual tower (the tower's capacity) varies dramatically
depending on a number of factors including the original engineering and design
of the tower, the geographic area in which the tower is erected and the specific
nature of the attachments which customers wish to install. These factors also
influence the amount of capital which must be invested to build such towers.
Due to risks associated with new development and construction, there can be
no assurance that the Company's new tower construction strategy will be
successful. See "Risk Factors - Barriers to New Construction."
COMPANY STRENGTHS
The Company had a network of approximately 610 towers as of June 9, 1998,
geographically clustered in the Southeastern United States. With the Southern
Towers Acquisition, the Company believes that it has significantly accelerated
its progress in its objective to create substantial value from its position as
the leading rental tower owner in the Southeastern United States. In many areas
in which it operates, the Company provides "one stop shopping" by establishing a
critical mass of geographical clusters adequate to supply customer's site
requirements. The Company believes its portfolio of rental towers has the
following favorable economic characteristics:
. High Absolute and Incremental Margins. The Company's towers are fixed-
cost assets with minimal variable costs associated with revenue from leasing
available space to additional or existing customers, as each customer generally
assumes the costs of installation, utilities and equipment maintenance.
Accordingly, a rental
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tower owner can generate increasing operating margins when new customers are
added, resulting in high incremental free cash flow available to service debt.
For the quarter ended March 31, 1998, the Company's Tower Level Cash Flow Margin
was 80.6%.
. Stable and Predictable Cash Flow. The Company believes that it benefits
from the long-term contract nature of its tower rental business and the
predictability and stability of monthly, prepaid and recurring revenue. The
Company generally leases space on its towers to wireless communications
providers under three-to five-year leases. In addition, a majority of the
Company's leases provide built-in annual rate increases of the greater of a
specified percentage (which typically ranges from 3-5%) or the change for the
relevant period in the CPI. Furthermore, because a significant proportion of
tower rental revenue is received from customers that are predominantly large
companies and because towers provide a basic utility-like service (which can be
terminated by a tower owner if rent is not paid), the Company generally
experiences low levels of bad debt expense. In 1997, the Company's bad debt
expense as a percentage of revenue was 1.0%.
. Diversified Customer Base. There is broad representation of wireless
communications providers and underlying technologies reflected in the Company's
customer base. Accordingly, the Company believes that the stability and growth
of its revenue will reflect that of the wireless communications industry in
general, rather than any specific customer or segment within that industry. The
Company has a diversified base of over 724 customers, only one of which accounts
for more than 5% of the Company's total revenue.
. Barriers to Entry. Towers are subject to a variety of federal and local
regulations which make construction of towers difficult, expensive and time
consuming, especially in highly populated or high transmission areas. In
addition, in areas where the Company has established a critical mass of rental
tower inventory adequate to supply customers' site requirements, construction of
alternative towers will be less attractive to others due to the likelihood of
lower returns on those towers. Wireless communications providers seeking to
construct their own proprietary, limited use towers face continued opposition by
municipalities, which are reducing the opportunities for such new towers to be
built and supporting the trend toward co-location on rental towers.
. Low Customer Churn. The Company typically experiences low customer churn
as a result of the high relocation costs incurred by customers. When customers
enter into long-term contracts for tower space, those customers generally make
significant capital and network engineering commitments to the related site. The
Company believes that these levels of commitment made by its customers support
the long-term nature and predictability of the Company's revenue. Municipal
approvals are becoming increasingly difficult to obtain and may also affect the
carrier's decision to relocate. The costs associated with network
reconfiguration, obtaining FCC and municipal approval and the time required to
complete these activities may not be justified by any potential savings in
reduced tower operating expense. As a result, the Company experienced customer
churn of 0.8% in 1996 and 0.6% in 1997.
. Attractive Underlying Growth and Prospects. According to industry
publications, as of December 31, 1997, penetration for wireless services was
approximately 21.0% and is projected to grow to 53.0% by 2007. The Company's
rental towers are basic infrastructure components for all major wireless
communications services, including cellular, paging, two-way radio, broadcast
television, microwave, wireless data transmission and SMR customers. As a
result, the Company believes that its tower rental revenue will reflect the
growth of its customer base over the next several years.
FINANCING PLAN
Since the Company's inception in May 1995, the Company's operations have been
financed primarily
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through borrowings under the Senior Credit Facility and equity and bridge
financings provided by the Company's primary stockholder, ABRY Broadcast
Partners II, L.P. ("ABRY II").
In May 1995, the Company and ABRY II entered into a capital contribution
agreement whereby ABRY II committed to invest up to $20.0 million of equity in
the Company (as amended, the "Capital Contribution Agreement") and, at that
time, management invested $1.2 million in equity. In February 1996, the Capital
Contribution Agreement was amended to increase ABRY II's equity commitment to
$50.0 million to continue the Company's planned strategy of rapid growth. During
1997, management invested an additional $0.3 million. As of June 9, 1998, $36.0
million of the ABRY II equity commitment has been invested. Additionally, in
February 1998, the Company borrowed $12.5 million from ABRY II (the "ABRY Bridge
Loan") to partially fund the Southern Towers Acquisition. A portion of the net
proceeds from the Private Offering were used to repay in full and retire the
ABRY Bridge Loan. During April 1998, the Company borrowed $2.5 million from ABRY
II under this Bridge Loan to partially fund acquisitions.
In September 1995, Pinnacle Towers Inc. (the principal subsidiary and
operating company of the Issuer) entered into a credit agreement which provided
for $25.0 million of senior debt financing through a reducing revolving line of
credit and revolver/term loan (as amended, the "Senior Credit Facility"). In
September 1996, the Company and the lenders under the Senior Credit Facility
agreed to expand the commitment amount to $100.0 million. In connection with the
Southern Towers Acquisition, the Company and the lenders under the Senior Credit
Facility agreed to expand the commitment under the Senior Credit Facility to
$200.0 million initially, which has been amended to provide a $150.0 million
commitment upon the closing of the Offering. The commitment under the Senior
Credit Facility may be increased up to $250.0 million at the request of the
Company and at the option of the lenders. As of June 9, 1998, outstanding
borrowings and availability under the Senior Credit Facility were approximately
$55.2 million and $79.0 million, respectively, after giving effect to $15.8
million of outstanding letters of credit that reduce availability under the
Senior Credit Facility.
In September 1997, the Company completed arrangements with Goldman Sachs
Credit Partners L.P. and NationsBridge, L.L.C. for a $20.0 million term loan
(the "Subordinated Term Loan"), the proceeds of which were used to repay in full
and retire a $12.3 million bridge loan and related accrued interest totalling
$0.5 million from ABRY II and repay certain amounts outstanding under the Senior
Credit Facility. The Subordinated Term Loan was repaid in full and retired with
the net proceeds of the Private Offering.
The Company expects to have significant capital requirements over the next
several years, particularly in relation to the acquisition and construction of
new towers. The Company intends to fund such future capital requirements through
availability under the Senior Credit Facility, the remaining equity commitment
under the Capital Contribution Agreement and other externally generated sources
of available funding.
RECENT DEVELOPMENTS
From time to time, the Company has been approached by potential merger
partners and buyers. As a result, the Company has engaged the firm of Morgan
Stanley & Company Incorporated to assist the Company in considering its
strategic alternatives.
A sale or merger of the Company will only be permitted if the successor
entity expressly assumes, by a supplemental indenture, all of the Company's
obligations under the Indenture (as defined herein). Therefore, the successor
entity would assume all of the obligations relating to the New Notes, including
the due and punctual payment of the principal, premium, if any, and interest on
the New Notes. Additionally, the successor entity would succeed to all of the
rights and powers of the Company under the Indenture. See
7
<PAGE>
"Description of Notes-Mergers, Consolidations and Certain Sales of Assets."
If the Company was sold and such sale resulted in a Change of Control (as
defined herein), which includes a sale of all or substantially all of the
Company's assets, each holder of the New Notes will have the right to require
the Company to repurchase all or any part of such holder's New Notes at a price
in cash equal to 101% of the Accreted Value (as defined herein) thereof as of
the date of purchase plus accrued and unpaid Liquidated Damages (as defined
herein) thereon, if any, to the date of purchase. See "Description of Notes-
Change of Control."
There can be no assurance that any such sale or merger transaction may
occur.
The Company's headquarters are located at 1549 Ringling Boulevard, Third
Floor, Sarasota, Florida 34236, and its telephone number is (941) 364-8886.
8
<PAGE>
THE EXCHANGE OFFER
Resale................................ $325,000,000 in aggregate principal
amount of the Original Notes were sold
in the Private Offering by the Company
on March 17, 1998 to Goldman, Sachs &
Co. and NationsBanc Montgomery
Securities LLC (the "Initial
Purchasers"). The holders of Original
Notes and New Notes are collectively
referred to herein as the "Holders." The
Company is making the Exchange Offer in
reliance on the position of the staff of
the Commission as set forth in Exxon
Capital Holdings Corp., SEC No-Action
Letter (April 13, 1989), Morgan Stanley
& Co. Inc., SEC No-Action Letter (June
5, 1991) and Shearman Sterling, SEC No-
Action Letter (July 2, 1993). These no-
action letters were addressed to other
parties in other transactions and the
Company has not sought its own no-action
letter. Therefore, there can be no
assurance that the staff of the
Commission would make a similar
determination with respect to the
Exchange Offer as in such other
circumstances. Based on these
interpretations by the staff of the
Commission, the Company believes that
New Notes issued pursuant to this
Exchange Offer in exchange for Original
Notes may be offered for resale, resold
and otherwise transferred by a holder
thereof other than (i) a broker-dealer
who purchased such Original Notes
directly from the Company to resell
pursuant to Rule 144A or any other
available exemption under the Securities
Act or (ii) a person that is an
"affiliate" (as defined in Rule 405 of
the Securities Act) of the Company
without compliance with the registration
and prospectus delivery provisions of
the Securities Act, provided that such
New Notes are acquired in the ordinary
course of such Holder's business and
that such Holder is not participating,
and has no arrangement or understanding
with any persons to participate, in the
distribution of such New Notes. Holders
of Original Notes accepting the Exchange
Offer will represent to the Company in
the Letter of Transmittal that such
conditions have been met.
Any Holder who participates in the
Exchange Offer for the purpose of
participating in a distribution of
the New Notes may not rely on the
position of the staff of the
Commission as set forth in these
no-action letters and would have to
comply with the registration and
prospectus delivery requirements of
the Securities Act in connection with
any secondary resale transaction.
This prospectus may not be used by
such Holders
9
<PAGE>
for any secondary resale. A
secondary resale transaction in the
United States by a Holder who is
using the Exchange Offer to
participate in the distribution of
New Notes must be covered by a
registration statement containing the
selling securityholder information
required by Item 507 of Regulation
S-K of the Securities Act. Each
broker-dealer (other than an
"affiliate" of the Company) that
receives New Notes for its own
account pursuant to the Exchange
Offer must acknowledge that it
acquired the Original Notes as the
result of market-making activities or
other trading activities and will
deliver a prospectus in connection
with any resale of such New Notes.
The Letter of Transmittal states that
by so acknowledging and by delivering
a prospectus, a broker-dealer will
not be deemed to admit that it is an
"underwriter" within the meaning of
the Securities Act. This Prospectus,
as it may be amended or supplemented
from time to time, may be used by a
broker-dealer in connection with
resales of New Notes received in
exchange for Original Notes where
such Original Notes were acquired by
such broker-dealer as a result of
market-making activities or other
trading activities. In addition,
pursuant to Section 4(3) under the
Securities Act, all dealers effecting
transactions in the New Notes,
whether or not participating in the
Exchange Offer, may be required to
deliver a Prospectus. The Company
has agreed that, for a period of 180
days after the date of this
Prospectus, it will make this
Prospectus available to any
broker-dealer for use in connection
with any such resale. See "Plan of
Distribution." Any broker-dealer who
is an affiliate of the Company may
not rely on such no-action letters
and must comply with the registration
and prospectus delivery requirements
of the Securities Act in connection
with any secondary resale
transaction. See "The Exchange Offer
- Purpose and Effect of the Exchange
Offer" and "Plan of Distribution."
The Exchange Offer.................... The Company is offering to exchange
pursuant to the Exchange Offer up to
$325,000,000 aggregate principal
amount of the New Notes for up to
$325,000,000 aggregate principal
amount of the Original Notes. The
terms of the New Notes are
substantially identical in all
respects (including principal amount,
interest rate and maturity) to
the
10
<PAGE>
terms of the Original Notes for which
they may be exchanged pursuant to the
Exchange Offer, except that the New
Notes are freely transferable by
Holders thereof (other than as
provided herein), and are not subject
to any covenant restricting transfer
absent registration under the
Securities Act. See "The Exchange
Offer - Terms of the Exchange" and
"The Exchange Offer -Procedures for
Tendering."
The Exchange Offer is not conditioned
upon any minimum aggregate principal
amount of Original Notes being
tendered for exchange.
Expiration Date....................... The Exchange Offer will expire at
5:00 p.m., New York City time on
July 30, 1998, unless extended
(the "Expiration Date").
Conditions of the Exchange Offer...... The Company's obligations to
consummate the Exchange Offer are
subject to certain conditions. See
"The Exchange Offer - Conditions to
the Exchange Offer." The Company
reserves the right to terminate or
amend the Exchange Offer at any time
prior to the Expiration Date upon the
occurrence of any such conditions.
Withdrawal Rights..................... Tenders may be withdrawn at any time
prior to the Expiration Date;
otherwise, all tenders will be
irrevocable.
Procedures for Tendering Notes........ See "The Exchange Offer - Procedures
for Tendering."
Federal Income Tax Consequences....... The exchange of Original Notes for
New Notes should not be a taxable
exchange for federal income tax
purposes. See "Certain Federal Income
Tax Considerations."
Effect on Holders of the Original
Notes................................ As a result of the making of, and
upon acceptance for exchange of all
validly tendered Original Notes
pursuant to the terms of this
Exchange Offer, the Company will have
fulfilled its obligations contained
in the Registration Rights Agreement
and, accordingly, there will be no
increase in the interest rate on the
Original Notes pursuant to the
applicable terms of the Registration
Rights Agreement due to the Exchange
Offer. Holders of the Original Notes
who do not tender their Original
Notes will be entitled to all the
rights and
11
<PAGE>
limitations applicable thereto under
the Indenture, dated as of March 20,
1998, among the Company and The Bank
of New York, as trustee (the
"Trustee"), relating to the Original
Notes and the New Notes (the
"Indenture"), except for any rights
under the Indenture or the
Registration Rights Agreement, which
by their terms, terminate or cease to
have further effect as a result of
the making of, and the acceptance for
exchange of all validly tendered
Original Notes pursuant to, the
Exchange Offer. All untendered
Original Notes will continue to be
subject to the restrictions on
transfer provided for in the Original
Notes and in the Indenture. To the
extent that Original Notes are
tendered and accepted in the Exchange
Offer, the trading market for
untendered Original Notes could be
adversely affected.
Exchange Agent........................ The exchange agent with respect to
the Exchange Offer is The Bank of New
York (the "Exchange Agent"). The
address and telephone number of the
Exchange Agent are set forth in "The
Exchange Offer - Exchange Agent."
Use of Proceeds....................... There will be no cash proceeds to the
Company from the exchange pursuant to
the Exchange Offer.
12
<PAGE>
THE NEW NOTES
The Exchange Offer applies to the $325,000,000 aggregate principal amount at
maturity of the Original Notes outstanding as of the date hereof. The form and
the terms of the New Notes will be identical in all material respects to the
form and the terms of the Original Notes, except that the New Notes will have
been registered under the Securities Act and, therefore, will not contain
legends restricting the transfer thereof. The New Notes evidence the same debt
as the Original Notes exchanged for the New Notes and will be entitled to the
benefits of the same Indenture under which the Original Notes were issued. See
"Description of Notes." Certain capitalized terms listed below are defined
under the caption "Description of the Notes - Certain Definitions."
Issuer............... Pinnacle Holdings Inc., a Delaware corporation.
Securities Offered... $325.0 million aggregate principal amount at maturity of
10% Senior Discount Notes due 2008.
Maturity Date........ March 15, 2008.
Interest............. The New Notes will accrete (representing the
amortization of original issue discount) at a rate
of 10% on a semi-annual bond-equivalent basis,
to an aggregate principal amount at maturity of
$325,000,000 by March 15, 2003. No interest
will accrue on the New Notes prior to March
15, 2003. The New Notes will accrue cash
interest at the rate of 10% per annum from
March 15, 2003, payable semi-annually in
arrears on March 15 and September 15 of each
year, commencing September 15, 2003.
Effective Yield...... 10% per annum, computed on a semi-annual
bond-equivalent basis using a 360-day year
comprised of 12 30-day months and calculated
from March 17, 1998.
13
<PAGE>
Ranking.............. The New Notes will be senior unsecured
obligations of the Issuer and will rank pari
passu in right of payment with all existing and
future senior obligations of the Issuer,
including any Original Notes that are not
exchanged in the Exchange Offer. The New
Notes will be effectively subordinated to all
existing and future indebtedness of the Issuer's
subsidiaries. As of March 31, 1998, the
aggregate amount of outstanding indebtedness
and other liabilities of the Issuer's subsidiaries
was $233.8 million, $33.4 million of which
was secured obligations. See "Management's
Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and
Capital Resources" and "Description of Credit
Facilities".
Optional Redemption.. Except as described below, the Notes are not
redeemable at the Issuer's option prior to
March 15, 2003. The Notes will be
redeemable, in whole or in part, on or after
March 15, 2003 at the redemption prices set
forth herein, plus accrued and unpaid interest,
including Liquidated Damages, if any, to the
date of redemption. In addition, at any time on
or prior to March 15, 2001, the Issuer may, at
its option, redeem up to 35% of the Notes with
the net cash proceeds from one or more Public
Equity Offerings at a redemption price equal to
110% of the Accreted Value thereof plus
accrued and unpaid Liquidated Damages, if
any, to the date of redemption; provided,
however, that, after giving effect to any such
redemption, at least 65% of the aggregate
principal amount of the Notes originally issued
on the Closing Date (as defined herein) remain
outstanding.
14
<PAGE>
Change of Control.... In the event of a Change of Control, the
holders of the Notes will have the right to
require the Issuer to purchase their Notes
pursuant to an Offer to Purchase (as defined
herein) at a price equal to 101% of the stated
principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages
thereon, if any, to the date of purchase or, if
such Offer to Purchase is to be consummated
prior to March 15, 2003, 101% of the
Accreted Value thereof on the date of purchase
plus accrued and unpaid Liquidated Damages
thereon, if any, to the date of purchase. See
"Risk Factors--Ability to Purchase Notes Upon
a Change of Control".
Covenants............ The Indenture contains certain covenants that,
among other things, limit the ability of the
Issuer and its subsidiaries to incur additional
indebtedness, pay dividends or make other
distributions, repurchase equity interests or
subordinated indebtedness, create certain liens,
enter into certain transactions with affiliates,
sell assets of the Issuer and its subsidiaries, and
enter into certain mergers and consolidations.
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating an investment in the Notes.
15
<PAGE>
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following summary historical consolidated financial data for the period
of inception (May 3, 1995) through December 31, 1995 and for each of the two
years ended December 31, 1996 and 1997 has been derived from the Company's
consolidated financial statements which have been audited by Price Waterhouse
LLP, certified public accountants, that are included elsewhere herein. The
unaudited pro forma consolidated financial data as of and for the year ended
December 31, 1997 and the selected historical and unaudited pro forma
consolidated financial data as of and for the three months ended March 31, 1997
and 1998 has been derived from the Company's unaudited consolidated financial
statements and the Unaudited Pro Forma Consolidated Financial Statements
contained elsewhere herein. The summary financial information should be read in
conjunction with the information contained in the Company's consolidated audited
financial statements and notes thereto, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Unaudited Pro Forma
Consolidated Financial Statements" and "Selected Historical and Unaudited Pro
Forma Consolidated Financial Data" included elsewhere herein.
The following unaudited pro forma consolidated financial data has been
prepared to reflect the financial position and results of operations of the
Company as if each of the following had been completed on March 31, 1998 as
it related to balance sheet data and as of January 1, 1997 as it relates to
statement of operations data: (i) all acquisitions completed during 1997; (ii)
the Southern Towers Acquisition; (iii) acquisitions of other rental towers by
the Company completed from January 1, 1998 through June 9, 1998, in addition to
the Southern Towers Acquisition; (iv) other individually immaterial acquisitions
of rental towers for which the Company has entered into agreements or letters of
intent to acquire as of June 9, 1998, the acquisitions of which the Company
believes are probable; (v) the financing of the acquisitions referred to in (i)
through (iv) above; and (vi) the issuance of the Original Notes and the
application of the net proceeds therefrom as described under "Use of Proceeds"
(collectively, the "Transactions").
<TABLE>
<CAPTION>
PRO FORMA
PERIOD FROM AS ADJUSTED
INCEPTION FOR THREE
(MAY 3, 1995) PRO FORMA THREE MONTHS THREE MONTHS MONTHS
THROUGH YEAR ENDED YEAR ENDED AS ADJUSTED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31, MARCH 31,
1995 1996 1997 1997(A) 1997 1998 1998 (B)
------------- ------------- ------------- --------------- ------------- ------------- ------------
(in Thousands)
Statement of Operations
Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Tower rental revenue...... $ 733 $ 4,842 $12,881 $ 26,130 $ 1,970 $ 5,373 $ 7,219
Tower operating
expenses, excluding
depreciation and
amortization............ 181 1,135 2,633 4,990 337 1,043 1,384
----- ------- ------- -------- ------- ------- -------
Gross profit, excluding
depreciation and
amortization............. 552 3,707 10,248 21,140 1,633 4,330 5,835
Other expenses:
General and
administrative(c)....... 306 923 1,385 1,768 312 298 313
Corporate
development(c).......... 369 1,440 3,772 3,772 848 1,289 1,289
Depreciation and
amortization............ 341 2,205 6,627 18,439 1,166 2,951 4,627
----- ------- ------- -------- ------- ------- -------
Loss from operations...... (464) (861) (1,536) (2,839) (693) (208) (394)
Interest expense.......... 181 1,155 6,925 26,348 856 3,103 2,567
Amortization of original
issue discount........... - - - - - 611 3,931
----- ------- ------- -------- ------- ------- -------
Net loss.................. $(645) $(2,016) $(8,461) $(29,187) $(1,549) $(3,922) $(6,892)
===== ======= ======= ======== ======= ======= =======
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA
PERIOD FROM AS ADJUSTED
INCEPTION FOR THREE
(MAY 3, 1995) PRO FORMA THREE MONTHS THREE MONTHS MONTHS
THROUGH YEAR ENDED YEAR ENDED AS ADJUSTED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31, MARCH 31,
1995 1996 1997 1997(A) 1997 1998 1998 (B)
------------- ------------- ------------- --------------- ------------- ------------- ------------
(in Thousands)
Statement of Operations
Data:
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER OPERATING DATA:
Tower Level Cash
Flow(d)................. $ 552 $ 3,707 $10,248 $ 21,140 $ 1,633 $ 4,330 $ 5,835
Tower Level Cash Flow
Margin(e)............... 75.3% 76.6% 79.6% 80.9% 82.9% 80.6% 80.8%
Adjusted EBITDA(d)........ $ 246 $ 2,784 $ 8,863 $ 19,372 $ 1,321 $ 4,032 $ 5,522
Adjusted EBITDA
Margin(e)............... 33.6% 57.5% 68.8% 74.1% 67.1% 75.0% 76.5%
EBITDA(d)................. $(123) $ 1,344 $ 5,091 $ 15,600 $ 473 $ 2,743 $ 4,233
EBITDA Margin(e).......... -- 27.8% 39.5% 59.7% 24.0% 51.1% 58.6%
Ratio of earnings to
fixed charges(f)........ - - - N/A - - -
Number of Towers: -
Beginning of period..... 0 33 156 N/A 156 312 312
Towers acquired
during the period....... 29 119 134 N/A 31 240 319
-------
Towers constructed
during the period....... 4 4 22 N/A 3 9 9
-------
End of period........... 33 156 312 N/A 190 561 640
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, MARCH 31, AS ADJUSTED
-------------------------- ----------------- MARCH 31,
1995 1996 1997 1997 1998 1998 (B)
------- ------- -------- ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.... 31 47 1,694 - 3,319 3,319
Tower assets, net............ 11,551 48,327 127,946 64,427 231,856 269,857
Total assets................. 14,573 55,566 143,178 73,130 264,380 302,381
Total debt................... 6,124 30,422 120,582 48,957 233,761 271,762
Redeemable Stock:
Class B common stock......... 1,200 1,200 1,761 1,200 1,761 1,761
Class D common stock......... - - - - - -
Common stock................... - - - - - -
Additional paid-in capital..... 7,051 24,881 25,876 24,881 35,031 35,031
Stock subscription receivable.. (180) - - - - -
Accumulated deficit............ (645) (2,661) (11,123) (4,211) (15,045) (15,045)
------ ------ ------- ------ ------- -------
Stockholders' equity........... 6,226 22,220 14,753 20,670 19,986 19,986
</TABLE>
____________________
(a) Reflects historical amounts adjusted for the effects of the Transactions
(including the acquisitions of 201 towers in the Southern Towers Acquisition
and 85 other towers acquired in 1998 as of June 9, 1998, and the probable
acquisition of 33 additional towers for which the Company has obtained
letters of intent as of June 9, 1998), as further described in "Unaudited
Pro Forma Consolidated Financial Statements."
(b) Reflects historical amounts adjusted for the effects of the Transactions
(including the acquisitions of 85 other towers as of June 9, 1998 and the
probable acquisition as of June 9, 1998 of 33 additional towers for which
the Company has obtained letters of intent), as further described in
"Unaudited Pro Forma Consolidated Financial Statements".
(c) "General and administrative" expenses represent those costs directly related
to the day-to-day management and operation of towers
17
<PAGE>
owned by the Company. "Corporate development" expenses represent costs
incurred in connection with acquisitions and development of new business
initiatives, consisting primarily of allocated compensation, benefits and
overhead costs that are not directly related to the administration or
management of existing towers.
(d) "Tower Level Cash Flow" is defined as tower rental revenue minus tower
operating expenses, excluding depreciation and amortization. "Adjusted
EBITDA" represents loss from operations before depreciation, amortization
and corporate development expenses. "EBITDA" represents loss from operations
before depreciation and amortization. The Company has included Tower Level
Cash Flow, Adjusted EBITDA and EBITDA in Other Operating Data because the
Company believes such information may be useful to certain investors in
evaluating the Company's ability to service its debt. Tower Level Cash Flow,
Adjusted EBITDA and EBITDA should not be considered as an alternative to
Gross Profit, net loss or net cash provided by operating activities (or any
other measure of performance in accordance with generally accepted
accounting principles) as a measure of the Company's ability to meet its
cash needs.
(e) Represents Tower Level Cash Flow, Adjusted EBITDA and EBITDA each as a
percentage of tower rental revenue.
(f) As a result of the loss incurred in 1995, 1996 and 1997 and for the three
months ended March 31, 1997 and 1998, the Company was unable to fully cover
the indicated fixed charges. Earnings did not cover fixed charges by $645,
$2,016, $8,461, $1,549, $3,922 and $6,892 in 1995, 1996, 1997, for the three
months ended March 31, 1997 and 1998 and Pro Forma as Adjusted March 31,
1998.
18
<PAGE>
RISK FACTORS
An investment in the Notes offered hereby involves a high degree of risk. The
following factors, in addition to the other information contained in this
Prospectus, should be carefully considered in evaluating an investment in the
Notes offered hereby.
SUBSTANTIAL INDEBTEDNESS; ABILITY TO SERVICE INDEBTEDNESS
The Company has a significant amount of indebtedness. As of March 31, 1998,
the Company's indebtedness was approximately $233.8 million, its stockholders'
equity was approximately $20.0 million and its ratio of debt to equity
(excluding redeemable stock) was 11.7 to 1.0. In addition, after completion of
the Private Offering and the application of net proceeds therefrom as described
under "Use of Proceeds," the Company had approximately $119.2 million (after
giving effect to $15.2 million of outstanding letters of credit) of availability
under the Senior Credit Facility, all of which the Company is permitted to
borrow under the Indenture. Further, subject to the restrictions in the Senior
Credit Facility and the Indenture, the Company may incur additional indebtedness
from time to time to finance acquisitions, capital expenditures, working capital
or for other purposes.
The level of the Company's indebtedness could have important consequences to
holders of the Notes, including, but not limited to, the following: (i) a
substantial portion of the Company's cash flow from operations must be dedicated
to the repayment of indebtedness and the payment of interest thereon and will
not be available for other purposes; (ii) the Company's future ability to obtain
additional debt financing for working capital, capital expenditures,
acquisitions or other purposes may be limited; and (iii) the Company's level of
indebtedness could limit its flexibility in reacting to changes in its industry
and general economic conditions and its ability to withstand a prolonged
downturn in the wireless communications or tower rental industries. Existing or
potential competitors of the Company may operate on a less leveraged basis and
have significantly greater operating and financing flexibility than the Company.
The Company's ability to service its debt obligations will depend upon its
future operating performance, which will be affected by prevailing economic
conditions in the wireless communications industry, and financial, business and
other factors, certain of which are beyond its control. If the Company is unable
to generate sufficient cash flow from operations to service its indebtedness, it
will be forced to adopt an alternative strategy that may include actions such as
reducing, delaying or eliminating acquisitions, tower construction and other
capital expenditures, selling assets, restructuring or refinancing its
indebtedness, or seeking additional equity capital. There can be no assurance
that any of these alternative strategies could be effected on satisfactory
terms, if at all.
The Senior Credit Facility and the Indenture each contain certain restrictive
covenants. The Senior Credit Facility also requires the Company to maintain
specified financial ratios and satisfy certain financial condition tests. The
Company's ability to meet those financial ratios and tests can be affected by
events beyond its control, and there can be no assurance that the Company will
meet those tests. A breach of any of these covenants could result in a default
under the Senior Credit Facility and the Indenture. If an event of default
should occur under the Senior Credit Facility, the lenders thereunder can elect
to declare all amounts of principal outstanding under the Senior Credit
Facility, together with all accrued interests, to be immediately due and
payable. This could also result in the triggering of cross-default or cross-
acceleration provisions in other instruments (including the Indenture), thereby
permitting acceleration of the maturity of additional indebtedness (including
the Notes). If the Company were unable to repay amounts that become due under
the Senior Credit Facility, the lenders thereunder could proceed against the
collateral granted to them to secure that indebtedness. If the indebtedness
under the Senior Credit Facility were to be accelerated, there can be no
assurance that the assets of the Company would be sufficient to repay in full
such indebtedness and any other indebtedness of the Company, including the
Notes. Substantially all the assets of the Company are pledged as security under
the Senior Credit Facility. See "Description of Credit Facilities."
Prior to March 15, 2003, the Issuer's interest expense on the Notes will be
comprised solely of the accretion
19
<PAGE>
of original issue discount. Thereafter, the Notes will require annual cash
interest payments of $32.5 million. In addition, the Senior Credit Facility will
require periodic interest payments on amounts borrowed thereunder. The Company's
ability to make scheduled payments of principal of, or to pay interest on, its
debt obligations, and its ability to refinance any such debt obligations
(including the Notes), will depend on its future performance, which, to a
certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond its control. As
discussed, the Company's business strategy contemplates substantial capital
expenditures in connection with execution of its business plan. There can be no
assurance that the Company will generate sufficient cash flow from operations in
the future, that anticipated revenue growth will be realized or that future
borrowings or equity contributions will be available in an amount sufficient to
service its indebtedness and make anticipated capital expenditures. The Company
anticipates that it may need to refinance all or a portion of its indebtedness
(including the Notes) on or prior to its scheduled maturity. There can be no
assurance that the Company will be able to effect any required refinancing of
its indebtedness (including the Notes) on commercially reasonable terms or at
all.
HOLDING COMPANY STRUCTURE
The Issuer is primarily a holding company with no material business
operations, sources of income or assets of its own other than the shares of its
subsidiaries. The New Notes are obligations exclusively of the Issuer. Because
substantially all of the Issuer's operations are conducted through subsidiaries,
the Issuer's cash flow and, consequently, its ability to meet its debt service
obligations, including payment of principal, premium, if any, and interest on
the Notes, is dependent upon the cash flow of its subsidiaries and the payment
of funds by those subsidiaries to the Issuer in the form of loans, dividends,
fees or otherwise. The Issuer's subsidiaries are separate and distinct legal
entities and will have no obligation, contingent or otherwise, to pay any
amounts due pursuant to the Notes or to make any funds available therefor,
whether in the form of loans, dividends or otherwise. Under the terms of the
Senior Credit Facility, the ability of the Issuer's subsidiaries to make loans
or distributions to the Issuer is restricted. Renewals or replacements of the
Senior Credit Facility and other agreements to which the Company may become a
party may contain similar prohibitions. The Issuer will need sufficient funds
available to pay cash interest on the Notes beginning in 2003 and to repay the
Notes when required. The Issuer would be unable to fulfill such obligations
under the current terms of the Senior Credit Facility unless it obtained a
waiver or refinanced the indebtedness borrowed under the Senior Credit Facility
or the Notes. There can be no assurance that the Issuer would be able to obtain
such waiver or refinancing on terms favorable to it, if at all.
In addition, because the Issuer's subsidiaries will not guarantee the payment
of principal of or interest on the Notes, any right of the Issuer to receive
assets of any of its subsidiaries upon its liquidation or reorganization (and
the consequent right of the holders of the Notes to participate in the
distribution of proceeds from those assets) will be structurally subordinated to
the claims of such subsidiary's creditors (including tax authorities, trade
creditors and lenders to such subsidiary), except to the extent that the Issuer
is itself a creditor of such subsidiary, in which case the Issuer's claims would
still be subordinated to any security interest in the assets of such subsidiary
and indebtedness of such subsidiary senior to that held by the Issuer. Pinnacle
Towers Inc. (the principal subsidiary and operating company of the Issuer) is
the borrower under the Senior Credit Facility and is obligated to repay the
indebtedness under the Senior Credit Facility, which obligations are secured by
such subsidiary's assets, which represent substantially all of the assets of the
Company. In the event of a default on secured indebtedness (whether as a result
of the failure to comply with a payment or other covenant, a cross-default or
otherwise), the parties granted such security interests will have a prior
secured claim on the assets of such subsidiary. If such parties should attempt
to foreclose on their collateral, the Issuer's financial condition and the value
of the Notes could be materially adversely affected. As of March 31, 1998, the
Issuer's subsidiaries was approximately $233.8 million of indebtedness and other
liabilities outstanding (including trade payables and capital lease
obligations), $33.4 million of which is secured and all of which was effectively
senior to the Notes. This amount includes substantially all of the Company's
indebtedness. The Indenture permits the Issuer's subsidiaries to incur
additional indebtedness under certain circumstances. See "Description of Notes."
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DEPENDENCE ON THE WIRELESS COMMUNICATIONS INDUSTRY; CURRENT INDUSTRY CONDITIONS
Substantially all of the Company's revenue is derived from leases of tower
space, most of which are with wireless communications providers. Accordingly,
the future growth of the Company depends, to a considerable extent, upon the
continued growth and increased availability of cellular and other wireless
communications providers, including PCS. There can be no assurance that the
wireless communications industry will not experience severe and prolonged
downturns in the future or that the wireless communications industry will expand
as quickly as forecasted. The wireless communications industry, which includes
paging, cellular, PCS, fixed microwave, SMR, ESMR and other wireless
communications providers, has undergone significant growth in recent years and
remains highly competitive, with service providers in a variety of technologies
and two or more providers of the same service (up to 6 for PCS) within a
geographic market competing for subscribers. The amount of tower leasing
business from wireless communications providers is dependent on a number of
factors beyond the Company's control, including demand for wireless services,
the financial condition and access to capital of wireless communications
providers, the strategy of wireless communications providers with respect to
owning or leasing towers, government licensing of broadcast rights, changes in
telecommunications regulations and general economic conditions. The demand for
space on the Company's towers is primarily dependent on the demand for wireless
communications services. A slowdown in the growth of the wireless communications
industry in the United States would depress network expansion activities and
reduce the demand for the Company's rental towers. In addition, a downturn in a
particular wireless segment as a result of technological competition or other
factors beyond the control of the Company could adversely affect the demand for
rental towers. Also, advances in technology could reduce the need for tower-
based transmission and reception. Furthermore, wireless communications providers
may increase the number of towers owned versus the number rented. The occurrence
of any of these factors could have a material adverse effect on the Company's
financial condition and results of operations. This Prospectus contains a number
of estimates by industry experts regarding expected growth rates and penetration
for wireless communications technologies. There can be no assurance that these
estimates will prove to be accurate.
DEPENDENCE ON ACQUISITIONS; INTEGRATION OF ACQUISITIONS
The Company's business plan is materially dependent upon the acquisition of
suitable communications towers at prices the Company considers reasonable in
light of the additional revenue it believes it will be able to generate from
such towers when acquired. Since the Company's inception, however, the price of
acquisitions within the industry have generally increased over time.
Additionally, the Company competes with certain wireless communications
providers, site developers and other independent tower owners and operators for
acquisitions of towers and it is possible such competition may increase.
Increased competition may result in fewer acquisition opportunities for the
Company as well as higher acquisition prices. The Company's inability to grow by
acquisition or to accurately estimate the amount of revenue that will be
generated from such acquisitions may have a material adverse effect on the
Company. Although the Company believes that opportunities may exist for the
Company to grow through acquisitions, there can be no assurance that the Company
will be able to identify and consummate sufficient appropriate acquisitions on
terms acceptable to the Company. Certain provisions of the Senior Credit
Facility or the Indenture may limit the Company's ability to effect
acquisitions. See "Risk Factors--Substantial Indebtedness; Ability to Service
Indebtedness". Further, there can be no assurance that the Company will be able
to profitably manage and market the space on additional towers acquired or
successfully integrate acquired towers with the Company's operations and sales
and marketing efforts without substantial costs or delays. Acquisitions involve
a number of potential risks, including the potential loss of customers and
unanticipated events or liabilities, some or all of which could have a material
adverse effect on the Company's financial condition and results of operations.
COMPETITION
The Company competes for customers with wireless communications providers and
utility companies that own and operate their own tower networks and lease tower
space to other carriers, site development companies which acquire space on
existing towers for wireless communications providers and manage new tower
construction, other
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independent tower companies and traditional local independent tower operators.
Wireless communications providers that own and operate their own tower networks
generally are substantially larger and have greater financial resources than the
Company. The Company believes that tower location and capacity, price, quality
of service, type of service and density within a geographic market historically
have been and will continue to be the most significant competitive factors
affecting tower rental companies. The Company believes that competition for
tower acquisitions will increase and that additional competitors will enter the
tower rental market, certain of which may have greater financial resources than
the Company.
SIGNIFICANT FUTURE CAPITAL REQUIREMENTS
The Company's acquisition and construction activities will create substantial
ongoing capital requirements. During 1996, 1997 and 1998 to June 9, 1998, the
Company made capital investments aggregating approximately $42.8 million, $88.4
million and $153.7 million, respectively, in tower acquisitions, site upgrades
and new tower construction. The Company historically has financed its capital
expenditures through a combination of borrowings under bank credit facilities,
bridge financings, equity issuances, seller financing and cash flow from
operations. However, significant acquisition or tower construction opportunities
could create a need for additional debt or equity financing. In addition, if the
Company's revenue and cash flow are not as expected, or if the Company's
borrowing base is reduced as a result of operating performance, the Company may
have limited ability to access necessary capital under its existing credit
facilities or otherwise. There can be no assurance that sufficient debt or
equity financing or cash generated by operations will be available to meet these
requirements.
RISKS ASSOCIATED WITH DAMAGE TO TOWERS
The Company's towers are subject to risks from vandalism and risks associated
with natural disasters such as tornados, hurricanes and earthquakes. The Company
maintains certain insurance to cover the cost of replacing damaged towers and
general liability insurance to protect the Company in the event of an accident
involving a tower, but the Company does not maintain business interruption
insurance. Accordingly, damage to a group of the Company's towers could result
in a significant loss of revenue and could have a material adverse effect on the
Company's results of operations and financial condition. In addition, a tower
accident for which the Company is uninsured or underinsured could have a
material adverse effect on the Company's financial condition or results of
operations.
PERCEIVED HEALTH RISKS ASSOCIATED WITH RADIO FREQUENCY EMISSIONS
The Company and the wireless communications providers that utilize the
Company's towers are subject to government requirements and other guidelines
relating to radio frequency ("RF") emissions. The potential connection between
RF emissions and certain negative health effects, including some forms of
cancer, has been the subject of substantial study by the scientific community in
recent years. To date, the results of these studies have been inconclusive.
Although the Company has not been subject to any claims relating to RF
emissions, there can be no assurance that it will not be subject to such claims
in the future, which could have a material adverse effect on the Company's
results of operations and financial condition. See "Business--Regulatory
Matters".
REGULATORY COMPLIANCE AND APPROVAL
Both the Federal Communications Commission (the "FCC") and the Federal
Aviation Administration (the "FAA") regulate towers used for wireless
communications transmitters and receivers. Such regulations control siting,
lighting and marking of towers and may, depending on the characteristics of the
tower, require registration of tower facilities. Wireless communications
equipment operating on towers is separately regulated and independently licensed
by the FCC. Certain proposals to construct new towers or to modify existing
towers are reviewed by the FAA to ensure that the tower will not present a
hazard to aviation. Tower owners may have an obligation to paint towers or
install lighting to conform to FAA standards and to maintain such painting and
lighting.
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Tower owners may also bear the responsibility of notifying the FAA of any tower
lighting failures. Failure to comply with existing or future applicable
requirements may lead to civil penalties or other liabilities. Such factors
could have a material adverse effect on the Company's financial condition or
results of operations.
Local regulations, including municipal or local ordinances, zoning
restrictions and restrictive covenants imposed by community developers, vary
greatly, but typically require tower owners to obtain approval from local
officials or community standards organizations prior to tower construction.
Local regulations can delay or prevent new tower construction or site upgrade
projects, thereby limiting the Company's ability to respond to customer demand.
In addition, such regulations increase costs associated with new tower
construction. There can be no assurance that existing regulatory policies will
not adversely affect the timing or cost of new tower construction or that
additional regulations will not be adopted that increase such delays or result
in additional costs to the Company. Such factors could have a material adverse
effect on the Company's future growth. The Company's customers may also become
subject to new regulations or regulatory policies that adversely affect the
demand for tower sites.
The Company's growth strategy will be affected by its ability to obtain the
permits, licenses and zoning relief necessary to build new towers. The tower
rental industry often encounters significant public resistance when attempting
to obtain the necessary permits, licenses and zoning relief for construction or
improvements of towers. There can be no assurance that the Company can obtain
the permits, licenses and zoning relief necessary to continue the expansion of
its tower rental business. The failure of the Company to obtain such permits,
licenses and zoning relief would have a material adverse effect on the Company's
business, financial condition and results of operations.
CUSTOMER CONCENTRATION
The Company has certain customers that account for a significant portion of
its revenue. Currently, the Company has only one customer that accounts for more
than 5.0% of its revenue, Southern Communications and its affiliates, which
account for approximately 19.8% of the Company's revenue. The loss of one or
more of these major customers, or a reduction in their utilization of the
Company's tower rental space, could have a material adverse effect on the
Company's business, results of operations and financial condition.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the continued
contributions of key management, engineering, sales and marketing, customer
support and finance personnel, certain of whom may be difficult to replace. The
loss of the services of certain of these executives could have a material
adverse effect on the Company. There can be no assurance that the services of
such personnel will continue to be available to the Company. The Company does
not maintain key man life insurance policies on its executives that would
adequately compensate the Company for any loss of services of such executives.
See "Management--Employment Agreements" and "Certain Relationships and
Transactions."
BARRIERS TO NEW CONSTRUCTION
As of June 9, 1998, the Company had 14 towers under construction and has in
excess of 100 additional tower projects in various stages of development. The
success of the Company's growth strategy is dependent in part on its ability to
construct new towers. Such construction can be delayed by factors beyond the
control of the Company, including zoning and local permitting requirements,
availability of erection equipment and skilled construction personnel and
weather conditions. Certain communities have placed restrictions on new tower
construction or have delayed granting permits required for construction. In
addition, as the pace of tower construction has increased in recent years,
manpower and equipment needed to erect towers have been in increasing demand.
The Company's expansion plans call for a significant increase in construction
activity. There can be no assurance that the Company will be able to overcome
the barriers to new construction or that the number of towers planned for
construction will be completed. The failure of the Company to complete the
necessary construction could
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have a material adverse effect on the Company's business, financial condition
and results of operations.
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state and local
environmental laws and regulations regarding the use, storage, disposal,
emission, release and remediation of hazardous and nonhazardous substances,
materials or wastes ("Environmental Laws"). Under certain Environmental Laws,
the Company could be held strictly, jointly and severally liable for the
remediation of hazardous substance contamination at its facilities or at third-
party waste disposal sites and could also be held liable for any personal or
property damage related to such contamination. Although the Company believes
that it is in substantial compliance with all applicable Environmental Laws,
there can be no assurance that the costs of compliance with existing or future
Environmental Laws will not have a material adverse effect on the Company's
financial condition and results of operations. See "Business--Regulatory
Matters."
CONTROLLING STOCKHOLDER
ABRY II holds approximately 81.3% of the units assigned to the Issuer's
outstanding voting stock as defined in the Stockholders' Agreement (as defined
herein), and controls four of seven seats on the board of directors. Therefore,
ABRY II has the power to control all matters submitted to stockholders of the
Issuer, to elect a majority of the directors of the Issuer and to exercise
control over the business, policies and affairs of the Issuer. The interests of
ABRY II, as an equity holder, may differ from the interests of the holders of
the Notes. See "Certain Relationships and Transactions".
ABILITY TO PURCHASE NOTES UPON A CHANGE OF CONTROL
The source of funds for any repurchase required as a result of a Change of
Control will be the Company's available cash or cash generated from operating or
other sources, including borrowings, sales of assets, sales of equity or funds
provided by a new controlling entity. Further, a Change of Control may trigger
an event of default under the Senior Credit Facility, which would permit the
lenders thereto to accelerate the debt under the Senior Credit Facility.
However, there can be no assurance that sufficient funds will be available at
the time of any Change of Control to make any required repurchases of Notes
tendered and to repay debt under the Senior Credit Facility. Furthermore,
the use of available cash to fund the potential consequences of a Change of
Control may impair the Company's ability to obtain additional financing in the
future. Any future credit agreements or other agreements relating to
indebtedness to which the Company may become a party may contain similar
restrictions and provisions. See "Description of Notes" and "Description of
Credit Facilities".
RISKS ASSOCIATED WITH FRAUDULENT CONVEYANCE LIABILITY
If under relevant federal and state fraudulent conveyance statutes in a
bankruptcy, reorganization or rehabilitation case or similar proceeding or a
lawsuit by or on behalf of unpaid creditors of the Issuer, a court were to find
that, at the time the Notes were issued (i) the Issuer issued the Notes with the
intent of hindering, delaying or defrauding current or future creditors or (ii)
(A) the Issuer received less than reasonably equivalent value or fair
consideration for issuing the Notes and (B) the Issuer (1) was insolvent or was
rendered insolvent by reason of the transactions contemplated in connection with
the Private Offering, (2) was engaged, or about to engage, in a business or
transaction for which its assets constituted unreasonably small capital, (3)
intended to incur, or believed that it would incur, debts beyond its ability to
pay as such debts matured (as all of the foregoing terms are defined in or
interpreted under such fraudulent conveyance statutes) or (4) was a defendant in
an action for money damages, or had a judgment for money damages docketed
against it (if, in either case, after final judgment, the judgment is
unsatisfied), such court could avoid or subordinate the Notes to presently
existing and future indebtedness of the Issuer and take other action detrimental
to the holders of the Notes, including, under certain circumstances,
invalidating the Notes.
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The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the federal or local law that is being applied in any such
proceeding. Generally, however, the Issuer would be considered insolvent if, at
the time it incurs the indebtedness constituting the Notes, either (i) the fair
market value (or fair saleable value) of its assets is less than the amount
required to pay its total existing debts and liabilities (including the probable
liability on contingent liabilities) as they become absolute and mature or (ii)
it is incurring debts beyond its ability to pay as such debts mature.
The Issuer believes that at the time of its issuance of the Notes, the Issuer
(i) (A) was neither insolvent nor rendered insolvent thereby, (B) had sufficient
capital to operate its business effectively and (C) was incurring debts within
its ability to pay as the same mature or become due and (ii) had sufficient
resources to satisfy any probable money judgment against it in any pending
action. In reaching the foregoing conclusions, the Issuer has relied upon its
analysis of internal cash flow projections and estimated values of assets and
liabilities of the Issuer. There can be no assurance, however, that such
analysis will prove to be correct or that a court passing on such questions
would reach the same conclusions.
ABILITY TO WAIVE COMPLIANCE OR DEFAULT UNDER THE INDENTURE
Pursuant to the Indenture, the holders of a majority in aggregate principal
amount of the Notes, on behalf of all holders of the Notes, may waive the
Issuer's compliance with certain restrictive provisions of the Indenture.
Additionally, subject to certain rights of the Trustee, as provided in the
Indenture, the holders of a majority of the Notes, may waive any past default
under the Indenture, with certain exceptions. The interests of the majority of
the holders may differ from the interests of other holders. See "Description of
New Notes-Modification and Waiver."
ABSENCE OF PUBLIC MARKET
The New Notes are a new issue of securities, have no established trading
market and may not be widely distributed. Although the New Notes are eligible
for trading in PORTAL by "qualified institutional buyers," as defined in Rule
144A under the Securities Act, there can be no assurance as to the liquidity of
any markets that may develop for the New Notes, the ability of Holders of the
New Notes to sell their New Notes or the price at which Holders would be able to
sell their New Notes. Future trading prices of the New Notes will depend on
many factors, including, among other things, prevailing interest rates, the
Company's operating results and the market for similar securities. The Initial
Purchasers have advised the Company that they currently intend to make a market
in the New Notes. However, the Initial Purchasers are not obligated to do so
and any market making may be discontinued at any time without notice. The
Company does not intend to apply for listing of the New Notes offered hereby on
any securities exchange. If a market for the New Notes does develop, the price
of the New Notes may fluctuate and liquidity may be limited. If a market for
the New Notes does not develop, Holders may be unable to resell such securities
for an extended period of time, if at all. If the market were to exist, the New
Notes could trade at prices lower than the initial offering price of the
Original Notes depending on many factors, including those described above.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that the market for the New Notes will
not be subject to similar disruptions. Any such disruption may have an adverse
effect on Holders of the New Notes.
REIT STATUS
The Company has elected to be taxed as a Real Estate Investment Trust
("REIT") under Sections 856-860 of the Code. The Company believes that it has
been organized and operates in such a manner as to qualify for taxation as a
REIT, and it intends to continue to operate in such a manner. However,
prospective investors should be aware that the federal tax rules and regulations
relating to REITs are highly technical and complex, and that the Company's
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qualification as a REIT during each taxable year (including prior years) will
depend upon its ability to meet these requirements, through actual annual
operating results, income distribution levels, stock ownership requirements and
tests relating to the Company's assets and sources of income. Therefore, no
assurance can be given that the Company has operated or will operate in a manner
so as to qualify or remain qualified as a REIT. The Company could be subject to
a variety of taxes and penalties if it engages in certain prohibited
transactions, fails to satisfy certain REIT distribution requirements or
recognizes gain on the sale or other disposition of certain types of property.
See "Business--REIT Status" for a more detailed discussion of the consequences
to the Company of a loss of or failure to maintain the REIT status of the
Company.
CONSEQUENCE OF FAILURE TO EXCHANGE
Holders of Original Notes who do not exchange their Original Notes for New
Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Original Notes as set forth in the legend
thereon as a consequence of the offer or sale of the Original Notes pursuant to
an exemption from or in a transaction not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Original Notes may not be offered or sold, unless registered under
the Securities Act, except pursuant to an exemption from, or in a transaction
not subject to, the Securities Act or applicable state securities laws. The
Company does not currently anticipate that it will register the Original Notes
under the Securities Act. To the extent that the Original Notes are tendered
and accepted in connection with the Exchange Offer, any trading market for
remaining Original Notes could be adversely affected.
Issuance of the New Notes in exchange for the Original Notes pursuant to the
Exchange Offer will be made only after timely receipt by the Exchange Agent of
such Original Notes, a properly completed and duly executed Letter of
Transmittal and all other required documents. Therefore, holders of the
Original Notes desiring to tender such Original Notes in exchange for New Notes
should allow sufficient time to ensure timely delivery. The Company is under no
duty to give notification of defects or irregularities with respect to tenders
of Original Notes for exchange. Original Notes that are not tendered or that
are tendered but not accepted by the Company for exchange, will, following
consummation of the Exchange Offer, continue to be subject to the existing
restrictions upon transfer thereof under the Securities Act and, upon
consummation of the Exchange Offer, certain registration rights under the
Registration Rights Agreement will terminate.
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Original Notes were sold by the Company on March 17, 1998 to the Initial
Purchasers who resold them to certain accredited institutions in the Private
Offering. In connection with the Private Offering, the Company entered into the
Registration Rights Agreement, which requires that within sixty (60) days
following the issuance of the Original Notes, the Company file with the
Commission a registration statement under the Securities Act with respect to an
issue of New Notes of the Company identical in all material respects to the
Original Notes, use its best efforts to cause such registration statement to
become effective under the Securities Act with 150 days following the issuance
of the Original Notes, and upon the effectiveness of that registration
statement, offer to the Holders of the Original Notes the opportunity to
exchange their Original Notes for a like principal amount of such New Notes,
which will be issued without a restrictive legend. The purpose of the Exchange
Offer is to fulfill the Company's obligations under the Registration Rights
Agreement. The Original Notes were initially represented by two global Notes in
registered form, in the principal amounts of $200,000,000 and $125,000,000
registered in the name of Cede & Co., a nominatee of The Depository Trust
Company, New York, New York ("DTC"), as depositary.
The Company is making the Exchange Offer in reliance on the position of the
staff of the Commission as set
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forth in Exxon Capital Holdings Corp., SEC No-Action Letter (April 13, 1989),
Morgan Stanley & Co. Inc., SEC No-Action Letter (June 5, 1991) and Shearman &
Sterling, SEC No-Action Letter (July 2, 1993). However, the Company has not
sought its own no-action letter, and there can be no assurance that the staff of
the Commission would make a similar determination with respect to the Exchange
Offer as in such other circumstances. Based upon these interpretations by the
staff of the Commission, the Company believes that the New Notes issued pursuant
to this Exchange Offer in exchange for Original Notes may be offered for resale,
resold and otherwise transferred by a Holder thereof other than (i) a broker-
dealer who purchased such Original Notes directly from the Company to resell
pursuant to Rule 144A or any other available exemption under the Securities Act
or (ii) a person that is an "affiliate" (as defined in Rule 405 of the
Securities Act) of the Company without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such Holder's business and that
such Holder is not participating, and has no arrangement or understanding with
any person to participate, in the distribution of such New Notes. Holders of
Original Notes accepting the Exchange Offer will represent to the Company in the
Letter of Transmittal that such conditions have been met. Any Holder who
participates in the Exchange Offer for the purpose of participating in a
distribution of the New Notes may not rely on the position of the staff of the
Commission as set forth in these no-action letters and would have to comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any secondary resale transaction. This Prospectus may not be
used by such Holders for any secondary resale. A secondary resale transaction in
the United States by a Holder who is using the Exchange Offer to participate in
the distribution of New Notes must be covered by a registration statement
containing the selling securityholder information required by Item 507 of
Regulation S-K of the Securities Act.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it acquired the Original Notes as a
result of market-making activities or other trading activities and will deliver
a prospectus in connection with any resale of such New Notes. This Prospectus,
as it may be amended or supplemented from time to time, may be used by a broker-
dealer in connection with resales of New Notes received in exchange for Original
Notes where such Original Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities. The Letter of
Transmittal states that by acknowledging and delivering a prospectus, a broker-
dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. The Company has agreed that for a period of 180
days after the Expiration Date, they will make this Prospectus available to
broker-dealers for use in connection with any such resale. See "Plan of
Distribution."
Except as aforesaid, this Prospectus may not be used for an offer to resell,
resale or other retransfer of New Notes.
The Exchange Offer is not being made to, nor will the Company accept tenders
for exchange from, Holders of Original Notes in any jurisdiction in which the
Exchange Offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of such jurisdiction.
As described above, the Original Notes were sold to the Initial Purchasers
and resold by the Initial Purchasers to a small number of institutional
investors on March 17, 1998, and there is currently a limited trading market for
them. To the extent Original Notes are tendered and accepted in the Exchange
Offer, the principal amount of outstanding Original Notes will decrease.
Following the consummation of the Exchange Offer, Holders of Original Notes will
continue to be subject to certain restrictions on transfer. Accordingly, the
liquidity of the market of the Original Notes could be adversely affected. See
"Risk Factors -- Consequence of Failure to Exchange."
TERMS OF THE EXCHANGE
Upon the terms and subject to the conditions set forth in this Prospectus and
in the Letter of Transmittal (which together constitute the "Exchange Offer"),
the Company will accept any and all Original Notes validly tendered, and not
theretofore withdrawn, prior to 5:00 p.m., New York City time, on the Expiration
Date. The Company will issue $1,000 principal amount of New Notes in exchange
for each $1,000 principal amount of outstanding
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Original Notes accepted in the Exchange Offer, as promptly as practicable after
the Expiration Date. Holders may tender some or all of their Original Notes
pursuant to the Exchange Offer, provided, however, that Original Notes may be
tendered only in integral multiples of $1,000. The Exchange Offer is not
conditioned upon any minimum aggregate principal amount of Original Notes being
tendered for exchange.
The form and terms of the New Notes are identical in all material respects to
the form and terms of the Original Notes except that the New Notes will have
been registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof. The New Notes will not represent additional
indebtedness of the Company and will be entitled to the benefits of the
Indenture, which is the same Indenture as the one under which the Original Notes
were issued.
No interest will accrue or be payable on the New Notes prior to March 15,
2003. Thereafter, interest on the New Notes will accrue at a rate of 10% per
annum and will be payable in cash semi-annually in arrears on March 15 and
September 15 of each year, commencing September 15, 2003.
Holders of Original Notes do not have any appraisal or dissenters' rights
under the Delaware General Corporation Law or the Indenture in connection with
the Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the applicable requirements of the Exchange Act and the rules
and regulations of the Commission thereunder.
For purposes of the Exchange Offer, the Company shall be deemed to have
accepted for exchange and exchanged Original Notes validly tendered for exchange
when, as and if the Company gives oral or written notice to the Exchange Agent
of acceptance of the tenders of such Original Notes for exchange. Exchange of
Original Notes accepted for exchange pursuant to the Exchange Offer will be made
by deposit of tendered Original Notes with the Exchange Agent, which will act as
agent for the tendering Holders for the purpose of receiving New Notes from the
Company and transmitting such New Notes to tendering Holders. In all cases, any
exchange of New Notes for Original Notes accepted for exchange pursuant to the
Exchange Offer will be made only after timely receipt by the Exchange Agent of
certificates for such Original Notes (or of a confirmation of a book-entry
transfer of such Original Notes in the Exchange Agent's account at the Book-
Entry Transfer Facility (as defined in "--Procedures for Tendering" below)), a
properly completed and duly executed Letter of Transmittal (or facsimile
thereof) and any other required documents. For a description of the procedures
for tendering Original Notes pursuant to the Exchange Offer, see "--Procedures
for Tendering."
If any tendered Original Notes are not accepted for exchange because of an
invalid tender, or due to the occurrence of certain other events set forth
herein or otherwise, certificates for any such unaccepted Original Notes will be
returned without expense to the tendering Holders thereof (or in the case of
Original Notes tendered by book-entry transfer, such Original Notes will be
credited to the account of such Holder maintained at the Book-Entry Transfer
Facility), as promptly as practicable after the expiration or termination of the
Exchange Offer.
No alternative, conditional or contingent tenders will be accepted. All
tendering Holders, by execution of a Letter of Transmittal (or facsimile
thereof), waive any right to receive notice of acceptance of their Original
Notes for exchange.
Holders who tender Original Notes in the Exchange Offer will not be required
to pay brokerage commission or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Original
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes, in connection with the Exchange
Offer. See "--Fees and Expenses."
This Prospectus, together with the Letter of Transmittal, is being sent to
registered Holders of Original Notes as of June 30, 1998.
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<PAGE>
EXPIRATION DATE; EXTENSIONS; AMENDMENTS; TERMINATION
The Expiration Date shall be 5:00 p.m. New York City time on July 30,
1998, unless the Company, in its sole discretion, extends the Exchange Offer, in
which case the Expiration Date shall be the latest date and time to which the
Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral (promptly confirmed in writing) or written notice
and will make a public announcement thereof, each prior to 9:00 a.m. New York
City time, on the next business day after the previously scheduled expiration
date of the Exchange Offer.
The Company reserves the right, at any time and from time to time, in its
sole discretion (subject to its obligations under the Registration Rights
Agreement) (i) to delay accepting any Original Notes or to delay the issuance
and exchange of New Notes for Original Notes, (ii) to extend the Exchange Offer
or, if any of the conditions set forth below under "--Conditions to the Exchange
Offer" shall not have been satisfied, to terminate the Exchange Offer by giving
oral or written notice of such delay, extension or termination to the Exchange
Agent, or (iii) to amend the terms of the Exchange Offer in any manner.
If the Company extends the period of time during which the Exchange Offer is
open, or if it is delayed in accepting for exchange of, or in issuing any
exchanging the New Notes for, any Original Notes, or is unable to accept for
exchange of, or issue New Notes for, any Original Notes pursuant to the Exchange
Offer for any reason, then, without prejudice to the Company's rights under the
Exchange Offer, the Exchange Agent may, on behalf of the Company, retain all
Original Notes tendered, and such Original Notes may not be withdrawn except as
otherwise provided below in "--Withdrawal of Tenders." The adoption by the
Company of the right to delay acceptance for exchange of, or the issuance and
the exchange of the New Notes, for any Original Notes is subject to applicable
law, including Rule 14e-1(c) under the Exchange Act, which requires that the
Company pay the consideration offered or return the Original Notes deposited by
or on behalf of the Holders thereof promptly after the termination or withdrawal
of the Exchange Offer.
Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by a public announcement thereof. If the
Exchange Offer is amended in a manner determined by the Company to constitute a
material change, the Company will promptly disclose such amendment by means of a
prospectus supplement that will be distributed to the registered Holders, and
the Company will extend the Exchange Offer for a period of five to ten business
days, depending upon the significance of the amendment and the manner of
disclosure to the registered Holders, if the Exchange Offer would otherwise
expire during such five to ten business day period. The term "business day"
shall mean any day other than Saturday, Sunday or a federal holiday and shall
consist of the time period from 12:01 a.m. through 12:00 midnight, New York City
time.
Without limiting the manner in which the Company may choose to make a public
announcement of any delay, extension, termination or amendment of the Exchange
Offer, the Company shall have no obligation to make public, advertise or
otherwise communicate any such public announcement, other than by making a
timely release to the Dow Jones News Service. Any such announcement of an
extension of the Exchange Offer shall be issued no later than 9:00 a.m., New
York City time, on the next business day after the previously scheduled
Expiration Date of the Exchange Offer.
PROCEDURES FOR TENDERING
Only a Holder of Original Notes may tender such Original Notes in the
Exchange Offer. To tender in the Exchange offer, the Holder must complete, sign
and date the Letter of Transmittal, or a facsimile thereof, have the signatures
thereon guaranteed if required by the Letter of Transmittal, and mail or
otherwise deliver such Letter of Transmittal, or such facsimile, together with
any other required documents, to the Exchange Agent so that delivery is received
prior to 5:00 p.m., New York City time, on the Expiration Date. To be tendered
effectively,
29
<PAGE>
the Letter of Transmittal and other required documents must be received by the
Exchange Agent at the address set forth below under "- Exchange Agent" prior to
5:00 p.m., New York City time, on the Expiration Date. In addition, either (i)
the certificates for the tendered Original Notes must be received by the
Exchange Agent along with the Letter of Transmittal, or such Original Notes must
be tendered pursuant to the procedures for book-entry transfer described below
and a confirmation of receipt of such tendered Original Notes must be received
by the Exchange Agent, in each case, prior to 5:00 p.m., New York City time, on
the Expiration Date, or (ii) the tendering Holder must comply with the
guaranteed delivery procedures described below.
NO LETTERS OF TRANSMITTAL, CERTIFICATES REPRESENTING ORIGINAL NOTES OR ANY
OTHER REQUIRED DOCUMENTATION SHOULD BE SENT TO THE COMPANY. SUCH DOCUMENTS
SHOULD BE SENT ONLY TO THE EXCHANGE AGENT.
The tender by a Holder of Original Notes made pursuant to any method of
delivery set forth in the Letter of Transmittal will constitute a binding
agreement between such tendering Holder and the Company in accordance with the
terms and subject to the conditions of the Exchange Offer.
The method of delivery of Original Notes and the Letter of Transmittal and
all other required documents to the Exchange Agent is at the election and risk
of the Holder. Instead of delivery by mail, it is recommended that Holders use
an overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure delivery to the Exchange Agent before the Expiration Date.
Holders may request their respective brokers, dealers, commercial banks, trust
companies or nominees to effect the above transaction for such Holders or for
assistance concerning the Exchange Offer.
Any beneficial owner whose Original Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered Holder promptly and instruct such
registered Holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of Transmittal and delivery such
owner's Original Notes, either make appropriate arrangements to register
ownership of the Original Notes in such owner's name or obtain a properly
completed bond power from the registered Holder. The transfer of registered
ownership may take considerable time.
If the Letter of Transmittal is signed by a person other than the registered
Holder of any Original Notes (which term includes any participants in DTC whose
name appears on a security position listing as the owner of the Original Notes)
or if delivery of the Original Notes is to be made to a person other than the
registered Holder, such Original Notes must be endorsed or accompanied by a
properly completed bond power, in either case signed by such registered Holder
as such registered Holder's name appears on such Original Notes with the
signature on the Original Notes or the bond power guaranteed by an Eligible
Institution (as defined herein).
If the Letter of Transmittal or any Original Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorney-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing and, unless waived by the Company, must
submit with the Letter of Transmittal evidence satisfactory to the Company of
their authority to so act.
Signature on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution unless the Original Notes
tendered pursuant thereto are (i) by a registered Holder who has not completed
the box entitled "Special Registration Instructions" or "Special Delivery
Instructions" on the Letter of Transmittal, (ii) for the account of an Eligible
Institution, or (iii) for the account of DTC. See Instruction 4 in the Letter
of Transmittal. In the event that signature on a Letter of Transmittal or a
notice of withdrawal, as the case may be, is required to be guaranteed, such
guarantee must be by a member firm of a registered national securities exchange
or of the National Association of Securities Dealers, Inc., a commercial bank or
trust company having an office or correspondent in the United States or an
"eligible guarantor institution" within the meaning of Rule 17Ad-15 under the
Exchange Act (any of which is referred to herein as an "Eligible Institution").
30
<PAGE>
The Exchange Agent will establish an account with respect to the Original
Notes at DTC (the "Book-Entry Transfer Facility") for the purpose of the
Exchange Offer promptly after the date of this Prospectus, and any financial
institution that is a participant in the Book-Entry Transfer Facility's system
may make delivery of the Original Notes by causing the Book-Entry Transfer
Facility to transfer such Original Notes into the Exchange Agent's Notes account
in accordance with the Book-Entry Transfer Facility's procedure for such
transfer. ALTHOUGH DELIVERY OF ORIGINAL NOTES MAY BE EFFECTED THROUGH BOOK-ENTRY
TRANSFER IN THE EXCHANGE AGENTS ACCOUNT AT THE BOOK-ENTRY TRANSFER FACILITY, THE
LETTER OF TRANSMITTAL (OR FACSIMILE THEREOF) WITH ALL REQUIRED SIGNATURE
GUARANTEES AND ANY OTHER REQUIRED DOCUMENTS MUST, IN ANY CASE, BE TRANSMITTED TO
AND RECEIVED AND CONFIRMED BY THE EXCHANGE AGENT AT ITS ADDRESS SET FORTH BELOW
PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE, EXCEPT AS
OTHERWISE PROVIDED BELOW UNDER THE CAPTION "-GUARANTEED DELIVERY PROCEDURES."
DELIVERY OF DOCUMENTS TO THE BOOK-ENTRY TRANSFER FACILITY IN ACCORDANCE WITH ITS
PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
All questions as to the validity, form (including time of receipt),
acceptance and withdrawal of tendered Original Notes will be determined by the
Company in its sole discretion, which determination will be final and binding.
The Company reserves the absolute right to reject any and all Original Notes
determined by the Company not to be validly tendered or any Original Notes the
Company's acceptance of which would, in the opinion of counsel for the Company,
be unlawful. The Company also reserves the absolute right to waive any defects,
irregularities or conditions of tender as to particular Original Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived by the Company in its full discretion,
any defects or irregularities in connection with tenders of Original Notes will
render such tenders invalid unless such defects or irregularities are cured
within such time as the Company shall determine. Although the Company intends
to notify Holders of defects or irregularities with respect to tenders of
Original Notes, neither the Company, the Exchange Agent nor any other person
shall incur any liability for failure to give such notification. Any Original
Notes received by the Exchange Agent that are not properly tendered and as to
which the defects or irregularities have not been cured or waived, as provided
for herein, will be returned by the Exchange Agent to the tendering Holders,
unless otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
In addition, the Company reserves the right in its sole discretion to
purchase or make offers for any Original Notes that remain outstanding
subsequent to the Expiration Date, or, as set forth herein, to terminate the
Exchange Offer and, to the extent permitted by applicable law, purchase Original
Notes in the open market, privately negotiated transactions or otherwise. The
terms of any such purchases or offers could differ from the terms of the
Exchange Offer.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Original Notes and (i) whose Original Notes
are not immediately available, or (ii) who cannot deliver their Original Notes
(or complete the procedures for book-entry transfer), the Letter of Transmittal
or any other required documents to the Exchange Agent prior to the Expiration
Date, may nevertheless effect a tender of Original Notes if all of the following
conditions are met:
(a) the tender is made by or through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail, hand delivery or
overnight courier) setting forth the name and address of the Holder, any
certificate number(s) of such Original Notes and the principal amount of
Original Notes tendered, stating that the tender is being made thereby and
guaranteeing that, within five New York Stock Exchange trading days after the
Expiration Date, the Letter of Transmittal (or facsimile thereof) together
with the certificate(s) representing the Original Notes
31
<PAGE>
(or a confirmation of a book-entry transfer of such Original Notes in the
Exchange Agent's account at the Book-Entry Transfer Facility) and any other
documents required by the Letter of Transmittal will be deposited Exchange
Agent's account at the Book-Entry Transfer Facility and any other documents
required by the Letter of Transmittal will be deposited by the Eligible
Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof) as well as the certificate(s) representing all tendered
Original Notes in proper form for transfer (or a confirmation of book-entry
transfer of such Original Notes into the Exchange Agent's Notes account at
the Book-Entry Transfer Facility) and all other documents required by the
Letter Transmittal are received by the Exchange Agent with five New York
Stock Exchange trading days after the Expiration Date.
A Notice of Guaranteed Delivery is being sent to Holders along with the
Prospectus and the Letter of Transmittal.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Original Notes may be
withdrawn at any time prior to 5:00 p.m. New York City time, on the Expiration
Date, as such term is defined above under the caption "--Expiration Date;
Extensions; Amendments; Termination." If the Company extends the period of time
during which the Exchange Offer is open, or if it is delayed in accepting for
exchange of, or in issuing and exchanging the New Notes for, any Original Notes
or are unable to accept for exchange of, or issue and exchange the New Notes
for, any Original Notes pursuant to the Exchange Offer for any reason, then
without prejudice to the Company's rights under the Exchange Offer, the Exchange
Agent may, on behalf of the Company, retain all Original notes tendered, and
such Original Notes may not be withdrawn except as otherwise provided herein,
subject to Rule 14e-1(c) under the Exchange Act, which provides that the person
making an issuer tender offer shall either pay the consideration offered or
return tendered securities, promptly after the termination or withdrawal of the
offer.
To withdraw a tender of Original Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its offices as set forth herein prior to 5:00 p.m., New York City time,
on the Expiration Date. Any such notice of withdrawal must (i) specify the name
of the person having deposited the Original Notes to be withdrawn (the
"Depositor"), (ii) specify the serial numbers on the particular certificates
evidencing the Original Notes to be withdrawn and the name of the registered
Holder thereof (if certificates have been delivered or otherwise identified to
the Exchange Agent) or the name and number of the account at DTC to be credited
with withdrawal of the Original Notes (if the Original Notes have been tendered
pursuant to the procedures for book-entry transfer), (iii) be signed by the
Holders in the same manner as the original signature on the Letter of
Transmittal by which Original Notes were tendered (including any required
signature guarantees) or be accompanied by documents of transfer sufficient to
have the registrar (the "Registrar") with respect to the Original Notes register
the transfer of such Original Notes into the name of the person withdrawing the
tender and (iv) specify the name in which any such Original Notes are to be
registered, if different from that of the Depositor. All questions as to the
validity, form and eligibility (including time of receipt) of such notices will
be determined by the Company in its sole discretion, which determination shall
be final and binding on all parties. Any Original Notes so withdrawn will be
deemed not to have been validly tendered for purposes of the Exchange Offer and
no New Notes will be issued with respect thereto unless the Original Notes so
withdrawn are validly tendered. Properly withdrawn Original Notes may be
retendered by following one of the procedures described above under "--
Procedures for Tendering" at any time prior to the Expiration Date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer and without prejudice to
the Company's other rights under the Exchange Offer, the Company shall not be
required to accept for exchange, or exchange New Notes for any Original Notes,
and may amend or terminate the Exchange Offer as provided herein before the
acceptance of such Original Notes, if, among other things:
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<PAGE>
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer,
which might materially impair the ability of the Company to proceed with the
Exchange Offer or materially impair the contemplated benefits of the Exchange
Offer to the Company, or any material adverse development has occurred in any
existing action or proceeding with respect to the Company or any of its
subsidiaries; or
(b) any change, or any development involving a prospective change, in the
business or financial affairs of the Company or any of its subsidiaries has
occurred, which might materially impair the ability of the Company to proceed
with the Exchange Offer or materially impair the contemplated benefits of the
Exchange Offer to the Company; or
(c) any law, statute, rule or regulation is proposed, adopted or enacted,
which might materially impair the ability of the Company to proceed with the
Exchange Offer or materially impair the contemplated benefits of the Exchange
Offer to the Company; or
(d) the New Notes to be received by Holders of Original Notes in the
Exchange Offer, upon receipt, will not be transferable by such Holders (other
than as "affiliates" of the Company) without restriction under the Securities
Act and Exchange Act and without material restriction under the blue sky laws
of substantially all of the states of the United States (subject, in the case
of Restricted Holders, to any requirements that such persons comply with the
Prospectus Delivery Requirements).
If the Company determines in its reasonable judgment that any of the
conditions are not satisfied, the Company may, subject to its obligations under
the Registration Rights Agreement to use its best efforts to consummate the
Exchange Offer, (i) terminate the Exchange Offer and return all tendered
Original Notes to tendering Holders, (ii) extend the Exchange Offer and, subject
to withdrawal rights as set forth in "-- Withdrawal of Tenders" above, retain
all such Original Notes until the expiration of the Exchange Offer as so
executed, (iii) waive such condition and, subject to any requirement to extend
the period of time during which the Exchange Offer is open, exchange all
Original Notes validly tendered for exchange by the Expiration Date and not
withdrawn or (iv) delay acceptance or exchange of, or delay the issuance and
exchange of New Notes for, any Original Notes until satisfaction or waiver of
such conditions to the Exchange Offer even though the Exchange Offer has
expired. The Company's right to delay acceptance for exchange of, or delay the
issuance and exchange of New Notes for, Original Notes tendered for exchange
pursuant to the Exchange Offer is subject to provisions of applicable law,
including, to the extent applicable, Rule 14e-1(c) promulgated under the
Exchange Act, which requires that the Company pay the consideration offered or
return the Original Notes deposited by or on behalf of Holders of Original Notes
promptly after the termination or withdrawal of the Exchange Offer. For a
description of the Company's right to extend the period of time during which the
Exchange Offer is open and to amend, delay or terminate the Exchange Offer, see
"-- Expiration Date; Extensions; Amendments; Termination" above. If such waiver
constitutes a material change to the Exchange Offer, the Company will promptly
disclose such waiver by means of a prospectus supplement that will be
distributed to the registered Holders, and the Company will extend the Exchange
Offer for a period of five to ten business days, depending upon the significance
of the waiver and the manner of disclosure to the registered Holders, if the
Exchange Offer would otherwise expire during such five to ten business day
period.
33
<PAGE>
EXCHANGE AGENT
The Bank of New York has been appointed as Exchange Agent for the Exchange
Offer. Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
By Registered or Certified Mail
The Bank of New York
101 Barclay Street
New York, New York 10286
Attn: Reorganization Section, Floor 21W
By Overnight Courier or By Hand
The Bank of New York
101 Barclay Street
New York, New York 10286
Attn: Reorganization Section, Floor 21W
By Facsimile
(212) 571-3083
Confirm by Telephone
(212) 815-6333
FEES AND EXPENSES
The expense of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail, however, additional solicitation
may be made by telegraph, telephone or in person by officer and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager or other soliciting agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or other soliciting acceptance of the Exchange Offer. The Company,
however, will pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$126,000. Such expenses include fees and expenses of the Exchange Agent,
Trustee, Paying Agent and Registrar, accounting and legal fees and printing
costs, among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Original Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes, or Original Notes for principal amounts not tended or
acceptable for exchange, are to be delivered to, or are to be issued in the name
of, any person other than the registered Holders of the Original Notes tendered,
or if tendered Original Notes are registered in the name of any person other
than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the exchange of Original Notes pursuant to the
Exchange Offer, then the amount of any such transfer
34
<PAGE>
taxes (whether imposed on the registered Holder or any other persons) will be
payable by the tendering Holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with the Letter of Transmittal,
the amount of such transfer taxes will be billed directly to such tendering
Holder.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the
Original Notes as reflected in the Company's accounting records on the date of
the exchange. Accordingly, no gain or loss for accounting purposes will be
recognized. The expenses of the Exchange Offer will be amortized over the term
of the New Notes.
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CAPITALIZATION
The following table sets forth (i) the actual capitalization of the
Company as of March 31, 1998 and (ii) the pro forma capitalization of the
Company after giving effect to the Transactions as if they had been completed on
March 31, 1998. This table should be read in conjunction with the information
contained in the "Unaudited Pro Forma Consolidated Financial Statements" and the
Company's audited consolidated financial statements and notes thereto included
elsewhere herein.
As of March 31, 1998
Pro Forma
Actual as Adjusted
(Unaudited)
Debt (including current maturities): (dollars in thousands)
Senior Discount Notes................. $ 200,401 $ 200,401
Senior Credit Facility................ $ 15,650 $ 52,746
Notes payable (1)..................... 17,710 18,615
---------------- --------------
Total debt.................................... 233,761 271,762
---------------- --------------
Redeemable stock:
Class B common stock.................. 1,761 1,761
Class D common stock.................. -- --
---------------- --------------
1,761 1,761
---------------- --------------
Common stock.................................. -- --
Additional paid-in capital.................... 35,031 35,031
Accumulated deficit........................... (15,045) (15,045)
---------------- --------------
Stockholders' equity.......................... 19,986 19,986
---------------- --------------
Total capitalization.......................... $ 255,508 $ 293,509
================ ==============
(1) Notes payable consist of notes issued to tower sellers in the Company's
acquisition of towers. Interest rates range from 8.5% to 13.0% and the
notes mature at varying dates through December 2020.
USE OF PROCEEDS
The Company will receive no proceeds from the exchange of New Notes for
the Original Notes. The net proceeds from the sale by the Company of the
Original Notes, after deducting discounts and estimated fees and expenses, were
approximately $192.8 million. Such net proceeds were used: (i) to repay
approximately $158.6 million of outstanding borrowings under the Senior Credit
Facility, (ii) to repay in full and retire the $20.0 million of principal and
approximately $1.2 million of accrued interest outstanding under the
Subordinated Term Loan; (iii) to repay in full and retire the $12.5 million of
principal and approximately $0.1 million of accrued interest outstanding under
the ABRY Bridge Loan; and (iv) to pay approximately $0.4 million in the
aggregate to the holders of the Company's Class B common stock in settlement of
a distribution preference on such stock.
The Senior Credit Facility is a revolving line of credit for borrowings
initially, of up to $150.0 million. The Company may make borrowings and
repayments until March 31, 2000, at which time the facility will convert into a
term loan maturing on December 31, 2005. At the time of the consummation of the
Private Offering, loans under the Senior Credit Facility bore interest at a rate
per annum, at the borrower's request, equal to the agent bank's prime rate plus
a margin ranging from 0% to 1.75% or the 90-day London Interbank Offered Rate
("LIBOR") plus a margin ranging from 0% to 2.75%. Outstanding borrowings under
the Senior Credit Facility amounted to $15.7 million at March 31, 1998. Advances
under the Senior Credit Facility were used to fund acquisitions and
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<PAGE>
construction of towers. Effective prior to closing of the Private Offering, the
Senior Credit Facility was amended to reduce the commitment amount to $150.0
million and to change the maximum LIBOR margin to 2.875%. Upon the closing of
the Private Offering, outstanding borrowings and availability under the Senior
Credit Facility were approximately $15.7 million and $119.1 million,
respectively, after giving effect to (i) repayment of $158.6 million of
outstanding borrowings with a portion of the proceeds of the Private Offering,
(ii) reduction of the Senior Credit Facility to a commitment of $150.0 million
and (iii) consideration of $15.2 million of outstanding letters of credit which
reduce availability under the Senior Credit Facility.
The ABRY Bridge Loan bore interest at a rate of 9.0% per annum and
matures on February 11, 1999. The Subordinated Term Loan is a $20.0 million term
loan maturing on September 22, 2000. Interest under this agreement is at a rate
equivalent to LIBOR plus a margin. The applicable margin under the agreement was
6.0%. The Company utilized the proceeds of that loan to repay in full and retire
a $12.5 million bridge loan and related accrued interest of $0.5 million from
ABRY II and repay certain amounts outstanding under the Senior Credit Facility.
See "Description of Credit Facilities."
RECENT DEVELOPMENTS
From time to time, the Company has been approached by potential merger
partners and buyers. As a result, the Company has engaged the firm of Morgan
Stanley & Company Incorporated to assist the Company in considering its
strategic alternatives.
A sale or merger of the Company will only be permitted if the successor
entity expressly assumes, by a supplemental indenture, all of the Company's
obligations under the Indenture. Therefore, the successor entity would assume
all of the obligations relating to the New Notes, including the due and punctual
payment of the principal, premium, if any, and interest on the New Notes.
Additionally, the successor entity would succeed to all of the rights and powers
of the Company under the Indenture. See "Description of Notes-Mergers,
Consolidations and Certain Sales of Assets."
If the Company was sold and such sale resulted in a Change of Control,
which includes a sale of all or substantially all of the Company's assets, each
holder of the New Notes will have the right to require the Company to repurchase
all or any part of such holder's New Notes at a price in cash equal to 101% of
the Accreted Value thereof as of the date of purchase plus accrued and unpaid
Liquidated Damages thereon, if any, to the date of purchase. See "Description of
Notes-Change of Control."
There can be no assurance that any such sale or merger transaction may
occur.
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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated balance sheet as of
March 31, 1998 has been prepared to reflect the financial position of the
Company as if the Transactions had been completed on March 31, 1998. The
following unaudited pro forma consolidated statement of operations for the year
ended December 31, 1997 and for the three months ended March 31, 1998 have been
prepared to reflect the results of operations as if the Transactions had been
completed on January 1, 1997.
Each of the acquisitions have or are anticipated to be accounted for
using the purchase method of accounting. The total cost of acquisitions has or
will be allocated to the tangible or intangible assets acquired based on their
respective fair values. The allocation of the respective purchase prices
included in the pro forma financial information is preliminary. The Company does
not expect that the final allocation of the purchase price will be materially
different from the preliminary allocation.
The pro forma adjustments are based upon available information and
certain assumptions that the Company believes are reasonable under the
circumstances. The unaudited pro forma consolidated financial information should
be read in conjunction with the Company's audited consolidated financial
statements included elsewhere in this Private Offering. The unaudited pro forma
consolidated statement of operations data are not necessarily indicative of the
results that would have occurred if the Transactions had occurred on the dates
indicated, nor are they indicative of the Company's future results of
operations. There can be no assurance whether or when any of the probable
acquisitions reflected in the unaudited pro forma consolidated financial data
will be consummated.
<TABLE>
<CAPTION>
Unaudited Pro Forma Consolidated Balance Sheet
Adjustments for
Acquisitions
Pinnacle Completed Adjustments
Holdings Subsequent for Probable Pro Forma
March 31, 1998 March 31, 1998 (a) Acquisitions (a) as Adjusted
-------------- ------------------ ---------------- -----------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents ...................................... $ 3,319 $ -- $ -- $ 3,319
Accounts receivable ............................................ 1,956 -- -- 1,956
Prepaid expenses and other current
assets ....................................................... 2,627 -- -- 2,627
--------- --------- --------- ---------
Total current assets ..................................... 7,902 -- -- 7,902
Restricted cash ................................................ 60 -- -- 60
Tower assets, net .............................................. 231,856 30,155 7,846 269,857
Fixed assets, net .............................................. 1,602 -- -- 1,602
Land ........................................................... 11,120 -- -- 11,120
Other assets ................................................... 11,840 -- -- 11,840
--------- --------- --------- ---------
$ 264,380 $ 30,155 $ 7,846 $ 302,381
========= ========= ========= =========
Liabilities and Stockholders' Equity Current liabilities:
Accounts payable ............................................... $ 4,550 $ -- $ -- $ 4,550
Accrued expenses ............................................... 2,891 -- -- 2,891
Deferred revenue ............................................... 1,338 -- -- 1,338
Current portion of long-term debt .............................. 322 -- -- 322
--------- --------- --------- ---------
Total current liabilities ........................................ 9,101 -- -- 9,101
Long-term debt ................................................... 233,439 30,155 7,846 271,440
Other liabilities ................................................ 93 -- -- 93
--------- --------- --------- ---------
242,633 30,155 7,846 280,634
--------- --------- --------- ---------
Redeemable Stock:
Class B common stock ............................................. 1,761 -- -- 1,761
Class D common stock ............................................. -- -- -- --
--------- --------- --------- ---------
1,761 -- -- 1,761
--------- --------- ---------
Stockholders' Equity
Common stock ..................................................... -- -- -- --
Additional paid in capital ....................................... 35,031 -- -- 35,031
Accumulated deficit .............................................. (15,045) -- -- (15,045)
--------- --------- --------- ---------
Total stockholders' equity ............................... 19,986 -- -- 19,986
--------- --------- --------- ---------
$ 264,380 $ 30,155 $ 7,846 $ 302,381
========= ========= ========= =========
</TABLE>
38
<PAGE>
Unaudited Pro Forma Consolidated Statement of Operations
for the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Adjustments
for Adjustments
Pinnacle Acquisitions Adjustments for other Adjustments
Holdings completed for Southern Acquisitions for Probable Pro Forma Adjustments Pro Forma
December 31, during Towers completed Acquisi- for for Issuance as
1997 1997(b) Acquisition(c) in 1998(c) tions(g) Acquisitions of Notes Adjusted
------------ --------- -------------- ------------ ---------- ------------ ------------ ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tower rental
revenue .......... $ 12,881 $ 2,789 $ 6,247 $ 3,581 $ 632 $ 26,130 $ -- $ 26,130
Tower operating
expenses excluding
depreciation and
amortization ..... 2,633 558 1,058 573 168 4,990 -- 4,990
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit
excluding
depreciation and
amortization ..... 10,248 2,231 5,189 3,008 464 21,140 -- 21,140
Other expenses:
General and
administrative ... 1,385 293 90 -- -- 1,768 -- 1,768
Corporate
development ...... 3,772 -- -- -- -- 3,772 -- 3,772
Depreciation and
amortization ..... 6,627 2,423 5,730 3,136 523 18,439 -- 18,439
--------- --------- --------- --------- --------- --------- --------- ---------
11,784 2,716 5,820 3,136 523 23,979 -- 23,979
Income (loss) from
operations ....... (1,536) (485) (631) (128) (59) (2,839) -- (2,839)
Interest expense ... 6,925 3,089 6,795 3,998 667 21,474 4,874(h) 26,348
--------- --------- --------- --------- --------- --------- --------- ---------
Net loss ... $ (8,461) $ (3,574) $ (7,426) $ (4,126) $ (726) $ (24,313) $ (4,874) $ (29,187)
========= ========= ========= ========= ========= ========= ========= =========
Net loss per common
share ............ $ (27.28) $ (94.12)
========= =========
Weighted average
number of common
shares
outstanding ...... $ 310,122 $ 310,122
========= =========
<CAPTION>
Unaudited Pro Forma Consolidated Statement of Operations
for the Three Months Ended March 31, 1998
Adjustments
for Acquisitions Adjustments for
Pinnacle completed during Adjustments Acquisitions
Holdings the three for Southern Completed Adjustments Pro Forma
for the three months ended Towers Subsequent to for Probable for Adjustments Pro Forma
months ended March 31, Acquisi- March 31, Acquisi- Acquisi- for Issuance as
March 31, 1998 1998 (b) tion(d) 1998 (f) tions(g) tions of Notes Adjusted
-------------- --------------- ---------- ------------- ---------- -------- ------------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tower rental
revenue............ $ 5,373 $ 94 $ 1,041 $ 553 $ 158 $ 7,219 $ -- $ 7,219
Tower operating
expenses excluding
depreciation and
amortization....... 1,043 19 176 104 42 1,384 -- 1,384
--------- -------- -------- -------- -------- --------- ------- ---------
Gross profit excluding
depreciation and
amortization....... 4,330 75 865 449 116 5,835 -- 5,835
Other expenses:
General and
administrative..... 298 -- 15 -- -- 313 -- 313
Corporate
development........ 1,289 -- -- -- -- 1,289 -- 1,289
Depreciation and
amortization....... 2,951 87 955 503 131 4,627 -- 4,627
--------- -------- -------- -------- -------- --------- ------- ---------
4,538 87 970 503 131 6,229 -- 6,229
Loss from operations. (208) (12) (105) (54) (15) (394) -- (394)
Interest expense..... 3,103 113 1,133 641 167 5,157 (2,590) 2,567
--------- -------- -------- -------- -------- --------- ------- ---------
Amortization of
original issue
discount........... 611 -- -- -- -- 611 3,320 3,931
--------- -------- -------- -------- -------- --------- ------- ---------
Net loss..... $ (3,922) $ (125) $ (1,238) $ (695) $ (182) $ (6,162) $ (730) $ (6,892)
========= ======== ======== ======== ======== ========= ======= =========
Net loss per share... $ (11.58) $ (20.33)
========= =========
Weighted average
number of common
shares outstanding.. 338,608 338,608
========= =========
</TABLE>
39
<PAGE>
Notes to Unaudited Pro Forma Consolidated Financial Statements
(dollars in thousands)
(a) Reflects the acquisition of tower assets from (i) 26 acquisitions of an
aggregate of 46 towers as of June 9, 1998, each of which acquisitions
are individually immaterial (aggregate purchase price of $30.2 million
includes $0.7 million of related fees and expenses; purchase price was
paid in cash, obtained from debt) and (ii) 11 acquisitions pending as of
June 9, 1998 for an aggregate of 33 towers (for which the Company has
obtained letters of intent and are considered probable), each of which
acquisitions are individually immaterial (aggregate purchase price of
$7.8 million includes $0.4 million of related fees and expenses;
purchase price was paid in cash, obtained from debt).
(b) Reflects the historical, pre-acquisition results of operations (in
aggregate) for tower acquisitions for the period from January 1, 1997
through their respective date of acquisition.
<TABLE>
<CAPTION>
Other
Shore Tidewater Majestic Individually Pro Forma
for the period for the period for the period Immaterial Pro Forma Tower
ending 12/3/97 ending 7/31/97 ending 6/27/97 Acquisitions Adjustments Operations
-------------- -------------- -------------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Tower rental revenues ...................... $ 667 $ 368 $ 192 $ 1,562 $ -- $ 2,789
Tower operating expenses, excluding
depreciation and amortization ...... 146 57 19 336 -- 558
------- ------- ------- ------- ------- -------
Gross profit excluding depreciation and
amortization ....................... 521 311 173 1,226 -- 2,231
General and administrative ................. 235 30 28 -- -- 293
Depreciation and amortization ............. 97 26 24 2,276 -- 2,423
------- ------- ------- ------- ------- -------
Income/(loss) from operations .............. 189 255 121 (1,050) -- (485)
Interest expense ........................... 198 14 6 2,871 -- 3,089
Income tax expense (benefit)................ (22) -- 10 -- 12 --
------- ------- ------- ------- ------- -------
Net income (loss) .......................... $ 13 $ 241 $ 105 $(3,921) $ (12) $(3,574)
======= ======= ======= ======= ======= =======
</TABLE>
(c) Reflects the historical operating results of Southern Towers plus
the pro forma effect of tower rental revenue, related operating expenses and
tower depreciation related to the lease of certain tower facilities by Southern
Communications and its affiliates (as set forth in the underlying purchase
agreement), assuming the transaction was completed as of January 1, 1997 as it
relates to statement of operations data.
<TABLE>
<CAPTION>
Southern
for the period Pro Forma
ending 12/31/97 Adjustments(1) Southern
--------------- -------------- ---------
<S> <C> <C> <C>
Tower rental revenues........................................................ $ 1,017 $ 5,230 $ 6,247
Tower operating expenses, excluding depreciation and amortization............ 877 181 1,058
--------------- ---------------- ------------
Gross profit excluding depreciation and amortization......................... 140 5,049 5,189
General and administration................................................... 90 -- 90
Depreciation and amortization................................................ 1,947 3,783 5,730
--------------- ---------------- ------------
Income/(loss) from operations................................................ (1,897) 1,266 (631)
Interest expense............................................................. -- 6,795 6,795
--------------- ---------------- ------------
Net loss..................................................................... $ (1,897) $ (5,529) $ (7,426)
=============== ================ ============
</TABLE>
40
<PAGE>
(1) Reflects increased revenue for lease agreements with Southern
Communications and its affiliates (as set forth in the underlying
purchase agreement), related increases to operating costs and
depreciation, increased expense associated with debt used to fund
the acquisition.
(d) Reflects the pro forma, pre-acquisition operating results of Southern
Towers, assuming the transaction was completed as of January 1, 1997.
(e) Reflects the aggregate adjustment to results of operations for 40
separate acquisitions of an aggregate 85 towers completed from January
1, 1998 through June 9, 1998, other than the Southern Towers
Acquisition, each of which acquisitions were individually immaterial,
assuming such transactions were completed as of January 1, 1997.
(f) Reflects the aggregate adjustment to results of operations for 26
separate acquisitions of an aggregate 46 towers completed from April 1,
1998 through June, 1998, each of which acquisitions were individually
immaterial, assuming such transactions were completed as of January 1,
1997.
(g) Reflects the adjustments to results of operations in connection with 11
separate acquisitions pending as of June 9, 1998 of an aggregate of 33
towers, each of which acquisitions are individually immaterial, assuming
such transactions were completed as of January 1, 1997.
(h) Reflects net increase in expense as a result of the issuance of the debt
in connection with the Private Offering, at an interest rate that
reflects a 1.5% incremental increase, interest expense on incremental
borrowings of $8,675 and amortization of debt issuance costs of $6,944.
41
<PAGE>
SELECTED HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data for the
period of inception (May 3, 1995) through December 31, 1995 and for each of the
two years ended December 31, 1996 and 1997 has been derived from the Company's
consolidated financial statements which have been audited by Price Waterhouse
LLP, certified public accountants, that are included elsewhere herein. The
unaudited pro forma consolidated financial data as of and for the year ended
December 31, 1997 and the selected historical and unaudited pro forma
consolidated financial data as of and for the three months ended March 31, 1997
and 1998 has been derived from the Company's unaudited consolidated financial
statements and the Unaudited Pro Forma Consolidated Financial Statements
contained elsewhere herein. The selected financial information should be read in
conjunction with the information contained in the Company's consolidated audited
financial statements and notes thereto, "Management's Discussion and Analysis of
Financial Condition and Results of Operation," and "Unaudited Pro Forma
Consolidated Financial Statements" included elsewhere herein.
The following unaudited pro forma consolidated statement of operations
for the year ended December 31, 1997 and for the three months ended March 31,
1998, has been prepared to reflect the results of operations as if the
Transactions had been completed on January 1, 1997. The following unaudited pro
forma consolidated balance sheet for the three months ended March 31, 1998 has
been prepared to reflect the financial position of the Company as if the
Transactions had been completed on March 31, 1998.
<TABLE>
<CAPTION>
Period from
Inception
(May 3, 1995) Pro Forma Three Months Three Months
through Year Ended Year Ended as Adjusted Ended Ended
December 31, December 31, December 31, December 31, March 31, March 31,
1995 1996 1997 1997(a) 1997 1998
------------ ------------ ------------ ------------ ------------ ------------
(in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Tower rental revenue ............. $ 733 $ 4,842 $ 12,881 $ 26,130 $ 1,970 $ 5,373
Tower operating expenses,
excluding depreciation and
amortization ................... 181 1,135 2,633 4,990 337 1,043
-------- -------- -------- -------- -------- --------
Gross profit, excluding
depreciation and
amortization .................... 552 3,707 10,248 21,140 1,633 4,330
Other expenses:
General and
administrative(c) ............. 306 923 1,385 1,768 312 298
Corporate development(c) ....... 369 1,440 3,772 3,772 848 1,289
Depreciation and
amortization .................. 341 2,205 6,627 18,439 1,166 2,951
-------- -------- -------- -------- -------- --------
Loss from operations ............. (464) (861) (1,536) (2,839) (693) (208)
Interest expense ................. 181 1,155 6,925 26,348 856 3,103
Amortization of original
issue discount .................. -- -- -- -- -- 611
-------- -------- -------- -------- -------- --------
Net loss ......................... $ (645) $ (2,016) $ (8,461) $(29,187) $ (1,549) $ (3,922)
======== ======== ======== ======== ======== ========
Other Operating Data:
Tower Level Cash
Flow(d) ........................ $ 552 $ 3,707 $ 10,248 $ 21,140 $ 1,633 $ 4,330
Tower Level Cash Flow
Margin(e) ...................... 75.3% 76.6% 79.6% 80.9% 82.9% 80.6%
Adjusted EBITDA(d) ............... $ 246 $ 2,784 $ 8,863 $ 19,372 $ 1,321 $ 4,032
Adjusted EBITDA
Margin(e) ...................... 33.6% 57.5% 68.8% 74.1% 67.1% 75.0%
EBITDA(d) ........................ $ (123) $ 1,344 $ 5,091 $ 15,600 $ 473 $ 2,743
EBITDA Margin(e) ................. -- 27.8% 39.5% 59.7% 24.0% 51.1%
Ratio of earnings to fixed
charges(f) ..................... -- -- -- N/A -- --
Number of Towers:
Beginning of period............. 0 33 156 N/A 156 312
Towers acquired during the
period......................... 29 119 134 N/A 31 240
Towers constructed during the
period......................... 4 4 22 N/A 3 9
End of period............. 33 156 312 N/A 190 561
<CAPTION>
Pro Forma
as Adjusted
from Three
Months
March 31,
1998 (b)
---------
<S> <C>
Statement of Operations
Data:
Tower rental revenue ............. $ 7,219
Tower operating expenses,
excluding depreciation and
amortization ................... 1,384
--------
Gross profit, excluding
depreciation and amortization ... 5,835
Other expenses:
General and administrative(c) .. 313
Corporate development(c) ....... 1,289
Depreciation and amortization .. 4,627
--------
Loss from operations ............. (394)
Interest expense ................. 2,567
Amortization of original
issue discount .................. 3,931
--------
Net loss ......................... $ (6,892)
========
Other Operating Data:
Tower Level Cash
Flow(d) ........................ $ 5,835
Tower Level Cash Flow
Margin(e) ...................... 80.8%
Adjusted EBITDA(d) ............... $ 5,522
Adjusted EBITDA
Margin(e) ...................... 76.5%
EBITDA(d) ........................ $ 4,233
EBITDA Margin(e) ................. 58.6%
Ratio of earnings to
fixed charges(f) ............... --
Number of Towers:
Beginning of period............. 312
Towers acquired
during the period............... 319
Towers constructed
during the period............... 9
End of period............. 640
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Pro Forma
as Adjusted
December 31, March 31, March 31,
---------------------------------------------- -------------------------- -----------
1995 1996 1997 1997 1998 1998
------------- -------------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents....... 31 47 1,694 - 3,319 3,319
Tower assets, net............... 11,551 48,327 127,946 64,427 231,856 269,857
Total assets.................... 14,573 55,566 143,178 73,130 264,380 302,381
Total debt...................... 6,124 30,422 120,582 48,957 233,761 271,762
Redeemable Stock: - - - - - -
Class B common stock............ 1,200 1,200 1,761 1,200 1,761 1,761
Class D common stock............ - - - - - -
Common stock...................... - - - - - -
Additional paid-in capital........ 7,051 24,881 25,876 24,881 35,031 35,031
Stock subscription receivable (180) - - - - -
Accumulated deficit............... (645) (2,661) (11,123) (4,211) (15,045) (15,045)
Stockholders' equity.............. 6,226 22,220 14,753 20,670 19,986 19,986
</TABLE>
Notes to Selected Historical and Unaudited Pro Forma Consolidated Financial
Statements
(a) Reflects historical amounts adjusted for the effects of the
Transactions (including the acquisitions of 85 other towers as of June 9, 1998
and the probable acquisition as of June 9, 1998 of 33 additional towers for
which the Company has obtained letters of intent), as further described in
"Unaudited Pro Forma Consolidated Financial Statements."
(b) Reflects historical amounts adjusted for the effects of the
Transactions (including the acquisitions of 85 other towers as of June 9, 1998
and the probable acquisition as of June 9, 1998 of 33 additional towers for
which the Company has obtained letters of intent), as further described in
"Unaudited Pro Forma Consolidated Financial Statements."
(c) "General and administrative" expenses represent those costs directly
related to the day-to-day management and operation of towers owned by the
Company. "Corporate development" expenses represent costs incurred in connection
with acquisitions and development of new business initiatives, consisting
primarily of allocated compensation, benefits and overhead costs that are not
directly related to the administration or management of existing towers.
(d) "Tower Level Cash Flow" is defined as tower rental revenue minus
tower operating expenses, excluding
43
<PAGE>
depreciation and amortization. "Adjusted EBITDA" represents loss from operations
before depreciation, amortization and corporate development expenses. "EBITDA"
represents loss from operations before depreciation and amortization. The
Company has included Tower Level Cash Flow, Adjusted EBITDA and EBITDA in Other
Operating Data because the Company believes such information may be useful to
certain investors in evaluating the Company's ability to service its debt. Tower
Level Cash Flow, Adjusted EBITDA and EBITDA should not be considered as an
alternative to Gross Profit, net loss or net cash provided by operating
activities (or any other measure of performance in accordance with generally
accepted accounting principles) as a measure of the Company's ability to meet
its cash needs.
(e) Represents Tower Level Cash Flow, Adjusted EBITDA and EBITDA each as
a percentage of tower rental revenue.
(f) As a result of the loss incurred in 1995, 1996 and 1997 and for the
three months ended March 31, 1997 and 1998, the Company was unable to fully
cover the indicated fixed charges. Earnings did not cover fixed charges by $645,
$2,016, $8,461, $1,549, $3,922 and $6,892 in 1995, 1996, 1997, for the three
months ended March 31, 1997 and 1998 and Pro Forma as Adjusted March 31, 1998.
44
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company as of and for the period from inception (May 3, 1995)
through December 31, 1995, for each of the two years ended December 31, 1996 and
1997 and as of and for the three months ended March 31, 1997 and 1998. The
discussion should be read in conjunction with the Financial Statements of the
Company and the notes thereto included in this Private Offering. The statements
in this discussion regarding the wireless communications industry, the Company's
expectations regarding its future performance and other non-historical
statements in this discussion are forward-looking statements. These forward-
looking statements include numerous risks and uncertainties, as described in
"Risk Factors."
OVERVIEW
The Company acquires and constructs rental towers and leases space on these
towers to a broad base of wireless communications providers, operators of
private networks, government agencies and other customers. The Company's
objective is to acquire or construct clusters of rental towers in areas where
there is significant existing and expected continued growth in the demand for
rental towers by wireless communications providers. The Company seeks to obtain
a significant ownership position of tower assets in such areas and as a result,
it is able to offer "one-stop shopping" to wireless communications providers who
are deploying or expanding wireless communications networks.
Since commencing operations in May 1995, the Company has completed
acquisitions and builds as follows:
<TABLE>
<CAPTION>
PERIODS ENDED
------------------------------------
<S> <C> <C> <C> <C> <C>
12/31/95 12/31/96 12/31/97 6/9/98 TOTAL
-------- -------- -------- ------ -----
Number of acquisition transactions.................... 13 49 72 41 175
Number of towers acquired............................. 29 119 134 286 568
Number of towers built................................ 4 4 22 12 42
-------- -------- -------- ------ ---
Number of towers acquired or built during the period..
33 123 156 298 610
</TABLE>
Additionally, as of June 9, 1998, the Company had a contract or letter of
intent with respect to 11 proposed acquisitions consisting of 33 towers and has
identified numerous additional acquisition candidates and had 14 towers under
construction and in excess of 100 additional tower projects in various stages of
development.
The Company's Annualized Run Rate Revenue is calculated as of a given date by
annualizing the monthly rental rates then in effect for customer lease contracts
in force as of such date. The Company believes that growth in its Annualized Run
Rate Revenue is a meaningful indicator of its performance. As of June 9, 1998,
the Company's Annualized Run Rate Revenue was $28.0 million, without giving
effect to adjustments totalling $0.6 million in pro forma revenue from probable
acquisitions. At June 9, 1998, the Company's inventory of 610 towers had an
average Annualized Run Rate Revenue per tower of $45,830. The Company also
believes that "same tower" revenue growth on towers (measured by comparing the
Annualized Run Rate Revenue of the Company's towers at the end of a period to
the Annualized Run Rate Revenue for the same towers at the end of a prior
period), is an indication of the quality of the Company's towers and its ability
to generate incremental revenue on such towers. The Company experienced
aggregate "same tower" revenue growth on towers of 26.3% in 1997 over 1996.
The Company's growth since its inception has primarily been based upon the
acquisition of rental towers as well as the subsequent improvement of the
financial performance of the towers. The pace and magnitude of the
45
<PAGE>
Company's previous acquisitions may hinder meaningful period-to-period
comparisons of results.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of each statement of operations item to total tower rental revenue.
The results of operations are not necessarily indicative of results for any
future period. The following data should be read in conjunction with the
Financial Statements and notes thereto included elsewhere in this Private
Offering.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
PERIOD ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- ------- --------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Tower rental revenue.............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Tower operating expenses, excluding depreciation 17.1% 19.4%
and amortization....................... 24.7% 23.4% 20.4%
Gross profit...................................... 75.3% 76.6% 79.6% 82.9% 80.6%
Expenses:
General and administrative........................ 41.7% 19.1% 10.8% 15.8% 5.5%
Corporate development............................. 50.3% 29.7% 29.3% 43.0% 24.0%
Depreciation and amortization..................... 46.5% 45.5% 51.4% 59.2% 54.9%
Loss from operations................................. (63.2%) (17.7%) (11.9%) (35.1%) (3.8%)
Interest expense..................................... 24.7% 23.9% 53.8% 43.5% 57.8%
Amortization of original issue discount.............. - - - - 11.4%
Net loss............................................. (87.9%) (41.6%) (65.7%) (78.6%) (73.0%)
</TABLE>
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Tower rental revenue increased 172.7% to $5.4 million for the three month
period ended March 31, 1998 from $2.0 million for the three month period ended
March 31, 1997. This increase is attributable to the acquisition and
construction of 122 towers during the nine months ended December 31, 1997, the
results of which are included for the entire three month period ended March 31,
1998, plus the tower rental revenue contribution from the acquisition and
construction of 249 more towers during the three months ended March 31, 1998. In
addition, the increase is a result of expanded marketing efforts to increase the
number of customers per tower, as well as regular, contractual price escalations
for existing customers.
Tower operating expenses, excluding depreciation and amortization, which
consist primarily of costs relating to the ongoing maintenance of properties
such as air conditioning and grounds maintenance, ground lease expense,
utilities, property taxes and other direct costs of tower operation, increased
209.5% to $1.0 million for the three month period ended March 31, 1998 from $.3
million for the three months ended March 31, 1997. This increase is
attributable to the acquisition and construction of 122 towers during the nine
months ended December 31, 1997, the results of which are included for the entire
three month period ended March 31, 1998, plus the tower operating expenses
contribution from the acquisition and construction of 249 more towers during the
three months ended March 31, 1998. Tower operating expenses, excluding
depreciation and amortization, increased as a percentage of tower rental revenue
from 17.1% for the three month period ended March 31, 1997 to 19.4% for the
three month period ended March 31, 1998. This increase resulted primarily from
the acquisition on February 14, 1997 of a group of managed towers. Such towers'
revenues represented approximately 8.7% of total revenues for the three months
ended March 31, 1998, and their margins are at approximately 50% of revenues.
General and administrative expenses, which are expenses associated with
supporting the Company's day-to-day management of its existing properties and
primarily consist of employee compensation and related benefits costs,
46
<PAGE>
advertising, professional and consulting fees, office rent and related expenses
and travel costs, remained relatively constant for the three month period ended
March 31, 1998 and 1997 at $.3 million.
Corporate development expenses, which represent costs incurred in connection
with acquisitions and construction of new towers, increased 52.0% to $1.3
million for the three month period ended March 31, 1998 from $.8 million for the
three month period ended March 31, 1997. The increase in corporate development
expenses reflects the higher costs associated with the Company's expansion of
its acquisition and construction strategies. Corporate development expenses
decreased as a percentage of tower rental revenue from 43.0% for the three
months ended March 31, 1997 to 24.0% for the three months ended March 31, 1998
because of the incremental increase in tower rental revenue from the comparative
period in 1997 and economics resulting from such growth.
Interest expense increased 262.5% to $3.1 million for the three months ended
March 31, 1998 from $.9 million for the three months ended March 31, 1997. The
increase in interest expenses was attributable to increased borrowing associated
with the Company's acquisitions during the period.
1997 COMPARED TO 1996
Tower rental revenue increased 166.0% to $12.9 million in 1997 from $4.8
million in 1996. This increase is attributable to the acquisition and
construction of 156 towers during 1997 and a result of expanded marketing
efforts to increase the number of customers per tower, as well as regular,
contractual price escalations for existing customers.
Tower operating expenses, excluding depreciation and amortization increased
132.0% to $2.6 million in 1997 from $1.1 million in 1996. This increase reflects
the addition of 156 towers during the year. Tower operating expenses, excluding
depreciation and amortization, decreased as a percentage of tower rental revenue
from 23.4% in 1996 to 20.4% in 1997, reflecting operating efficiencies gained on
existing towers as well as on new towers acquired or constructed.
General and administrative expenses increased 50.1% to $1.4 million in 1997
from $0.9 million in 1996. General and administrative costs decreased as a
percentage of tower rental revenue from 19.1% in 1996 as compared to 10.8% in
1997 because of lower overhead costs as a percentage of tower rental revenue.
Corporate development expenses increased 161.9% to $3.8 million in 1997 from
$1.4 million in 1996. The increase in corporate development expenses reflects
the higher costs associated with the Company's expansion of its acquisition and
construction strategies. Corporate development expenses remained relatively
constant as a percentage of tower rental revenue at 29.3% in 1997 compared to
29.7% in 1996.
Interest expense increased 499.6% to $6.9 million in 1997 from $1.2 million
in 1996. The increase in interest expense was attributable to increased
borrowing associated with the Company's acquisitions during the period.
1996 COMPARED TO 1995
The Company commenced operations on May 3, 1995. The results described herein
reflect the effect of a full year of operations in 1996 as compared to
approximately eight months of activity for the period from inception (May 3,
1995) through December 31, 1995.
Tower rental revenue increased 560.6% to $4.8 million in 1996 from $0.7
million in 1995. This increase is attributable to the acquisition and
construction of 123 towers during 1996 and a result of expanded marketing
efforts to increase the number of customers per tower, as well as regular,
contractual price escalations for existing customers.
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Tower operating expenses, excluding depreciation and amortization,
increased 527.1% to $1.1 million in 1996 from $0.2 million in 1995. This
increase is primarily attributable to the effect of a full year of operations in
1996 versus eight months in 1995 and the acquisition and construction of 123
towers. Tower operating expenses, excluding depreciation and amortization,
decreased as a percentage of tower rental revenue from 24.7% in 1995 to 23.4% in
1996. The decrease as a percentage of tower rental revenue was due primarily to
operating efficiencies resulting from a significantly increased number of
towers.
General and administrative expenses increased 201.6% to $0.9 million in
1996 from $0.3 million in 1995. This increase is attributable to the addition of
support personnel related to the Company's acquisition and construction efforts
during the period. General and administrative costs decreased as a percentage of
tower rental revenue from 41.7% in 1995 to 19.1% in 1996. The decrease as a
percentage of tower rental revenue was due to lower overhead costs as a
percentage of tower rental revenue.
Corporate development expenses increased 290.2% to $1.4 million in 1996
from $0.4 million in 1995. The increase in corporate development expenses
reflects the higher costs associated with the Company's expansion of its
acquisition and construction strategies. Corporate development expenses
decreased as a percentage of tower rental revenue from 50.3% in 1995 to 29.7% in
1996.
Interest expense increased 538.1% to $1.2 million in 1996 from $0.2 million
in 1995. This increase was attributable to increased borrowing associated with
the Company's acquisitions during the period.
Liquidity and Capital Resources
As of March 31, 1998, the Company had consolidated cash and cash
equivalents of $3.3 million, consolidated long-term debt of $233.8 million and
consolidated stockholders' equity of $20.0 million.
The Company has historically funded its operations, acquisitions and
construction of towers with proceeds from equity contributions, bank borrowings
and cash flow from operations. The Company had a working capital deficit of $1.2
million, $12.8 million and $1.5 million as of March 31, 1998, December 31, 1997
and 1996, respectively. Excluding the current portion of long-term debt, current
liabilities exceeded current assets by $.9 million, $1.7 million and $0.8
million as of March 31, 1998, December 31, 1997 and 1996, respectively. The
Company's ratio of total debt to stockholders' equity (excluding redeemable
stock) was 11.70 to 1 at March 31, 1998, 8.17 to 1 at December 31, 1997 and 1.37
to 1 as of December 31, 1996.
Capital expenditures for the three months ended March 31, 1998 were
$111.0 million, compared to $17.7 million in the comparable 1997 period. Capital
expenditures were $89.4 million, $42.8 million and $12.7 million for the periods
ended December 31, 1997, 1996 and 1995, respectively.
At March 31, 1998, $15.7 million of borrowings were outstanding under the
Senior Credit Facility. Additionally, the Company had outstanding letters of
credit issued by a bank totalling $15.2 million, which secured certain notes to
sellers. Advances under the Senior Credit Facility are limited to a borrowing
base, which is based on the Company's Annualized EBITDA (as defined in the
Senior Credit Facility). At March 31, 1998, advances under the Senior Credit
Facility subject to the base rate (as defined in the Senior Credit Facility)
bore interest, payable in quarterly installments, at the base rate plus a margin
ranging from 0% to 1.75%, and advances subject to LIBOR bore interest, payable
in installments at periods no greater than three months, at LIBOR plus a margin,
ranging from 0% to 2.875%.
On March 4, 1998, the Company amended the Senior Credit Facility to provide
for borrowings of up to $200.0 million. As a result of such amendment, advances
under the Senior Credit Facility bore interest at the Company's option at either
LIBOR plus a margin of up to 2.75% or the base rate plus a margin of up to
1.75%. Upon the
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closing of the Private Offering, the Senior Credit Facility was amended to
reduce the commitment amount to $150.0 million and to change the maximum LIBOR
margin to 2.875%. Upon the closing of the Private Offering, outstanding
borrowings and availability under the Senior Credit Facility were approximately
$15.7 million and $119.1 million, respectively, after giving effect to (i)
repayment of $158.6 million of outstanding borrowings with a portion of the
proceeds of the Private Offering, (ii) a reduction of the Senior Credit Facility
to a commitment of $150.0 million and (iii) consideration of $15.2 million of
outstanding letters of credit which reduce availability under the Senior Credit
Facility.
In September 1997, the Company entered into the $20.0 million Subordinated
Term Loan. Interest under this agreement was at a rate equivalent to LIBOR plus
a margin (as defined in the agreement). The applicable margin under the
agreement was 6.0%. The Company utilized the proceeds of this loan to repay
bridge loans which were outstanding from its principle investor and to fund
ongoing tower acquisitions. The Subordinated Term Loan was repaid in full and
retired with proceeds from the Private Offering.
In February 1998, the Company entered into the ABRY Bridge Loan with ABRY
II whereby the Company borrowed $12.5 million. Amounts outstanding under the
ABRY Bridge Loan bore interest at the rate of 9.0% per annum. Interest and
principal under the ABRY Bridge Loan were payable within one year from the date
of the related borrowing. The ABRY Bridge Loan was repaid in full and retired
with proceeds from the Private Offering. During April 1998, the Company borrowed
$2.5 million under this Bridge Loan to partially fund acquisitions.
The Company has entered into the Capital Contribution Agreement with ABRY
II, pursuant to which ABRY II has agreed to make equity contributions to the
Company, up to an aggregate capital contribution of $50.0 million, in an amount
equal to (i) 100% of the Company's general and administrative expenses and
corporate development, and (ii) the amount necessary to cure any payment or
financial covenant default under the Senior Credit Facility. As of March 31,
1998, ABRY II had contributed $36.0 million of the aggregate $50.0 million
capital contribution commitment. Additionally, ABRY II is the guarantor of a
note of the Company payable to a former tower owner in an amount totaling $3.9
million.
The Company uses seller financing in some of its tower acquisitions. The
Company had outstanding notes that it issued to sellers bearing interest at 8.5%
to 13.0% per annum in the aggregate amount of $17.7 million at March 31, 1998
and $28.6 million at December 31, 1997. Of the amount outstanding at
December 31, 1997, approximately $10.4 million was repaid through borrowings
under the Senior Credit Facility in January 1998.
The Company used the net proceeds from the Private Offering to repay a
portion of its outstanding borrowings under the Senior Credit Facility, to repay
in full and retire the Subordinated Term Loan and the ABRY Bridge Loan and to
make a payment to the holders of its Class B common stock in settlement of a
distribution preference on such stock. See "Use of Proceeds".
As of June 9, 1998, the Company and its subsidiaries expected to use the
$79.0 million of availability under the Senior Credit Facility to fund the
execution of the Company's business plan following the Private Offering. The
Company's plan anticipates substantial capital expenditures in connection with
the ongoing acquisition and construction of towers. In the event that the
Company needs additional debt or equity financing in the future, there can be no
assurance that such financing will be commercially available or permitted by the
terms of the Company's existing indebtedness. To the extent that the Company is
unable to finance future capital expenditures, it will be unable to achieve its
current business strategy.
Prior to March 15, 2003, the Issuer's interest expense on the Notes will be
comprised solely of the accretion of original issue discount. Thereafter, the
Notes will require annual cash interest payments of $32.5 million. In addition,
the Senior Credit Facility will require periodic interest and principal payments
on amounts borrowed thereunder. The Company's ability to make scheduled payments
of principal of, or to pay interest on, its debt obligations, and its ability to
refinance any such debt obligations (including the Notes), will depend on its
future
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performance, which, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond its control. As discussed above, the Company's business strategy
contemplates substantial capital expenditures in connection with the execution
of its business plan. There can be no assurance that the Company will generate
sufficient cash flow from future operations, that anticipated revenue growth
will be realized or that future borrowings or equity contributions will be
available in an amount sufficient to service the Company's indebtedness and make
anticipated capital expenditures. The Company anticipates that it may need to
refinance all or a portion of its indebtedness (including the Notes) on or prior
to its scheduled maturity. There can be no assurance that the Company will be
able to effect any required refinancing of its indebtedness (including the
Notes) on commercially reasonable terms or at all. See "Risk Factors--
Substantial Indebtedness; Ability to Service Indebtedness".
Inflation
Because of the relatively low levels of inflation experienced in 1995,
1996, 1997 and as of March 31, 1998, inflation did not have a significant effect
on the Company's results in such years.
Year 2000
The Company 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 the Company's current information systems because its software is
either already Year 2000 compliant or required changes are not expected to be
material. Based on the nature of the Company's business, the Company 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, 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.
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BUSINESS
Company Background
As a result of rapid developments in the wireless communications industry,
the Company's founders recognized the opportunity to consolidate strategically
located wireless communications towers and enhance rental revenue on those
towers. The Company's founders developed their strategy of acquiring clusters of
towers that would provide strong positions in selected, high growth markets in
the Southeastern United States. To date, the Company has acquired 568 towers in
175 separate acquisitions and has built an additional 42 towers in 13 states. As
a result of these efforts, the Company believes it has established itself as the
leading rental tower owner in the Southeastern United States.
The Company's objective is to create substantial value from its position as
the leading rental tower owner in the Southeastern United States. In order to
achieve its objective, the Company has designed and implemented a three-tiered
growth strategy of (i) capitalizing on the operating leverage of its business by
aggressively marketing available rental space on its towers, (ii) rapidly
acquiring towers in key markets and (iii) implementing a selective tower
construction program.
The Company has rapidly executed its strategy and today owns a significant
portfolio of high quality towers that generates increasing revenue and cash
flow. The Company believes that its portfolio of strategically located rental
towers exhibits the following economic characteristics: (i) high absolute and
incremental margins; (ii) stable and predictable cash flow; (iii) a diversified
customer base; (iv) high barriers to entry; (v) low customer churn; and (vi)
attractive underlying growth. The Company anticipates that this portfolio
provides the core asset base from which it will continue the ongoing strategy to
acquire and construct clusters of towers in attractive, high growth markets.
Further, the Company believes it has created a stable and long-term stream of
tower rental revenue that would continue to be generated even if the Company
were to discontinue pursuing its aggressive expansion strategy.
The Company is designed to be an efficient consolidator and operator of
rental towers. The Company has created a highly focused, structured organization
in which significant resources are devoted to acquiring or constructing
strategically located sites supported by customer demand. In addition, the
Company has the capability to "instantly integrate" new towers and initiate
sales and marketing efforts immediately following the acquisition or
construction of new towers.
The success of the Company's focused efforts is illustrated by its
financial results. The Company believes that its "Annualized Run Rate Revenue",
calculated as of a given date by annualizing the monthly rental rates then in
effect for customer lease contracts in force as of such date, is a significant
indicator of its performance. As of June 9, 1998, the Company's Annualized Run
Rate Revenue was $28.0 million, without giving effect to adjustments totaling
$.2 million in pro forma revenue from probable acquisitions, and, based upon the
Company's current inventory of 610 towers, average Annualized Run Rate Revenue
per tower of $45,830. The Company also believes that "same tower" revenue growth
(measured by comparing the Annualized Run Rate Revenue of the Company's towers
at the end of a period to the Annualized Run Rate Revenue for the same towers at
the end of a prior period), is an indication of the quality of the Company's
towers and its ability to generate incremental revenue on such towers. The
Company experienced aggregate "same tower" revenue growth of 26.3% in 1997 over
1996.
Industry Background
Communications towers are primary infrastructure components for wireless
communications services such as cellular, paging, PCS, SMR, wireless data
transmission and radio and television broadcasting. Wireless communications
companies require specialized wireless transmission networks in order to provide
service to their
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customers. Each of these networks is configured specifically to meet the
coverage requirements of the particular carrier and includes transmission
equipment such as antennae, transmitters and receivers placed at various
locations throughout the covered area. These locations, or communications sites,
are critical to the operation of wireless communications networks and consist of
towers, rooftops and other structures upon which such equipment is placed.
Wireless communications providers design their network and select their
communications sites in order to optimize available frequencies relative to
their projected usage patterns, topography and service requirements.
The Wireless Communications Industry
The wireless communications industry is growing rapidly as (i) consumers
become increasingly aware of the uses and benefits of wireless communications
services, (ii) the costs of wireless communications services decline and
(iii) new wireless communications technologies continue to be developed. Changes
in U.S. federal regulatory policy have led to a significant increase in the
number of competitors in the wireless communications industry, most recently
through the auction of radio spectrum for PCS. This competition, combined with
an increasing reliance on wireless communications services by consumers and
businesses, has increased demand for higher quality networks characterized by
uninterrupted service and improved coverage. As new carriers build out their
networks and existing carriers upgrade and expand their networks to maintain
their competitiveness, the demand for communications sites has increased
dramatically.
The wireless communications industry is comprised of the following
segments:
. Cellular--currently each market in the United States has two
cellular operators. Cellular networks consist of numerous geographic
"cells" in which frequencies are reused every few miles. Each cell
includes a communications site which includes transmission equipment
generally residing on a wireless communications tower. According to
industry publications, as of June 30, 1997 there were 48.7 million
wireless telephone subscribers in the United States, representing a
27.5% growth rate over the prior 12 months, and an overall penetration
of approximately 18.0%. In addition, as the cellular market migrates
from an analog based transmission technology to a digital based
transmission technology, demand is expected to increase as prices
decline. In order to increase network capacity and improve service
quality, cellular carriers are re-engineering their networks to have
smaller and more numerous cells. While historically cellular operators
have generally built their own towers, the growing demand for tower
space and restrictions on new tower construction are making rental
towers an increasingly important component of their transmission
networks.
The following illustrates the growth in the United States' wireless
communications industry from 1987 to 1996.
<TABLE>
<CAPTION>
Number of Subscribers
Year (in millions)
---- ---------------------
<S> <C>
1987 .9
1988 1.6
1989 2.7
1990 4.4
1991 6.4
1992 8.9
1993 13.1
1994 19.3
1995 28.2
1996 38.2
</TABLE>
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Source: CTIA Reflects Cellular, ESMR, and PCS Subscribers
. PCS--PCS is an emerging wireless communications technology
competing with cellular that offers a digital signal that is
clearer and offers greater privacy than typical analog cellular
systems. Up to six PCS licenses have been issued by the FCC in
each market (versus two for cellular). PCS system construction
began in 1995, and due to their small cell size, PCS companies
are expected to be substantial users of tower space. According to
industry publications, there were approximately 2.2 million PCS
subscribers in the United States as of December 31, 1997. The
Personal Communications Industry Association ("PCIA") estimates
that on December 31, 1997 there were approximately 45,000
antennae sites (cellular and PCS) in the United States. PCIA
estimates that this number will increase by approximately 100,000
additional antennae sites over the next 10 years. While some of
these sites may use existing towers, it is expected that a large
number of new towers will be required for the deployment of PCS
networks. As an example, PrimeCo, Aerial and Sprint PCS are
currently building out PCS systems in the Company's target region
and are co-locating their equipment on many of the Company's
rental towers, as opposed to constructing their own towers.
. Paging--Paging has also enjoyed dramatic growth over the last
ten years. According to industry publications, there were 49.8
million pagers at the end of 1997, representing an average annual
growth rate of 26.8% since 1992. This growth was spurred by
declining prices, wider coverage and increasing expansion into
the consumer market. While network construction by the paging
industry appears to be reaching a certain level of maturity, the
increased number of subscribers is expected to require
utilization of additional channels and related transmitter
equipment. Utilization of these additional channels will result
in additional revenue on rental towers. Paging companies have
historically relied heavily on rental towers and are expected to
continue to do so.
. SMR / ESMR--SMR companies provide two-way radio communications
for primarily commercial purposes, especially fleet vehicles.
Two-way private business radio is used primarily for businesses
engaged in dispatching personnel or equipment to work sites and
includes construction and trucking companies, courier services,
hospitals and taxicabs. Each service provider holds an FCC radio
license that allows it to transmit over a particular frequency,
and most lease space on a local tower for transmission purposes.
As a result of advances in digital technology, some wireless
communications providers have begun to design or modify networks
that utilize SMR frequencies by deploying advanced digital
technologies called ESMR. ESMR increases the capacity of radio
networks allowing more efficient use of allocated frequencies.
These efficiencies and improvements allow ESMR to provide
wireless telephone service that can compete more effectively with
cellular and PCS. As more commercial users are attracted to such
enhanced services, the demand for tower space to support such
usage also continues to increase. Nextel and Southern
Communications are the leading ESMR providers in the United
States and are significant customers of the Company.
. Government Agencies--Federal, state and local government
agencies are major users of wireless communications services and
typically operate their own dedicated frequencies. These
government agencies, in certain circumstances, often find it
easier to lease rather than own tower space. As new technologies
are developed in law enforcement, emergency and other government
services, various municipalities and government agencies are
becoming more significant users of wireless communications
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services. Examples of government customers of tower space include
the Federal Bureau of Investigation, U.S. Coast Guard, U.S.
Secret Service and various municipal agencies.
. Broadcast And Wireless Cable--Broadcasters transmit AM/FM
radio signals and VHF and UHF television signals in order to
obtain the broadest, clearest coverage available. A broadcast
station's coverage is one of the primary factors that influences
the station's ability to attract advertising revenue. Once a
tower location is chosen, broadcasters rarely change sites due to
complex regulatory requirements, high switching costs and
business disruption. The U.S. broadcasting industry is generally
mature with respect to demand for transmission tower capacity.
However, a significant increase in demand for tower capacity may
occur when digital spectrum is used to deliver high definition
television ("HDTV") or digital multi-casting, i.e., multiple
"normal" definition television channels. In addition, wireless
cable television is being developed and positioned as a
potentially more accessible alternative to traditional cable
television. Wireless cable operates by receiving programming from
a satellite which is retransmitted from an antenna on a tower to
a receiving antenna on a subscriber's residence. Several wireless
cable companies are now in the process of constructing their
systems in the Company's region.
. Emerging Technologies and Availability of FCC Spectrum--
Several new entrants in the wireless communications industry are
emerging as new technology becomes available and additional radio
spectrum is authorized for use by the FCC. For example, Local
Multipoint Distribution Service ("LMDS"), has diverse
applications including wireless video, telephone, paging and
wireless local loop. Wireless local loop ("WLL") systems are seen
as an alternative to traditional copper and fiber-optic based
services with the potential to be implemented more quickly and at
lower costs than fixed wireline services. WLL systems provide
non-mobile telecommunications services to users by transmitting
voice messages over radio waves from the public switched network
to the location of the fixed telephone. The installation of WLL
systems minimizes the need to obtain right-of-ways and excavate
existing roads and infrastructure in order to install or upgrade
a local telephone system serving non-mobile telephones. Also,
wireless data transmission is widely viewed as being in its
infancy as the development of Personal Digital Assistants and a
variety of applications are being developed. In addition to
private networks, several companies are building national
wireless data transmission networks including Motorola's EMBARC
system, Nationwide Wireless Network (an affiliate of MTEL), RAM
Mobile Data (10% owned by BellSouth), and Racotek's and Geotek's
SMR based data networks. Automatic Vehicle Monitoring/Location
and Monitoring Services ("AVM/LMS") systems generally require a
minimum of three towers to band a coverage area. The Company
believes that AVM/LMS service providers will use the band to
provide fleet tracking, rail and container transportation
monitoring, security and access control, etc. Other new
developments including the auction of 220 and 450 Megahertz
spectrum are expected to increase available radio spectrum for
commercial applications.
These recent developments in the wireless communications industry indicate
continuing opportunities for the tower rental industry. Industry analysts
project rapid and continued growth in the major wireless communications industry
segments and these projections all share a common outcome: more equipment needs
to be installed on a limited supply of towers.
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The Tower Rental Industry
A typical tower consists of a compound enclosing the tower and an equipment
shelter which houses a variety of transmitting, receiving and switching
equipment. There are three types of towers: (i) guyed; (ii) self-supporting
lattice; and (iii) self-supporting monopole. Guyed towers gain their support
capacity from a series of cables attaching separate levels of the tower to
anchor foundations in the ground. A lattice model is usually tapered from the
bottom up and can have three or four legs. A monopole is a tubular structure
that typically accommodates fewer customers and may be used as a single purpose
tower or in locations where there are space constraints or a need to address
aesthetic concerns. Self-supporting towers typically range in height from 50-200
feet for monopoles and up to 1,000 feet for lattices, while guyed towers can
reach a height of up to 2,000 feet. Different wireless communications
technologies require that equipment be located at various heights to optimize
signal propagation. The Company's current tower inventory is comprised of 494
guyed, 90 self-supporting lattices and 12 monopoles.
Wireless communications equipment can also be placed on building rooftops.
Traditionally, rooftop sites have been common in urban downtown areas where tall
buildings are available and multiple communications sites are required because
of high wireless traffic density. Today, rooftop sites are used less for certain
types of customers as current technology requirements cause an increasing number
of providers to place antennae lower on buildings.
The value of a rental tower is principally determined by the desirability
of its location to customers and the amount of customer equipment installations
that it can support. Several customers may share one tower through "vertical
separation" with each type of customer on a different level. While many existing
towers were not originally built with the capacity to support multiple
customers, these towers can often be upgraded to support additional equipment.
Emergence of the Tower Rental Industry. Historically, wireless
communications providers and broadcasters built, owned and operated their own
towers, which were typically constructed and designed for their exclusive use.
As recent technologies emerged, the original equipment on many of these towers
became obsolete, resulting in these towers becoming available for other uses,
and in some cases, for acquisition . For example, fiber optic cables have
largely replaced transmission traffic traditionally carried by wireless
microwave networks. The paging and SMR industries were traditionally owned by
local or regional companies which constructed their own networks and
transmission towers. As these industries consolidated over the past ten years,
the acquiring companies typically purchased the radio licenses and subscriber
leases and entered into lease agreements with the original tower owner. Wireless
communications providers today are generally more focused on developing their
subscriber base and relatively less focused on building and owning tower
networks. An opportunity to acquire towers arose as a result of these
developments.
During the mid-to-late 1980s, a number of independent tower owners began
to emerge, marking the beginning of the tower rental industry. These independent
tower owners focused on owning and managing towers which could serve multiple
customers. The Company believes the majority of these tower operators were
individuals with a small number of local rental towers offering very limited
coverage areas. In the last three years, several larger independent tower owners
have emerged as demand for wireless communications services continued to grow
and as additional high frequency licenses were awarded for new wireless
communications services (including PCS, narrowband paging and LMDS) each
requiring networks with extensive tower infrastructure. As the demand for towers
has been increasing, there has been a growing trend by municipalities to slow
the proliferation of towers. These trends have contributed to a growing need for
towers that can accommodate co-location of wireless communications providers. In
this regard, an opportunity to acquire towers and lease space to multiple
wireless communications providers was created.
Ownership of rental towers in many parts of the United States remains
highly fragmented. Only a few
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independent tower owners have accumulated a large number of towers and the
Company believes it is the only one to achieve a consolidated position in the
Southeastern United States. The pace of consolidation has begun to accelerate as
larger independent owners acquire small local owners in certain regions. In
individual markets that are consolidated, the consolidating owners have created
formidable competition for new potential rental tower owners.
The Pinnacle Approach to the Tower Rental Industry
The Company is the leading provider of wireless communications rental tower
space in the Southeastern United States. Since commencing operations
approximately three years ago, as of June 9, 1998, the Company has completed 175
acquisitions through which it has acquired 568 towers within the Southeastern
United States and has constructed an additional 42 towers in such high growth
markets as Orlando, Atlanta, Birmingham and Tampa and believes it is well
positioned to continue to capitalize on the rapid consolidation of the highly
fragmented tower rental industry.
The Company leases tower space to its customers and receives rental
payments under tower leases that generally range in duration from three to five
years. In addition, a majority of the Company's leases provide for scheduled
minimum rent increases of the greater of a specified percentage (which typically
ranges from 3-5%) or the change for the relevant period in the CPI. The Company
experiences negligible customer churn. The Company has a diversified base of
over 724 customers, only one of which accounts for more than 5% of the Company's
total revenue. The Company's customers are a broad base of wireless
communications providers, operators of private networks and government agencies
that include Nextel, Sprint PCS, Motorola, PageNet, BellSouth Mobility, PrimeCo,
AT&T Wireless, Southern Communications, Georgia Power, Alabama Power, U.S. Coast
Guard, Internal Revenue Service, Federal Bureau of Investigation and Bureau of
Alcohol, Tobacco & Firearms.
The Company has rapidly executed its strategy and today owns a significant
portfolio of high quality towers that generates increasing revenue and cash
flow. The Company believes that its portfolio of strategically located rental
towers exhibits the following economic characteristics: (i) high absolute and
incremental margins; (ii) stable and predictable cash flow; (iii) a diversified
customer base; (iv) high barriers to entry; (v) low customer churn; and (vi)
attractive underlying growth. The Company anticipates that this portfolio
provides the core asset base from which it will continue the ongoing strategy to
acquire and construct clusters of towers in attractive, high growth markets.
Further, the Company believes it has created a stable and long-term stream of
tower rental revenue that would continue to be generated even if the Company
were to discontinue pursuing its aggressive expansion strategy.
The Company has established a strong market position throughout the
Southeastern United States and continues to execute its strategy through both
the acquisition and construction of rental towers. Upon completing an
acquisition or construction of a new tower, the Company attempts to enhance its
financial performance through the application of aggressive marketing techniques
and, in the case of acquisitions, through improved operational and engineering
management. All of the Company's functional business areas participate in the
assessment of all potential acquisition and construction projects and are
organized with a goal of rapidly and effectively integrating additional towers
into the Company's operations.
Unlike several industry competitors, the Company has not focused on the
rooftop ownership or management businesses as it believes these businesses do
not generate the same levels of cash-flow margin which the Company currently
experiences through the rental of tower space. However, the Company does own
selected rooftops in West Palm Beach, Florida and New Orleans, Louisiana that
have cash-flow margins similar to those of its rental towers. The Company also
manages a selected number of rooftops located in high profile areas where tower
construction and rooftop ownership have proven difficult, including the Empire
State Building, The Boca Raton Hotel and Resort and several sites within Disney
World in Florida.
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The Company has established a leading position within the tower rental
industry in the Southeastern United States. The Southeastern United States is
generally characterized by a number of attractive demographic trends including
relatively high population and economic growth rates. For example, according to
the U.S. Census Bureau, during the three years ending July 1, 1997 the
population growth rate in Florida was 5.0%, nearly double that of the overall
rate of 2.8% for the United States. Moreover, according to the U.S. Census
Bureau, 4 of the top 10 fastest growing cities in the United States are located
in the 12 state region targeted by the Company. As a result of this rapid
population growth, a large and affluent population base and high levels of
business and leisure travel, the Company believes that towers located in major
population centers and along major transportation corridors in the Southeastern
United States are and will continue to be highly pursued by wireless
communications providers and therefore have greater future revenue potential. In
addition, the Company believes that new tower construction in these areas is
more likely to face local zoning restrictions because of the aforementioned
characteristics of the region.
Business and Growth Strategy
The Company's objective is to create substantial value from its position
as the leading rental tower owner in the Southeastern United States. In order to
achieve its objective, the Company has designed and implemented a three-tiered
growth strategy of (i) capitalizing on the operating leverage of its business by
aggressively marketing available rental space on its towers, (ii) rapidly
acquiring towers in key markets and (iii) implementing a selective tower
construction program. However, there can be no assurance that the Company will
successfully implement its strategy and achieve its objective.
I. Marketing and Development Strategy
The Company seeks to capitalize on the operating leverage of its business
by increasing the utilization of rental space on its towers. The Company's
customers are generally responsible for the installation of their own equipment
and the incremental utility costs associated with that equipment. Furthermore,
there are no additional monitoring, maintenance or insurance costs to the
Company associated with additional customers. Accordingly, the Company believes
that when additional rental space is available on its towers, incremental
revenue can be achieved at low incremental costs, thereby yielding significant
incremental profit margin.
The implementation of the Company's marketing and development strategy
includes the following:
. Offer Strategically Located Clusters of Towers. By owning
and assembling clusters of towers in strategically attractive
regions, the Company believes it is able to offer its customers
the ability to rapidly fulfill their network expansion plans. The
Company believes that the ability to offer "one stop shopping"
services to customers on a local and regional basis provides the
Company a significant competitive advantage.
. Leverage Customer Relationships. The Company believes it has
established a reputation among its customers as a highly
professional, responsive tower space provider that routinely
fulfills its commitments to its customers. This has been achieved
through ongoing investment in the development of multilevel
customer relationships. The Company believes that making
customers' technical and planning personnel aware of the quality
of a particular site, the ease of doing business with one lessor,
the location of other Company-owned towers and the Company's
ability to construct new sites are important factors in
generating interest in the Company's towers.
. Track FCC Filings. All FCC licensees must file applications
for site locations. Utilizing its proprietary databases and
publicly available information, the Company tracks
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these filings closely to identify tower acquisition and
construction opportunities which, due to the site's appeal to a
broad base of customers, the Company believes will have
significant and predictable future revenue growth. Additionally,
the Company closely monitors FCC auctions in order to identify
new market entrants.
. Promote Quality and Security of Facilities. The wireless
communications equipment typically stored in a tower building is
becoming increasingly sophisticated and is critical to a wireless
communications provider's ability to generate revenue.
Accordingly, the Company believes it is of vital importance to
its customers that their equipment be in a well-maintained and
secure building. The Company believes it has developed a
reputation as a provider of high quality and secure sites.
. Dedicate Resources to Customer Service. The Company employs
a group of individuals who are entirely dedicated to assisting
customers with site location and installation logistics.
Management of the Company's technical data through effective
information systems enables the customer service group to respond
quickly and accurately to customers' needs before, during and
after the installation of customers' equipment.
II. Acquisition Strategy
The Company's acquisition strategy is focused on (i) the rapid acquisition
of towers in key markets as a means to quickly gain critical mass, thereby
discouraging other tower consolidators from entering its markets and (ii) the
completion of follow-on acquisitions combined with the selective construction of
new tower sites to complete coverage of the selected market. In executing its
acquisition strategy, the Company generally targets strategically located
individual towers or small groups of towers. Since commencing operations in
1995, the Company had completed the acquisition of 568 towers in 175 separate
transactions. As of June 9, 1998, the Company had a contract or a letter of
intent with respect to 11 proposed acquisitions consisting of 33 towers and
through June 9, 1998, had identified and initiated discussions concerning
numerous additional acquisition opportunities.
The Company conducts extensive due diligence prior to consummating an
acquisition, leveraging what the Company believes to be its competitive
advantage in terms of its experience in, and knowledge of, the tower rental
industry. Of the Company's 88 total employees, 23.0% are dedicated to completing
acquisitions. The Company utilizes nine full-time tower buyers, who spend
substantially all of their time in the field identifying, evaluating and
generating acquisition opportunities for the Company. The Company uses a
standardized process that it has developed to ensure that acquisitions are
evaluated, documented and rapidly processed. In order to execute and ensure the
integrity and quality of this process, the Company utilizes outside independent
professionals to verify certain accounting, legal and engineering data. The
Company believes that this approach has proven effective in permitting the
Company to more accurately predict the performance of acquired assets and reduce
the risks associated with the Company's acquisitions. However, acquisitions
involve a number of potential risks, including the potential loss of customers
and unanticipated events or liabilities. Because of such risks, there can be no
assurance that the Company will be able to successfully implement its
acquisition strategy. See "Risk Factors -Dependence on Acquisitions;
Integration of Acquisitions."
The Company utilizes the following primary criteria in evaluating the
attractiveness of a potential acquisition:
. Target Attractive Wireless Geographic Markets. Within its
targeted region, the Company targets population centers and
transportation corridors where there is evidence of high growth
in wireless communications services. The Southeastern United
States is
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generally characterized by a number of attractive demographic
trends including relatively high population and economic growth
rates. Today, the Company has strong market positions in many
population centers such as Orlando, Atlanta, Birmingham, Tampa
and New Orleans. Further, the Company has established a strong
market position along the following transportation corridors:
I-10 from Baton Rouge, Louisiana to Jacksonville, Florida
I-4 from Daytona Beach, Florida to Tampa, Florida
I-85 from Atlanta, Georgia to Montgomery, Alabama
I-75 from Atlanta, Georgia to Naples, Florida
I-65 from Birmingham, Alabama to Mobile, Alabama
I-16 from Atlanta, Georgia to Savannah, Georgia
I-59 from Birmingham, Alabama to New Orleans, Louisiana
. Compatibility with Existing Tower Network. The Company's
marketing activities provide information as to how a potential
acquisition may enhance its existing tower network. The Company
considers many factors when evaluating a potential acquisition.
For example, the Company considers whether an acquisition will,
when combined with existing tower inventory, result in the
Company owning a cluster of towers in a given area, thereby
providing the Company with a stronger market position. The
Company also considers whether the towers in a particular
acquisition meet demand for enhanced coverage which has been
previously identified by customers. In some instances, the
Company may acquire, as part of a group of towers being
purchased, an individual tower which falls outside of normal
acquisition parameters. Such acquisitions occur only when the
Company has determined that the overall transaction is
attractive.
. Disciplined Valuation Process. The Company seeks to acquire
towers that have existing cash flow and the potential for
significant future cash flow growth. The price paid for a
particular tower depends on many factors including the quality of
existing cash flow, location, land values, customer quality and
excess tower capacity. For each potential acquisition, the
Company reviews the current population coverage of each proposed
tower, the nature and quality of the customer base, coverage of
current and future major transportation corridors and the
location and desirability of competing towers. The Company also
makes an assessment of potential cash flow growth and estimates
whether additional capital expenditures will be required to add
capacity to accommodate future growth.
The Southern Towers Acquisition. In March 1998, the Company completed
the acquisition of 201 towers from Southern Communications, a subsidiary of
Southern Company, one of the largest utility holding companies in the United
States and a large ESMR provider in the United States with a network in the
Southeast. The Company paid $83.5 million plus fees and expenses for these
towers, which are located in Georgia, Alabama, Mississippi and Florida,
substantially all of which were constructed within the last four years. Prior to
the acquisition, these towers were principally for the exclusive use of Southern
Communications and its affiliates. Only a limited number of third party tenants
have been given access to these towers. The towers were generally constructed
with capacity significantly exceeding Southern Communications' specific capacity
requirements.
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Accordingly, the Company believes that there is substantial additional revenue
potential on these towers.
The Company believes that the Southern Towers Acquisition has
significantly accelerated its progress in achieving its goal to become the
leading provider of rental tower space in the Southeast United States. The
locations of the Southern towers are complementary to the Company's previously
existing inventory of towers and result in a level of geographic coverage which
the Company believes is far more comprehensive than that offered by any of its
competitors. In particular, the Southern Towers Acquisition provides the Company
with a strong market position in Atlanta, one of the fastest growing wireless
communications markets in the Southeast. The characteristics of the Southern
towers (predominately single tenant with significant remaining capacity) is
consistent with the Company's strategy to acquire towers with the potential for
substantial future growth.
In connection with the Southern Towers Acquisition, the Company and
Southern Communications have entered into leases whereby Southern Communications
or an affiliate is a customer on each of the 201 towers acquired. Under the
lease agreements, Southern Communications and its affiliates will pay annual
initial aggregate rents of $5.5 million. The leases have initial terms of ten
years with five optional renewal periods of five years each exercisable at the
customer's option on the same terms as the original leases. The Company is
currently in discussions with several large customers with respect to rental
space on these towers. Southern Communications has also indicated a desire to
lease space on these towers in addition to the space covered by the leases
referred to above. The Company has also entered into an option agreement with
Southern Communications whereby the Company may supply, acquire or construct an
additional 80 sites, the locations of which have been identified by Southern
Communications, for rental by Southern Communications or its affiliates. Any of
these additional sites would be rented under the same terms as the original
leases of the 201 towers described above.
III. NEW TOWER CONSTRUCTION STRATEGY
The Company's tower site construction is not speculative. Construction is
only initiated after at least one anchor customer is identified and after the
Company has determined, based on market research, that the capital outlay for
the construction project would not exceed a maximum multiple of estimated Tower
Level Cash Flow after a given period of time. As such, the Company's capital
investments are tailored to provide for anticipated demand with a goal of
ensuring the appropriate financial return on each tower constructed through its
build program. There are, however, risks associated with new development and
tower construction. Because of such barriers, there can be no assurance that
the Company's new tower construction strategy will be successful. See "Risk
Factors -- Barriers to New Construction."
The elements of the Company's tower build program include the following:
. DISCIPLINED BUILD SELECTION CRITERIA. Through its sales and
marketing efforts, the Company seeks to identify suitable tower
construction sites based on information obtained from wireless
communications providers regarding their network construction
plans. The Company evaluates those plans and ensures that an
effective solution to meeting customer requirements is employed,
whether the result is selling space on an existing tower,
acquiring an existing tower, augmenting an existing tower or
constructing a new tower. Once such opportunities are identified,
the Company acts quickly to select only those opportunities which
are financially attractive.
. RAPID CONSTRUCTION/BUILD IMPLEMENTATION. After identifying
an attractive construction opportunity, the Company moves quickly
to: (i) secure access to the site by either purchasing or
entering into a long-term lease for a parcel of land; (ii) select
the appropriate type of tower based on structural capacity needs;
(iii) initiate sales and marketing efforts to rent space on the
tower; and (iv) complete necessary steps to obtain
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zoning approvals and building permits. The Company then oversees
the construction of the tower by hired sub-contractors.
. EFFECTIVE TOWER DESIGN AND SOURCING. New tower structures
are available from a variety of manufacturers. The number of
customer attachments that can be installed on any individual
tower (the tower's capacity) varies dramatically depending on a
number of factors including the original engineering and design
of the tower, the geographic area in which the tower is erected
and the specific nature of the attachments (coaxial lines,
mounting devices and antennas) which customers wish to install.
These factors also influence the amount of capital which must be
invested to build such towers, which in the case of a 500-foot
guyed tower could range from $35,000 to $1,000,000. Tower rental
rates are a function of demand, the amount and type of equipment
to be installed and the degree of local competition.
While construction of new towers does not provide immediate cash flow like
that of existing towers, the Company believes that due to the generally lower
capital requirements for constructed towers versus acquired towers, new tower
construction generates a higher return than acquisitions once the new towers are
fully leased. Approximately 14 new towers are currently under construction by
the Company and there is in excess of 100 additional tower projects in various
stages of development.
COMPANY OPERATIONS
Through its centralized management structure, the Company is designed to
be an efficient consolidator and operator of rental towers. This is reflected in
the methods and processes that the Company employs in managing its day-to-day
operations, including the rapid integration of acquisition, tower construction
and sales and marketing data into the Company's proprietary management
information systems. This approach ensures that tower management is coordinated
across the Company's functional areas and that such information is accurate,
timely and easily available. The Company has invested heavily in its information
systems and believes that its investments in these areas will accommodate
significant additional growth.
The Company has two levels of non-tower operating expenses: corporate
development expenses and general and administrative expenses. Corporate
development expenses are associated with the Company's acquisition and
construction strategies. General and administrative expenses are associated with
supporting the Company's day-to-day management of its existing properties. If
the Company were to curtail its acquisition and construction activities, the
related corporate development costs could be avoided.
The key components of the Company's operations include (i) effective
integration of tower assets into the Company's existing portfolio, (ii) ongoing
monitoring of the Company's portfolio of tower assets and (iii) customer sales
and support.
INTEGRATION. The pace and level of activity which characterize the
Company's acquisition, construction and marketing strategies create certain
operational challenges including the efficient integration of the due diligence
data and other accounting, legal, regulatory, real estate, engineering and lease
information. In response to these challenges, two years ago the Company
committed substantial resources to the development of its proprietary management
information systems to accommodate the Company's overall acquisition,
construction and marketing strategies. As a result, the Company has developed
the capability to "instantly integrate" new acquisitions and tower construction
activity and initiate sales and marketing efforts immediately upon closing or
completion. This capability applies to an acquisition of a single tower as well
as the Southern Towers Acquisition, which added 201 towers to the Company's
portfolio of assets.
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<PAGE>
ONGOING MONITORING. The Company's operations personnel perform routine,
ongoing monitoring to ensure the maintenance of accurate data with regard to the
Company's tower inventory. Such inventory management includes radio frequency
audits and regulatory compliance. The Company seeks to maintain accurate
information with regard to customers' equipment that is installed on its towers.
The Company believes that this area is overlooked by many rental tower owners,
resulting in erroneous information about the availability of tower space and
certain existing customers using more capacity than is reflected in their lease.
To minimize such errors, the Company conducts radio frequency audits and matches
each customer's equipment (which includes base stations, frequencies, coaxial
lines and antennas) to those allowed under the customer's lease. Discrepancies
are identified and customers are informed of required modifications to the lease
terms in order to provide for additional rent. In addition, the Company utilizes
this information to facilitate future capacity calculations and predict where
and when capital expenditures may be required to provide additional space to new
customers. Regulatory compliance and respect for the needs of the communities in
which the Company operates are essential to the Company as well as to its
customers. Operations personnel ensure that all sites are in compliance with all
FAA and FCC regulations and other local requirements. Regulatory data is
integrated into the Company's management information systems and is provided to
current and potential customers as part of equipment installation support
efforts.
CUSTOMER SALES AND SUPPORT. The Company's customer sales support group
is dedicated to responding to the needs of current and potential customers.
Support is offered to customers in connection with assessing a selected tower's
capacity, determining the potential for radio frequency interference from new
equipment and providing required documentation as to ownership and other
property issues. This service function seeks to facilitate the customer's
decision to initiate installation on the Company's tower and, the Company
believes, has enhanced the Company's reputation as a full-service and responsive
provider of rental tower space.
ECONOMICS OF PINNACLE'S BUSINESS
Today, the Company owns a portfolio of tower assets that it believes has
the following favorable economic characteristics:
. HIGH ABSOLUTE AND INCREMENTAL MARGINS. The Company's towers
are fixed-cost assets with minimal variable costs associated with
revenue from leasing available space to additional or existing
customers, as each customer generally assumes the costs of
installation, utilities and equipment maintenance. Accordingly, a
rental tower owner can generate increasing operating margins when
new customers are added, resulting in high incremental free cash
flow available to service debt. For the quarter ended March 31,
1998, the Company's Tower Level Cash Flow Margin was 80.6%.
. STABLE AND PREDICTABLE CASH FLOW. The Company believes that
it benefits from the long-term contract nature of its tower
rental business and the predictability and stability of monthly,
prepaid and recurring revenue. The Company generally leases space
on its towers to wireless communications providers under three to
five-year leases. In addition, a majority of the Company's leases
provide built-in annual rate increases of the greater of a
specified percentage, (which typically ranges from 3-5%), or the
change for the relevant period in the CPI. Furthermore, because a
significant proportion of tower rental revenue is received from
customers that are predominantly large companies and because
towers provide a basic utility-like service (which can be
terminated by a tower owner if rent is not paid), the Company
generally experiences low levels of bad debt expense. In 1997,
the Company's bad debt expense as a percentage of revenue was
1.0%.
. DIVERSIFIED CUSTOMER BASE. There is broad representation of
wireless
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communications providers and underlying technologies reflected in
the Company's customer base. Accordingly, the Company believes
that the stability and growth of its revenue will reflect that of
the wireless communications industry in general, rather than any
specific customer or segment within that industry. The Company
has a diversified base of over 724 customers, only one of which
accounts for more than 5% of the Company's total revenue.
. BARRIERS TO ENTRY. Towers are subject to a variety of
federal and local regulations which make construction of towers
difficult, expensive and time consuming, especially in highly
populated or high transmission areas. In addition, in areas where
the Company has established a critical mass of rental tower
inventory adequate to supply customers' site requirements,
construction of alternative towers will be less attractive to
others due to the likelihood of lower returns on those towers.
Wireless communications providers seeking to construct their own
proprietary, limited use towers face continued opposition by
municipalities, which are reducing the opportunities for such new
towers to be built and supporting the trend toward co-location on
rental towers.
. LOW CUSTOMER CHURN. The Company typically experiences low
customer churn as a result of the high relocation costs incurred
by customers. When customers enter into long-term contracts for
tower space, those customers generally make significant capital
and network engineering commitments to the related site. The
Company believes that these levels of commitment made by its
customers support the long-term nature and predictability of the
Company's revenue. Municipal approvals are becoming increasingly
difficult to obtain and may also affect the carrier's decision to
relocate. The costs associated with network reconfiguration,
obtaining FCC and municipal approval and the time required to
complete these activities may not be justified by any potential
savings in reduced tower operating expense. As a result, the
Company experienced customer churn of 0.8% in 1996 and 0.6% in
1997.
. ATTRACTIVE UNDERLYING GROWTH AND PROSPECTS. According to
industry publications, the paging industry has experienced annual
average growth rates of approximately 26.8% over the past few
years and, the cellular industry had a growth rate of 27.5% from
June 30,1996 to June 30, 1997. According to industry
publications, as of December 31, 1997, penetration for wireless
services was approximately 21.0% and is projected to grow to
53.0% by 2007. The Company's rental towers are basic
infrastructure components for all major wireless communications
services, including cellular, paging, two-way radio, broadcast
television, microwave, wireless data transmission and SMR
customers. As a result, the Company believes that its tower
rental revenue will reflect the growth of its customer base over
the next several years.
CUSTOMERS
As of June 9, 1998, the Company had over 2,750 separate tower space
leases. The Company has a diversified base of over 724 customers, only one of
which accounts for more than 5% of the Company's total revenue.
The Company has a diverse mix of customers representing the various
technologies and segments of the wireless communications industry. As a result,
the Company believes it is not dependent on any one segment of the
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wireless communications industry for future revenue growth. The following is a
summary of the Company's Annualized Run Rate Revenue by customer type and
approximate percentage of revenue derived therefrom as of June 9, 1998:
<TABLE>
<CAPTION>
CUSTOMER TYPE PERCENTAGE
--------------- OF REVENUE
-----------
<S> <C>
SMR...................................... 28%
Paging................................... 25%
Land Mobile.............................. 20%
PCS...................................... 12%
Cellular................................. 6%
Government............................... 4%
Broadcasting............................. 4%
Data..................................... 1%
---
Total................................. 100%
===
</TABLE>
The following is a summary of the Company's towers by state, as of June 9,
1998:
<TABLE>
<CAPTION>
STATE NUMBER
----- OF TOWERS
---------
<S> <C>
Florida 168
Georgia 139
Alabama 96
Louisiana 67
Mississippi 40
North Carolina 23
South Carolina 18
Virginia 18
Texas 15
Maryland 12
Tennessee 8
Arkansas 5
New York 1
---
Total 610
===
</TABLE>
The Company believes it has effectively executed its strategy to accumulate
clusters of towers in designated market areas especially with respect to certain
urban areas within its targeted region. For example, as of June 9, 1998, the
Company had 49 towers in the Orlando, Florida market, 48 towers in the Atlanta,
Georgia market, 37 towers in the Birmingham, Alabama market, 35 towers in the
Tampa/Sarasota, Florida market and 28 towers in the New Orleans, Louisiana
market.
PROPERTIES
The Company both owns and leases the real property upon which its towers
are located. As of June 9, 1998, the Company owned 372 towers on parcels of real
estate that are leased and 223 towers on parcels of real estate that are owned.
Additionally, the Company leases its corporate headquarters in Sarasota,
Florida. The aggregate square
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footage of office space under this lease is approximately 14,000. The lease term
ends on September 30, 2000, and rent paid by the Company for its headquarters
was approximately $159,200 in 1997. The Company believes that its facilities are
adequate for its short-term needs and does not expect difficulty replacing such
facilities or locating additional facilities, if needed.
COMPETITION
The markets in which the Company operates are highly competitive. The
Company competes with wireless communications providers who own and operate
their own tower networks, site development companies which acquire space on
existing towers, rooftops and other sites, other independent tower companies and
traditional local independent tower operators. Wireless communications providers
who own and operate their own tower networks generally are larger and have
greater financial resources than the Company. The Company believes that tower
location and capacity, price, quality of service and density within a geographic
market historically have been and will continue to be the most significant
competitive factors affecting tower rental companies. The Company believes that
competition for tower acquisitions will increase and that additional competitors
will enter the tower rental market, some of which may have greater financial
resources than the Company.
REGULATORY MATTERS
FEDERAL REGULATIONS. Both the FCC and FAA promulgate regulations relative
to towers used for wireless communications. Such regulations primarily relate to
the siting, lighting and marking of towers. Most proposed antenna structures
that are higher than 200 feet above ground level or that may interfere with the
flight path of a nearby airport must be studied by the FAA and registered with
the FCC. Upon notification to the FAA of a potential new tower or a proposed
change in the height or location of certain existing towers, the FAA assigns a
number to and conducts an aeronautical study. Upon the finding that a proposed
tower, new or modified, does not constitute a hazard to air navigation, the FAA
will require certain painting and lighting requirements to be met to maximize
the visibility of the tower. All towers subject to the FAA notification process
must be registered by the tower owner with the FCC. At FCC registration, the FCC
generally requires the painting and lighting requirements of the FAA to be met.
Tower owners may also bear the responsibility of notifying the FAA of any tower
lighting outage. The FCC enforces the tower painting and lighting requirements.
Failure to comply with applicable requirements may lead to civil liabilities.
Wireless communications devices operating on towers are separately regulated by
the FCC and independently licensed based upon the particular frequency used.
The Telecommunications Act of 1996 (the "Telecom Act") amended the
Communications Act of 1934 to prevent the FCC preemption of local and state land
use decisions and preserves the authority of state and local governments over
zoning and land use matters concerning the construction, modification and
placement of towers, except in limited circumstances. The Telecom Act prohibits
any action that would (i) discriminate between different wireless communications
providers or (ii) ban altogether the construction, modification or placement of
radio communications towers. The Telecom Act requires the federal government to
establish procedures to make available on a fair, reasonable and
nondiscriminatory basis property rights-of-way and easements under federal
control for the placement of new telecommunications services. This may require
that federal agencies and departments work directly with licensees to make
federal property available for tower facilities.
All towers must comply with the National Environmental Policy Act of 1969
as well as other federal environmental statutes. The FCC's environmental rules
place responsibility on each applicant to investigate any potential
environmental effect of tower placement and operations and to disclose any
significant effects on the environment in an environmental assessment prior to
constructing a tower. In the event the FCC determines the proposed tower would
have significant environmental impact based on the standards the FCC has
developed, the FCC would be required to prepare an environmental impact
statement. This process could significantly delay the licensing of a particular
tower site.
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LOCAL REGULATIONS. Local regulations include city, county and other local
ordinances, zoning restrictions and restrictive covenants imposed by community
developers. These regulations vary greatly, but typically require tower owners
to obtain approval from local officials prior to tower construction.
ENVIRONMENTAL REGULATION. In addition to the FCC's environmental
regulations, the Company is subject to various other federal, state and local
health, safety and environmental laws and regulations. The Company believes that
it is in material compliance with existing applicable health, safety and
environmental laws and regulations and has all necessary permits and licenses.
EMPLOYEES
As of March 31, 1998, the Company had approximately 74 full-time employees,
of which 54 work in the Company's Sarasota, Florida headquarters office. None of
the Company's employees are unionized, and the Company considers its
relationship with its employees to be good.
REIT STATUS
The Company has elected, and intends to continue to elect, to be treated as
a REIT. A REIT is generally not subject to federal corporate income taxes on
that portion of its ordinary income or capital gain for a taxable year that is
distributed to stockholders within such year. To qualify and remain qualified as
a REIT, the Company is required for each taxable year to satisfy certain
requirements pertaining to organization, sources of income, distributions and
asset ownership. Among the numerous requirements which must be satisfied with
respect to each taxable year in order to qualify and remain qualified as such, a
REIT generally must (i) distribute to stockholders 95% of its taxable income
computed without regard to net capital gains and deductions for distributions to
stockholders, (ii) maintain at least 75% of the value of the Company's total
assets in real estate assets (generally real property and interests therein),
cash, cash items and government securities, (iii) derive at least 75% of its
gross income from investments in real property or mortgages on real property and
(iv) derive at least 95% of its gross income from real property investments
described in (iii) and from dividends, interest and gain from the sale or
disposition of stock and securities and certain other types of gross income.
Income tax regulations provide that the term "real property" for the foregoing
requirements means land or improvements thereon, such as buildings or other
inherently permanent structures thereon, including items which are structural
components of such buildings or structures. The IRS has ruled in a revenue
ruling that transmitting and receiving communications towers built upon pilings
or foundations similar to those of the Company as well as ancillary buildings,
heating and air conditioning systems and fencing constitutes inherently
permanent structures and are therefore real estate assets.
The Company could be subject to a variety of taxes and penalties if at any
time the Company engages in certain prohibited transactions, fails to satisfy
certain REIT distribution requirements or recognizes gain on the sale or
disposition of certain types of property. In addition, if the IRS determines
that the Company has failed to satisfy any of the requirements to maintain its
qualification as a REIT for any taxable year, and cannot utilize any of the
relief provisions which may be applicable, then the Company will be subject to
corporate level income tax at regular corporate rates on its net income
unreduced by distributions to stockholders, together with interest and
penalties. However, because the Company has not reported any net taxable income
(determined before the deduction for dividends paid) in its corporate income tax
returns following its filing of an election to be taxed as a REIT, unless its
reported net taxable loss is adjusted, the risk that any corporate income tax
liability would result from a retroactive determination by the IRS that the
Company has, to date, failed to satisfy all of the requirements for REIT
qualification during any such year would be minimal. However, with respect to
any year in which the Company recognizes positive net taxable income, the loss
of REIT status or a determination that the Company did not qualify as a REIT may
have a material adverse affect on the Company's financial condition or results
from operations. In such circumstances, the Issuer may have made the
distributions to its stockholders required for REIT status described above in an
attempt to qualify for REIT status but would not be entitled to receive such
distributions back from the stockholders or a tax deduction for such
distributions.
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In February 1998, President Clinton proposed the enactment of tax
legislation. Included in the President's proposal were certain provisions to
change the income tax treatment of REITs. One such provision would impose an
additional requirement for REIT qualification that no person can own either (i)
more than 50% of the total combined voting power of all classes of voting stock
of a REIT or (ii) more than 50% of the total value of shares of all classes of
stock of a REIT. As set forth under the caption "Principal Stockholders", over
80% of the stock of the Issuer is owned by ABRY II. However, as presently
proposed, such additional requirements for REIT qualification would be effective
only for entities electing REIT status for taxable years beginning on or after
the date of first committee action, thereby effectively grandfathering the
Issuer from such provision. There can be no assurance that any future tax
legislation will contain such a grandfathering provision or will not adversely
affect the continued qualification of the Company as a REIT.
LEGAL PROCEEDINGS
The Company is from time to time involved in ordinary litigation
incidental to the conduct of its business. The Company believes that none of its
pending litigation will have a material adverse effect on the Company's
business, financial condition or results of operations.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
Set forth below is certain information concerning the Company's directors,
executive officers and key employees.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Robert Wolsey.......... 47 Director, President and Chief Executive Officer and
Chief Operating Officer
James Dell'Apa......... 40 Director, Executive Vice President
Steven Day............. 45 Director, Vice President, Secretary and Chief
Financial Officer
David Zahn............. 33 Vice President of Operations
Ben Gaboury............ 46 Vice President of Sales and Marketing
Martin Alvarez......... 43 Chief Information Officer
Andrew Banks........... 43 Director
Peni Garber............ 35 Director
Peggy Koenig........... 41 Director
Royce Yudkoff.......... 42 Director
</TABLE>
ROBERT WOLSEY is primarily responsible for the overall direction of the
Company's acquisitions and operations and has substantial experience in
consolidating fragmented industries. From 1990 to 1994, Mr. Wolsey, as Chief
Executive Officer of Pittencrieff Communications, Inc. (PCI), a regional
consolidator of SMR operators, spearheaded the acquisition of 28 SMR businesses
and related assets (including over 100 towers) for a purchase price of over $30
million. During Mr. Wolsey's tenure at PCI, revenue increased from $100,000 to
over $28 million. In June 1993, PCI completed its initial public offering in an
offering that raised over $74 million. At the time of Mr. Wolsey's departure
from PCI in April 1994, it had a market capitalization in excess of $200
million. From 1983 to 1989, Mr. Wolsey, as President of Pittencrieff PLC and a
predecessor company, negotiated and acquired over $30 million in oil and gas
assets in 16 separate transactions. He has a Bachelor of Science (Honors) degree
in Color Physics from the University of Manchester.
JAMES DELL'APA is principally responsible for managing the initiation and
negotiation of acquisitions. Mr. Dell'Apa has brokered SMR, tower, paging, and
two-way businesses since 1991 and has had various levels of involvement with
over 250 transactions with a combined valuation of over $650 million. Before his
acquisitions work, he was a technical consultant in Washington, D.C. responsible
for planning large-scale military networks for government consulting firms under
the employment of Booz Allen & Hamilton and Advanced Technology (later Planning
Research Corporation and Black and Decker). Mr. Dell'Apa also worked for
Georgetown University's International Law Institute developing long-term,
intensive training programs on Negotiation and Policy for Developing
Telecommunications Infrastructure for senior level government ministers. He has
a law degree from American University in Washington, D.C., a technical Masters
degree in Telecommunications from the University of Colorado (Boulder), and a
liberal arts/bachelors degree from the University of Northern Colorado.
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<PAGE>
STEVEN DAY is primarily responsible for the Company's financial, legal and
administrative affairs and for the integration of acquired properties. Mr. Day
was a partner in the accounting firm of Price Waterhouse LLP until joining the
Company in February 1997. Since 1986, he has been involved with high-growth
companies principally in technology-based industries and, for the last several
years, worked with large venture capital and leveraged buyout firms in his role
in the Price Waterhouse Mergers and Acquisitions Group. Mr. Day has substantial
experience in dealing with companies which have filed initial public offerings
and public debt related registration statements. Mr. Day earned a Masters of
Business Administration at Loyola University of Chicago and a Bachelor of Arts
degree at the University of West Florida.
BEN GABOURY is primarily responsible for the sales and marketing operations
of the Company. Mr. Gaboury was employed for 17 years with Motorola Inc. in
various sales and sales management positions. Before joining the Company in
October 1996, Mr. Gaboury was responsible for planning the strategy that
Motorola employed in connection with the build out of its SMR network in New
York and the New England area. He then executed the plan to market SMR services
as well as related rental towers. Mr. Gaboury holds a Masters Degree from Jersey
City State College and a Bachelors Degree from Fairleigh Dickinson University.
DAVID ZAHN is primarily responsible for the ongoing maintenance of the
Company's existing tower inventory, new site construction, capacity augmentation
and new customer's equipment integration. He joined Pinnacle in September 1996.
From 1987 to 1996, Mr. Zahn worked for 360 (degree) Communications (formerly
Sprint Cellular and Centel Cellular) where he held a variety of positions
ranging from Project Manager, Transmission Engineer, Radio Frequency Engineering
Supervisor and Traffic Engineering Manager. His most recent management position
was Director of Engineering where he was responsible for a $50 million capital
program related to the construction of cellular transmission towers and the
associated communications network. Mr. Zahn earned his degrees in Bachelor of
Science in Electrical Engineering Technology and an Associate in Applied
Electronic Communications Engineering Technology from the Milwaukee School of
Engineering.
MARTIN ALVAREZ is primarily responsible for the Company's Information
Technology and Services. Prior to joining the Company in June 1997, Mr. Alvarez
was a Senior Manager in the Management Consulting Services division of Price
Waterhouse LLP. Mr. Alvarez has been involved with the growth and management of
Information Technology and Services at Pinnacle since April of 1996. His
experience includes work for a variety of industries that include
telecommunications, entertainment, manufacturing, utilities, among other
industries. Mr. Alvarez' experience includes management of various technology
areas, systems development and implementation, systems programming,
effectiveness evaluation and strategic planning. Mr. Alvarez earned his degree
in Bachelor of Science in Engineering Science, Computer Science Option from the
University of South Florida.
ANDREW BANKS is Chairman of ABRY Holdings Inc. Previously, Mr. Banks was
affiliated with Bain & Company, an international management consulting firm. At
Bain, where he was a partner from 1986 until 1988, he shared significant
responsibility for the firm's media practice. Mr. Banks is presently a director
of various companies, including DirecTel and Cat, Ltd. Mr. Banks is a graduate
of the Harvard Law School, a Rhodes Scholar holding a Master's degree from
Oxford University and a graduate of the University of Florida.
PENI GARBER is a principal at ABRY Partners, Inc. ("ABRY"). She joined ABRY
in 1990 from Price Waterhouse LLP where she served as Senior Accountant in the
Audit Division from 1985 to 1990. Ms. Garber is presently a director of Nexstar
Broadcasting Group, L.P. and Sullivan Broadcasting Company, Inc. Ms. Garber
graduated summa cum laude from Bryant College.
PEGGY KOENIG is a partner in ABRY. She joined ABRY in 1993. From 1988 to
1992, Ms. Koenig was a Vice President, partner and member of the Board of
Directors of Sillerman Communications Management Corporation, a merchant bank,
which made investments principally in the radio industry. Ms. Koenig was the
Director of Finance from 1986 to 1988 for Magera Management, an independent
motion picture financing company. She is presently a director of Sullivan
Broadcasting Company, Inc., Connoisseur Communications Partners, L.P.
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<PAGE>
and Weather Services Corporation. She received her MBA from the Wharton Business
School and received an undergraduate degree from Cornell University.
ROYCE YUDKOFF is President and Managing Partner of ABRY. Previously, Mr.
Yudkoff was affiliated with Bain & Company, an international management
consulting firm. At Bain, where he was a partner from 1985 through 1988, he
shared significant responsibility for the firm's media practice. Mr. Yudkoff is
presently a director of various companies including Sullivan Broadcasting
Company, Inc., Nexstar Broadcasting Group, L.P. and Metrocall. He graduated as a
Baker Scholar from the Harvard Business School and is an honors graduate of
Dartmouth College.
BOARD COMMITTEES
The Company's Board of Directors has appointed an Audit Committee, a
Compensation Committee and an Executive Committee. The members of the Audit
Committee are Mr. Day, Ms. Garber and Ms. Koenig. The members of the
Compensation Committee are Mr. Yudkoff, Ms. Koenig and Mr. Day. The members of
the Executive Committee are Mr. Wolsey, Ms. Koenig and Mr. Yudkoff.
COMPENSATION OF DIRECTORS
All directors receive reimbursement of reasonable out-of-pocket expenses
incurred in connection with meetings of the Board of Directors. No director
receives separate compensation for services rendered as a director.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth information concerning the compensation for
each of the last three years for the Chief Executive Officer and the four other
most highly compensated executive officers of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------- -------------------------------------
AWARDS PAYOUTS
-------------------------- ---------
OTHER
ANNUAL RESTRICTED SECURITIES ALL OTHER
COMPEN- STOCK UNDERLYING LTIP COMPEN-
NAME AND PRINCIPAL POSITION(A) SATION AWARDS OPTIONS PAYOUTS SATION
- -------------------------------- YEAR SALARY ($) BONUS ($) ($) ($) (#) ($) ($)
---- ---------- --------- ---------- ----------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert Wolsey................... 1997 $156,000 $70,000 6,500(b) -- -- -- --
Chief Executive Officer 1996 129,698 30,000 -- -- -- -- --
and President 1995 50,000 -- -- $10,000 -- -- --
James Dell'Apa.................. 1997 156,248 -- -- -- -- -- --
Vice President and 1996 128,125 30,000 -- -- -- -- --
Chief Operating Officer 1995 50,000 -- -- 10,000 -- -- --
Steven Day...................... 1997 131,250 -- -- 12,000 -- -- --
Vice President and 1996 -- -- -- -- -- -- --
Chief Financial Officer 1995 -- -- -- -- -- -- --
Ben Gaboury..................... 1997 126,094 -- -- -- -- -- --
Vice President 1996 31,789 -- -- 1,200 -- -- --
Sales and Marketing 1995 -- -- -- -- -- -- --
David Zahn...................... 1997 126,260 -- -- -- -- -- --
Vice President Operations 1996 36,102 -- -- 1,200 -- -- --
1995 -- -- -- -- -- -- --
</TABLE>
(a) See also, "Employment Agreements".
(b) Amount of reimbursement for payment of income taxes.
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<PAGE>
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements (the "Employment
Agreements") with each of Messrs. Wolsey, Dell'Apa and Day (the "Principal
Employees"). The terms of the Employment Agreements are substantially similar.
The Employment Agreements provide that each of the Principal Employees will be
employed by the Company until his resignation, death or disability or other
incapacity, or until terminated by the Company. Under the Employment Agreements,
each of the Principal Employees will receive, among other things, (i) an annual
base salary and (ii) other benefits as described in the Employment Agreements
(including all employee benefit plans and arrangements that are generally
available to other employees). Each of the Employment Agreements includes
noncompetition and nonsolicitation provisions restricting the respective
employees' ability to engage in activities competitive with the Company for a
period of two years following termination of employment. In the event of the
termination of an executive, the agreements provide for severance benefits
including salary and health plan benefits for periods ranging from six to 18
months.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of June 9, 1998, information as to the
Company's stock beneficially owned by (i) each director of the Company, (ii)
each executive officer named in the Summary Compensation Table, (iii) all
directors and executive officers of the Company as a group, and (iv) any person
who is known by the Company to be the beneficial owner of more than 5% of the
outstanding shares of the Company's common stock. In addition to the common
stock, the Company's capital includes 100,000 shares of preferred stock. No
shares of the Company's preferred stock are issued or outstanding.
SHARES BENEFICIALLY OWNED
<TABLE>
<CAPTION>
PERCENTAGE
OF
ECONOMIC PERCENTAGE
NAME OF STOCKHOLDERS, OWNERSHIP OF VOTING
DIRECTORS AND EXECUTIVE CLASS A COMMON CLASS B COMMON CLASS D COMMON CLASS E COMMON OF ALL POWER OF
- --------------------------- ------------------ ------------------ ------------------ ------------------ COMMON ALL COMMON
OFFICERS(A) SHARES(B) % SHARES(B) % SHARES(B) % SHARES(B) % STOCK STOCK
- --------------------------- ----------- ----- ---------- ------ ---------- ------ ----------- ----- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ABRY Broadcast Partners
II, L.P.(c)............... 200,000 98.8 -- -- -- -- 140,260 98.2 81.3 81.3
Robert Wolsey(d)........... -- -- 10,000 83.3 11,000 27.5 -- -- 6.4 6.4
James Dell'Apa............. -- -- 1,500 12.5 10,000 25.0 2,500 1.8 4.6 4.6
Steven Day(e).............. -- -- 500 4.2 10,000 25.0 -- -- 3.8 3.8
Ben Gaboury................ -- -- -- -- 1,000 2.5 -- -- * *
David Zahn................. -- -- -- -- 1,000 2.5 -- -- * *
Andrew Banks............... 25 * -- -- -- -- -- -- * *
Peni Garber................ 25 * -- -- -- -- -- -- * *
Peggy Koenig............... 50 * -- -- -- -- -- -- * *
Royce Yudkoff(f)........... 200,050 98.8 -- -- -- -- 140,260 98.2 81.3 81.3
All directors and
executive officers as a
group..................... 200,150 98.8 12,000 100 33,000 82.5 142,760 100 96.1 96.1
</TABLE>
* Indicates less than 1 percent.
(a) The address of all persons in this table is c/o Pinnacle Towers Inc., 1549
Ringling Blvd., Sarasota, Florida 34236.
(b) As used in this table, "beneficial ownership" means sole or shared power to
vote or direct the voting of a security, or the sole or shared investment
power with respect to a security (i.e., the power to dispose, or direct the
disposition, of a security). A person is deemed as of any date to have
"beneficial ownership" of any security that such person has a right to
acquire within 60 days after such date. For purposes of computing the
percentage of outstanding shares held by each person named above, any
security that such person has the right to acquire within 60 days of the
date of calculation is deemed to be outstanding, but is not deemed to be
outstanding for purposes of computing the percentage ownership of any other
person.
(c) ABRY Holdings, Inc., the general partner of ABRY Capital, which is the
general partner of ABRY II, is wholly-owned by Mr. Yudkoff.
(d) Mr. Wolsey is deemed the beneficial owner of his Class B common stock and
his Class D common stock through his control of Pantera, Inc. and Pantera
Partnership Ltd.
(e) Mr. Day is deemed the beneficial owner of his Class D common stock through
his control of South Creek, Inc. and South Creek Partnership Ltd.
(f) Mr. Yudkoff is deemed the beneficial owner of the Class A common stock and
Class E common stock held by ABRY II. See note (c) above.
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<PAGE>
CERTAIN RELATIONSHIPS AND TRANSACTIONS
SUBSCRIPTION AND STOCKHOLDERS AGREEMENT
The principal stockholders of the Issuer (ABRY II, and Messrs. Wolsey,
Dell'Apa and Day) are parties to the Subscription and Stockholders Agreement,
dated April 17, 1995, as amended May 3, 1995 and September 22, 1997, (the
"Stockholders' Agreement"). The Stockholders' Agreement gives such stockholders
the preemptive right, with some exceptions, to acquire their pro rata share of
future issuances of capital stock of the Issuer. The following issuances are
exempt from this preemptive right: (a) to any employee of the Issuer; (b) in
connection with an acquisition or merger; (c) pursuant to a public offering; (d)
upon the exercise, conversion, or exchange of any option or convertible
security; (e) of up to a total of 200,000 Class A common stock to ABRY II at a
price of $100 per share; (f) as a part of any recapitalization or
reorganization; (g) upon the conversion of Class D common stock into Class C
common stock; and (h) as a distribution to stockholders in the form of
securities of the Issuer.
Parties to the Stockholders' Agreement have certain rights and obligations
in connection with a sale by ABRY II of shares in the Issuer, a sale of the
Issuer and a reorganization or recapitalization of the Issuer in anticipation of
a sale of the Issuer or a public offering. In the case of a sale by ABRY II of
shares in the Issuer, stockholders party to the Stockholders' Agreement will
have the right to participate pro rata in such a sale. In the case of a sale of
the Issuer approved by its stockholders or a reorganization or recapitalization
in anticipation of a sale or a public offering, stockholders party to the
Stockholders' Agreement will have the obligation to participate in such
transaction.
The Stockholders' Agreement also governs the vesting of the Class D common
stock issued to certain executives and employees of the Issuer and provides for
certain put and call rights, among the Issuer and its current stockholders with
respect to the Class B common stock and Class D common stock upon the
termination of employment or death of Messrs. Wolsey, Dell'Apa, or Day.
CAPITAL CONTRIBUTION AGREEMENT
The Issuer has entered into the Capital Contribution Agreement with ABRY
II, pursuant to which ABRY II has agreed to make equity contributions to the
Issuer, up to an aggregate capital contribution of $50.0 million, in an amount
equal to (i) 100.0% of the Issuer's general and administrative expenses and
corporate development expenses and (ii) the amount necessary to cure any payment
or financial covenant default under the Senior Credit Facility. As of June 9,
1998, ABRY II has contributed $36.0 million of the aggregate $50.0 million
capital contribution commitment. Additionally, ABRY II is the guarantor of a
note of the Issuer payable to a former tower owner in an amount totaling
approximately $3.9 million.
PINNACLE TOWERS II INC.
In November 1997, certain of the stockholders of the Issuer formed a new
company, Pinnacle Towers II Inc. ("PTI II"). PTI II is an affiliate of the
Issuer as PTI II is an entity under common control with the Issuer, as ABRY II
and certain executives of the Issuer control a majority of PTI II stock. PTI II
was formed for the purpose of pursuing certain opportunities, such as potential
joint ventures and other businesses related to the tower rental industry. PTI II
has a $5.0 million credit facility with a bank.
In November 1997, the Issuer sold, for cash, certain of its towers and
projects-in-progress to PTI II. In this transaction, the Issuer sold 12 towers
and 34 projects which were in process. The purchase price was $2.2 million. In
connection with this sale, the Issuer entered into a management agreement with
PTI II, whereby the Issuer provides management services with regard to the PTI
II towers and projects. The term of the management agreement is one year and is
renewable annually upon notice by PTI II to the Issuer, on terms to be
determined upon renewal. Under the agreement, charges for services performed are
billed at the Issuer's cost, plus an agreed
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<PAGE>
upon margin, as defined in the agreement. As of March 31, 1998, charges for
services under the agreement were insignificant.
MANAGEMENT INDEBTEDNESS
At March 31, 1998, the Company had a loan receivable from Mr.
Dell'Apa, a named executive officer, in the amount of $94,000. The loan to Mr.
Dell'Apa is secured by a mortgage on certain real property and by a pledge of
all of Mr. Dell'Apa's Class D common stock of the Company. The loan bears
interest payable quarterly at a rate equal to the Company's bank rate less 600
basis points. On June 9, 1998, the loan to Mr. Dell'Apa is accruing interest at
a rate of 7.8%.
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<PAGE>
DESCRIPTION OF CREDIT FACILITIES
SENIOR CREDIT FACILITY
In September 1995, Pinnacle Towers Inc. (the principal subsidiary and
operating company of the Issuer) entered into the Senior Credit Facility which
provided for $25.0 million of senior debt financing through reducing revolving
line of credit and revolver/term loan. In September 1996, the Company and its
lenders agreed to expand the commitment amount to $100.0 million. In connection
with the Southern Towers Acquisition, the Company and its lenders agreed to
expand the commitment under the Senior Credit Facility to $200.0 million
initially, which was amended to provide a $150.0 million commitment upon the
closing of the Private Offering. The commitment under the Senior Credit Facility
may be increased up to $250.0 million at the request of the Company and at the
option of the lenders. Advances under the Senior Credit Facility are available
to fund acquisitions and construction of towers and for general corporate
purposes. Upon the closing of the Private Offering, outstanding borrowings and
availability under the Senior Credit Facility were approximately $14.2 million
and $120.6 million, respectively, after giving effect to (i) repayment of $158.6
million of outstanding borrowings with a portion of the proceeds of the Private
Offering, (ii) reduction of the Senior Credit Facility to a commitment of $150.0
million and (iii) consideration of $15.2 million of outstanding letters of
credit which reduce availability under the Senior Credit Facility.
Immediately prior to the closing of the Private Offering, advances under
the Senior Credit Facility accrued interest at the Company's option at either
LIBOR plus a margin of up to 2.75% or the base rate, plus a margin of up to
1.75%. In addition, the Company was required to pay commitment fees based on the
unused portion of the commitments and customary facility fees on the total
amount of the commitments. Upon closing of the Private Offering, the Senior
Credit Facility was amended to reduce the commitment amount to $150.0 million
and to change the maximum LIBOR margin to 2.875%. The Issuer has guaranteed the
Senior Credit Facility.
The Senior Credit Facility is secured by a lien on substantially all of
the assets of the Company and its subsidiaries and a pledge of substantially all
of the capital stock of its subsidiaries. The credit agreement contains
customary covenants such as limitations on the Company's ability to incur
indebtedness, to incur liens or encumbrances on assets, to make certain
investments, to make distributions to stockholders, or prepay subordinated debt.
Under the credit agreement, the Company may not permit the Leverage Ratio to
exceed certain amounts, as defined in the Senior Credit Facility.
ABRY BRIDGE LOAN
In February 1998, the Company entered into the ABRY Bridge Loan, whereby
the Company borrowed $12.5 million to partially finance the Southern Towers
Acquisition. Amounts outstanding under the ABRY Bridge Loan bore interest at the
rate of 9.0% per annum. Interest and principal under the ABRY Bridge Loan are
payable within one year from the date of the related borrowing. A portion of the
proceeds from the Private Offering were used to repay in full and retire the
ABRY Bridge Loan. During April 1998, the Company borrowed $2.5 million from ABRY
II under this Bridge Loan.
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<PAGE>
DESCRIPTION OF NEW NOTES
GENERAL
The New Notes are to be issued under an Indenture, dated as of March 20,
1998 (the "Indenture"), between the Issuer and The Bank of New York, as trustee
(the "Trustee"). The Original Notes were also issued under the Indenture in a
private transaction that was not subject to the registration requirements of the
Securities Act. All material terms of the Notes and the Indenture have been
summarized herein, however, because the statements under this caption are
summaries, they are not purported to be complete, and are subject to, and are
qualified in their entirety by reference to, all the provisions of the
Indenture, including the definitions of certain terms therein. The Indenture is
by its terms subject to and governed by the Trust Indenture Act of 1939, as
amended. Unless otherwise indicated, references under this caption to sections,
"(S)" or articles are references to the Indenture. Where reference is made to
particular provisions of the Indenture or to defined terms not otherwise defined
herein, such provisions or defined terms are incorporated herein by reference.
Copies of the Indenture and the Exchange and Registration Rights Agreement
referred to below (see "--Registration Covenant; Exchange Offer" below) are
filed as exhibits to the Registration Statement filed with the Commission of
which this Prospectus is a part.
The New Notes will be senior unsecured obligations of the Issuer, will rank
pari passu in right of payment with all existing and future senior unsecured
indebtedness of the Issuer (including any Original Notes that remain outstanding
after the Exchange Offer) and senior in right of payment to all existing and
future subordinated debt of the Issuer.
The operations of the Issuer are conducted primarily through its
subsidiaries. As such, the Issuer is primarily dependent upon the cash flows of
its subsidiaries to meet its obligations, including its obligations under the
New Notes. As a result, the New Notes are effectively subordinated to all
indebtedness and other liabilities (including trade payables and lease
obligations) of the Issuer's subsidiaries. Any right of the Issuer to receive
assets of any of its subsidiaries upon the latter's liquidation or
reorganization (and the consequent right of the Holders of the New Notes to
participate in those assets) will be effectively subordinated to the claims of
that subsidiary's creditors (including trade creditors), except to the extent
that the Issuer is itself recognized as a creditor of such Subsidiary, in which
case the claims of the Issuer would still be subordinate to any security in the
assets of such Subsidiary and any indebtedness of such Subsidiary senior to that
held by the Issuer.
As of the date of the Indenture, all of the Issuer's Subsidiaries will be
Restricted Subsidiaries. However, under certain circumstances, the Issuer will
be able to designate current or future Subsidiaries as Unrestricted
Subsidiaries, which will not be subject to many of the restrictive covenants set
forth in the Indenture.
PRINCIPAL, INTEREST AND MATURITY
The Notes mature on March 15, 2008. The Notes are not limited in principal
amount. $325 million aggregate principal amount of Notes were initially issued
on the Closing Date. Thereafter, from time to time, the Issuer may issue
additional Notes subject (other than with respect to the issuance of the New
Notes) to compliance with the provisions of the Indenture described under "--
Covenants--Limitation on Consolidated Debt". The Notes are issued in
denominations of $1,000 and integral multiples thereof. The Original Notes were
offered at a discount from their principal amount at maturity with the initial
Accreted Value per $1,000 in principal amount of Notes equal to $614.74
(representing the original price at which the Notes are being offered). The
Notes accrete (representing the amortization of original issue discount) on a
semi-annual bond equivalent basis using a 360-day year comprised of twelve 30-
day months such that the Accreted Value shall be equal to the full principal
amount at maturity of the Notes on March 15, 2003 (the "Full Accretion Date").
No interest (other than Liquidated Damages, if any) is payable in cash on the
Notes prior to the Full Accretion Date. Beginning on the Full Accretion Date the
Notes will accrue interest at the rate of 10% per annum, which will be payable
in cash semi-annually in
76
<PAGE>
arrears on March 15 and September 15 of each year, commencing September 15,
2003, to the Person in whose name the Note (or any predecessor Note) is
registered at the close of business on the immediately preceding March 1 or
September 1, as the case may be. The Notes bear interest on overdue principal
and premium, if any, and, to the extent permitted by law, overdue interest at
the rate of 11 1/2% per annum. Interest on the Notes is computed on the basis of
a 360-day year comprised of twelve 30-day months. ((S)(S) 301, 307 and 310)
Principal, premium, if any, interest and Liquidated Damages, if any, on the
Notes is payable, and the Notes may be presented for registration of transfer
and exchange, at the office or agency of the Issuer maintained for that purpose
in the Borough of Manhattan, The City of New York, provided that at the option
of the Issuer, payment of interest on the Notes may be made by check mailed to
the address of the Person entitled thereto as it appears in the Note Register.
Until otherwise designated by the Issuer, such office or agency will be the
corporate trust office of the Trustee, as Paying Agent and Registrar. ((S)(S)
301, 305 and 1002)
No service charge will be made for any registration of transfer or exchange
of Notes, but the Issuer may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith. ((S) 305)
FORM, DENOMINATION, BOOK-ENTRY PROCEDURES AND TRANSFER
The New Notes will be represented by one or more Notes in registered,
global form without interest coupons (collectively, the "Global Notes"). The
Global Notes will be deposited upon issuance with the Trustee as custodian for
DTC in New York, New York, and registered in the name of DTC or its nominee, in
each case for credit to an account of a direct or indirect participant in DTC as
described below.
Except as set forth below, the Global Notes may be transferred, in whole
and not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Notes may not be exchanged for
Notes in certificated form except in the limited circumstances described below.
In addition, the transfer of beneficial interests in the Global Notes will be
subject to the applicable rules and procedures of DTC and its direct or indirect
participants, which may change from time to time.
Initially, the Trustee will act as Paying Agent and Registrar. The Notes
may be presented for registration of transfer and exchange at the offices of the
Registrar.
DEPOSITORY PROCEDURES
DTC has advised the Issuer that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic book-
entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial Purchasers), banks, trust
companies, clearing corporations and certain other organizations. Access to
DTC's system is also available to other entities such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a Participant either directly or indirectly (collectively, the "Indirect
Participants"). Persons who are not Participants may beneficially own
securities held by or on behalf of DTC only through the Participants or the
Indirect Participants. The ownership interest and transfer of ownership
interest of each actual purchaser of each security held by or on behalf of DTC
are recorded on the records of the Participants and Indirect Participants.
DTC has also advised the Issuer that pursuant to procedures established by
it, (i) upon deposit of the Global Notes, DTC will credit the accounts of
Participants designated by the Initial Purchasers with portions of the principal
amount of the Global Notes and (ii) ownership of such interests in the Global
Notes will be shown on, and the transfer of ownership thereof will be effected
only through, records maintained by DTC (with respect to the Participants) or by
the Participants and the Indirect Participants (with respect to other owners of
beneficial interests
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in the Global Notes).
The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interests in a Global Note to such persons may be limited to
that extent. Because DTC can act only on behalf of Participants, which in turn
act on behalf of Indirect Participants and certain banks, the ability of a
person having beneficial interests in a Global Note to pledge such interests to
persons or entities that do not participate in the DTC system, or otherwise take
actions in respect of such interests, may be affected by the lack of a physical
certificate evidencing such interests. For certain other restrictions on the
transferability of the Notes, see "--Exchange of Book-Entry Notes for
Certificated Notes".
Except as described below, owners of interests in the Global Notes will not
have Notes registered in their names, will not receive physical delivery of
Notes in certificated form and will not be considered the registered owners or
Holders thereof under the Indenture for any purpose.
Payments in respect of the principal of (and premium, if any) and interest
on a Global Note registered in the name of DTC or its nominee will be payable by
the Trustee to DTC or its nominee in its capacity as the registered Holder under
the Indenture. Under the terms of the Indenture, the Issuer and the Trustee
will treat the persons in whose names the Notes, including the Global Notes, are
registered as the owners thereof for the purpose of receiving such payments and
for any and all other purposes whatsoever. Consequently, none of the Issuer,
the Trustee nor any agent of the Issuer or the Trustee has or will have any
responsibility or liability for (i) any aspect of DTC's records or any
Participant's or Indirect Participant's records relating to or payments made on
account of beneficial ownership interests in the Global Notes, or for
maintaining, supervising or reviewing any of DTC's records or any Participant's
or Indirect Participant's records relating to the beneficial ownership interests
in the Global Notes, or (ii) any other matter relating to the actions and
practices of DTC or any of its Participants or Indirect Participants.
DTC has advised the Issuer that its current practice, upon receipt of any
payment in respect of securities such as the Notes (including principal and
interest), is to credit the accounts of the relevant Participants with the
payment on the payment date, in amounts proportionate to their respective
holdings in principal amount of beneficial interests in the relevant security
such as the Global Notes as shown on the records of DTC unless DTC has reason to
believe it will not receive payment on such payment date. Payments by the
Participants and the Indirect Participants to the beneficial owners of Notes
will be governed by standing instructions and customary practices and will be
the responsibility of the Participants or the Indirect Participants and will not
be the responsibility of DTC, the Trustee or the Issuer. None of the Issuer or
the Trustee will be liable for any delay by DTC or any of its Participants in
identifying the beneficial owners of the Notes, and the Issuer and the Trustee
may conclusively rely on and will be protected in relying on instructions from
DTC or its nominee as the registered owner of the Notes for all purposes.
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, will be settled in same-day funds.
DTC has advised the Issuer that it will take any action permitted to be
taken by a Holder of Notes only at the direction of one or more Participants to
whose account with DTC interests in the Global Notes are credited and only in
respect of such portion of the aggregate principal amount of the Notes as to
which such Participant or Participants has or have given such direction.
However, if there is an Event of Default (as defined below) under the Notes, DTC
reserves the right to exchange the Global Notes for legended Notes in
certificated form, and to distribute such Notes to its Participants.
The information in this section concerning DTC and its book-entry system
has been obtained from sources that the Issuer believes to be reliable, but the
Issuer takes no responsibility for the accuracy thereof.
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the Global Notes
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among participants in DTC, it is under no obligation to perform or to continue
to perform such procedures, and such procedures may be discontinued at any time.
Neither the Issuer nor the Trustee will have any responsibility for the
performance by DTC or its participants or indirect participants of its
obligations under the rules and procedures governing its operations.
Exchange of Book-Entry Notes for Certificated Notes
A Global Note is exchangeable for definitive Notes in registered
certificated form if (i) DTC (x) notifies the Issuer that it is unwilling or
unable to continue as depository for such Global Note and the Issuer thereupon
fails to appoint a successor depository or (y) has ceased to be a clearing
agency registered under the Exchange Act, (ii) the Issuer, at its option,
notifies the Trustee in writing that it elects to cause the issuance of the
Notes in certificated form or (iii) there shall have occurred and be continuing
a Default or an Event of Default with respect to the Notes. In addition,
beneficial interests in a Global Note may be exchanged for certificated Notes
upon request but only upon prior written notice given to the Trustee by or on
behalf of DTC in accordance with the Indenture. In all cases, certificated
Notes delivered in exchange for any Global Note or beneficial interests therein
will be registered in the names, and issued in any approved denominations,
requested by or on behalf of the depository (in accordance with its customary
procedures).
Optional Redemption
Except as described below, the Notes are not redeemable at the Issuer's
option prior to March 15, 2003.
The Notes are subject to redemption, at the option of the Issuer, in whole
or in part, at any time on or after March 15, 2003 and prior to maturity, upon
not less than 30 nor more than 60 days' notice mailed to each Holder of Notes to
be redeemed at such Holder's address appearing in the Note Register, in amounts
of $1,000 or an integral multiple of $1,000, at the following Redemption Prices
(expressed as percentages of the principal amount) plus accrued interest to but
excluding the Redemption Date (subject to the right of Holders of record on the
immediately preceding Record Date to receive interest due on an Interest Payment
Date that is on or prior to the Redemption Date), if redeemed during the 12-
month period beginning March 15 of the years indicated below:
REDEMPTION
YEAR PRICE
---- -----
2003 105.000%
2004 103.333%
2005 101.667%
2006 and thereafter 100.000%
The Notes are subject to redemption prior to March 15, 2003 only in the
event that on or before March 15, 2001 the Issuer receives net proceeds from the
sale of its Common Stock in one or more Public Equity Offerings, in which case
the Issuer may, at its option, use all or a portion of any such net proceeds to
redeem Notes in a principal amount of at least $5 million and up to an aggregate
amount equal to 35% of the Notes at a redemption price equal to 110% of the
Accreted Value of the Notes to but excluding the Redemption Date plus accrued
and unpaid Liquidated Damages thereon, if any, to the Redemption Date, provided,
however, that Notes in an amount equal to at least 65% of the principal amount
of the Notes originally issued on the Closing Date remain outstanding after such
redemption (excluding any Notes held by the Issuer or any of its subsidiaries).
Any such redemption must occur on a Redemption Date within 60 days of any such
sale and upon not less than 30 nor more than 60 days' notice mailed to each
Holder of Notes to be redeemed at such Holder's address appearing in the Note
Register, in face amounts of $1,000 or an integral multiple of $1,000.
If less than all the Notes are to be redeemed, selection of Notes for
redemption will be made by the
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Trustee, in compliance with the requirements of the principal national
securities exchange, if any, on which the Notes are listed, or, if the Notes are
not so listed, on a pro rata basis, by lot or in such manner as it shall deem
fair and appropriate, the particular Notes to be redeemed or any portion thereof
that is an integral multiple of $1,000. Notices of redemption may not be
conditional. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. Notes called for redemption become due on the
date fixed for redemption. On and after the redemption date, interest ceases to
accrue on Notes or portions of them called for redemption and, unless the Issuer
defaults in the payment of the redemption price, Notes or portions of them
called for redemption will no longer be deemed outstanding. ((S)(S) 203, 1101,
1104, 1105 and 1107).
Mandatory Redemption
The Issuer is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
Repurchase at the Option of Holders
Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Issuer to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes pursuant to the Offer to
Purchase described below at an offer price in cash equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest and
Liquidated Damages thereon, if any, to the date of purchase or, if such Offer to
Purchase is to be consummated prior to the Full Accretion Date, 101% of the
Accreted Value thereof on the date of purchase plus accrued and unpaid
Liquidated Damages thereon, if any, to the date of purchase. Within thirty days
following any Change of Control, the Issuer will mail an Offer to Purchase to
each Holder describing the transaction or transactions that constitute the
Change of Control and offering to purchase Notes on the date specified in such
Offer to Purchase, which date shall be no earlier than 20 business days and no
later than 60 days from the date such Offer to Purchase is mailed. The Issuer
will comply with the requirements of Rule 14e-1 under the Exchange Act and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the purchase of the Notes pursuant
to the Offer to Purchase.
The Senior Credit Facility restricts the Issuer's ability to prepay debt,
including the Notes, and also provides that certain change of control events
with respect to the Issuer would constitute a default thereunder. Any future
credit agreements or other agreements to which the Issuer becomes a party may
contain similar restrictions and provisions. In the event a Change of Control
occurs at a time when the Issuer is prohibited from purchasing the Notes, the
Issuer could seek the consent of its lenders to the purchase of Notes or could
attempt to refinance the borrowings that contain such prohibition. If the Issuer
does not obtain such a consent or repay such borrowings, the Issuer will remain
prohibited from purchasing Notes. In such case, the Issuer's failure to purchase
tendered Notes would constitute an Event of Default under the Indenture, which
would, in turn, constitute a default under the Senior Credit Facility or such
other future agreements. See "Risk Factors--Ability to Purchase Notes Upon a
Change of Control".
The Change of Control provisions described above are applicable whether or
not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Notes to require that the Issuer
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar transaction.
The Issuer is not required to make an Offer to Purchase upon a Change of
Control if a third party makes the Offer to Purchase in the manner, at the times
and otherwise in compliance with the requirements set forth in the Indenture
applicable to the Offer to Purchase made by the Issuer and purchases all Notes
validly tendered and
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not withdrawn under such Offer to Purchase.
The consequences of a Change of Control may result in the use of a
substantial amount of the Company's available funds. The Company, therefore,
may not have sufficient funds necessary to obtain additional financing in the
future.
"Change of Control" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of the
Issuer and its Subsidiaries, taken as a whole, to any Person or group of related
Persons, as defined in Section 13(d) of the Exchange Act (a "Group"), other than
to Permitted Holders; (ii) the approval by the holders of Capital Stock of the
Issuer of any plan or proposal for the liquidation or dissolution of the Issuer
(whether or not otherwise in compliance with the provisions of the applicable
Indenture); (iii) any Person or Group (other than Permitted Holders) shall
become the owner, directly or indirectly, beneficially or of record, of shares
representing more than 50% of the aggregate ordinary voting power represented by
the issued and outstanding Voting Stock of the Issuer or any successor to all or
substantially all of its assets; or (iv) the first day on which a majority of
the members of the Board of Directors of the Issuer are not Continuing
Directors.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Issuer and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all", there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a Holder of Notes to require the Issuer to
repurchase such Notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of the assets of the Issuer and its
Subsidiaries taken as a whole to another Person or group may be uncertain.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Issuer who (i) was a member of such Board of
Directors on the date of the original issuance of the Notes or (ii) was
nominated for election or elected to such Board of Directors by any of the
Permitted Holders or with the approval of a majority of the Continuing Directors
who were members of such Board at the time of such nomination or election.
"Permitted Holders" means as of the date of determination (i) Andrew Banks,
Royce Yudkoff or Robert Wolsey and any of their respective spouses, estates,
lineal descendants (including adoptive children), heirs, executors, personal
representatives, administrators and trusts for any of their benefit and (ii) any
other Person, the majority of whose Voting Stock is directly or indirectly owned
by any Person described in clause (i) above.
Asset Dispositions
The Indenture provides that the Issuer will not, and will not permit any
Restricted Subsidiary to, consummate an Asset Disposition unless (i) the Issuer
or the applicable Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Disposition at least equal to the fair
market value of the assets sold or otherwise disposed of (as evidenced by a
resolution of the Board of Directors set forth in an Officers' Certificate
delivered to the Trustee), (ii) except in the case of a Tower Asset Exchange, at
least 75% of the consideration received by the Issuer or the Restricted
Subsidiary, as the case may be, from such Asset Disposition shall be cash or
Cash Equivalents; provided that the amount of (a) any liabilities (as shown on
the Issuer's or such Restricted Subsidiary's most recent balance sheet) of the
Issuer or any such Restricted Subsidiary (other than liabilities that are by
their terms subordinated to the Notes) that are assumed by the transferee of any
such assets pursuant to a customary novation agreement that releases the Issuer
or such Restricted Subsidiary from further liability, (b) any securities, notes
or other obligations received by the Issuer or any such Restricted Subsidiary
from such transferee that are converted by the Issuer or such Restricted
Subsidiary into cash (to the extent of the cash received) within 20 days of the
applicable Asset Disposition and (c) any liabilities (as shown on the Issuer's
or such Restricted Subsidiary's most recent balance sheet) of a Restricted
Subsidiary all of the Capital Stock of which is disposed of
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in such Asset Disposition, which liabilities have ceased to be liabilities of
the Issuer or any Restricted Subsidiary as a result of such Asset Disposition,
shall be considered cash for purposes of such provision, and (iii) after the
consummation of such Asset Disposition, the Issuer shall apply, or cause such
Restricted Subsidiary to apply, the Net Cash Proceeds relating to such Asset
Disposition within 365 days of receipt thereof, less any amounts invested in
assets related to, or the majority voting Capital Stock of entities operating
in, the same line of business as the Issuer or a business reasonably ancillary
thereto, to permanently repay Debt under the Senior Credit Facility or any
renewal, extension, refinancing or refunding thereof to the extent that any such
instrument would require or, at the Issuer's option, permit such application or
prohibit the Offer to Purchase referred to below and, in the case of any Debt
under any revolving credit facility, effect a commitment reduction under such
revolving credit facility. Pending the final application of any such Net Cash
Proceeds, the Issuer or such Restricted Subsidiary may temporarily reduce
indebtedness under a revolving credit facility, if any, or otherwise invest such
Net Cash Proceeds in Cash Equivalents. Any Net Cash Proceeds from Asset
Dispositions that are not applied or invested as provided will be deemed to
constitute "Excess Proceeds," which shall be applied by the Issuer or such
Restricted Subsidiary to make an Offer to Purchase that amount of Notes equal to
the amount of Excess Proceeds at a price equal to 100% of the principal amount
of the Notes (or, if such Offer to Purchase is to be consummated prior to the
Full Accretion Date, 100% of the Accreted Value of Notes) to be purchased, plus
accrued and unpaid interest and Liquidated Damages thereon, if any, to the date
of purchase and, to the extent required by the terms thereof, any other Debt of
the Issuer that is pari passu with the Notes or Debt of a Restricted Subsidiary
at a price no greater than 100% of the principal amount thereof plus accrued
interest to the date of purchase or, if such Debt was issued at a discount, 100%
of the accreted value thereof to the date of purchase on a pro rata basis with
the Notes; provided, however, that if at any time any non-cash consideration
received by the Issuer or any Restricted Subsidiary, as the case may be in
connection with any Asset Disposition is converted into or sold or otherwise
disposed of for cash (other than interest received with respect to any such non-
cash consideration), then such conversion or disposition shall be deemed to
constitute an Asset Disposition hereunder and the Net Cash Proceeds thereof
shall be applied in accordance with this covenant. Each Offer to Purchase shall
be mailed within 390 days following the Asset Disposition that required such
Offer to Purchase. Following the completion of an Offer to Purchase, to the
extent there are any remaining Excess Proceeds the Issuer may use such Excess
Proceeds to any use which is not otherwise prohibited by the Indenture.
Notwithstanding the foregoing, if the Excess Proceeds resulting from an
Asset Disposition are less than $10.0 million, the application of such Excess
Proceeds to an Offer to Purchase may be deferred until such time as the sum of
such Excess Proceeds plus the aggregate amount of all Excess Proceeds arising
subsequent to such Asset Disposition from all subsequent Asset Dispositions by
the Issuer and its Restricted Subsidiaries aggregates at least $10.0 million, at
which time the Issuer or such Restricted Subsidiary shall apply all Excess
Proceeds that have been so deferred to make an Offer to Purchase as provided
above.
The Issuer will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the purchase
of Notes pursuant to such Offer to Purchase.
Registration Covenant; Exchange Offer
Holders of the New Notes are not entitled to any registration rights with
respect to the New Notes. The Issuer and the Initial Purchasers entered into the
Registration Rights Agreement pursuant to which the Issuer agreed, for the
benefit of the Holders of the Original Notes, to file with the Commission the
Exchange Offer Registration Statement on the appropriate form under the
Securities Act with respect to the New Notes. The registration statement of
which this Prospectus is a part, constitutes the Exchange Offer Registration
Statement. Upon the effectiveness of the Exchange Offer Registration Statement,
the Issuer will offer to the Holders of Transfer Restricted Securities the
opportunity to exchange their Transfer Restricted Securities for New Notes. The
Registration Rights Agreement provides that if (i) the Issuer is not required to
file the Exchange Offer Registration Statement or permitted to consummate the
Exchange Offer because the Exchange Offer is not permitted by
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applicable law or Commission policy or (ii) any Holder of Transfer Restricted
Securities notifies the Issuer prior to the 20th day following consummation of
the Exchange Offer that (A) it is prohibited by law or Commission policy from
participating in the Exchange Offer or (B) that it may not resell the New Notes
acquired by it in the Exchange Offer to the public without delivering a
prospectus and the Prospectus contained in the Exchange Offer Registration
Statement is not appropriate or available for such resales or (C) that it is a
broker-dealer and owns Notes acquired directly from the Issuer or an affiliate
of the Issuer, the Issuer will file with the Commission a Shelf Registration
Statement to cover resales of the Notes by the Holders thereof who satisfy
certain conditions relating to the provisions of information in connection with
the Shelf Registration Statement. The Issuer has agreed that it will use all
commercially reasonable efforts to cause any Shelf Registration Statement to be
declared effective as promptly as possible by the Commission. For purposes of
the foregoing, "Transfer Restricted Securities" means each Original Note until
(i) the date on which such Original Note has been exchanged by a person other
than a broker-dealer for a New Note in the Exchange Offer, (ii) following the
exchange by a broker-dealer in the Exchange Offer of an Original Note for a New
Note, the date on which such New Note is sold to a purchaser who receives from
such broker-dealer on or prior to the date of such sale a copy of the Prospectus
contained in the Exchange Offer Registration Statement, (iii) the date on which
such Note has been effectively registered under the Securities Act and disposed
of in accordance with the Shelf Registration Statement or (iv) the date on which
such Original Note is distributed to the public pursuant to Rule 144 under the
Act.
The Registration Rights Agreement provides that (i) the Issuer will file an
Exchange Offer Registration Statement with the Commission on or prior to 60 days
after the Closing Date, (ii) the Issuer will use all commercially available
efforts to have the Exchange Offer Registration Statement declared effective by
the Commission on or prior to 150 days after the Closing Date, (iii) unless the
Exchange Offer would not be permitted by applicable law or Commission policy,
the Issuer will commence the Exchange Offer and use its best efforts to issue on
or prior to 30 business days after the date on which the Exchange Offer
Registration Statement was declared effective by the Commission, New Notes in
exchange for Original Notes tendered prior thereto in the Exchange Offer and
(iv) if obligated to file the Shelf Registration Statement, the Issuer will use
its best efforts to file the Shelf Registration Statement with the Commission on
or prior to 45 days after such filing obligation arises and to cause the Shelf
Registration to be declared effective by the Commission on or prior to 90 days
after such obligation arises. If (a) the Issuer fails to file any of the
Registration Statements required by the Registration Rights Agreement on or
before the date specified for such filing, (b) any of such Registration
Statements is not declared effective by the Commission on or prior to the date
specified for such effectiveness (the "Effectiveness Target Date"), or (c) the
Issuer fails to consummate the Exchange Offer within 30 business days of the
Effectiveness Target Date with respect to the Exchange Offer Registration
Statement, or (d) the Shelf Registration Statement or the Exchange Offer
Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Transfer Restricted Securities
during the periods specified in the Registration Rights Agreement (each such
event referred to in clauses (a) through (d) above a "Registration Default"),
then the Issuer will pay liquidated damages ("Liquidated Damages") to each
Holder of Notes, with respect to the first 90-day period immediately following
the occurrence of the first Registration Default, in an amount equal to $.05 per
week per $1,000 principal amount of Notes held by such Holder. The amount of the
Liquidated Damages will increase by a additional $.05 per week per $1,000
principal amount of Notes with respect to each subsequent 90-day period until
all Registration Defaults have been cured, up to a maximum amount of Liquidated
Damages for all Registration Defaults of $.50 per week per $1,000 principal
amount of Notes. All accrued Liquidated Damages will be paid by the Issuer on
each Damages Payment Date to the Global Note Holder by wire transfer of
immediately available funds or by federal funds check and to Holders of
Certificated Securities by wire transfer to the accounts specified by them or by
mailing checks to their registered addresses if no such accounts have been
specified. Following the cure of all Registration Defaults, the accrual of
Liquidated Damages will cease.
Holders of Original Notes are required to make certain representations to
the Issuer (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and are required to deliver certain
information to be used in connection with the Shelf Registration Statement and
to provide comments on the Shelf Registration Statement within the time periods
set forth in the Registration Rights in order to have their Original
Notes included in the Shelf Registration Statement and benefit from the
provisions regarding Liquidated Damages
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set forth above.
COVENANTS
The Indenture contains, among others, the following covenants:
LIMITATION ON CONSOLIDATED DEBT
The Issuer may not, and may not permit any Restricted Subsidiary of the
Issuer to Incur any Debt unless the ratio of (a) the aggregate consolidated
principal amount of Debt of the Issuer and its Restricted Subsidiaries
outstanding as of the most recent available quarterly or annual balance sheet,
after giving pro forma effect to the Incurrence of such Debt and any other Debt
Incurred since such balance sheet date that remains outstanding and the receipt
and application of the proceeds thereof, less the principal amount of any Debt
that was outstanding as of such balance sheet date that no longer remains
outstanding, to (b) Adjusted Consolidated Cash Flow, determined on a pro forma
basis as if any such Debt had been incurred and the proceeds thereof had been
applied at the beginning of the relevant fiscal quarter, would be less than or
equal to 7.0 to 1.
Notwithstanding the foregoing limitation, the following Debt may be
Incurred:
(i) Permitted Senior Bank Debt;
(ii) Debt owed by the Issuer to any Wholly Owned Restricted
Subsidiary of the Issuer for which fair value has been received or Debt
owed by a Restricted Subsidiary of the Issuer to the Issuer or a Wholly
Owned Restricted Subsidiary of the Issuer; provided, however, that (a) any
such Debt owing by the Issuer to a Wholly Owned Restricted Subsidiary shall
be Subordinated Debt evidenced by an intercompany promissory note and (b)
upon either (1) the transfer or other disposition by such Wholly Owned
Restricted Subsidiary or the Issuer of any Debt so permitted to a Person
other than the Issuer or another Wholly Owned Restricted Subsidiary of the
Issuer or (2) the issuance (other than directors' qualifying shares), sale,
lease, transfer or other disposition of shares of Capital Stock (including
by consolidation or merger) of such Wholly Owned Restricted Subsidiary to a
Person other than the Issuer or another such Wholly Owned Restricted
Subsidiary, the provisions of this clause (ii) shall no longer be
applicable to such Debt and such Debt shall be deemed to have been Incurred
at the time of such transfer or other disposition;
(iii) Debt consisting of Permitted Interest Rate or Currency
Protection Agreements;
(iv) Debt which is exchanged for or the proceeds of which are used to
refinance or refund, or any extension or renewal of (each of the foregoing,
a "refinancing"), (a) the Notes, (b) Debt incurred pursuant to clause (v)
of this paragraph or (c) Debt that is not described in any other clause
hereof that is outstanding at the date of original issuance of the Notes
after giving effect to the application of the proceeds thereof (as
described in a schedule to the Indenture), in each case in an aggregate
principal amount not to exceed the principal amount of the Debt so
refinanced plus the amount of any premium required to be paid in connection
with such refinancing pursuant to the terms of the Debt so refinanced or
the amount of any premium reasonably determined by the Issuer as necessary
to accomplish such refinancing by means of a tender offer or privately
negotiated repurchase, plus the expenses of the Issuer or the Restricted
Subsidiary, as the case may be, Incurred in connection with such
refinancing; provided, however, that (A) Debt the proceeds of which are
used to refinance the Notes or Debt which is pari passu with or subordinate
in right of payment to the Notes shall only be permitted if (x) in the case
of any refinancing of the Notes or Debt which is pari passu to the Notes,
the refinancing Debt is Incurred by the Issuer and made pari passu to the
Notes or subordinated to the Notes, and (y) in the case of any refinancing
of Debt which is subordinated to the Notes, the refinancing Debt is
Incurred by the Issuer and constitutes Subordinated Debt; (B) the
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refinancing Debt by its terms, or by the terms of any agreement or
instrument pursuant to which such Debt is issued, (1) does not provide for
payments of principal of such Debt at the stated maturity thereof or by way
of a sinking fund applicable thereto or by way of any mandatory redemption,
defeasance, retirement or repurchase thereof (including any redemption,
defeasance, retirement or repurchase which is contingent upon events or
circumstances, but excluding any retirement required by virtue of
acceleration of such Debt upon any event of default thereunder or a
redemption or retirement permitted in clause (2) below), in each case prior
to the stated maturity of the Debt being refinanced and (2) does not permit
redemption or other retirement (including pursuant to an offer to purchase)
of such debt at the option of the holder thereof prior to the final stated
maturity of the Debt being refinanced, other than a redemption or other
retirement at the option of the holder of such Debt (including pursuant to
an offer to purchase) which is conditioned upon provisions substantially
similar to those described under "Repurchase at Option of Holders"; (C) in
the case of any refinancing of Debt Incurred by the Issuer, the refinancing
Debt may be Incurred only by the Issuer, and in the case of any refinancing
of Debt Incurred by a Restricted Subsidiary, the refinancing Debt may be
Incurred only by such Restricted Subsidiary or the Issuer; and (D) in the
case of any refinancing of Preferred Stock of a Restricted Subsidiary, such
Preferred Stock may be refinanced only with Preferred Stock of such
Restricted Subsidiary or the Issuer;
(v) Acquisition Debt;
(vi) ABRY Subordinated Debt;
(vii) the New Notes issued in the Exchange Offer;
(viii) Subordinated Debt of the Issuer owed to any of its shareholders
not to exceed in principal face amount in the aggregate for any taxable
year the amount necessary to enable Pinnacle Towers to obtain the maximum
possible deduction for dividends paid, as defined in Section 561 of the
Code and further described in Section 857 of the Internal Revenue Code for
such year, taking into account the sum of all distributions previously made
to shareholders of the Issuer permitted by the provisions described in
clause (iii) of the second paragraph under "Limitation on Restricted
Payments" for such fiscal year, provided that, any determination under
Section 857 of the Internal Revenue Code shall take into consideration for
such purpose the necessity of increasing the aggregate amounts distributed
to reflect the fact that distributions in payment of any preferred return
on any class of stock will be treated as being made partly from earnings
and partly from capital. ((S) 1008)
LIMITATION ON SUBORDINATED DEBT OF RESTRICTED SUBSIDIARIES
The Issuer may not permit any Restricted Subsidiary to Incur any Debt that
is subordinated in right of payment to any other Debt of such Restricted
Subsidiary, other than Debt that is owed to the Issuer or any other Restricted
Subsidiary.
LIMITATION ON GUARANTEES OF ISSUER DEBT BY RESTRICTED SUBSIDIARIES
The Issuer may not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee, assume or in any other manner become liable for the
payment of any Debt of the Issuer unless: (i) (A) such Restricted Subsidiary
simultaneously executes and delivers a supplemental indenture providing for a
Guarantee of payment of the Notes by such Restricted Subsidiary; and (B) with
respect to any Guarantee of Debt of the Issuer that is subordinate in right of
payment to the Notes, such Guarantee shall be subordinated to such Restricted
Subsidiary's Guarantee with respect to the Notes at least to the same extent as
such Debt is subordinated to the Notes, and (ii) such Restricted Subsidiary
waives, and will not in any manner whatsoever claim or take the benefit or
advantage of, any rights of reimbursement, indemnity or subrogation or any other
rights against the Issuer or any other Restricted Subsidiary as a result of any
payment by such Restricted Subsidiary under its Guarantee until the Notes have
been paid in full. ((S) 1010)
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LIMITATION ON RESTRICTED PAYMENTS
The Issuer (i) may not, and may not permit any Restricted Subsidiary of the
Issuer to, directly or indirectly, declare or pay any dividend or make any
distribution (including any payment in connection with any merger or
consolidation derived from assets of the Issuer or any Restricted Subsidiary) in
respect of its Capital Stock or to the holders thereof, excluding (a) any
dividends or distributions by the Issuer payable solely in shares of its Capital
Stock (other than Redeemable Stock) or in options, warrants or other rights to
acquire its Capital Stock (other than Redeemable Stock), and (b) in the case of
a Restricted Subsidiary, dividends or distributions payable to the Issuer or a
Wholly Owned Restricted Subsidiary or pro rata dividends or distributions, (ii)
may not, and may not permit any Restricted Subsidiary to, purchase, redeem, or
otherwise acquire or retire for value (a) any Capital Stock of the Issuer or any
Related Person of the Issuer or (b) any options, warrants or other rights to
acquire shares of Capital Stock of the Issuer or any Related Person of the
Issuer or any securities convertible or exchangeable into shares of Capital
Stock of the Issuer or any Related Person of the Issuer, excluding any purchase
from the Issuer by a Wholly Owned Restricted Subsidiary of any Capital Stock of
the Issuer or options, warrants or other rights to acquire shares of Capital
Stock of the Issuer or any securities convertible or exchangeable into shares of
Capital Stock of the Issuer, (iii) may not make, or permit any Restricted
Subsidiary to make, any Investment in any Unrestricted Subsidiary or any
Affiliate or any Person that would become an Affiliate after giving effect
thereto or any Related Person, other than an Investment in the Issuer or a
Restricted Subsidiary or a Person that will become or be merged with or into or
consolidated with a Restricted Subsidiary as a result of such Investment and
which is not subject to any restriction that would prevent such Restricted
Subsidiary from repaying such Investment and (iv) may not, and may not permit
any Restricted Subsidiary to, redeem, repurchase, defease or otherwise acquire
or retire for value prior to any scheduled maturity, repayment or sinking fund
payment Debt of the Issuer (other than ABRY Subordinated Debt) which is pari
passu with or subordinate in right of payment to the Notes (each of clauses (i)
through (iv) being a "Restricted Payment") if:
(1) an Event of Default, or an event that with the passing of time or
the giving of notice, or both, would constitute an Event of Default, shall
have occurred and is continuing or would result from such Restricted
Payment, or
(2) after giving pro forma effect to such Restricted Payment as if
such Restricted Payment had been made at the beginning of the applicable
fiscal-quarter period, the Issuer could not Incur at least $1.00 of
additional Debt pursuant to the terms of the Indenture described in the
first paragraph of "Limitation on Consolidated Debt" above, or
(3) upon giving effect to such Restricted Payment, the aggregate of
all Restricted Payments from the date of original issuance of the Notes
exceeds the sum of: (a) cumulative Consolidated Cash Flow since the date of
original issuance of the Notes through the last day of the last full fiscal
quarter ending immediately preceding the date of such Restricted Payment
for which quarterly or annual financial statements are available; minus (b)
1.75 times cumulative Consolidated Interest Expense of the Issuer since the
date of original issuance of the Notes through the last day of the last
full fiscal quarter ending immediately preceding the date of such
Restricted Payment for which quarterly or annual financial statements are
available; plus (c) $10 million.
Prior to the making of any Restricted Payment, the Issuer shall deliver to the
Trustee an Officers' Certificate setting forth the computations by which the
determinations required by clauses (2) and (3) above were made and stating that
no Event of Default, or event that with the passing of time or the giving of
notice, or both, would constitute an Event of Default, has occurred and is
continuing or will result from such Restricted Payment.
Notwithstanding the foregoing, so long as no Event of Default, or event
that with the passing of time or the giving of notice, or both, would constitute
an Event of Default, shall have occurred and is continuing or would result
therefrom:
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(i) the Issuer may make Restricted Payments in an aggregate amount
up to the amount of the net proceeds received by the Issuer after the date
of original issuance of the Notes, including the fair market value of
property other than cash (determined in good faith by the Board of
Directors as evidenced by a resolution of the Board of Directors filed with
the Trustee), from contributions of capital or the issuance and sale (other
than to a Subsidiary or from or to an employee stock ownership plan
financed by loans from the Issuer or a Subsidiary of the Issuer) of Capital
Stock (other than Redeemable Stock) of the Issuer, options, warrants or
other rights to acquire Capital Stock (other than Redeemable Stock) of the
Issuer and Debt of the Issuer that has been converted into or exchanged for
Capital Stock (other than Redeemable Stock and other than by or from a
Subsidiary) of the Issuer after the date of original issuance of the Notes;
(ii) the Issuer and any Restricted Subsidiary of the Issuer may pay
any dividend on Capital Stock of any class within 60 days after the
declaration thereof if, on the date when the dividend was declared, the
Issuer or such Restricted Subsidiary could have paid such dividend in
accordance with the foregoing provisions;
(iii)(a) the Issuer may use cash distributions received from Pinnacle
Towers to make distributions to shareholders of the Issuer, each such
distribution in an aggregate amount per taxable year equal to (1) the
amount of gross income actually includible by the shareholders of the
Issuer on their tax returns with respect to such taxable year solely as a
result of the operations of the Issuer and its Subsidiaries, multiplied by
(2) the sum of the highest marginal federal and highest marginal state
income tax rates applicable to one or more of the shareholders of the
Issuer; and (b) Pinnacle Towers may make one or more distributions with
respect to any taxable year, which distribution may consist of subordinated
debt of Pinnacle Towers, and, to the extent such distribution is made by
Pinnacle Towers, the Issuer may make one or more distributions to its
shareholders consisting of Subordinated Debt of the Issuer, each such
distribution constituting Subordinated Debt not to exceed in the aggregate
an amount necessary to enable the Issuer to obtain the maximum possible
deduction for dividends paid, as defined in Section 561 of the Internal
Revenue Code and further described in Section 857 of the Internal Revenue
Code, for such year, taking into account the sum of all distributions
previously paid to shareholders of the Issuer in accordance with the terms
of clause (a) of this clause (iii), provided that, in connection with any
such distribution, the Issuer shall take into consideration for such
purpose the necessity of increasing the aggregate amounts distributed to
reflect the fact that distributions in payment of any preferred return on
any class of stock will be treated as being made partly from earnings and
profits and partly from capital;
(iv) the Issuer may repurchase Capital Stock of the Issuer owned by
any deceased shareholder of the Issuer (a) to the extent that the Issuer or
any Restricted Subsidiary was the beneficiary of a key-man life insurance
policy on such shareholder and (b) in an amount not to exceed the net
proceeds received by the Issuer or such Restricted Subsidiary from such
key-man life insurance;
(v) the Issuer may repurchase Capital Stock of the Issuer owned by
either any deceased shareholder of the Issuer or former employee of the
Issuer, provided that the aggregate amount of such repurchases in any
twelve-month period may not exceed $1 million; and
(vi) the Issuer may refinance any Debt otherwise permitted by clause
(iv) of the second paragraph under "Limitation on Consolidated Debt" above.
Any payment made pursuant to clause (ii) of this paragraph shall be a Restricted
Payment for purposes of calculating aggregate Restricted Payments pursuant to
the requirements of clause (3) of the preceding paragraph and any payment made
pursuant to clauses (i), (iii), (iv), (v) and (vi) of this paragraph shall not
be a Restricted Payment for purposes of calculating aggregate Restricted
Payments pursuant to the requirements of clause (3) of the preceding paragraph.
((S) 1011)
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LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
The Issuer may not, and may not permit any Restricted Subsidiary to,
directly or indirectly, create or otherwise cause or suffer to exist or become
effective any encumbrance or restriction on the ability of any Restricted
Subsidiary (i) to pay dividends (in cash or otherwise) or make any other
distributions in respect of its Capital Stock owned by the Issuer or any other
Restricted Subsidiary or pay any Debt or other obligation owed to the Issuer or
any other Restricted Subsidiary; (ii) to make loans or advances to the Issuer or
any other Restricted Subsidiary; or (iii) to transfer any of its property or
assets to the Issuer or any other Restricted Subsidiary. Notwithstanding the
foregoing, the Issuer may, and may permit any Restricted Subsidiary to, suffer
to exist any such encumbrance or restriction:
(a) pursuant to any agreement in effect on the date of original
issuance of the Notes (including the Senior Credit Facility and the
agreements executed in connection therewith) as described in a schedule to
the Indenture;
(b) pursuant to an agreement relating to any Debt Incurred by a Person
(other than a Restricted Subsidiary existing on the date of original
issuance of the Notes or any Restricted Subsidiary carrying on any of the
businesses of any such Restricted Subsidiary) prior to the date on which
such Person became a Restricted Subsidiary and outstanding on such date and
not Incurred in anticipation of becoming a Restricted Subsidiary, which
encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person so acquired;
(c) pursuant to an agreement effecting a renewal, extension, refunding
or refinancing of Debt Incurred pursuant to an agreement referred to in
clause (a) or (b) above, provided, however, that the provisions contained
in such renewal, extension, refunding or refinancing agreement relating to
such encumbrance or restriction are no more restrictive in any material
respect than the provisions contained in the agreement the subject thereof,
as determined in good faith by the Board of Directors and evidenced by a
resolution of the Board of Directors filed with the Trustee;
(d) in the case of clause (iii) above, restrictions contained in any
security agreement (including a capital lease) securing Debt of a
Restricted Subsidiary otherwise permitted under the Indenture, but only to
the extent such restrictions restrict the transfer of the property subject
to such security agreement;
(e) in the case of clause (iii) above, customary nonassignment
provisions entered into in the ordinary course of business in leases and
other contracts to the extent such provisions restrict the transfer or
subletting of any such lease or the assignment of rights under any such
contract;
(f) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement which has been entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets of
such Restricted Subsidiary, provided that consummation of such transaction
would not result in an Event of Default or an event that, with the passing
of time or the giving of notice or both, would constitute an Event of
Default, that such restriction terminates if such transaction is closed or
abandoned and that the closing or abandonment of such transaction occurs
within one year of the date such agreement was entered into; or
(g) such encumbrance or restriction is the result of applicable
corporate law or regulation relating to the payment of dividends or
distributions. ((S) 1012)
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LIMITATION ON LIENS
The Issuer may not, and may not permit any Restricted Subsidiary to, Incur
or suffer to exist any Lien on or with respect to any property or assets now
owned or hereafter acquired to secure any Debt without making, or causing such
Restricted Subsidiary to make, effective provision for securing the Notes (x)
equally and ratably with such Debt as to such property for so long as such Debt
will be so secured or (y) in the event such Debt is Debt of the Issuer which is
subordinate in right of payment to the Notes, prior to such Debt as to such
property for so long as such Debt will be so secured.
The foregoing restrictions shall not apply to:
(i) Liens in existence on the date of original issuance of the
Notes (other than Liens described in clause (iv) below), as described in a
schedule to the Indenture;
(ii) Liens securing only the Notes;
(iii) Liens in favor of the Issuer;
(iv) Liens to secure Debt under the Credit Agreement and any
extension, renewal, refinancing or refunding thereof (or successive
extensions, renewals, refinancings or refundings) so long as the Incurrence
of such Debt is permitted under the Indenture;
(v) Liens on real or personal property of the Issuer or a
Restricted Subsidiary as described in the definition of "Purchase Money
Secured Debt" to secure Purchase Money Secured Debt;
(vi) Liens on property existing immediately prior to the time of
acquisition thereof (and not Incurred in anticipation of the financing of
such acquisition);
(vii) Liens on property of a Person (a) existing at the time such
Person becomes a Restricted Subsidiary and not incurred in anticipation of
becoming a Restricted Subsidiary or (b) existing immediately prior to the
time such Person is merged or consolidated with or into the Issuer or any
Restricted Subsidiary and not incurred in anticipation of such merger or
consolidation;
(viii) any interest in or title of a lessor to any property subject to
a Capital Lease Obligation which is permitted under the Indenture; or
(ix) Liens to secure Debt Incurred to extend, renew, refinance or
refund (or successive extensions, renewals, refinancings or refundings), in
whole or in part, Debt secured by any Lien referred to in the foregoing
clauses (i), (ii), (v), (vi) and (vii) so long as such Lien does not extend
to any other property and the principal amount of Debt so secured is not
increased except as otherwise permitted under clause (iv) of "Limitation on
Consolidated Debt." ((S) 1013)
LIMITATION ON OWNERSHIP OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES
The Issuer may not, and may not permit any Restricted Subsidiary to, issue,
transfer, convey, lease or otherwise dispose of any shares of Capital Stock of a
Restricted Subsidiary or securities convertible or exchangeable into, or
options, warrants, rights or any other interest with respect to, Capital Stock
of a Restricted Subsidiary to any person other than the Issuer or a Wholly Owned
Restricted Subsidiary except in a transaction consisting of a sale of all of the
Capital Stock of such Restricted Subsidiary owned by the Issuer and any
Restricted Subsidiary and that complies with the provisions described under "--
Limitation on Asset Dispositions" above to the extent such provisions apply.
((S) 1014)
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TRANSACTIONS WITH AFFILIATES AND RELATED PERSONS
The Issuer may not, and may not permit any Restricted Subsidiary to, enter
into any transaction (or series of related transactions) not in the ordinary
course of business with an Affiliate or Related Person of the Issuer (other than
the Issuer or a Wholly Owned Restricted Subsidiary) involving aggregate
consideration in excess of $1.0 million, including any Investment, either
directly or indirectly, unless such transaction is on terms no less favorable to
the Issuer or such Restricted Subsidiary than those that could be obtained in a
comparable arm's-length transaction with an entity that is not an Affiliate or
Related Person and is in the best interests of the Issuer or such Restricted
Subsidiary. For any transaction (or series of related transactions) that
involves less than or equal to $10 million, the Chief Executive Officer or Chief
Operating Officer of the Issuer shall determine that the transaction satisfies
the above criteria and shall evidence such a determination by an Officer's
certificate filed with the Trustee. For any transaction that involves in excess
of $10 million, a majority of the disinterested members of the Board of
Directors shall determine that the transaction satisfies the above criteria and
shall evidence such a determination by a Board Resolution filed with the
Trustee. ((S) 1017)
PROVISION OF FINANCIAL INFORMATION
Whether or not the Issuer is required to be subject to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, or any successor provision
thereto, from and after the earlier of (a) the effectiveness of either the
Exchange Offer Registration Statement or the Shelf Registration Statement or (b)
the date that is 150 days after the Closing Date the Issuer shall file with the
Commission the annual reports, quarterly reports and other documents which the
Issuer would have been required to file with the Commission pursuant to such
Section 13(a) or 15(d) or any successor provision thereto if the Issuer were so
required, such documents to be filed with the Commission on or prior to the
respective dates (the "Required Filing Dates") by which the Issuer would have
been required so to file such documents if the Issuer were so required. The
Issuer shall also in any event (a) within 15 days of each Required Filing Date
(i) transmit by mail to all Holders, as their names and addresses appear in the
Security Register, without cost to such Holders, and (ii) file with the Trustee,
copies of the annual reports, quarterly reports and other documents which the
Issuer files with the Commission pursuant to such Section 13(a) or 15(d) or any
successor provision thereto or would have been required to file with the
Commission pursuant to such Section 13(a) or 15(d) or any successor provisions
thereto if the Issuer were required to be subject to such Sections and (b) if
filing such documents by the Issuer with the Commission is not permitted under
the Securities Exchange Act of 1934, promptly upon written request supply copies
of such documents to any prospective Holder. ((S) 1018)
UNRESTRICTED SUBSIDIARIES
The Issuer may designate any Subsidiary of the Issuer to be an
"Unrestricted Subsidiary" as provided below in which event such Subsidiary and
each other Person that is then or thereafter becomes a Subsidiary of such
Subsidiary will be deemed to be an Unrestricted Subsidiary. "Unrestricted
Subsidiary" means (1) any Subsidiary designated as such by the Board of
Directors as set forth below where (a) neither the Issuer nor any of its other
Subsidiaries (other than another Unrestricted Subsidiary) (i) provides credit
support for, or Guarantee of, any Debt of such Subsidiary or any Subsidiary of
such Subsidiary (including any undertaking, agreement or instrument evidencing
such Debt) or (ii) is directly or indirectly liable for any Debt of such
Subsidiary or any Subsidiary of such Subsidiary, and (b) no default with respect
to any Debt of such Subsidiary or any Subsidiary of such Subsidiary (including
any right which the holders thereof may have to take enforcement action against
such Subsidiary) would permit (upon notice, lapse of time or both) any holder of
any other Debt of the Issuer and its Subsidiaries (other than another
Unrestricted Subsidiary) to declare a default on such other Debt or cause the
payment thereof to be accelerated or payable prior to its final scheduled
maturity and (2) any Subsidiary of an Unrestricted Subsidiary. The Board of
Directors may designate any Subsidiary to be an Unrestricted Subsidiary unless
such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any
property of, any other Subsidiary of the Issuer which is not a Subsidiary of the
Subsidiary to be so designated or otherwise an Unrestricted Subsidiary, provided
that either
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(x) the Subsidiary to be so designated has total assets of $1,000 or less or (y)
immediately after giving effect to such designation, the Issuer could Incur at
least $1.00 of additional Debt pursuant to the first paragraph under
"--Limitation on Debt" and provided, further, that the Issuer could make a
Restricted Payment in an amount equal to the greater of the fair market value
and book value of such Subsidiary pursuant to "Limitation on Restricted
Payments" and such amount is thereafter treated as a Restricted Payment for the
purpose of calculating the aggregate amount available for Restricted Payments
thereunder. ((S) 101)
MERGERS, CONSOLIDATIONS AND CERTAIN SALES OF ASSETS
The Issuer may not, in a single transaction or a series of related
transactions, (i) consolidate or merge with or into any other Person or permit
any other Person to consolidate or merge with or into the Issuer or (ii)
directly or indirectly, transfer, sell, lease or otherwise dispose of all or
substantially all of its assets, unless:
(1) in a transaction in which the Issuer does not survive or in which
the Issuer sells, leases or otherwise disposes of all or substantially all
of its assets, the successor entity to the Issuer is organized under the
laws of the United States of America, any State thereof or the District of
Columbia, and shall expressly assume, by a supplemental indenture executed
and delivered to the Trustee in form satisfactory to the Trustee, all of
the Issuer's obligations under the Indenture;
(2) immediately before and after giving effect to such transaction and
treating any Debt which becomes an obligation of the Issuer or a Restricted
Subsidiary as a result of such transaction as having been Incurred by the
Issuer or such Restricted Subsidiary at the time of the transaction, no
Event of Default or event that with the passing of time or the giving of
notice, or both, would constitute an Event of Default shall have occurred
and be continuing;
(3) except in the case of any such consolidation or merger of the
Issuer with or into, or any such transfer, sale, lease or other disposition
of assets to, a Wholly Owned Restricted Subsidiary, immediately after
giving effect to such transaction, the Consolidated Net Worth of the Issuer
(or other successor entity to the Issuer) is equal to or greater than that
of the Issuer immediately prior to the transaction;
(4) except in the case of any such consolidation or merger of the
Issuer with or into, or any such transfer, sale, lease or other disposition
of assets to, a Wholly Owned Restricted Subsidiary, immediately after
giving effect to such transaction and treating any Debt which becomes an
obligation of the Issuer or a Restricted Subsidiary as a result of such
transaction as having been Incurred by the Issuer or such Restricted
Subsidiary at the time of the transaction, the Issuer (including any
successor entity to the Issuer) could Incur at least $1.00 of additional
Debt pursuant to the provisions of the Indenture described in the first
paragraph under "Limitation on Debt" above;
(5) if, as a result of any such transaction, property or assets of the
Issuer would become subject to a Lien prohibited by the provisions of the
Indenture described under "Limitation on Liens above, the Issuer or the
successor entity to the Issuer shall have secured the Notes as required by
said covenant; and
(6) certain other conditions are met. ((S) 801)
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided. ((S) 101)
"ABRY Subordinated Debt" means Debt of the Issuer in principal amount not
to exceed $15 million in the
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aggregate at any time outstanding (a) that is owed to ABRY II, ABRY, any other
investment fund controlled by ABRY, Robert Wolsey, or any Person the majority of
whose Voting Stock is directly or indirectly owned by Robert Wolsey and (b) as
to which the payment of principal of (and premium, if any) and interest and
other payment obligations in respect of such Debt shall be subordinate to the
prior payment in full of the Notes to at least the following extent: (i) no
payments of principal of (or premium, if any) or interest on or otherwise due in
respect of such Debt may be permitted for so long as any default in the payment
of principal (or premium, if any) or interest on the Notes exists; (ii) in the
event that any other default that with the passing of time or the giving of
notice, or both, would constitute an event of default exists with respect to the
Notes, upon notice by 25% or more in principal amount of the Notes to the
Trustee, the Trustee shall have the right to give notice to the Issuer and the
holders of such Debt (or trustees or agents therefor) of a payment blockage, and
thereafter no payments of principal of (or premium, if any) or interest on or
otherwise due in respect of such Debt may be made for a period of 179 days from
the date of such notice.
"Accreted Value" means, as of any date prior to March 15, 2003, an amount
per $1,000 principal amount at maturity of Notes that is equal to the sum of (a)
the initial offering price ($614.74 per $1,000 principal amount at maturity of
Notes) of such Notes and (b) the portion of the excess of the principal amount
of such Notes over such initial offering price which shall have been amortized
through such date, such amount to be so amortized on a daily basis and
compounded semi-annually on each March 15 and September 15 at the rate of 10%
per annum from the date of original issue of the Notes through the date of
determination computed on the basis of a 360-day year of twelve 30-day months,
and as of any date on or after March 15, 2003, the principal amount of each
Note.
"Acquisition Debt" means with respect to any specified Person, Debt that is
Incurred in connection with an acquisition of assets consisting of (i) Debt
Incurred for the purpose of financing all or part of the cost of an acquisition
by such Person or any of its Restricted Subsidiaries of assets (including
Capital Stock of a Person that will become a Restricted Subsidiary of such
Person or be merged or consolidated with or into such Person or a Restricted
Subsidiary of such Person) in an amount not to exceed 100% of the purchase price
of such acquisition, (ii) Debt of any other Person existing at the time such
other Person merged with or into or became a Subsidiary of such specified
Person, including, without limitation, Debt Incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, or (iii) Debt secured by a Lien encumbering
any assets acquired by such specified Person, provided in each case (i), (ii)
and (iii) that after giving pro forma effect to the Incurrence of such Debt the
ratio of (a) the aggregate consolidated principal amount of Debt of the Issuer
and its Restricted Subsidiaries outstanding as of the most recent available
quarterly or annual balance sheet, after giving pro forma effect to the
Incurrence of such Debt and any other Debt Incurred since such balance sheet
date that remains outstanding and the receipt and application of the proceeds
thereof, to (b) Adjusted Consolidated Cash Flow (after giving effect to such
acquisition) is not greater than such actual ratio prior to the Incurrence of
such Debt.
"Adjusted Consolidated Cash Flow" means the Consolidated Cash Flow for the
most recent fiscal quarter for which financial statements are available,
determined (i) after giving effect on a pro forma basis to (a) any Asset
Disposition or acquisition of assets (including acquisitions of other Persons by
merger, consolidation or purchase of Capital Stock) by the Issuer or any
Restricted Subsidiaries during or after such quarter as if such Asset
Disposition or acquisition had taken place on the first day of such quarter,
(b) any new lease or Site Management Contract entered into by the Issuer or any
Restricted Subsidiary in the ordinary course of business with respect to Tower
Assets during or after such quarter as if such new lease or Site Management
Contract had been signed on the first day of such quarter and the rent required
by the terms of such lease or Site Management Contract for such quarter had been
received by the Issuer or a Restricted Subsidiary during such quarter, (c) the
loss after the first day of such quarter of any lease or Site Management
Contract of the Issuer or a Restricted Subsidiary with respect to any Tower
Assets that was in effect on the first
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day of such quarter as if such lease or Site Management Contract had not been in
effect during such quarter and no rent under such lease had been received during
such quarter, and (d) any rent increases received by the Issuer or any
Restricted Subsidiary during or after such quarter related to leases or Site
Management Contracts on Tower Assets as if such increased rental rate had been
in effect on the first day of such quarter and the Issuer had received such
increased amount of rent during such quarter, and (ii) as adjusted to add back
Corporate Development Expenses which had been deducted from consolidated
revenues in determining Consolidated Net Income for such quarter, multiplied by
four.
"Affiliate" of any Person means any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person. For the purposes of this definition, "control" when used with
respect to any Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Asset Disposition" by any Person means any transfer, conveyance, sale,
lease or other disposition by such Person or any of its Restricted Subsidiaries
(including a consolidation or merger or other sale of any such Restricted
Subsidiary with, into or to another Person in a transaction in which such
Restricted Subsidiary ceases to be a Restricted Subsidiary, but excluding a
disposition by a Restricted Subsidiary of such Person to such Person or a Wholly
Owned Restricted Subsidiary of such Person or by such Person to a Wholly Owned
Restricted Subsidiary of such Person) of (i) shares of Capital Stock (other than
directors' qualifying shares) or other ownership interests of a Restricted
Subsidiary of such Person, (ii) substantially all of the assets of such Person
or any of its Restricted Subsidiaries representing a division or line of
business or (iii) other assets or rights of such Person or any of its Restricted
Subsidiaries outside of the ordinary course of business, provided in each case
that the aggregate consideration for such transfer, conveyance, sale, lease or
other disposition is equal to $1 million or more.
"Capital Lease Obligation" of any Person means the obligation to pay rent
or other payment amounts under a lease of (or other Debt arrangements conveying
the right to use) real or personal property of such Person which is required to
be classified and accounted for as a capital lease or a liability on the face of
a balance sheet of such Person in accordance with generally accepted accounting
principles. The stated maturity of such obligation shall be the date of the last
payment of rent or any other amount due under such lease prior to the first date
upon which such lease may be terminated by the lessee without payment of a
penalty. The principal amount of such obligation shall be the capitalized amount
thereof that would appear on the face of a balance sheet of such Person in
accordance with generally accepted accounting principles.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of corporate stock or
other equity participations, including partnership interests, whether general or
limited, of such Person.
"Cash Equivalents" means (i) securities issued or directly and fully
guaranteed or insured by the United States government or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States is pledged in support thereof) having maturities of six months from the
date of acquisition, (ii) certificates of deposit with maturities of not more
than six months or less from the date of acquisition, bankers' acceptances with
maturities not exceeding six months and overnight bank deposits, in each case
with any domestic commercial bank having capital and surplus in excess of $500.0
million and a Thompson Bank Watch Rating of "B" or better, (iii) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clauses (i) and (ii) above entered into with any
financial institution meeting the qualifications specified in clause (ii) above,
(iv) commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's Ratings Group and in each case
maturing within six months after the date of acquisition and (v) money market
funds at least 95% of the assets of which constitute Cash Equivalents of the
kinds described in clauses (i)-(iv) of this definition.
"Common Stock" of any Person means Capital Stock of such Person that does
not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Person, to shares of Capital Stock of any other class of such Person.
"Consolidated Cash Flow" for any period means the Consolidated Net Income
for such period increased
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by the sum of (i) Consolidated Interest Expense for such period, plus (ii)
Consolidated Income Tax Expense for such period, plus (iii) the consolidated
depreciation and amortization expense included in the income statement of the
Issuer and its Restricted Subsidiaries for such period, plus (iv) other non-cash
charges of such Person for such period deducted from consolidated revenues in
determining Consolidated Net Income for such period, minus (v) other non-cash
items of the Issuer and its Restricted Subsidiaries for such period increasing
consolidated revenues in determining Consolidated Net Income for such period.
"Consolidated Income Tax Expense" for any period means the consolidated
provision for income taxes of the Issuer and its Restricted Subsidiaries for
such period calculated on a consolidated basis in accordance with generally
accepted accounting principles.
"Consolidated Interest Expense" means for any period the consolidated
interest expense included in a consolidated income statement (without deduction
of interest income) of the Issuer and its Restricted Subsidiaries for such
period calculated on a consolidated basis in accordance with generally accepted
accounting principles, including without limitation or duplication (or, to the
extent not so included, with the addition of), (i) the amortization of Debt
discounts; (ii) any payments or fees with respect to letters of credit, bankers'
acceptances or similar facilities; (iii) fees (net of any amounts received) with
respect to interest rate swap or similar agreements or foreign currency hedge,
exchange or similar agreements; (iv) Preferred Stock dividends of the Issuer and
its Restricted Subsidiaries (other than with respect to Redeemable Stock)
declared and paid or payable, other than dividends paid in Capital Stock that is
not Redeemable Stock; (v) accrued Redeemable Stock dividends of the Issuer and
its Restricted Subsidiaries, whether or not declared or paid; (vi) interest on
Debt guaranteed by the Issuer and its Restricted Subsidiaries; and (vii) the
portion of any rental obligation allocable to interest expense.
"Consolidated Net Income" for any period means the consolidated net income
(or loss) of the Issuer and its Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with generally accepted
accounting principles; provided that there shall be excluded therefrom (a) the
net income (or loss) of any Person acquired by the Issuer or a Restricted
Subsidiary of the Issuer in a pooling-of-interests transaction for any period
prior to the date of such transaction, (b) the net income (or loss) of any
Person that is not a Restricted Subsidiary of the Issuer except to the extent of
the amount of dividends or other distributions actually paid to the Issuer or a
Restricted Subsidiary of the Issuer by such Person during such period, (c) gains
or losses on Asset Dispositions by the Issuer or its Restricted Subsidiaries,
(d) all extraordinary gains and extraordinary losses, (e) the cumulative effect
of changes in accounting principles and (f) the tax effect of any of the items
described in clauses (a) through (e) above.
"Consolidated Net Worth" of any Person means the consolidated stockholders'
equity of such Person, determined on a consolidated basis in accordance with
generally accepted accounting principles, less amounts attributable to
Redeemable Stock of such Person; provided that, with respect to the Issuer,
adjustments following the date of the Indenture to the accounting books and
records of the Issuer in accordance with Accounting Principles Board Opinions
Nos. 16 and 17 (or successor opinions thereto), or otherwise resulting from the
acquisition of control of the Issuer by another Person shall not be given
effect.
"Corporate Development Expenses" means non-tower-level costs incurred in
connection with acquisitions and development of Tower Assets.
"Debt" means (without duplication), with respect to any Person, whether
recourse is to all or a portion of the assets of such Person and whether or not
contingent, (i) every obligation of such Person for money borrowed, (ii) every
obligation of such Person evidenced by bonds, debentures, notes or other similar
instruments, including obligations Incurred in connection with the acquisition
of property, assets or businesses, (iii) every reimbursement obligation of such
Person with respect to letters of credit, bankers' acceptances or similar
facilities issued for the account of such Person, (iv) every obligation of such
Person issued or assumed as the deferred purchase price of property or services
(including securities repurchase agreements but excluding trade accounts payable
or accrued
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liabilities arising in the ordinary course of business which are not overdue or
which are being contested in good faith), (v) every Capital Lease Obligation of
such Person, (vi) all Receivables Sales of such Person, together with any
obligation of such Person to pay any discount, interest, fees, indemnities,
penalties, recourse, expenses or other amounts in connection therewith, (vii)
all Redeemable Stock issued by such Person, (viii) if such Person is a
Restricted Subsidiary, all Preferred Stock issued by such Person, (ix) every
obligation under Interest Rate or Currency Protection Agreements of such Person
and (x) every obligation of the type referred to in clauses (i) through (x) of
another Person and all dividends of another Person the payment of which, in
either case, such Person has Guaranteed or is responsible or liable, directly or
indirectly, as obligor, Guarantor or otherwise. The "amount" or "principal
amount" of Debt at any time of determination as used herein represented by (a)
any contingent Debt, shall be the maximum principal amount hereof, (b) any Debt
issued at a price that is less than the principal amount at maturity thereof,
shall be the amount of the liability in respect thereof determined in accordance
with generally accepted accounting principles, (c) any Receivables Sale, shall
be the amount, if any, in connection with such Receivables Sale for which there
is recourse to the seller or any of its Subsidiaries, (d) any Redeemable Stock,
shall be the maximum fixed redemption or repurchase price in respect thereof,
and (e) any Preferred Stock, shall be the maximum voluntary or involuntary
liquidation preference plus accrued and unpaid dividends in respect thereof, in
each case as of such time of determination.
"Generally accepted accounting principles" means generally accepted
accounting principles in the United States which are in effect on the date of
original issuance of the Notes.
"Guarantee" by any Person means any obligation, contingent or otherwise, of
such Person guaranteeing, or having the economic effect of guaranteeing, any
Debt of any other Person (the "primary obligor") in any manner, whether directly
or indirectly, and including, without limitation, any obligation of such Person,
(i) to purchase or pay (or advance or supply funds for the purchase or payment
of) such Debt or to purchase (or to advance or supply funds for the purchase of)
any security for the payment of such Debt, (ii) to purchase property, securities
or services for the purpose of assuring the holder of such Debt of the payment
of such Debt, or (iii) to maintain working capital, equity capital or other
financial statement condition or liquidity of the primary obligor so as to
enable the primary obligor to pay such Debt (and "Guaranteed", "Guaranteeing"
and "Guarantor" shall have meanings correlative to the foregoing); provided,
however, that the Guaranty by any Person shall not include endorsements by such
Person for collection or deposit, in either case, in the ordinary course of
business.
"Incur" means, with respect to any Debt or other obligation of any Person,
to create, issue, incur (by conversion, exchange or otherwise), assume,
Guarantee or otherwise become liable in respect of such Debt or other obligation
including by acquisition of Restricted Subsidiaries or the recording, as
required pursuant to generally accepted accounting principles or otherwise, of
any such Debt or other obligation on the balance sheet of such Person (and
"Incurrence", "Incurred", "Incurrable" and "Incurring" shall have meanings
correlative to the foregoing); provided, however, that a change in generally
accepted accounting principles that results in an obligation of such Person that
exists at such time becoming Debt shall not be deemed an Incurrence of such
Debt.
"Interest Rate or Currency Protection Agreement" of any Person means any
forward contract, futures contract, swap, option or other financial agreement or
arrangement (including, without limitation, caps, floors, collars and similar
agreements) relating to, or the value of which is dependent upon, interest rates
or currency exchange rates or indices.
"Internal Revenue Code" means the Internal Revenue Code of 1986.
"Investment" by any Person means any direct or indirect loan, advance or
other extension of credit or capital contribution (by means of transfers of cash
or other property to others or payments for property or services for the account
or use of others, or otherwise) to, or purchase or acquisition of Capital Stock,
bonds, notes, debentures or other securities or evidence of Debt issued by, any
other Person, including any payment on a Guarantee of any obligation of such
other Person, but shall not include trade accounts receivable in the ordinary
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course of business on credit terms made generally available to the customers of
such Person.
"Lien" means, with respect to any property or assets, any mortgage or deed
of trust, pledge, hypothecation, assignment, Receivables Sale, deposit
arrangement, security interest, lien, charge, easement (other than any easement
not materially impairing usefulness or marketability), encumbrance, preference,
priority or other security agreement or preferential arrangement of any kind or
nature whatsoever on or with respect to such property or assets (including,
without limitation, any conditional sale or other title retention agreement
having substantially the same economic effect as any of the foregoing).
"Net Cash Proceeds" from any Asset Disposition by any Person means cash or
Cash Equivalents received (including by way of sale or discounting of a note,
instalment receivable or other receivable, but excluding any other consideration
received in the form of assumption by the acquiror of Debt or other obligations
relating to such properties or assets) therefrom by such Person, net of (i) all
legal, title and recording tax expenses, commissions and other fees and expenses
Incurred and all federal, state, foreign and local taxes required to be accrued
as a liability as a consequence of such Asset Disposition, (ii) all payments
made by such Person or its Restricted Subsidiaries on any Debt which is secured
by such assets in accordance with the terms of any Lien upon or with respect to
such assets or which must by the terms of such Lien, or in order to obtain a
necessary consent to such Asset Disposition or by applicable law, be repaid out
of the proceeds from such Asset Disposition, (iii) all distributions and other
payments made to minority interest holders in Restricted Subsidiaries of such
Person or joint ventures as a result of such Asset Disposition and (iv)
appropriate amounts to be provided by such Person or any Restricted Subsidiary
thereof, as the case may be, as a reserve in accordance with generally accepted
accounting principles against any liabilities associated with such assets and
retained by such Person or any Restricted Subsidiary thereof, as the case may
be, after such Asset Disposition, including, without limitation, liabilities
under any indemnification obligations and severance and other employee
termination costs associated with such Asset Disposition, in each case as
determined by the Board of Directors, in its reasonable good faith judgment
evidenced by a resolution of the Board of Directors filed with the Trustee;
provided, however, that any reduction in such reserve within twelve months
following the consummation of such Asset Disposition will be treated for all
purposes of the Indenture and the Notes as a new Asset Disposition at the time
of such reduction with Net Cash Proceeds equal to the amount of such reduction.
"Offer to Purchase" means a written offer (the "Offer") sent by the Issuer
by first class mail, postage prepaid, to each Holder at his address appearing in
the Note Register on the date of the Offer offering to purchase up to the
principal amount of Notes specified in such Offer at the purchase price
specified in such Offer (as determined pursuant to the Indenture). Unless
otherwise required by applicable law, the Offer shall specify an expiration date
(the "Offer Expiration Date") of the Offer to Purchase which shall be, subject
to any contrary requirements of applicable law, not less than 20 business days
or more than 60 days after the date of such Offer and a settlement date (the
"Purchase Date") for purchase of Notes within five Business Days after the Offer
Expiration Date. The Issuer shall notify the Trustee at least 15 Business Days
(or such shorter period as is acceptable to the Trustee) prior to the mailing of
the Offer of the Issuer's obligation to make an Offer to Purchase, and the Offer
shall be mailed by the Issuer or, at the Issuer's request, by the Trustee in the
name and at the expense of the Issuer. The Offer shall contain information
concerning the business of the Issuer and its Restricted Subsidiaries which the
Issuer in good faith believes will enable such Holders to make an informed
decision with respect to the Offer to Purchase (which at a minimum will include
(i) the most recent annual and quarterly financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained in the documents required to be filed with the Trustee pursuant to the
Indenture (which requirements may be satisfied by delivery of such documents
together with the Offer), (ii) a description of material developments in the
Issuer's business subsequent to the date of the latest of such financial
statements referred to in clause (i) (including a description of the events
requiring the Issuer to make the Offer to Purchase), (iii) if applicable,
appropriate pro forma financial information concerning the Offer to Purchase and
the events requiring the Issuer to make the Offer to Purchase and (iv) any other
information required by applicable law to be included therein. The Offer shall
contain all instructions and materials necessary to enable such Holders to
tender Notes pursuant to the Offer to Purchase.
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The Offer shall also state:
(1) the Section of the Indenture pursuant to which the Offer to
Purchase is being made;
(2) the Offer Expiration Date and the Purchase Date;
(3) the aggregate principal amount of the Outstanding Notes offered to
be purchased by the Issuer pursuant to the Offer to Purchase (including, if
less than 100%, the manner by which such has been determined pursuant to
the Section hereof requiring the Offer to Purchase) (the "Purchase
Amount");
(4) the purchase price to be paid by the Issuer for each $1,000
aggregate principal amount of Notes accepted for payment (as specified
pursuant to the Indenture) (the "Purchase Price");
(5) that the Holder may tender all or any portion of the Notes
registered in the name of such Holder and that any portion of a Note
tendered must be tendered in an integral multiple of $1,000 principal
amount;
(6) the place or places where Notes are to be surrendered for tender
pursuant to the Offer to Purchase;
(7) that interest on any Note not tendered or tendered but not
purchased by the Issuer pursuant to the Offer to Purchase will continue to
accrue;
(8) that on the Purchase Date the Purchase Price will become due and
payable upon each Note being accepted for payment pursuant to the Offer to
Purchase and that interest thereon shall cease to accrue on and after the
Purchase Date;
(9) that each Holder electing to tender a Note pursuant to the Offer
to Purchase will be required to surrender such Note at the place or places
specified in the Offer prior to the close of business on the Offer
Expiration Date (such Note being, if the Issuer or the Trustee so requires,
duly endorsed by, or accompanied by a written instrument of transfer in
form satisfactory to the Issuer and the Trustee duly executed by, the
Holder thereof or his attorney duly authorized in writing);
(10) that Holders will be entitled to withdraw all or any portion of
Notes tendered if the Issuer (or their Paying Agent) receives, not later
than the close of business on the Offer Expiration Date, a telegram, telex,
facsimile transmission or letter setting forth the name of the Holder, the
principal amount of the Note the Holder tendered, the certificate number of
the Note the Holder tendered and a statement that such Holder is
withdrawing all or a portion of his tender;
(11) that (a) if Notes in an aggregate principal amount less than or
equal to the Purchase Amount are duly tendered and not withdrawn pursuant
to the Offer to Purchase, the Issuer shall purchase all such Notes and (b)
if Notes in an aggregate principal amount in excess of the Purchase Amount
are tendered and not withdrawn pursuant to the Offer to Purchase, the
Issuer shall purchase Notes having an aggregate principal amount equal to
the Purchase Amount on a pro rata basis (with such adjustments as may be
deemed appropriate so that only Notes in denominations of $1,000 or
integral multiples thereof shall be purchased); and
(12) that in the case of any Holder whose Note is purchased only in
part, the Issuer shall execute, and the Trustee shall authenticate and
deliver to the Holder of such Note without service charge, a new Note or
Notes, of any authorized denomination as requested by such Holder, in an
aggregate principal amount equal to and in exchange for the unpurchased
portion of the Note so tendered.
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Any Offer to Purchase shall be governed by and effected in accordance with the
Offer for such Offer to Purchase.
"Permitted Holder" means as of the date of determination (i) Andrew Banks,
Royce Yudkoff or Robert Wolsey and any of their respective spouses, estates,
lineal descendants (including adoptive children), heirs, executors, personal
representatives, administrators and trusts for any of their benefit and (ii) any
other Person, the majority of whose Voting Stock is directly or indirectly owned
by any Person described in clause (1) above.
"Permitted Interest Rate or Currency Protection Agreement" of any Person
means any Interest Rate or Currency Protection Agreement entered into with one
or more financial institutions in the ordinary course of business that is
designed to protect such Person against fluctuations in interest rates or
currency exchange rates with respect to Debt Incurred and which shall have a
notional amount no greater than the payments due with respect to the Debt being
hedged thereby and not for purposes of speculation.
"Permitted Senior Bank Debt" means Debt under the Senior Credit Facility
and any extension, renewal, refinancing or refunding thereof in an aggregate
amount not to exceed at any one time outstanding the sum of $250 million less
the aggregate amount of any such Debt that is repaid pursuant to the provisions
of clause (iii) of the provisions of the Indenture described under the caption
"Asset Dispositions".
"Pinnacle Towers" means Pinnacle Towers Inc., a Delaware corporation.
"Preferred Stock" of any Person means Capital Stock of such Person of any
class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding up of such Person, to shares of Capital
Stock of any other class of such Person.
"Public Equity Offering" means an underwritten primary public offering of
Common Stock of the Issuer pursuant to an effective registration statement under
the Securities Act of 1933, as amended.
"Purchase Money Secured Debt" of any Person means Debt of such Person
secured by a Lien on real or personal property of such Person which Debt (a)
constitutes all or a part of the purchase price or construction cost of such
property or (b) is Incurred prior to, at the time of or within 180 days after
the acquisition or substantial completion of such property for the purpose of
financing all or any part of the purchase price or construction cost thereof;
provided, however, that (w) the Debt so incurred does not exceed 100% of the
purchase price or construction cost of such property, (x) such Lien does not
extend to or cover any property other than such item of property and any
improvements on such item, (y) the purchase price or construction cost for such
property is or should be included in "addition to property, plant and equipment"
in accordance with generally accepted accounting principles and (z) the purchase
or construction of such property is not part of any acquisition of a Person or
business unit or line of business.
"Receivables" means receivables, chattel paper, instruments, documents or
intangibles evidencing or relating to the right to payment of money.
"Receivables Sale" of any Person means any sale of Receivables of such
Person (pursuant to a purchase facility or otherwise), other than in connection
with a disposition of the business operations of such Person relating thereto or
a disposition of defaulted Receivables for purpose of collection and not as a
financing arrangement.
"Redeemable Stock" of any Person means any Capital Stock of such Person
that by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or otherwise (including upon the occurrence of
an event other than a Change of Control or substantially similar event) matures
or is required to be redeemed (pursuant to any sinking fund obligation or
otherwise, but other than as a result of the death or disability of the holder
thereof or the termination of the employment with the Company of the holder
thereof) or is convertible into or exchangeable for Debt or is
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redeemable at the option of the holder thereof, in whole or in part, at any time
prior to the final Stated Maturity of the Notes; provided, however, that any
Capital Stock which would not constitute Redeemable Stock but for provisions
thereof giving holders thereof the right to require the Issuer or a Restricted
Subsidiary to repurchase or redeem such Capital Stock upon the occurrence of an
Asset Disposition occurring prior to the final maturity of the Notes shall not
constitute Redeemable Stock if such provisions applicable to such Capital Stock
are no more favorable to the holders of such stock than the provisions
applicable to the Notes contained in the covenant described under "Asset
Dispositions" and such provisions applicable to such Capital Stock specifically
provide that the Issuer and its Restricted Subsidiaries will not repurchase or
redeem any such stock pursuant to such provisions prior to the repurchase of
such Notes as are required to be repurchased pursuant to the covenant described
under "Asset Dispositions."
"Related Person" of any Person means any other Person directly or
indirectly owning (a) 5% or more of the outstanding Common Stock of such Person
(or, in the case of a Person that is not a corporation, 5% or more of the equity
interest in such Person) or (b) 5% or more of the combined voting power of the
Voting Stock of such Person.
"Restricted Subsidiary" means any Subsidiary of the Issuer, whether
existing on or after the date of the Indenture, unless such Subsidiary is an
Unrestricted Subsidiary.
"Site Management Contract" means any agreement pursuant to which the Issuer
or any of its Restricted Subsidiaries has the right to substantially control
Tower Assets and the revenues derived from the rental or use thereof.
"Subordinated Debt" means Debt of the Issuer as to which the payment of
principal of (and premium, if any) and interest and other payment obligations in
respect of such Debt shall be subordinate to the prior payment in full of the
Notes to at least the following extent: (i) no payments of principal of (or
premium, if any) or interest on or otherwise due in respect of such Debt may be
permitted for so long as any default in the payment of principal (or premium, if
any) or interest on the Notes exists; (ii) in the event that any other default
that with the passing of time or the giving of notice, or both, would constitute
an event of default exists with respect to the Notes, upon notice by 25% or more
in principal amount of the Notes to the Trustee, the Trustee shall have the
right to give notice to the Issuer and the holders of such Debt (or trustees or
agents therefor) of a payment blockage, and thereafter no payments of principal
of (or premium, if any) or interest on or otherwise due in respect of such Debt
may be made for a period of 179 days from the date of such notice; and (iii)
such Debt may not (x) provide for payments of principal of such Debt at the
stated maturity thereof or by way of a sinking fund applicable thereto or by way
of any mandatory redemption, defeasance, retirement or repurchase thereof by the
Issuer (including any redemption, retirement or repurchase which is contingent
upon events or circumstances, but excluding any retirement required by virtue of
acceleration of such Debt upon an event of default thereunder), in each case
prior to the final Stated Maturity of the Notes or (y) permit redemption or
other retirement (including pursuant to an offer to purchase made by the Issuer)
of such other Debt at the option of the holder thereof prior to the final Stated
Maturity of the Notes, other than a redemption or other retirement at the option
of the holder of such Debt (including pursuant to an offer to purchase made by
the Issuer) which is conditioned upon a change of control of the Issuer pursuant
to provisions substantially similar to those described under "Change of Control"
(and which shall provide that such Debt will not be repurchased pursuant to such
provisions prior to the Issuer's repurchase of the Notes required to be
repurchased by the Issuer pursuant to the provisions described under "Change of
Control"); provided, however, that any Debt which would constitute Subordinated
Debt but for provisions thereof giving holders thereof the right to require the
Issuer or a Restricted Subsidiary to repurchase or redeem such Subordinated Debt
upon the occurrence of an Asset Disposition occurring prior to the final
maturity of the Notes shall constitute Subordinated Debt if such provisions
applicable to such Subordinated Debt are no more favorable to the holders of
such Debt than the provisions applicable to the Notes contained in the covenant
described under "Asset Dispositions" and such provisions applicable to such Debt
specifically provide that the Issuer and its Restricted Subsidiaries will
not repurchase or redeem any such Debt pursuant to such provisions prior to the
repurchase of such Notes as are
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required to be repurchased pursuant to the covenant described under "Asset
Dispositions."
"Subsidiary" of any Person means (i) a corporation more than 50% of the
combined voting power of the outstanding Voting Stock of which is owned,
directly or indirectly, by such Person or by one or more other Subsidiaries of
such Person or by such Person and one or more Restricted Subsidiaries thereof,
or (ii) any other Person (other than a corporation) in which such Person, or one
or more other Subsidiaries of such Person or such Person and one or more other
Subsidiaries thereof, directly or indirectly, has at least a majority ownership
and power to direct the policies, management and affairs thereof.
"Tower Asset Exchange" means any transaction in which the Issuer or a
Restricted Subsidiary exchanges assets for Tower Assets and/or cash or Cash
Equivalents where the fair market value (evidenced by a resolution of the Board
of Directors set forth in an Officers' Certificate delivered to the Trustee) of
the Tower Assets and cash or Cash Equivalents received by the Issuer and its
Restricted Subsidiaries in such exchange is at least equal to the fair market
value of the assets disposed in such exchange.
"Tower Assets" means (i) wireless transmission towers and related assets
that are located on the site of a transmission tower and rooftop and other
wireless transmission sites and related assets located at such site and (ii)
Site Management Contracts.
"Voting Stock" of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors (or persons performing
similar functions) of such Person, whether at all times or only so long as no
senior class of securities has such voting power by reason of any contingency.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person or by such Person and one or more Wholly Owned
Restricted Subsidiaries of such Person.
EVENTS OF DEFAULT
The following will be Events of Default under the Indenture:
(a) failure to pay principal of (or premium, if any, on) any Note when
due;
(b) failure to pay any interest on any Note when due, continued for 30
days;
(c) default in the payment of principal and interest on Notes required
to be purchased pursuant to an Offer to Purchase as described under "Change
of Control" and "Asset Dispositions" when due and payable;
(d) failure to perform or comply with the provisions described under
"Merger, Consolidation and Certain Sales of Assets";
(e) failure to perform any other covenant or agreement of the Issuer
under the Indenture or the Notes continued for 60 days after written notice
to Holding by the Trustee or Holders of at least 25% in aggregate principal
amount of Outstanding Notes;
(f) default under the terms of any instrument evidencing or securing
Debt for money borrowed by the Issuer or any Restricted Subsidiary having
an outstanding principal amount of $5 million individually or in the
aggregate which default results in the acceleration of the payment of all
or any portion of such indebtedness or constitutes the failure to pay all
or any portion of such indebtedness when due;
100
<PAGE>
(g) the rendering of a final judgment or judgments (not subject to
appeal) against the Issuer or any Subsidiary in an amount in excess of $5
million which remains undischarged or unstayed for a period of 60 days
after the date on which the right to appeal has expired; and
(h) certain events of bankruptcy, insolvency or reorganization
affecting the Issuer or any Subsidiary. ((S) 501)
Subject to the provisions of the Indenture relating to the duties of the Trustee
in case an Event of Default (as defined) shall occur and be continuing, the
Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request or direction of any of the Holders, unless
such Holders shall have offered to the Trustee reasonable indemnity. ((S) 603)
Subject to such provisions for the indemnification of the Trustee, the Holders
of a majority in aggregate principal amount of the Outstanding Notes will have
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee or exercising any trust or power conferred
on the Trustee. ((S) 512)
If an Event of Default (other than an Event of Default described in Clause
(h) above) shall occur and be continuing, either the Trustee or the Holders of
at least 25% in aggregate principal amount of the Outstanding Notes may
accelerate the maturity of all Notes; provided, however, that after such
acceleration, but before a judgment or decree based on acceleration, the Holders
of a majority in aggregate principal amount of Outstanding Notes may, under
certain circumstances, rescind and annul such acceleration if all Events of
Default, other than the non-payment of accelerated principal, have been cured or
waived as provided in the Indenture. If an Event of Default specified in Clause
(h) above occurs, the Outstanding Notes will ipso facto become immediately due
and payable without any declaration or other act on the part of the Trustee or
any Holder. ((S) 502) For information as to waiver of defaults, see
"Modification and Waiver".
Notwithstanding the foregoing, upon an acceleration of the Notes or an
Event of Default specified in Clause (h) above, in each case prior to the Full
Accretion Date, the holders of Notes will be entitled to receive only a default
amount equal to the Accreted Value of the Notes, which until the Full Accretion
Date will be less than the face amount of such Notes.
No Holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such Holder shall
have previously given to the Trustee written notice of a continuing Event of
Default (as defined) and unless also the Holders of at least 25% in aggregate
principal amount of the Outstanding Notes shall have made written request, and
offered reasonable indemnity, to the Trustee to institute such proceeding as
trustee, and the Trustee shall not have received from the Holders of a majority
in aggregate principal amount of the Outstanding Notes a direction inconsistent
with such request and shall have failed to institute such proceeding within 60
days. ((S) 507) However, such limitations do not apply to a suit instituted by a
Holder of a Note for enforcement of payment of the principal of and premium, if
any, or interest on such Note on or after the respective due dates expressed in
such Note. ((S) 508)
The Issuer will be required to furnish to the Trustee quarterly a statement
as to the performance by the Issuer of certain of its obligations under the
Indenture and as to any default in such performance. ((S) 1018)
SATISFACTION AND DISCHARGE OF THE INDENTURE
The Indenture will cease to be of further effect as to all outstanding
Notes (except as to (i) rights of registration of transfer and exchange and the
Issuer's right of optional redemption, (ii) substitution of apparently
mutilated, defaced, destroyed, lost or stolen Notes, (iii) rights of Holders to
receive payment of principal and interest on the Notes, (iv) rights, obligations
and immunities of the Trustee under the Indenture and (v) rights of the Holders
of the Notes as beneficiaries of the Indenture with respect to any property
deposited with the Trustee payable to all or any of them), if (x) the Issuer
will have paid or caused to be paid the principal of and interest on
101
<PAGE>
the Notes as and when the same will have become due and payable or (y) all
outstanding Notes (except lost, stolen or destroyed Notes which have been
replaced or paid) have been delivered to the Trustee for cancellation. (Article
Four)
DEFEASANCE
The Indenture will provide that, at the option of the Issuer, (a) if
applicable, the Issuer will be discharged from any and all obligations in
respect of the Outstanding Notes or (b) if applicable, the Issuer may omit to
comply with certain restrictive covenants, that such omission shall not be
deemed to be an Event of Default under the Indenture and the Notes, in either
case (a) or (b) upon irrevocable deposit with the Trustee, in trust, of money
and/or U.S. government obligations which will provide money in an amount
sufficient in the opinion of a nationally recognized firm of independent
certified public accountants to pay the principal of and premium, if any, and
each installment of interest, if any, on the Outstanding Notes. With respect to
clause (B), the obligations under the Indenture other than with respect to such
covenants and the Events of Default other than the Events of Default relating to
such covenants above shall remain in full force and effect. Such trust may only
be established if, among other things:
(i) with respect to clause (a), the Issuer has received from, or there
has been published by, the Internal Revenue Service a ruling or there has
been a change in law, which in the Opinion of Counsel provides that Holders
of the Notes will not recognize gain or loss for U.S. federal income tax
purposes as a result of such deposit, defeasance and discharge and will be
subject to U.S. federal income tax on the same amount, in the same manner
and at the same times as would have been the case if such deposit,
defeasance and discharge had not occurred; or, with respect to clause (b),
the Issuer has delivered to the Trustee an Opinion of Counsel to the effect
that the Holders of the Notes will not recognize gain or loss for U.S.
federal income tax purposes as a result of such deposit and defeasance and
will be subject to U.S. federal income tax on the same amount, in the same
manner and at the same times as would have been the case if such deposit
and defeasance had not occurred;
(ii) such deposit, defeasance and discharge will not result in a
breach or violation of, or constitute a default under, any agreement or
instrument to which the Issuer or any Restricted Subsidiary is a party or
by which the Issuer and any Restricted Subsidiary is bound;
(iii) no Event of Default or event that with the passing of time or
the giving of notice, or both, shall constitute an Event of Default shall
have occurred and be continuing;
(iv) the Issuer has delivered to the Trustee an Opinion of Counsel to
the effect that such deposit shall not cause the Trustee or the trust so
created to be subject to the Investment Issuer Act of 1940; and
(v) certain other customary conditions precedent are satisfied.
(Article Thirteen)
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the
Issuer and the Trustee with the consent of the Holders of a majority in
aggregate principal amount of the Outstanding Notes; provided, however,
that no such modification or amendment may, without the consent of the
Holder of each Outstanding Note affected thereby, (a) change the Stated
Maturity of the principal of, or any installment of interest on, any Note,
(b) reduce the principal amount of, (or the premium) or interest on, any
Note, (c) change the place or currency of payment of principal of (or
premium), or interest on, any Note, (d) impair the right to institute suit
for the enforcement of any payment on or with respect to any Note, (e)
reduce the above-stated percentage of Outstanding Notes necessary to modify
or amend the Indenture, (f) reduce the percentage of aggregate principal
amount of Outstanding Notes necessary for waiver of compliance with certain
provisions of the Indenture or for waiver of certain defaults, (g)
102
<PAGE>
modify any provisions of the Indenture relating to the modification and
amendment of the Indenture or the waiver of past defaults or covenants,
except as otherwise specified, or (h) following the mailing of any Offer to
Purchase, modify any Offer to Purchase for the Notes required under the
"Limitation on Asset Dispositions" and the "Change of Control" covenants
contained in the Indenture in a manner materially adverse to the Holders
thereof. ((S) 902)
Notwithstanding the foregoing, without the consent of any Holder, the
Issuer and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency provided that such action
does not adversely affect the interests of the Holders of the Notes in any
material respect, to provide for the assumption of the Issuer's obligations
to Holders of Notes in the case of a merger or consolidation, to secure the
Notes, to add to the covenants of the Issuer for the benefits of the
Holders or to comply with requirements of the Commission in order to effect
or maintain the qualification of the Indenture under the Trust Indenture
Act.
The Holders of a majority in aggregate principal amount of the
Outstanding Notes, on behalf of all Holders of Notes, may waive compliance
by the Issuer with certain restrictive provisions of the Indenture.
((S) 1019) Subject to certain rights of the Trustee, as provided in the
Indenture, the Holders of a majority in aggregate principal amount of the
Outstanding Notes, on behalf of all Holders of Notes, may waive any past
default under the Indenture, except a default in the payment of principal,
premium or interest or a default arising from failure to purchase any Note
tendered pursuant to an Offer to Purchase. ((S) 513)
GOVERNING LAW
The Indenture and the Notes are governed by the laws of the State of
New York.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event
of Default, the Trustee will perform only such duties as are specifically
set forth in the Indenture. During the existence of an Event of Default,
the Trustee will exercise such rights and powers vested in it under the
Indenture and use the same degree of care and skill in its exercise as a
prudent person would exercise under the circumstances in the conduct of
such person's own affairs. ((S)(S) 601 and 605)
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee, should it
become a creditor of the Issuer, to obtain payment of claims in certain cases or
to realize on certain property received by it in respect of any such claim as
security or otherwise. The Trustee is permitted to engage in other transactions
with the Issuer or any Affiliate, provided, however, that if it acquires any
conflicting interest (as defined in the Indenture or in the Trust Indenture
Act), it must eliminate such conflict or resign. ((S) 608)
103
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following general discussion summarizes certain of the material U.S.
federal income tax considerations of the Exchange Offer to Holders of the
Original Notes. This discussion is a summary for general information only and
does not consider all aspects of U.S. federal income tax that may be relevant to
a Holder of the Original Notes in light of such Holder's particular
circumstances. This discussion also does not address the U.S. federal income
tax consequences to Holders subject to special treatment under the U.S. federal
income tax laws, such as dealers in securities or foreign currency, tax-exempt
entities, financial institutions, foreign persons, insurance companies, persons
that hold the Notes as part of a "straddle," a "hedge" against currency risk or
a "conversion transaction," persons that have a "functional currency" other than
the U.S. dollar and investors in pass-through entities. In addition, this
discussion does not describe any tax consequences arising out of the tax laws of
any state, local or foreign jurisdiction.
This discussion is based upon the Code, existing and proposed regulations
thereunder, Internal Revenue Service ("IRS") rulings and pronouncement and
judicial decisions now in effect, all of which are subject to change (possibly
on a retroactive basis). The Company has not and will not seek any rulings or
opinions from the IRS or counsel with respect to the matters discussed below.
There can be no assurance that the IRS will not take positions concerning the
tax consequences of the Exchange Offer which are different from those discussed
herein.
HOLDERS OF ORIGINAL NOTES SHOULD CONSULT THEIR OWN ADVISORS CONCERNING THE
APPLICATION OF U.S. FEDERAL INCOME TAX LAWS, AS WELL AS THE LAWS OF ANY STATE,
LOCAL OR FOREIGN TAXING JURISDICTION, TO THE EXCHANGE OFFER IN LIGHT OF THEIR
PARTICULAR SITUATIONS.
The exchange of the Original Notes for New Notes pursuant to the Exchange
Offer should not constitute a taxable exchange. As a result, (i) a holder
should not recognize taxable gain or loss as a result of exchanging Original
Notes for New Notes pursuant to the Exchange Offer; (ii) the holding period of
the New Notes should include the holding period of the Original Notes exchanged
therefor; and (iii) the adjusted tax basis of the New Notes should be the same
as the adjusted tax basis of the Original Notes exchanged therefor immediately
before the exchange.
104
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that received New Notes for its own account pursuant to
the Exchange Offer ("Restricted Holder") must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a Restricted
Holder in connection with resales of New Notes received in exchange for Original
Notes where such Original Notes were acquired as a result of market-making
activities or other trading activities. For a period of 180 days after the
Expiration Date, the Company will use reasonable efforts to make this Prospectus
available to any Restricted Holder for use in connection with any such resale,
provided that such Restricted Holder indicates in the Letter of Transmittal that
is a broker-dealer. In addition, until September 29, 1998, all Restricted
Holders effecting transactions in the New Notes may be required to deliver a
Prospectus.
The Company will not receive any proceeds from any sale of Original Notes
by Restricted Holders. Original Notes received by Restricted Holders for their
own account pursuant to the Exchange Offer may be sold from time to time in one
or more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such methods
of resale, at market prices prevailing at the time of resale, or at prices
related to such prevailing market prices on negotiated prices. Any such resale
may be made directly to purchasers or to or through Restricted Holders who may
receive compensation in the form of commissions or concessions from any such
Restricted Holder and/or the purchasers of any New Notes. Any Restricted Holder
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any person that participates in the distribution of such
New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such Restricted Holders may be deemed
to be underwriting compensation under the Securities Act. The Letter of
Transmittal states that by acknowledging that it will deliver and by delivering
a prospectus, a Restricted Holder will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any Restricted Holder that requires such
documents in the Letter of Transmittal.
By acceptance of this Exchange Offer, each Restricted Holder that receives
New Notes pursuant to the Exchange Offer agrees that, upon receipt of notice
from the Company of the happening of any event which makes any statement in the
Prospectus untrue in any material respect or which requires the making of any
changes in the Prospectus in order to make the statements therein not misleading
(which notice the Company agrees to deliver promptly to such Restricted Holder),
such Restricted Holder will suspend use of the Prospectus until the Company has
amended or supplemented the Prospectus to correct such misstatement or omission
and has furnished copies of the amended or supplemented Prospectus to such
Restricted Holder. If the Company gives any such notice to suspend the use of
the Prospectus, it shall extend the 180-day period referred to above by the
number of days during the period from and including the date of the giving of
such notice up to and including when Restricted Holders shall have received
copies of the supplemental or amended Prospectus necessary to permit resales of
New Notes.
LEGAL OPINIONS
Certain legal matters with respect to the issuance of New Notes will be
passed upon for the Company by its counsel, Holland & Knight LLP.
105
<PAGE>
EXPERTS
The financial statements included in this Prospectus for Pinnacle Holdings
Inc. as of December 31, 1997 and 1996 and for the years then ended and for the
period from inception through December 31, 1995, Shore Communications as of
December 3, 1997 and for the period from January 1, 1997 through December 3,
1997, Tidewater Communications as of July 31, 1997 and for the period from
January 1, 1997 through July 31, 1997 and Majestic Communications as of June 27,
1997 and for the period from January 1, 1997 through June 27, 1997 included in
this Prospectus, have been so included in reliance on the reports of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
The financial statements of the Tower Operations of Southern
Communications Services, Inc., as of December 31, 1997 and 1996 and for the
years then ended, included in this Prospectus, have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said reports.
106
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PINNACLE HOLDINGS INC.
Report of Independent Certified Public Accountants........................ F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 as of and for
the three months ended March 31, 1998 (unaudited)........................ F-3
Consolidated Statements of Operations for the period from inception
through
December 31, 1995 and for each of the two years ended December 31, 1997
and for the three months ended March 31, 1998 and 1997 (unaudited)....... F-4
Consolidated Statements of Changes in Stockholders' Equity for the period
from inception through December 31, 1995 and for each of the two years
ended December 31, 1997 and for the three months ended March 31, 1998
(unaudited).............................................................. F-5
Consolidated Statements of Cash Flows for the period from inception
through December 31, 1995 and for each of the two years ended December
31, 1997 and for the three months ended March 31, 1998 and 1997
(unaudited).............................................................. F-6
Notes to Consolidated Financial Statements................................ F-7
SOUTHERN COMMUNICATIONS SERVICES, INC. TOWER OPERATIONS
Report of Independent Certified Public Accountants........................ F-18
Balance Sheets as of December 31, 1997 and 1996........................... F-19
Statements of Operations.................................................. F-20
Statements of Changes in Accumulated Deficit.............................. F-21
Statements of Cash Flows.................................................. F-22
Notes to Financial Statements............................................. F-23
SHORE COMMUNICATIONS
Report of Independent Certified Public Accountants........................ F-26
Combined Balance Sheet as of December 3, 1997............................. F-27
Combined Statement of Operations and Retained Earnings for the period from
January 1, 1997 through December 3, 1997................................. F-28
Combined Statement of Cash Flows for the period from January 1, 1997
through
December 3, 1997......................................................... F-29
Notes to Combined Financial Statements.................................... F-30
TIDEWATER COMMUNICATIONS
Report of Independent Certified Public Accountants........................ F-35
Combined Balance Sheet as of July 31, 1997................................ F-36
Combined Statement of Operations and Retained Earnings for the period from
January 1, 1997 through July 31, 1997.................................... F-37
Combined Statement of Cash Flows for the period from January 1, 1997
through
July 31, 1997............................................................ F-38
Notes to Combined Financial Statements.................................... F-39
MAJESTIC COMMUNICATIONS
Report of Independent Certified Public Accountants........................ F-44
Combined Balance Sheet as of June 27, 1997................................ F-45
Combined Statement of Operations and Retained Earnings for the period from
January 1, 1997 through June 27, 1997.................................... F-46
Combined Statement of Cash Flows for the period from January 1, 1997
through
June 27, 1997............................................................ F-47
Notes to Combined Financial Statements.................................... F-48
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Pinnacle Holdings Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders' equity, and
of cash flows present fairly, in all material respects, the financial position
of Pinnacle Holdings Inc. and its subsidiaries (the "Company") at December 31,
1997 and 1996, and the results of their operations and their cash flows for
each of the two years in the period ended December 31, 1997, and for the
period from inception (May 3, 1995) through December 31, 1995, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Tampa, Florida
March 4, 1998
F-2
<PAGE>
PINNACLE HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1997 1998
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $ 47,419 $ 1,693,923 $ 3,318,875
Accounts receivable, less allowance
for doubtful accounts
of $45,000, $70,000, and $100,000,
respectively....................... 483,883 1,577,575 1,955,768
Prepaid expenses and other current
assets............................. 291,148 1,037,447 2,627,212
----------- ------------ ------------
Total current assets............... 822,450 4,308,945 7,901,855
Restricted cash....................... 34,072 59,822 59,822
Tower assets, net of accumulated
depreciation of $2,229,274,
$8,278,524, and $10,998,629,
respectively......................... 48,327,035 127,946,070 231,856,099
Fixed assets, net..................... 757,595 1,495,121 1,602,570
Land.................................. 4,112,000 6,850,951 11,119,824
Other assets.......................... 1,512,485 2,516,994 11,839,950
----------- ------------ ------------
$55,565,637 $143,177,903 $264,380,120
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................... $ 807,092 $ 2,242,397 $ 4,549,556
Accrued expenses.................... 723,444 3,095,049 2,891,496
Deferred revenue.................... 132,423 639,460 1,337,498
Current portion of long-term debt... 636,214 11,122,077 322,488
----------- ------------ ------------
Total current liabilities.......... 2,299,173 17,098,983 9,101,038
Long-term debt........................ 29,785,966 109,459,790 233,438,576
Other liabilities..................... 60,759 105,012 93,292
----------- ------------ ------------
32,145,898 126,663,785 242,632,906
----------- ------------ ------------
Commitments and contingencies (Note 7)
Redeemable stock:
Class B common stock, 12,000 shares
issued and outstanding at December
31, 1996 and 1997 and at March 31,
1998............................... 1,200,000 1,761,000 1,761,000
Class D common stock (convertible,
see Note 9), 38,000 shares issued
and outstanding at December 31,
1996 and 39,000 shares issued and
outstanding at December 31, 1997
and March 31, 1998................. 38 39 39
----------- ------------ ------------
1,200,038 1,761,039 1,761,039
----------- ------------ ------------
Stockholders' equity:
Common stock:
Class A common stock--202,500 shares
issued and outstanding at December
31, 1996 and 1997 and shares
issued and outstanding at March 31,
1998............................... 203 203 203
Class E common stock--51,300,
67,089, and shares issued and
outstanding at December 31, 1996
and 1997 and at March 31, 1998,
respectively....................... 51 67 163
Additional paid-in capital.......... 24,881,219 25,875,752 35,030,477
Accumulated deficit................. (2,661,772) (11,122,943) (15,044,668)
----------- ------------ ------------
22,219,701 14,753,079 19,986,175
----------- ------------ ------------
$55,565,637 $143,177,903 $264,380,120
=========== ============ ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these financial statements.
F-3
<PAGE>
PINNACLE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MAY 3, 1995) THREE MONTHS ENDED
THROUGH YEAR ENDED YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, DECEMBER 31, ------------------------
1995 1996 1997 1997 1998
------------- ------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Tower rental revenue.... $ 733,003 $ 4,841,752 $12,880,631 $ 1,969,546 $ 5,372,833
Tower operating
expenses, excluding
depreciation and
amortization........... 180,919 1,135,023 2,632,274 337,161 1,043,406
---------- ----------- ----------- ----------- -----------
Gross margin.......... 552,084 3,706,729 10,248,357 1,632,385 4,329,427
Other expenses:
General and
administrative....... 306,180 923,168 1,385,382 311,407 298,198
Corporate
development.......... 369,496 1,439,749 3,772,140 847,962 1,288,807
Depreciation and
amortization......... 340,614 2,205,176 6,626,912 1,165,998 2,950,850
---------- ----------- ----------- ----------- -----------
1,016,290 4,568,093 11,784,434 2,325,367 4,537,855
---------- ----------- ----------- ----------- -----------
Loss from operations.... (464,206) (861,364) (1,536,077) (692,982) (208,428)
Interest expense........ 181,212 1,154,990 6,925,094 856,319 3,102,826
Amortization of original
issue discount......... -- -- -- -- 610,471
---------- ----------- ----------- ----------- -----------
Net loss................ $ (645,418) $(2,016,354) $(8,461,171) $(1,549,301) $(3,921,725)
========== =========== =========== =========== ===========
Loss per common share... $ (6.31) $ (8.10) $ (27.28) $ (5.10) $ (11.58)
Weighted average number
of common shares
outstanding............ 102,250 248,950 310,122 303,800 338,608
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these financial statements.
F-4
<PAGE>
PINNACLE HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
REDEEMABLE STOCK
----------------------------------
CLASS B CLASS D CLASS A CLASS E
COMMON STOCK COMMON STOCK COMMON STOCK COMMON STOCK ADDITIONAL STOCK
------------------ --------------- -------------- -------------- PAID-IN SUBSCRIPTIONS ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT
------ ---------- ------- ------ ------- ------ ------- ------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
common stock, net
of issuance
costs:
Class A......... $ 75,500 $ 76 $-- $ 7,051,405
Class B......... 12,000 $1,200,000
Class D......... 30,000 30
Stock subscrip-
tion............. $(180,015)
Net loss........ $ (645,418)
------ ---------- ------- ---- ------- ---- ------- ---- ----------- --------- ------------
Balance at Decem-
ber 31, 1995..... 12,000 1,200,000 30,000 30 75,500 76 -- -- 7,051,405 (180,015) (645,418)
Issuance of
common stock, net
of issuance
costs:
Class A......... 127,000 127 12,699,873
Class D......... 8,000 8
Class E......... 51,300 51 5,129,941
Payment received
for stock
subscriptions.... 180,015
Net loss......... (2,016,354)
------ ---------- ------- ---- ------- ---- ------- ---- ----------- --------- ------------
Balance at
December 31,
1996............. 12,000 1,200,000 38,000 38 202,500 203 51,300 51 24,881,219 -- (2,661,772)
Issuance of
common stock, net
of issuance
costs:
Class B......... 500
Class D......... 11,000 11
Class E......... 15,789 16 1,555,533
Retirement of
common stock:
Class B......... (500)
Class D......... (10,000) (10)
Net loss......... (8,461,171)
Adjustment to
Class B common
stock............ 561,000 (561,000)
------ ---------- ------- ---- ------- ---- ------- ---- ----------- --------- ------------
Balance at Decem-
ber 31, 1997..... 12,000 1,761,000 39,000 39 202,500 203 67,089 67 25,875,752 -- (11,122,943)
Unaudited:
Issuance of
common stock, net
of issuance
costs:
Class E......... 95,677 96 9,567,613
Distribution to
Class B common
stockholders
(Note 6)......... (412,888)
Net loss......... (3,921,725)
Balance at March
31, 1998......... 12,000 $1,761,000 39,000 $ 39 202,500 $203 162,766 $163 $35,030,477 -- $(15,044,668)
------ ---------- ------- ---- ------- ---- ------- ---- ----------- --------- ------------
<CAPTION>
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Issuance of
common stock, net
of issuance
costs:
Class A......... $ 7,051,481
Class B.........
Class D.........
Stock subscrip-
tion............. (180,015)
Net loss........ (645,418)
-------------
Balance at Decem-
ber 31, 1995..... 6,226,048
Issuance of
common stock, net
of issuance
costs:
Class A......... 12,700,000
Class D.........
Class E......... 5,129,992
Payment received
for stock
subscriptions.... 180,015
Net loss......... (2,016,354)
-------------
Balance at
December 31,
1996............. 22,219,701
Issuance of
common stock, net
of issuance
costs:
Class B.........
Class D.........
Class E......... 1,555,549
Retirement of
common stock:
Class B.........
Class D.........
Net loss......... (8,461,171)
Adjustment to
Class B common
stock............ (561,000)
-------------
Balance at Decem-
ber 31, 1997..... 14,753,079
Unaudited:
Issuance of
common stock, net
of issuance
costs:
Class E......... 9,567,709
Distribution to
Class B common
stockholders
(Note 6)......... (412,888)
Net loss......... (3,921,725)
Balance at March
31, 1998......... $19,986,175
-------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these financial statements.
F-5
<PAGE>
PINNACLE HOLDINGS
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MAY 3, 1995) THREE MONTHS ENDED
THROUGH YEAR ENDED YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, DECEMBER 31, -------------------------
1995 1996 1997 1997 1998
------------- ------------ ------------ ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss............... $ (645,418) $(2,016,354) $(8,461,171) $(1,549,301) $ (3,921,725)
Adjustments to
reconcile net loss to
net cash provided by
operating activities:
Depreciation and
amortization.......... 340,614 2,205,176 6,626,912 1,165,998 2,950,850
Amortization of
original issue
discount.............. -- -- -- -- 610,471
Provision for doubtful
accounts.............. -- 45,000 25,000 -- 30,000
(Increase) decrease
in:
Accounts receivable,
gross............... (74,818) (454,065) (1,118,692) (515,057) (408,193)
Notes receivable..... (387,455) 387,455 -- -- --
Prepaid expenses and
other current
assets.............. (13,544) (277,604) (746,299) (19,921) (1,589,765)
Other assets......... (175,172) (237,408) (358,587) (298,513) 60,736
Increase (decrease)
in:
Accounts payable..... 173,381 633,711 1,435,305 (43,127) 2,307,159
Accrued expenses..... 293,665 429,779 2,371,605 283,310 (203,553)
Deferred revenue..... 55,006 77,417 507,037 336,313 698,038
Other current
liabilities......... 490,000 (490,000) -- -- --
Other liabilities.... -- 49,491 44,253 1,759 (21,721)
----------- ----------- ----------- ----------- ------------
Total adjustments.... 701,677 2,368,952 8,786,534 910,762 4,434,022
----------- ----------- ----------- ----------- ------------
Net cash provided by
operating activities... 56,259 352,598 325,363 (638,539) 512,297
----------- ----------- ----------- ----------- ------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Payments made in
connection with
acquisitions:
Tower assets......... (10,553,958) (31,845,153) (70,852,422) (13,916,477) (96,440,006)
Land................. (774,153) (3,337,847) (2,738,951) (140,408) (4,268,873)
Capital expenditures:
Tower assets......... (1,121,150) (7,036,048) (14,815,863) (3,128,318) (10,122,475)
Fixed assets......... (287,711) (563,646) (1,023,513) (519,643) (216,188)
(Increase) decrease in
restricted cash....... (297,118) 138,157 (25,750) (218,806) --
----------- ----------- ----------- ----------- ------------
Net cash used in
investing activities... (13,034,090) (42,644,537) (89,456,499) (17,923,652) (111,047,542)
----------- ----------- ----------- ----------- ------------
CASH FLOWS FROM
FINANCING ACTIVITIES
Borrowings under long-
term debt, net
of deferred
loan costs............ 4,937,200 24,866,994 89,918,073 19,574,430 307,028,824
Repayment of long-term
debt.................. -- (568,516) (695,982) (1,059,658) (204,023,448)
Proceeds from issuance
of redeemable stock,
net of issuance
costs................. 1,200,030 8 -- -- --
Proceeds from issuance
of common stock, net
of
issuance costs and
stock subscriptions
receivable............ 6,871,466 18,010,007 1,555,549 -- 9,567,709
Payment of accretion
in Class B common
stock................. -- -- -- -- (412,888)
----------- ----------- ----------- ----------- ------------
Net cash provided by
financing activities... 13,008,696 42,308,493 90,777,640 18,514,772 112,160,197
----------- ----------- ----------- ----------- ------------
Net increase in cash and
cash equivalents....... 30,865 16,554 1,646,504 (47,419) 1,624,952
----------- ----------- ----------- ----------- ------------
Cash and cash
equivalents, beginning
of year................ -- 30,865 47,419 47,419 1,693,923
----------- ----------- ----------- ----------- ------------
Cash and cash
equivalents, end of
year................... $ 30,865 $ 47,419 $ 1,693,923 $ -- $ 3,318,875
=========== =========== =========== =========== ============
SUPPLEMENTAL DISCLOSURE
OF CASH FLOWS:
Cash paid for
interest.............. $ 185,980 $ 1,037,452 $ 5,786,816 $ 989,130 $ 4,416,557
=========== =========== =========== =========== ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these financial statements.
F-6
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
The accompanying consolidated financial statements reflect the financial
position and results of operations and cash flows of Pinnacle Holdings Inc.
and its wholly owned subsidiaries: Pinnacle Towers Inc., Coverage Plus Antenna
Systems, Inc. and Tower Systems, Inc., collectively referred to as the
"Company." The Company acquires, develops and operates telecommunication
towers and leases space on its towers to customers in the wireless
communications industries located in the United States. All significant
intercompany balances and transactions have been eliminated in consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and use
assumptions that affect the reported amounts of assets and liabilities and the
disclosure for contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. Actual results may vary from estimates used.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers all highly
liquid temporary cash investments with a maturity of three months or less to
be cash equivalents.
Concentration of Credit Risk
Substantially all of the accounts receivable are with federal, state and
local government agencies and national and local wireless communications
providers. The Company performs ongoing credit evaluations of its customers
but does not require collateral to support customer receivables. The Company
maintains an allowance for doubtful accounts on its customer receivables based
upon factors surrounding the credit risk of specific customers, historical
trends and other information.
Restricted Cash
Restricted cash reflects cash held in escrow restricted for the acquisition
of tower sites.
Tower Assets
Tower assets consists of towers and related attachments which are recorded
at cost and depreciated using the straight-line method over the estimated
useful life of the assets, which is 15 years for towers and 30 years for
buildings. Also included in tower assets are towers in progress of $2,815,153
and $3,452,045 as of December 31, 1996 and 1997, respectively. Improvements,
renewals and extraordinary repairs which increase the value or extend the life
of the asset are capitalized. Repairs and maintenance costs are expensed as
incurred.
Fixed Assets
Fixed assets are recorded at cost and depreciated using the straight-line
method over the estimated useful lives of the fixed assets. Equipment held
under capital leases is amortized on a straight-line basis over the term of
the lease or the remaining life of the leased property, whichever is
F-7
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
shorter. Betterments, renewals and extraordinary repairs which increase the
value or extend the life of the asset are capitalized. Repairs and maintenance
costs are expensed as incurred.
Other Assets
Other assets consists primarily of organization costs of $98,553 and $32,313
at December 31, 1996 and 1997, respectively, (net of accumulated amortization
of $101,570 and $167,810, respectively), and costs associated with the
acquisition of debt, which are capitalized and amortized over the terms of the
related debt arrangements.
Impairment of Long-lived Assets
The Company evaluates the recoverability of its long-lived assets whenever
adverse events or changes in business climate indicate that the expected
undiscounted future cash flows from the related asset may be less than
previously anticipated. If the net book value of the related asset exceeds the
undiscounted future cash flows of the asset, the carrying amount would be
reduced to the present value of its expected future cash flows and an
impairment loss would be recognized. As of December 31, 1997 management does
not believe that an impairment reserve is required.
Fair Value of Financial Instruments
The carrying amount of the Company's financial instruments at December 31,
1996 and 1997, which includes cash, accounts receivable and debt, approximates
fair value due to the short maturity of those instruments. The Company
considers the fixed rate and variable rate financial instruments to be
representative of current market interest rates and, accordingly, the recorded
amounts approximate their present fair market value.
Accounting for Interest Rate Swaps
The Company is exposed to credit losses in the event of nonperformance by
counterparties on interest rate swaps and other risk management instruments.
The Company does not believe there is a significant risk of nonperformance by
any of the parties to these instruments. Amounts due to the Company under
these agreements were not significant at December 31, 1997.
Tower Rental Revenue Recognition
Tower rental revenue is recognized on a straight-line basis over the life of
the related lease agreements. Revenue is recorded in the month in which it is
due. Any rental amounts received in advance of the month due are recorded as
deferred revenue.
Corporate Development Expenses
Corporate development expenses represent costs incurred in connection with
acquisitions, construction activities and expansion of the customer base.
These expenses consist primarily of allocated compensation and overhead costs
that are not directly related to the administration or management of existing
towers, and are expensed as incurred.
Income Taxes
The Company qualifies and intends to continue to qualify to be taxed as a
Real Estate Investment Trust ("REIT") under the Internal Revenue Code of 1986,
as amended, for each taxable year of
F-8
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
operations. As a REIT, the Company is allowed a tax deduction for the amount
of dividends paid to its stockholders, thereby effectively subjecting the
distributed net income of the Company to taxation at the stockholder level
only, provided it distributes at least 95% of its REIT taxable income and
meets certain other requirements for qualifying as a REIT. The Company
incurred a loss for both book and tax purposes in the years ended December 31,
1996 and 1997 and, therefore, was not required to pay a cash dividend in order
to retain its REIT status.
Earnings Per Share
Basic net income per common share is based on the weighted average number of
shares of common stock outstanding during each period. The computation of
diluted earnings per share, assuming conversion of the Class D common shares
described in Note 9, has an antidilutive effect on earnings per share.
Interim Financial Information
The interim financial data includes the accounts and operations of the
Company. The interim financial data is unaudited; however, in the opinion of
the Company, the interim data includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the results of
the interim period and are prepared on the same basis as the audited annual
financial statements.
3. ACQUISITIONS
The Company actively acquires towers and assumes the sellers' related
customer activity on an ongoing basis. In January 1996, the Company acquired
telecommunications tower sites and related assets from an individual for cash
of $4,443,000. During May of 1996, the Company acquired the rooftop of the
Plaza Tower building including all of the related tower assets and fixtures
from Baha Towers Limited Partnership for a purchase price of $3,000,000 which
was paid in cash. In July 1996, the Company purchased the tower leases and
subleases of Florida Mobile Telephone, Inc. for a purchase price of
$2,270,000, which was also paid in cash. In September 1996, the Company
purchased 10 tower sites and related assets for $3,010,000, which consisted of
$792,325 in cash and $2,217,675 of notes payable to Tall Towers Rentals, Inc.
Additionally, the Company completed 44 other acquisitions of towers and
related assets, all of which were individually insignificant to the Company,
from various sellers during the year ended December 31, 1996. The aggregate
purchase price of $20,854,055 consisted of $15,578,475 in cash and $5,275,580
of notes payable to the former tower owners (see Note 6).
The Company completed 63 acquisitions during the year ended December 31,
1997, all of which were individually insignificant to the Company. The
aggregate purchase price for acquisitions for the year ended December 31, 1997
was $73,591,373, which consisted of $54,339,523 in cash and $19,251,850 of
notes payable to the former tower owners.
On March 4, 1998, the Company completed the acquisition of 201 towers from
Southern Communications Services, Inc. (see Note 12).
The Company accounts for its acquisitions using the purchase method of
accounting. The results of operations of the acquired assets are included with
those of the Company from the dates of the respective acquisitions. The pro-
forma results of operations listed below reflect purchase accounting and pro-
forma adjustments as if the transactions occurred as of January 1, 1996. The
unaudited pro- forma consolidated financial statements are not necessarily
indicative of the results that would have
F-9
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
occurred if the assumed transaction had occurred on the dates indicated and
are not necessarily indicative of the expected financial position or results
of operations in the future.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1996 1997 1998
------------ ------------ -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Tower rental revenue............... $ 10,798,643 $ 16,918,640 $5,467,168
Gross profit, excluding
depreciation and amortization..... 8,472,242 13,478,764 4,373,734
Net loss........................... (12,570,435) (13,233,398) (408,846)
Net loss per common share.......... $ (50.49) $ (42.67) $ (1.21)
</TABLE>
4. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL DECEMBER 31,
LIVES IN --------------------
YEARS 1996 1997
--------- -------- ----------
<S> <C> <C> <C>
Vehicles................................... 5 $257,304 $ 489,778
Furniture, fixtures and other office equip-
ment...................................... 5 426,542 504,759
Data processing equipment.................. 5 167,511 880,333
-------- ----------
851,357 1,874,870
Accumulated depreciation................... (93,762) (379,749)
-------- ----------
Fixed assets, net.......................... $757,595 $1,495,121
======== ==========
</TABLE>
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
-------- ----------
<S> <C> <C>
Construction costs....................................... $ -- $1,071,719
Interest................................................. 199,385 1,337,662
Professional fees........................................ 146,000 150,000
Sales tax and other...................................... 109,446 148,115
Payroll and other........................................ 268,613 387,553
-------- ----------
$723,444 $3,095,049
======== ==========
</TABLE>
F-10
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------- ------------
1996 1997 1998
----------- ------------ ------------
<S> <C> <C> <C>
Senior Discount Notes, interest at
10%, less unamortized discount
(1998--$124,599,092), unsecured,
maturing March 15, 2008............. $ -- $ -- $200,400,971
Senior Credit Facility, monthly
interest at variable rates (7.75%
and 8.25% at December 31, 1996 and
1997, respectively), unsecured,
quarterly principal installments
beginning June 30, 2000, maturing
December 31, 2004................... 21,100,000 72,000,000 15,650,000
Notes payable to former tower owners,
interest from 8.5% to 13% per annum,
monthly installments of principal
and interest of varying amounts
through December 31, 2020, secured
by various letters of credit........ 9,322,180 28,581,867 17,710,093
Subordinated term note, quarterly
interest at variable rates (11.88%
at December 31, 1997), unsecured,
principal and interest maturing
September 22, 2000.................. -- 20,000,000 --
----------- ------------ ------------
30,422,180 120,581,867 233,761,064
Less current portion of long-term
debt................................ (636,214) (11,122,077) (322,488)
----------- ------------ ------------
$29,785,966 $109,459,790 $233,438,576
=========== ============ ============
</TABLE>
The remaining principal payments at December 31, 1997 were due as follows:
1999-$357,561; 2000-$30,713,259; 2001-$10,243,954; 2002-$11,256,324; and 2003
and thereafter $56,888,692.
Senior Credit Facility
In September 1995, the Company entered into a credit agreement which
provided for $25,000,000 of senior debt financing through a reducing revolving
line of credit and revolver/term loan (as amended, the "Senior Credit
Facility"). In September 1996, the Company and its senior lender agreed to
expand the commitment amount to $100,000,000. Advances under the credit
agreement are limited to a borrowing base, which is based on the Company's
cash flows, as defined in the agreement.
Advances under the Senior Credit Facility accrue interest at the Company's
option at either LIBOR plus a margin of up to 2.375%, as defined in the
related agreement, or at the greater of the Federal Funds Effective Rate plus
0.50% or the prime rate, plus a margin of up to 1.375%. Advances under the
Senior Credit Facility bear interest payable in quarterly installments. In
addition, the Company is required to pay commitment fees based on the unused
portion of the commitments and customary facility fees on the total amount of
the commitments.
The Senior Credit Facility is secured by a lien on substantially all of the
Company's assets and a pledge of substantially all of the Company's capital
stock. The credit agreement contains customary covenants such as limitations
on the Company's ability to incur indebtedness, to incur liens or encumbrances
on assets, to make certain investments, to make distributions to shareholders,
or prepay subordinated debt. Under the credit agreement, the Company may not
permit the ratio of debt to annualized EBITDA to exceed certain amounts, as
defined in the agreement.
F-11
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For the period from inception (May 3, 1995) through December 31, 1995 and
for the years ended December 31, 1996 and 1997, the Company incurred
commitment fees of approximately $38,000, $52,000, and $192,000, respectively.
Subsequent Events
On March 4, 1998, the Company amended the Senior Credit Facility to provide
for borrowings initially of up to $200,000,000. The facility comprises a
revolving line of credit under which the Company may make borrowings and
repayments until March 31, 2000, at which time the facility will convert into
a term loan payable through December 31, 2004. Advances under the Senior
Credit Facility accrue interest at the Company's option of either LIBOR plus a
margin of up to 2.75%, as defined in the related agreement, or at the greater
of the Federal Funds Effective Rate plus 0.50% or the prime rate, plus a
margin of up to 1.75%. Advances under the facility are available to fund
acquisitions and construction of towers and for general corporate purposes. In
connection with the closing of the Private Offering, the Senior Credit
Facility was amended to reduce the commitment amount to $150.0 million and to
change the maximum LIBOR margin to 2.875%.
In February 1998, the Company entered into an agreement with its principal
stockholder (the "Bridge Loan"), whereby the Company borrowed $12,500,000 in
cash. Amounts outstanding under the Bridge Loan earn interest at the rate of
9% per annum. Interest and principal under the Bridge Loan are payable within
one year from the date of the related borrowing. During April 1998, the
Company borrowed $2.5 million under this Bridge Loan to partially fund
acquisitions.
On March 17, 1998, the Company issued $325,000,000 of 10% Senior Discount
Notes with a scheduled maturity in 2008 through a private placement offering
to institutional investors. The Senior Discount Note holders have the right to
require the Company to redeem the notes on or after March 15, 2003 at a price
105.0%, 103.3%, 102.6% and 100.0% during the twelve month period ending March
15, 2003, 2004, 2005, and 2006 and thereafter, respectively. In addition, the
Company at any time prior March 15, 2001 may redeem up to 35% of the Senior
Discount Notes upon a public equity offering at a redemption price equal to
110% of the accreted value of the notes plus unpaid liquidating damages, if
any, as of the redemption date. The notes will accrete interest, representing
the amortization of the original issue discount, at a rate of 10% compounded
semi-annually to a maturity of $325,000,000 by March 15, 2003. Thereafter, the
notes will pay interest at the rate of 10% semi annually, payable in arrears
on March 15 and September 16. The proceeds of this issuance were used to repay
approximately $158.6 million of outstanding borrowing under the Senior Credit
Facility, to repay and retire $20 million and approximately $1.2 million in
accrued interest outstanding under the Subordinated Term Loan, to repay in
full and retire the $12.5 million of principal and $.1 million in accrued
interest outstanding under the ABRY Bridge Loan, and to pay approximately $.4
million in the aggregate to holders of the Company's Class B common stock in
settlement of a distribution preference on such stock.
Subordinated Term Loan
On September 22, 1997, the Company entered into a term loan agreement for
$20,000,000, which is subordinated to the Company's Senior Credit Facility.
Borrowings under this agreement accrue
interest, at interest rates equal to a margin amount (as defined in the
agreement), plus LIBOR. The amount of the related margins are 6% through March
22, 1998, 7.5% through September 22, 1998, 10% through March 22, 1999 and the
ratio increases by 2% for each successive six month period to a maximum
combined rate of 18%. The Company may extend the maturity of the subordinated
debt to September 22, 2007 if the Company complies with the subordinated debt
covenants, as defined in the agreement. The Company may prepay this loan at
any time at the Company's option. In connection with the term loan agreement,
the Company issued warrants to lenders for 10,000 shares of the Company's
Class F Common Stock (see Note 9). As of December 31, 1997, no value was
assigned to the warrants.
F-12
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interest Rate Swap
The Company entered into interest rate swap agreements to manage the
interest rate risk associated with certain of its variable rate debt. The swap
agreement effectively converts the credit agreement floating rate debt from
LIBOR plus a margin, as defined in the agreement, to a fixed rate debt plus
the applicable margin under the credit agreement on an amount equal to the
notional value of the interest rate swap. The following table summarizes the
interest rate swap agreement:
<TABLE>
<CAPTION>
NOTIONAL AMOUNT
-----------------------------------
FIXED
PAY RATE DECEMBER 31, 1996 DECEMBER 31, 1997
-------- ----------------- -----------------
<S> <C> <C> <C>
EXPIRATION DATE
September 30, 2000.............. 5.75% $20,000,000 $20,000,000
May 1, 1998..................... 6.22% -- 20,000,000
December 24, 1998............... 5.90% -- 30,000,000
</TABLE>
Approximately $28,000 and $51,000 of interest expense was incurred in 1996
and 1997, respectively, related to the interest rate swap agreements.
7. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company is obligated under noncancellable leases for office space,
machinery and equipment and ground leases which expire at various times
through 2015. The majority of these leases have renewal options which range up
to 10 years. Certain of the leases have purchase options at the end of the
original lease term. The future minimum lease commitments under these leases
are as follows:
<TABLE>
<S> <C>
YEAR ENDING
DECEMBER 31,
1998.......................................................... $ 787,532
1999.......................................................... 781,319
2000.......................................................... 722,262
2001.......................................................... 574,192
2002.......................................................... 541,397
2003 and thereafter........................................... 6,623,432
-----------
Total minimum lease payments................................ $10,030,134
===========
</TABLE>
Total rent expense under noncancellable operating leases was approximately
$118,000, $468,083 and $1,468,323 for the period ended December 31, 1995 and
for the years ended December 31, 1996 and 1997, respectively.
Employment Agreements
The Company has severance agreements with certain officers of the Company
which grant these employees the right to receive their base salary and
continuation of certain benefits for periods ranging from six to eighteen
months in the event of a termination (as defined by the agreement) of such
employees.
Litigation
The Company is not a party to any material legal proceedings other than
routine litigation incidental to its business. In the opinion of management,
the amount of ultimate liability with respect to these actions will not
materially affect the financial position or results of operations of the
Company.
F-13
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. TENANT LEASES
The following is a schedule by year of total rentals to be received for
tower space under noncancellable lease agreements as of December 31, 1997:
<TABLE>
<S> <C>
YEAR ENDING
DECEMBER 31,
1998........................................................... $ 6,333,611
1999........................................................... 5,813,840
2000........................................................... 5,204,757
2001........................................................... 3,858,188
2002........................................................... 3,046,291
2003 and thereafter............................................ 2,211,626
-----------
$26,468,313
===========
</TABLE>
Principally all of the leases provide for renewal at varying escalations.
These escalations have not been reflected above.
9.STOCKHOLDERS' EQUITY
Capital Contribution Commitment
In 1995, the Company and its principal shareholder entered into a capital
contribution agreement whereby the principal shareholder committed to invest
up to $20,000,000 as equity in the Company (the "Capital Contribution
Agreement") and at that time, management contributed $1,200,000. In February
1996, the Capital Contribution Agreement was amended and the principal
shareholder's equity commitment to the Company was increased to $50,000,000.
Redeemable Stock
Class D common stock is convertible into shares of Class C common stock. The
number of shares of Class C common stock issuable upon conversion will be 25%
of the aggregate number of Class A and Class B common stock outstanding at the
close of business on the Conversion date, as defined in the agreement. Such
conversion will be effected by the surrender of the Class D common stock in
exchange for the Class C common stock on a date to be approved by the Board of
Directors, or upon consummation of an initial public offering. Any Class D
common stock converted into Class C common stock will maintain the vesting
characteristics such Class D common stock had prior to the time of conversion.
Shares of Class D Common Stock are held by various officers and employees of
the Company. Vesting of the ownership of these shares is subject to varying
schedules. Certain employees vest into the ownership of the shares at the rate
of 20% per year. Other employees vest according to the following schedule:
<TABLE>
<CAPTION>
VESTING FRACTION
OF SHARES
REMAINING UNVESTED
------------------
<S> <C>
ANNIVERSARY OF
THE CLOSING DATE
First................................................... 1/10
Second.................................................. 1/9
Third................................................... 1/8
Fourth.................................................. 2/7
Fifth................................................... 1/2
Sixth................................................... 1/1
</TABLE>
F-14
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
If certain employees cease to be employed prior to the third anniversary of
the date their respective shares were granted, any vested shares will become
unvested. In the event of an initial public offering or sale of the Company,
all unvested shares for any employee still employed will become vested shares.
In the event of termination of employment, all shares of Class D common stock
are subject to repurchase provisions, as defined below.
If any employee ceases to be employed, then such employee's Class B and
Class D common stock will be subject to repurchase by the Class A stockholders
and the Company. The employee will have the right to require the Company to
purchase any or all Class B and D common stock which are held, if such
employee's termination was with or without cause and any Class D stock if
termination is as a result of death or disability. If the employee is
terminated with or without cause, the repurchase price for Class B common
stock and vested Class D common stock will be fair market value, while the
repurchase price for unvested Class D common stock will be $.001 per share.
During 1997, the Company repurchased 500 shares of Class B common stock from a
former employee. The purchase price approximated $147 per share, resulting in
the determination of a new fair market value of the stock. Accordingly, the
Class B common stock and additional paid in capital accounts have been
adjusted to reflect this increase in fair market value.
The Company's obligation to repurchase the Class D stock in the event of
death or disability of an employee stockholder is limited to the amount of
shares the Company could purchase with the proceeds of the life insurance
policy covering the respective Class D employee stockholder. Additionally, all
repurchases of shares are subject to the applicable restrictions contained in
the Company's debt agreements.
Common Stock
The Company has six classes of authorized common stock: Class A, B, C, D, E
and F. Under the Company's Amended and Restated Certificate of Incorporation,
the relative rights and preferences of each class of common stock are as
follows:
Voting Rights
All classes of common stock will vote together as a single combined class on
all matters submitted to a vote of the shareholders, with each holder of Class
A, B, C, E or F common shares being entitled to one vote per share of such
stock held and each holder of Class D common shares being entitled to a number
of votes equal to the number of shares of Class C stock which would be issued
upon conversion of the Class D stock, as described below.
Distributions
The holders of the Class A and B common shares have an initial distribution
preference equal to 15% per annum (the "Yield") based on the initial purchase
price of $100 per share from the date of issuance through June 30, 1997. In
addition to the Yield, the holders of Class A, Class B and Class E common
stock are entitled to a distribution preference of $100 per share (the
"Preference Amount").
Holders of Class A common stock are entitled to receive their respective
Preference Amounts before any distributions are to be made to any other class
of stock. Similarly, holders of Class E Common stock are entitled to receive
their respective Preference Amount before any distributions are to be made to
the holders of Class B, C, D or F common stock. Once distributions have been
made to Class A and E, holders of Class B common stock will receive their
Preference Amounts. Remaining distributions will be made to all classes of
common stock on the basis of the number of Units (as defined by the Company's
Certificate of Incorporation) assigned to the respective shares.
F-15
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Additional stock information is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------- -------
<S> <C> <C>
Preferred stock:
Par value per share.......................................... $ 0.001 $ 0.001
Shares authorized............................................ 100,000 100,000
Shares issued and outstanding................................ -- --
Class A common stock:
Par value per share.......................................... $ 0.001 $ 0.001
Shares authorized............................................ 202,500 202,500
Shares issued and outstanding................................ 202,500 202,500
Class B common stock:
Par value per share.......................................... $ 0.001 $ 0.001
Shares authorized............................................ 12,000 12,000
Shares issued and outstanding................................ 12,000 12,000
Class C common stock:
Par value per share.......................................... $ 0.001 $ 0.001
Shares authorized............................................ 200,000 200,000
Shares issued and outstanding................................ -- --
Class D common stock:
Par value per share.......................................... $ 0.001 $ 0.001
Shares authorized............................................ 100,000 100,000
Shares issued and outstanding................................ 38,000 39,000
Class E common stock:
Par value per share.......................................... $ 0.001 $ 0.001
Shares authorized............................................ 300,000 300,000
Shares issued and outstanding................................ 51,300 67,089
Class F common stock:
Par value per share.......................................... $ -- $ 0.001
Shares authorized............................................ -- 10,000
Shares issued and outstanding................................ -- --
</TABLE>
10. RELATED PARTY TRANSACTIONS
Certain board members and/or stockholders provide management services to the
Company. The Company pays up to $75,000 plus reimbursable expenses each year
for such management services. For the period from inception (May 3, 1995)
through December 31, 1995, the Company paid approximately $12,500 for such
services and related expenses. The Company paid approximately $55,162 and
$78,166 for such services and related reimbursable expenses for the years
ended December 31, 1996 and 1997, respectively. At December 31, 1996 and 1997,
$88,016 and $29,950, respectively, was due to these related parties for
management services and related reimbursable expenses. A balance due from
current or former officers of $200,000 is included in other assets at December
31, 1997.
During 1997, the majority stockholder of the Company guaranteed a note
payable to a tower seller of $3,904,600 associated with a tower acquisition
(see Note 6).
F-16
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11.EMPLOYEE BENEFIT PLAN
Effective January 1, 1997, the Company began participating in a 401(k) plan
of the majority stockholder. The plan covers substantially all employees.
Benefits vest based on number of years of service. To participate in the plan,
employees must be at least 21 years old and have completed six months of
service.
12.SUBSEQUENT EVENTS
Acquisitions
On March 4, 1998, the Company completed the acquisition of 201 towers from
Southern Communications Services, Inc. ("Southern Communications"), a
subsidiary of Southern Company. The Company paid $83,500,000 for these towers,
located in Georgia, Alabama, Mississippi, and Florida.
In connection with the acquisition of these towers, the Company and Southern
Communications or one of its affiliates have entered into leases whereby
Southern Communications or one of its affiliates is a customer on each of the
201 towers acquired. Under the lease agreement, Southern Communications and
its affiliates will pay initial annual aggregate rent of approximately
$5,500,000 in 1998. The leases have initial terms of ten years with five
optional renewal periods of five years exercisable at the customer's option.
On a pro forma basis as of December 31, 1997, Southern Communications would
have represented approximately 21.0% of the Company's total revenue. The
Company anticipates that Southern will continue to represent a significant,
but declining percentage of the Company's revenues as the Company grows. The
Company has also entered into an option agreement with Southern Communications
under which the Company may supply, acquire or develop an additional 80 sites.
Any of these additional sites would be rented under the same terms as the
original leases of the 201 towers described above.
In addition to the Southern Communications acquisition, subsequent to
December 31, 1997 the Company purchased a total of 33 towers for aggregate
consideration of approximately $14,328,000. Also subsequent to December 31,
1997, the Company entered into several letters of intent with various third
parties to purchase 52 towers. Under these agreements, the Company has
committed to pay approximately $22,190,000.
Common Stock
In connection with the Subordinated Term Loan agreement (see Note 6), the
Company issued warrants to the lenders for 10,000 shares of the Company's
Class F Common Stock. The warrants are exercisable by the holders only in the
event the Company defaults (as defined in the agreement) under the terms of
its loans or does not repay the Subordinated Term Loan on or before
September 22, 2000.
F-17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Southern Communications Services, Inc.:
We have audited the accompanying balance sheets of the tower operations (the
"Tower Operations" or "Company") of SOUTHERN COMMUNICATIONS SERVICES, INC. (a
Delaware corporation) as of December 31, 1997 and 1996 and the related
statements of operations, changes in accumulated deficit, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Tower Operations of
Southern Communications Services, Inc. as of December 31, 1997 and 1996 and
the results of their operations and their cash flows for the years then ended
in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Atlanta, Georgia
February 20, 1998
F-18
<PAGE>
SOUTHERN COMMUNICATIONS SERVICES, INC.
TOWER OPERATIONS
(A CARVE-OUT ENTITY OF SOUTHERN COMMUNICATIONS SERVICES, INC.)
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Accounts receivable................................. $ 39,459 $ 169,994
Prepaids and other.................................. 117,599 102,942
----------- -----------
Total current assets.............................. 157,058 272,936
----------- -----------
Property and Equipment, at cost:
Tower investment.................................... 40,191,788 38,139,393
Less accumulated depreciation....................... (3,875,184) (1,928,510)
----------- -----------
Net property and equipment........................ 36,316,604 36,210,883
----------- -----------
Total assets...................................... $36,473,662 $36,483,819
=========== ===========
LIABILITIES AND ACCUMULATED DEFICIT
Current Liabilities:
Accounts Payable.................................... $ 78,342 $ 115,865
Due to Parent......................................... 40,930,277 39,007,286
Commitments and Contingencies
Accumulated Deficit................................... (4,534,957) (2,639,332)
----------- -----------
Total liabilities and accumulated deficit......... $36,473,662 $36,483,819
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-19
<PAGE>
SOUTHERN COMMUNICATIONS SERVICES, INC.
TOWER OPERATIONS
(A CARVE-OUT ENTITY OF SOUTHERN COMMUNICATIONS SERVICES, INC.)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Revenues............................................. $ 1,017,305 $ 349,428
Expenses:
Operations......................................... 876,614 748,001
Administrative and General......................... 89,642 54,072
Depreciation....................................... 1,946,674 1,810,282
----------- -----------
Total expenses..................................... 2,912,930 2,612,355
----------- -----------
Net Loss............................................. $(1,895,625) $(2,262,927)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-20
<PAGE>
SOUTHERN COMMUNICATIONS SERVICES, INC.
TOWER OPERATIONS
(A CARVE-OUT ENTITY OF SOUTHERN COMMUNICATIONS SERVICES, INC.)
STATEMENTS OF CHANGES IN ACCUMULATED DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<S> <C>
Accumulated Deficit as of December 31, 1995....................... $ (376,405)
Net Loss.......................................................... (2,262,927)
-----------
Accumulated Deficit as of December 31, 1996....................... (2,639,332)
Net Loss.......................................................... (1,895,625)
-----------
Accumulated Deficit as of December 31, 1997....................... $(4,534,957)
===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-21
<PAGE>
SOUTHERN COMMUNICATIONS SERVICES, INC.
TOWER OPERATIONS
(A CARVE-OUT ENTITY OF SOUTHERN COMMUNICATIONS SERVICES, INC.)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss........................................... $(1,895,625) $(2,262,927)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation...................................... 1,946,674 1,810,282
Changes in current assets and liabilities:
Decrease (increase) in accounts receivable....... 130,535 (169,994)
Decrease (increase) in prepaids and other........ (14,657) (102,942)
(Decrease) increase in accounts payable.......... (37,523) 115,865
----------- -----------
Total adjustments.............................. 2,025,029 1,653,211
----------- -----------
Net cash provided by (used in) operating activities.. 129,404 (609,716)
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures............................... (2,052,395) (8,657,518)
----------- -----------
Net cash used by investing activities................ (2,052,395) (8,657,518)
CASH FLOW FROM FINANCING ACTIVITIES:
Change in Due to Parent............................ 1,922,991 9,267,234
----------- -----------
Net cash provided from financing activities.......... 1,922,991 9,267,234
Increase In Cash..................................... $ 0 $ 0
----------- -----------
Cash at Beginning of Year............................ $ 0 $ 0
=========== ===========
Cash at End of Year.................................. $ 0 $ 0
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-22
<PAGE>
SOUTHERN COMMUNICATIONS SERVICES, INC.
TOWER OPERATIONS
(A CARVE-OUT ENTITY OF SOUTHERN COMMUNICATIONS SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements present the financial position and the
results of operations of the Tower Operations (the "Company") of Southern
Communications Services, Inc. (the "Parent"), which include the Parent's
business of leasing space on the 201 tower sites that are being acquired by
Pinnacle Towers Inc. ("Pinnacle") (See Note 4) to customers in the broadcast
and wireless communication industries. Tower leasing has been incidental to
the Parent's communications services business, and it has had no concentrated
marketing and sales effort to generate revenues from tower leases.
Tower Operations is not a separate subsidiary, division or segment of the
Parent. The financial statements of the Tower Operations business have been
derived from the financial statements of the Parent and have been prepared to
present the financial position, results of operations, and cash flows on a
stand-alone basis. All revenues and expenses specifically identifiable to
tower ownership are included. Additionally, the accompanying financial
statements include certain costs and expenses that have been allocated to the
tower business from the Parent. These costs have been allocated on a pro rata
basis primarily on either revenues or total costs of infrastructure
operations, depending upon the nature of the cost. Management believes this
allocation methodology is reasonable.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the reported amounts of assets and liabilities and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Credit Risk
The owned tower site lease receivables potentially subject the business to
credit risk, as collateral is generally not required. The business risk of
loss is limited due to the significant number of leases with affiliated
companies and the superior credit ratings of non-affiliated lessees. The
carrying amount of the Company's receivables approximates fair value.
Property and Equipment
Towers are recorded at cost and include certain capitalized overhead costs
(primarily engineering). Depreciation is computed using the straight-line
method over the estimated useful lives of its towers, which are 20 years.
Long-Lived Assets
The business periodically reviews the values assigned to long-lived assets
to determine whether any impairments are other than temporary. Management
believes that the long-lived assets in the accompanying balance sheets are
appropriately valued.
Income Taxes
The Company is not in itself a taxable entity, and no provision or benefit
for United States federal or state income taxes has been recorded.
F-23
<PAGE>
SOUTHERN COMMUNICATIONS SERVICES, INC.
TOWER OPERATIONS
(A CARVE-OUT ENTITY OF SOUTHERN COMMUNICATIONS SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition
The Company earns revenues by leasing space on its towers to customers in
the broadcast and communication industries or to customers that have internal
communication systems. Lease revenues are recognized on a straight-line basis
over the noncancelable lease term.
2. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases land for certain tower sites under long-term operating
leases. The majority of these leases contain renewal provisions which
generally require renewals to be exercised at market rates. Rental expense for
the years ended December 31, 1997 and 1996 totaled $228,688 and $195,075,
respectively, and are included in Operations Expense in the accompanying
statements of operations.
Future minimum rental payments required under the operating leases that have
initial or remaining noncancelable lease terms in excess of one year as of
December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998.............................................................. $ 240,320
1999.............................................................. 240,320
2000.............................................................. 218,840
2001.............................................................. 203,544
2002 and thereafter............................................... 854,096
----------
Total............................................................. $1,757,120
==========
</TABLE>
3. RELATED-PARTY TRANSACTIONS
Certain specialized services are performed for the Company by Southern
Company Services, Inc., an affiliate. Services provided include support in
major functional areas, such as engineering, site acquisition, site leasing,
benefits, cash management, legal, risk management, accounting, payroll, and
taxes. These services are provided at cost and totaled $38,994 and $37,054 in
1997 and 1996, respectively.
The Company purchases electrical power and leases land for towers from
affiliated companies. The costs of these services were $117,061 and $112,623
in 1997 and 1996, respectively.
The Company leases space on towers to certain of its affiliates. Revenues
for these sales and services were $371,936 and $169,995 in 1997 and 1996,
respectively.
At December 31, 1997 and December 31, 1996, the Company owed approximately
$26,574 and $71,267, respectively, to its affiliates for amounts due under the
agreements discussed above.
4. SALE AND LEASEBACK OF TOWER ASSETS
On January 9, 1998, the Parent entered into a definitive agreement to sell
201 towers and 90 parcels of land to Pinnacle for a purchase price of
$83,500,000 and received $6,000,000 from Pinnacle as a nonrefundable deposit
for the transaction. The transaction also includes the assignment
F-24
<PAGE>
SOUTHERN COMMUNICATIONS SERVICES, INC.
TOWER OPERATIONS
(A CARVE-OUT ENTITY OF SOUTHERN COMMUNICATIONS SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
of leases and related lease payments for 111 land leases related to towers
included in the sale. The transaction is expected to close on March 4, 1998.
The sale price will be adjusted proportionately to the average price per tower
site if the Parent or Pinnacle elect not to include certain sites in the
transaction for certain casualty, title, or lease defects.
In connection with the transaction, the Parent and Pinnacle have entered
into a lease agreement in which the Parent will lease space on each tower
included in the transaction for a period of 10 years at a cost of $1,500 per
month per site. Five five-year option periods are included in the lease
agreement.
The Parent and Pinnacle have also entered into an option agreement, in which
at the sole option of the Parent, Pinnacle may be used to construct up to 80
additional towers for the purpose of permitting the Parent to place thereon
communications antennae and related equipment.
F-25
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Pinnacle Holdings Inc.
In our opinion, the accompanying combined balance sheet and the related
combined statements of operations and retained earnings and of cash flows
present fairly, in all material respects, the financial position of Shore
Communications ("Shore") at December 3, 1997, and the results of its
operations and their cash flows for the eleven month period from January 1,
1997 through December 3, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
Shore's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
/s/Price Waterhouse LLP
Price Waterhouse LLP
Tampa, Florida
February 9, 1998
F-26
<PAGE>
SHORE COMMUNICATIONS
(A CARVE-OUT ENTITY OF SHORE COMMUNICATIONS, INC.,
WEST SHORE COMMUNICATIONS, INC., AND 28 WALKER ASSOCIATES, LLC)
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 3, 1997
----------------
<S> <C>
ASSETS
Current assets:
Accounts receivable......................................... $ 3,548
Due from affiliate.......................................... 58,107
Prepaid expenses............................................ 16,447
Stockholder receivable...................................... 91,745
Deferred tax asset.......................................... 22,007
Other current assets........................................ 6,948
----------
Total current assets...................................... 198,802
Fixed assets, net............................................. 9,638
Tower assets, net of accumulated depreciation of $229,580..... 2,254,591
Deferred loan costs, net of accumulated amortization of
$26,777...................................................... 48,599
----------
$2,511,630
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and other current liabilities.............. $ 62,251
Deferred revenue............................................ 60,391
Stockholder payable......................................... 328,494
Short-term debt............................................. 2,000,084
----------
Total current liabilities................................. 2,451,220
Customer deposits............................................. 2,600
----------
2,453,820
----------
Commitments and Contingencies (Note 6)
Stockholder's equity:
Common stock, $1 par value; 10,000 shares authorized; 100
shares issued and outstanding.............................. 100
Common stock, no par value; 5,000 shares authorized; 100
shares issued and outstanding.............................. --
Additional paid in capital.................................. 66,900
Retained earnings........................................... (9,190)
----------
57,810
----------
$2,511,630
==========
</TABLE>
The accompanying Notes to Combined Financial Statements
are an integral part of these combined financial statements.
F-27
<PAGE>
SHORE COMMUNICATIONS
(A CARVE-OUT ENTITY OF SHORE COMMUNICATIONS, INC.,
WEST SHORE COMMUNICATIONS, INC., AND 28 WALKER ASSOCIATES, LLC)
COMBINED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
PERIOD FROM JANUARY 1,
THROUGH DECEMBER 3, 1997
------------------------
<S> <C>
Revenue.............................................. $667,263
Tower operating expenses, excluding depreciation and
amortization........................................ 145,938
--------
Gross margin..................................... 521,325
--------
Expenses:
General and administrative expenses................ 235,108
Depreciation and amortization...................... 96,554
--------
331,662
--------
Income from operations............................... 189,663
Interest expense..................................... 197,909
--------
Loss from operations................................. (8,246)
Income tax benefit................................... 22,007
--------
Net income........................................... $ 13,761
========
Pro-forma income tax benefit......................... $ 2,849
--------
Pro-forma net loss................................... $ (5,397)
========
Retained earnings at December 31, 1996............... $(22,951)
Net income........................................... 13,761
--------
Retained earnings at December 3, 1997................ $ (9,190)
========
</TABLE>
The accompanying Notes to Combined Financial Statements
are an integral part of these combined financial statements.
F-28
<PAGE>
SHORE COMMUNICATIONS
(A CARVE-OUT ENTITY OF SHORE COMMUNICATIONS, INC., WEST SHORE COMMUNICATIONS,
INC., AND 28 WALKER ASSOCIATES, LLC)
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM JANUARY 1,
THROUGH DECEMBER 3, 1997
------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ $ (13,761)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................... 96,554
Deferred tax asset................................. (22,007)
(Increase) decrease in:
Accounts receivable............................... (3,548)
Due from affiliate................................ (58,107)
Prepaid expenses.................................. (11,261)
Stockholder receivable............................ 146,567
Other current assets.............................. 40,722
Increase (decrease) in:
Accounts payable and other current liabilities.... 52,011
Deferred revenue.................................. 42,874
Stockholder payable............................... 181,800
---------
Total adjustments............................... 465,605
---------
Net cash provided by operating activities............. 451,844
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures:
Tower assets...................................... (543,737)
Fixed assets...................................... (3,023)
---------
Net cash used in investing activities................. (546,760)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under term note.......................... 339,379
Repayment of short-term debt........................ (403,662)
---------
Net cash used in financing activities................. (64,283)
Net decrease in cash.................................. (159,199)
---------
Cash at December 31, 1996............................. 159,199
---------
Cash at December 3, 1997.............................. $ --
=========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
Cash paid for interest................................ $ 199,547
=========
</TABLE>
The accompanying Notes to Combined Financial Statements are an integral part of
these combined financial statements.
F-29
<PAGE>
SHORE COMMUNICATIONS
(A CARVE-OUT ENTITY OF SHORE COMMUNICATIONS, INC.,
WEST SHORE COMMUNICATIONS, INC., AND 28 WALKER ASSOCIATES, LLC)
NOTES TO COMBINED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Nature of Business
On December 3, 1997, Pinnacle Towers Inc. acquired all of the outstanding
stock of Shore Communications, Inc. ("Shore Communications", a C Corporation)
and West Shore Communications, Inc. ("West Shore", a C Corporation) and
certain of the assets and business operations of 28 Walker Associates, LLC (
"Walker", a limited liability company). Shore Communications and West Shore
were wholly-owned by an individual. Walker is owned by two individuals.
Collectively, the acquired corporations, assets and related operations are
referred to hereafter as Shore Communications ("Shore"). Shore owns
telecommunication towers and leases space on these towers to customers in the
wireless communications industries in Maryland and Virginia.
Basis of Presentation
The combined financial statements of Shore have been derived from the
accounting records of Shore Communications, West Shore and Walker. Additional
allocations were made to reflect Shore's share of general and administrative
expenses on a carve-out basis as described in Note 2.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and use
assumptions that affect the reported amounts of assets and liabilities and the
disclosure for contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. Actual results may vary from those estimates.
Due from Affiliate
Tower revenues related to Walker are collected by an affiliate on behalf of
Walker. Similarly, all direct tower operating expenses and general and
administrative expenses are paid by an affiliate on behalf of Walker.
Accordingly, a receivable from and payable to affiliates are recorded (see
Note 8).
Tower Assets
Tower assets consist of towers, buildings, and related attachments which are
recorded at cost and depreciated using the straight-line method over the
estimated useful lives of the assets, which range from 6 to 31.5 years.
Improvements, renewals and extraordinary repairs which increase the value or
extend the life of the asset are capitalized. Repairs and maintenance costs
are expensed as incurred.
Fixed Assets
Fixed assets are recorded at cost and depreciated using the straight-line
method over the estimated useful life of the assets, which range from 5 to 7
years. Improvements, renewals and extraordinary repairs which increase the
value or extend the life of the assets are capitalized. Repairs and
maintenance costs are expensed as incurred.
F-30
<PAGE>
SHORE COMMUNICATIONS
(A CARVE-OUT ENTITY OF SHORE COMMUNICATIONS, INC.,
WEST SHORE COMMUNICATIONS, INC., AND 28 WALKER ASSOCIATES, LLC)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Impairment of Long-lived Assets
Shore evaluates the recoverability of its long-lived assets whenever adverse
events or changes in business climate indicate that the expected undiscounted
future cash flows from the related asset may be less than previously
anticipated. If the net book value of the related asset exceeds the
undiscounted future cash flows of the asset, the carrying amount would be
reduced to the present value of its expected future cash flows and an
impairment loss would be recognized. As of December 3, 1997, management does
not believe that an impairment reserve is required.
Fair Value of Financial Instruments
The carrying amount of Shore's financial instruments at December 3, 1997,
which consists of accounts receivable, due from affilliate and short-term
debt, approximates fair value due to the short maturity of those instruments.
Revenue Recognition
Rental revenue is recognized on a straight-line basis over the life of the
related lease agreements. Revenue is recorded in the month in which it is due.
Allocation of Expenses
The accompanying financial statements include certain costs and expenses
that have been allocated to the tower business from the Parent. These costs
have been allocated on a pro rata basis primarily on either revenues or total
costs of infrastructure operations, depending upon the nature of the cost.
Management believes this allocation is reasonable.
Income Taxes
Shore accounts for income taxes using the liability method as required by
Statement No. 109, Accounting for Income Taxes, issued by the Financial
Accounting Standards Board.
Deferred income taxes are provided for temporary differences between the
basis of assets and liabilities for financial reporting and income tax
reporting.
As described in Note 1, Shore consisted of two C Corporations and a portion
of a limited liability company. As such, the combined accounts reflect an
income tax benefit for only the operations of the C Corporations at December
3, 1997. The Combined Statement of Operations and Retained Earnings also
reflects an income tax benefit for the operations of Shore at December 3, 1997
on a pro-forma basis as if Shore were treated as a C Corporation.
3. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES DECEMBER 3,
IN YEARS 1997
------------ -----------
<S> <C> <C>
Furniture, fixtures................................. 5, 7 $ 11,691
Automobile.......................................... 5 13,784
--------
25,475
Accumulated depreciation............................ (15,837)
--------
Fixed assets, net................................... $ 9,638
========
</TABLE>
F-31
<PAGE>
SHORE COMMUNICATIONS
(A CARVE-OUT ENTITY OF SHORE COMMUNICATIONS, INC.,
WEST SHORE COMMUNICATIONS, INC., AND 28 WALKER ASSOCIATES, LLC)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. SHORT-TERM DEBT
Shore maintained line of credit facilities with a bank under guidance line
notes which provided for secured borrowings up to $1,900,000. Amounts borrowed
under these lines of credit have been converted to term notes which bore
interest from 9.75% to 10.5% through December 3, 1997. At December 3, 1997,
$400,223 was available under the line of credit facilities. Shore paid $2,637
in unused commitment fees as of December 3, 1997. Shore also had a term note
which bore a variable interest rate (10.25% at December 3, 1997) which
$500,277 was outstanding at December 3, 1997. The term notes provided
borrowings for construction of tower sites and were secured by all of the
business assets of Shore Communications and the towers owned by Shore
Communications and West Shore. The term notes originally matured through
December 10, 2002. However, the outstanding balance was repaid subsequent to
December 3, 1997 as part of the purchase agreement with Pinnacle Towers, Inc.
(Note 10).
5. INCOME TAXES
As described in Note 1, Shore consisted of two C Corporations and a portion
of a limited liability company. As such, the combined accounts reflect an
income tax benefit for only the operations of the C Corporations at December
3, 1997. The Combined Statement of Operations and Retained Earnings also
reflects an income tax benefit for the operations of Shore at December 3, 1997
on a pro-forma basis as if Shore were treated as a C Corporation.
Significant components of the income tax benefit on a historical and pro-
forma basis were as follows:
<TABLE>
<CAPTION>
PRO-FORMA
DECEMBER 3, 1997 DECEMBER 3, 1997
---------------- ----------------
<S> <C> <C>
Current:
Federal.................................. $17,867 $2,313
State.................................... 4,140 536
------- ------
Income tax benefits........................ $22,007 $2,849
======= ======
</TABLE>
Significant components of the deferred tax asset on a historical and pro-
forma basis were as follows:
<TABLE>
<CAPTION>
PRO-FORMA
DECEMBER 3, 1997 DECEMBER 3, 1997
---------------- ----------------
<S> <C> <C>
Deferred tax asset:
Net operating loss....................... $22,007 $2,849
------- ------
$22,007 $2,849
======= ======
</TABLE>
The effective tax rate approximates the statutory federal and state rates on
a historical and pro-forma basis as no permanent differences exist for either
the C Corporations or Shore.
At December 3, 1997, Shore had cummulative federal tax net operating loss
("NOL") carryforward of approximately $8,246 which the Company was unable to
use due to its operating loss. This NOL carryforward expires in the year
ending December 3, 2013. Shore believes that it is more likely than
F-32
<PAGE>
SHORE COMMUNICATIONS
(A CARVE-OUT ENTITY OF SHORE COMMUNICATIONS, INC.,
WEST SHORE COMMUNICATIONS, INC., AND 28 WALKER ASSOCIATES, LLC)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
not that the NOL carryforward will be utilized prior to its expiration by
continuing to achieve future profitable operations. Shore does not believe
that the change in ownership (Note 10) will impact such operations. Because of
the extremely long period that is available to realize these future tax
benefits, a valuation allowance for the deferred tax asset is not necessary.
6. COMMITMENTS AND CONTINGENCIES
Operating Leases
Shore is obligated under noncancelable leases for ground leases which expire
at various times through 2009. The majority of these leases have renewal
options which range up to 15 years. The future minimum lease commitments under
these leases are as follows:
<TABLE>
<S> <C>
PERIOD FROM DECEMBER 4, 1997 THROUGH DECEMBER 31, 1997........... $ 4,583
YEAR ENDED DECEMBER 31,
1998........................................................... 55,554
1999........................................................... 47,864
2000........................................................... 34,521
2001........................................................... 22,806
2002........................................................... 14,419
2003 and thereafter............................................ 131,531
----------
$ 311,278
==========
</TABLE>
Rental expense under noncancelable ground leases for the period ended
December 3, 1997 was $52,299.
7. TENANT LEASES
The following is a schedule by year of total future rentals to be received
for tower space under noncancelable lease agreements as of December 3, 1997:
<TABLE>
<S> <C>
PERIOD DECEMBER 4, 1997 THROUGH DECEMBER 31, 1997................ $ 87,124
YEAR ENDED DECEMBER 31,
1998........................................................... 732,032
1999........................................................... 685,567
2000........................................................... 594,445
2001........................................................... 419,552
2002........................................................... 139,683
2003 and thereafter............................................ 13,200
----------
$2,671,603
==========
</TABLE>
8. RELATED PARTY TRANSACTIONS
Shore paid certain expenses related to development of a microwave
communications system on behalf of a company wholly owned by the sole
stockholder of Shore Communications and West Shore. Expenditures related to
the development of the microwave communications system were to be
F-33
<PAGE>
SHORE COMMUNICATIONS
(A CARVE-OUT ENTITY OF SHORE COMMUNICATIONS, INC.,
WEST SHORE COMMUNICATIONS, INC., AND 28 WALKER ASSOCIATES, LLC)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
reimbursed to Shore upon completion of the project. However, as Shore entered
into a purchase agreement with Pinnacle Towers Inc. (Note 10), the project was
terminated and the entire receivable from the related party of $91,461 was
expensed as of December 3, 1997 and is included in general and administrative
expenses.
Prior to the acquisition by Pinnacle Towers Inc., the carve-out entity of
Walker included transactions with the surviving Walker ("affiliate"). These
transactions are disclosed as related party transactions in these financial
statements.
The affiliate received rent payments related to Walker's lease agreements.
At December 3, 1997, due from affiliate of $72,818 reflected these receipts.
The affiliate paid tower operating expense related to Walker. For the period
January 1, 1997 through December 3, 1997, Walker incurred tower operating
expense of $6,701.
For the period January 1, 1997 through December 3, 1997, general and
administrative expenses of $8,010 were allocated to Walker from the affiliate.
9. EMPLOYEE BENEFIT PLANS
Shore Communications has defined contribution plans covering employees with
two years of service and are of the age of 21. Contributions under these plans
are based primarily on the performance of Shore Communications and employee
compensation. Total expense amounted to $7,130 for the period from January 1,
1997 through December 3, 1997.
10. SUBSEQUENT EVENTS
On December 3, 1997, Shore sold all of the outstanding stock of Shore
Communications and West Shore and certain of the assets of Walker to Pinnacle
Towers Inc. In accordance with the purchase agreement, Shore received
approximately $8,973,300 for the outstanding stock, a tower and related
assets. Also under the agreement, rent revenue reverted to Pinnacle Towers
Inc. as of December 4, 1997. Deferred revenue as of December 3, 1997 reflects
rent received by Shore to be remitted to Pinnacle Towers Inc. Of the total
purchase price, $2,000,084 was used by Pinnacle Towers Inc. to repay the
outstanding bank notes subsequent to December 3, 1997 in accordance with the
purchase agreement.
F-34
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Pinnacle Holdings Inc.
In our opinion, the accompanying combined balance sheet and the related
combined statements of operations and retained earnings and of cash flows
present fairly, in all material respects, the financial position of Tidewater
Communications ("Tidewater") at July 31, 1997, and the results of their
operations and their cash flows for the seven month period January 1, 1997
through July 31, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of Tidewater's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
Tidewater is a member of a group of affiliated companies and, as disclosed
in the financial statements, has extensive transactions and relationships with
members of the group. Because of these relationships, it is possible that the
terms of these transactions are not the same as those that would result from
transactions among wholly unrelated parties.
/s/Price Waterhouse LLP
Price Waterhouse LLP
Tampa, Florida
February 9, 1998
F-35
<PAGE>
TIDEWATER COMMUNICATIONS
(A CARVE-OUT ENTITY OF ANTENNA RENTALS CORPORATION, JOHN HARRIS & ASSOCIATES,
INC., AND DARE COUNTY PROPERTIES)
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
JULY 31, 1997
-------------
<S> <C>
ASSETS
Current assets:
Due from affiliate.............................................. $ 249,796
Accounts receivable............................................. 33,843
Prepaid expenses................................................ 1,043
----------
Total current assets.......................................... 284,682
Tower assets, net of accumulated depreciation of $326,373......... 553,450
Land.............................................................. 380,009
----------
$1,218,141
==========
LIABILITIES AND RETAINED EARNINGS
Current liabilities:
Accounts payable and other current liabilities.................. $ 10,596
Deferred revenue................................................ 10,505
Short-term debt................................................. 264,982
----------
Total current liabilities..................................... 286,083
Commitments and Contingencies (Note 5)
Retained earnings................................................. 932,058
----------
$1,218,141
==========
</TABLE>
The accompanying Notes to Combined Financial Statements
are an integral part of these combined financial statements.
F-36
<PAGE>
TIDEWATER COMMUNICATIONS
(A CARVE-OUT ENTITY OF ANTENNA RENTALS CORPORATION, JOHN HARRIS & ASSOCIATES,
INC.,
AND DARE COUNTY PROPERTIES)
COMBINED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
PERIOD FROM JANUARY 1,
THROUGH JULY 31, 1997
----------------------
<S> <C>
Revenue.................................................. $368,011
Tower operating expenses, excluding depreciation....... 56,961
--------
Gross margin......................................... 311,050
--------
Other expenses:
General and administrative expenses.................... 29,609
Depreciation........................................... 26,009
--------
55,618
--------
Income from operations................................... 255,432
Interest expense......................................... 14,055
--------
Net income............................................... $241,377
========
Pro-forma income tax expense............................. $ 91,785
--------
Pro-forma net income..................................... $149,592
========
Retained earnings at December 31, 1996................... $690,681
Net income............................................... 241,377
--------
Retained earnings at July 31, 1997....................... $932,058
========
</TABLE>
The accompanying Notes to Combined Financial Statements
are an integral part of these combined financial statements.
F-37
<PAGE>
TIDEWATER COMMUNICATIONS
(A CARVE-OUT ENTITY OF ANTENNA RENTALS CORPORATION, JOHN HARRIS & ASSOCIATES,
INC., AND DARE COUNTY PROPERTIES)
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM JANUARY 1,
THROUGH JULY 31, 1997
----------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 241,377
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation......................................... 26,009
(Increase) decrease in:
Due from affiliates................................. (249,796)
Accounts receivable................................. (11,529)
Prepaid expenses.................................... 2,353
Increase (decrease) in:
Accounts payable and other current liabilities...... 661
Deferred revenue.................................... (9,075)
---------
Total adjustments................................. (241,377)
---------
Net cash provided by operating activities............... --
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................. (46,189)
---------
Net cash used in investing activities................... (46,189)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of short-term debt.......................... (28,811)
Borrowing under promissory notes...................... 75,000
---------
Net cash provided by financing activities............... 46,189
---------
Net increase in cash.................................... --
---------
Cash at December 31, 1996............................... --
---------
Cash at July 31, 1997................................... $ --
---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
Cash paid for interest.................................. $ 12,863
=========
</TABLE>
The accompanying Notes to Combined Financial Statements are an integral part of
these combined financial statements.
F-38
<PAGE>
TIDEWATER COMMUNICATIONS
(A CARVE-OUT ENTITY OF ANTENNA RENTALS CORPORATION, JOHN HARRIS & ASSOCIATES,
INC., AND DARE COUNTY PROPERTIES)
NOTES TO COMBINED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Nature of Business
On July 31, 1997, Pinnacle Towers Inc. acquired certain of the assets and
business operations of Antenna Rentals Corporation, Inc. (an S Corporation),
John Harris & Associates, Inc. (a partnership), and Dare County Properties (a
partnership). John W. Harris is the majority shareholder of Antenna Rentals
Corporation, Inc. and the general partner of John Harris & Associates, Inc.
and Dare County Properties. Collectively, the acquired assets and related
operations are referred to hereafter as Tidewater Communications
("Tidewater"). Tidewater owns telecommunication towers and leases space on
these towers to customers in the wireless communications industries in
Virginia and North Carolina.
Basis of Presentation
The combined financial statements of Tidewater have been derived from the
accounting records of Antenna Rentals Corporation, Inc., John Harris &
Associates, Inc., and Dare County Properties. Additional allocations were made
to reflect Tidewater's share of general and administrative expenses on a
carve-out basis as described in Note 2.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and use
assumptions that affect the reported amounts of assets and liabilities and the
disclosure for contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. Actual results may vary from estimates used.
Due from Affiliate
All tower rent revenues are collected by affiliates on behalf of Tidewater.
Similarly, all direct tower operating expenses, general and administrative
expenses, and interest are paid by affiliates on behalf of Tidewater.
Accordingly, a receivable from and payable to affiliates are recorded (see
Note 7).
Tower Assets
Tower assets consist of towers, buildings, and related attachments which are
recorded at cost and depreciated using the straight-line method over the
estimated useful life of the assets, which range from 15 to 30 years.
Improvements, renewals and extraordinary repairs which increase the value or
extend the life of the asset are capitalized. Repairs and maintenance costs
are expensed as incurred.
Impairment of Long-lived Assets
Tidewater evaluates the recoverability of its long-lived assets whenever
adverse events or changes in business climate indicate that the expected
undiscounted future cash flows from the related asset may be less than
previously anticipated. If the net book value of the related asset exceeds the
undiscounted future cash flows of the asset, the carrying amount would be
reduced to the present value of its expected future cash flows and an
impairment loss would be recognized. As of July 31, 1997, management does not
believe that an impairment reserve is required.
F-39
<PAGE>
TIDEWATER COMMUNICATIONS
(A CARVE-OUT ENTITY OF ANTENNA RENTALS CORPORATION, JOHN HARRIS & ASSOCIATES,
INC.,
AND DARE COUNTY PROPERTIES)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Fair Value of Financial Instruments
The carrying amount of Tidewater's financial instruments at July 31, 1997,
which includes due from affiliate, accounts receivable and short-term debt,
approximates fair value due to the short maturity of those instruments.
Revenue Recognition
Rental revenue is recognized on a straight-line basis over the life of the
related lease agreements. Revenue is recorded in the month in which it is due.
Allocation of Expenses
The accompanying financial statements include certain costs and expenses
that have been allocated to the tower business from the Parent. These costs
have been allocated on a pro rata basis primarily on either revenues or total
costs of infrastructure operations, depending upon the nature of the cost.
Management believes this allocation is reasonable.
Income Taxes
Tidewater consisted of certain assets of an S Corporation and two
partnerships. As such, net income was not subject to income taxes as the
income is taxed directly to their owners. Pro forma income taxes are presented
using the liability method as required by Statement No. 109, Accounting for
Income Taxes, issued by the Financial Accounting Standards Board. Deferred
income taxes are provided for temporary differences between the basis of
assets and liabilities for financial reporting and income tax reporting.
3. SHORT-TERM DEBT
At July 31, 1997, $264,982 was outstanding under three bank loans, which
provided secured borrowings for the purchases of land and towers in North
Carolina. The loans were secured by mortgage deeds of trust on the land, the
tower assets and an assignment of rents and leases. The interest rates on all
the notes were prime plus 0.5%. The original maturity dates were July 30,
2001, October 9, 2001, and February 12, 2002. However, the outstanding balance
was repaid subsequent to July 31, 1997 as part of the purchase agreement with
Pinnacle Towers, Inc. (see Note 8).
4. INCOME TAXES
As described in Note 1, Tidewater consisted of certain assets of an S
Corporation and of two partnerships. As such, net income related to the S
Corporation and partnerships was not subject to income taxes as the income is
taxed directly to their owners. The Combined Statement of Operations and
Retained Earnings reflects a tax provision for the operations of Tidewater at
July 31, 1997 on a pro-forma basis as if Tidewater were treated as a C
Corporation.
F-40
<PAGE>
TIDEWATER COMMUNICATIONS
(A CARVE-OUT ENTITY OF ANTENNA RENTALS CORPORATION, JOHN HARRIS & ASSOCIATES,
INC.,
AND DARE COUNTY PROPERTIES)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Significant components of the provision for income taxes on a pro-forma
basis were as follows:
<TABLE>
<CAPTION>
PRO-FORMA
JULY 31, 1997
-------------
<S> <C>
Current:
Federal..................................................... $ 85,918
State....................................................... 17,567
--------
Total current............................................. 103,485
Deferred:
Federal..................................................... (9,822)
State....................................................... (1,878)
--------
Total deferred............................................ (11,700)
--------
Provision for income taxes.................................... $ 91,785
========
</TABLE>
Significant components of the deferred tax liability on a pro-forma basis
were as follows:
<TABLE>
<CAPTION>
PRO-FORMA
JULY 31, 1997
-------------
<S> <C>
Deferred tax liability:
Tax over book depreciation................................... $68,607
=======
The effective tax rate approximates the statutory federal and state rates on
a pro-forma basis as no permanent differences exist for Tidewater.
5. COMMITMENTS AND CONTINGENCIES
The Company is obligated under a noncancelable lease for land which expires
February 20, 2005. The lease has two five-year renewal options. The future
minimum lease commitments under these leases are as follows:
PERIOD AUGUST 1, 1997 THROUGH DECEMBER 31, 1997................ $ 2,750
YEAR ENDED DECEMBER 31,
1998......................................................... 6,500
1999......................................................... 6,500
2000......................................................... 6,500
2001......................................................... 6,500
2002......................................................... 6,500
2003 and thereafter.......................................... 14,300
-------
$49,550
=======
</TABLE>
Rental expense for the seven month period ended July 31, 1997 was $3,792.
F-41
<PAGE>
TIDEWATER COMMUNICATIONS
(A CARVE-OUT ENTITY OF ANTENNA RENTALS CORPORATION, JOHN HARRIS & ASSOCIATES,
INC.,
AND DARE COUNTY PROPERTIES)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
6. TENANT LEASES
The following is a schedule by year of total future rentals to be received
for tower space under noncancelable lease agreements as of July 31, 1997.
<TABLE>
<S> <C>
PERIOD AUGUST 1, 1997 THROUGH DECEMBER 31, 1997.................. $ 202,501
YEAR ENDED DECEMBER 31,
1998........................................................... 431,775
1999........................................................... 388,806
2000........................................................... 335,024
2001........................................................... 139,554
2002........................................................... 82,200
2003 and thereafter............................................ 151,550
----------
$1,731,410
==========
</TABLE>
7. RELATED PARTY TRANSACTIONS
Prior to the acquisition by Pinnacle Towers Inc. as described in Note 1, the
carve out entity of Tidewater included transactions with the surviving Antenna
Rentals Corporation, Inc., John Harris and Associates, Inc. and Dare County
Properties ("affiliates"). These transactions are disclosed as related party
transactions in these financial statements.
Affiliates received rent payments related to Tidewater's lease agreements.
At July 31, 1997, due from affiliates of $347,407 reflected these receipts.
Affiliates paid tower operating and interest expense as well as short-term
debt related to Tidewater. For the period January 1, 1997 through July 31,
1997, Tidewater incurred tower operating and interest expense of $56,961 and
$14,055, respectively. Short-term debt of $28,811 was paid by affiliates for
this period.
For the period January 1, 1997 through July 31, 1997, general and
administrative expenses of $29,609 were allocated to Tidewater from
affiliates.
Bay Tower Corporation, a minority shareholder in one of the entities which
owned Tidewater, is a customer on one tower. Bay Tower performs monthly
routine maintenance on all of Tidewater's towers at a reduced price, in
exchange for free rent on the tower. Tidewater has recorded both revenue and
maintenance expense related to Bay Tower Corporation at their fair market
value. Tower revenue and maintenance expense amounted to $2,100 and $5,600,
respectively, for the period January 1, 1997 through July 31, 1997.
Additionally, Bay Tower has built all of Tidewater's towers. Other related
parties are customers on two towers. Accounts receivable of $2,120 is due from
these related parties at July 31, 1997 and $6,920 of rent revenue was earned
for the period January 1, 1997 through July 31, 1997. Management believes that
these transactions were under terms no different than those arranged with
other parties.
F-42
<PAGE>
TIDEWATER COMMUNICATIONS
(A CARVE-OUT ENTITY OF ANTENNA RENTALS CORPORATION, JOHN HARRIS & ASSOCIATES,
INC.,
AND DARE COUNTY PROPERTIES)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
8. SUBSEQUENT EVENTS
On July 31, 1997, Tidewater was sold to Pinnacle Towers Inc. In accordance
with the purchase agreement, the owners of Tidewater received approximately
$8,400,000 for thirteen towers, related assets and management contracts on two
additional towers. Deferred revenue as of July 31, 1997 reflects rent received
by Tidewater to be remitted to Pinnacle Towers Inc. Of the total purchase
price, $264,982 was used by Pinnacle Towers Inc. to repay outstanding bank
loans (see Note 3) subsequent to July 31, 1997 in accordance with the purchase
agreement.
Prior to the closing, Pinnacle Towers Inc. placed approximately $650,000 in
escrow due to conflicts with the terms under a land lease agreement related to
one of the management contracts. However, as the lease between Tidewater and
the lessor was amended to increase the initial lease period from 15 to 20
years, the consideration in escrow will be released in fulfillment of the
purchase agreement.
F-43
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Pinnacle Holdings Inc.
In our opinion, the accompanying combined balance sheet and the related
combined statements of operations and retained earnings and of cash flows
present fairly, in all material respects, the financial position of Majestic
Communications ("Majestic") at June 27, 1997, and the results of their
operations and their cash flows for the six month period January 1, 1997
through June 27, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of Majestic's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
/s/Price Waterhouse LLP
Price Waterhouse LLP
Tampa, Florida
February 9, 1998
F-44
<PAGE>
MAJESTIC COMMUNICATIONS
(A CARVE-OUT ENTITY OF MAJESTIC COMMUNICATIONS, INC.)
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 27, 1997
-------------
<S> <C>
ASSETS
Current assets:
Due from affiliate.............................................. $133,348
Accounts receivable............................................. 5,290
Prepaid expenses................................................ 4,014
--------
Total current assets.......................................... 142,652
Tower assets, net of accumulated depreciation of $227,974......... 511,571
Land.............................................................. 277,562
--------
$931,785
========
LIABILITIES AND RETAINED EARNINGS
Current liabilities:
Accounts payable and other current liabilities.................. $ 5,801
Taxes payable................................................... 10,339
Deferred revenue................................................ 18,831
Short-term debt................................................. 161,712
--------
Total current liabilities..................................... 196,683
Deferred tax liability............................................ 48,257
--------
244,940
Retained earnings................................................. 686,845
--------
$931,785
========
</TABLE>
The accompanying Notes to Combined Financial Statements
are an integral part of these combined financial statements.
F-45
<PAGE>
MAJESTIC COMMUNICATIONS
(A CARVE-OUT ENTITY OF MAJESTIC COMMUNICATIONS, INC.)
COMBINED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
PERIOD FROM JANUARY 1,
THROUGH JUNE 27, 1997
----------------------
<S> <C>
Revenue.................................................. $192,123
Tower operating expenses, excluding depreciation....... 19,425
--------
Gross margin......................................... 172,698
--------
Other expenses:
General and administrative expenses.................... 27,739
Depreciation........................................... 24,033
--------
51,772
--------
Income from operations................................... 120,926
Interest expense......................................... 6,036
--------
Income before taxes...................................... 114,890
Income tax expense....................................... 9,838
--------
Net income............................................... $105,052
========
Pro-forma income tax expense............................. $ 40,895
--------
Pro-forma net income..................................... $ 73,995
========
Retained earnings at December 31, 1996................... $581,793
Net income............................................... 105,052
--------
Retained earnings at June 27, 1997....................... $686,845
========
</TABLE>
The accompanying Notes to Combined Financial Statements are an integral part of
these combined financial statements.
F-46
<PAGE>
MAJESTIC COMMUNICATIONS
(A CARVE-OUT ENTITY OF MAJESTIC COMMUNICATIONS, INC.)
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM JANUARY 1,
THROUGH JUNE 27, 1997
----------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $105,052
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation......................................... 24,033
(Increase) decrease in:
Due from affiliates................................. (133,348)
Accounts receivable................................. (1,530)
Prepaid expenses.................................... (4,014)
Increase (decrease) in:
Accounts payable and other current liabilities...... 3,444
Taxes payable....................................... 10,339
Deferred revenue.................................... 9,351
Deferred tax liability.............................. (501)
--------
Total adjustments................................. (92,226)
--------
Net cash provided by operating activities............... 12,826
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of short-term debt.......................... (12,826)
--------
Net increase in cash.................................... --
--------
Cash at December 31, 1996............................... --
--------
Cash at June 27, 1997................................... $ --
--------
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
Cash paid for interest.................................. $ 6,036
========
</TABLE>
The accompanying Notes to Combined Financial Statements are an integral part of
these combined financial statements.
F-47
<PAGE>
MAJESTIC COMMUNICATIONS
(A CARVE-OUT ENTITY OF MAJESTIC COMMUNICATIONS, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Nature of Business
On June 27, 1997, Pinnacle Towers Inc. acquired certain of the assets and
business operations of Majestic Communications, Inc. (a C Corporation) and two
sole proprietors. Majestic Communications, Inc. is owned 75%/25% by these two
sole proprietors. Collectively, the acquired assets and related operations are
referred to hereafter as Majestic Communications ("Majestic"). Majestic owns
telecommunication towers and leases space on these towers to customers in
wireless communications industries in Tennessee and Mississippi.
Basis of Presentation
The combined financial statements of Majestic have been derived from the
accounting records of Majestic Communications, Inc. and the two sole
proprietors. Additional allocations were made to reflect Majestic's share of
general and administrative expenses on a carve-out basis as described in Note
2.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and use
assumptions that affect the reported amounts of assets and liabilities and the
disclosure for contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. Actual results may vary from those estimates.
Due from Affiliate
All tower rent revenues are collected by affiliates on behalf of Majestic.
Similarly, all direct tower operating expenses, general and administrative
expenses, and interest are paid by affiliates on behalf of Majestic.
Accordingly, a receivable from and payable to affiliates are recorded (see
Note 6).
Tower Assets
Tower assets consist of towers, buildings, and related attachments which are
recorded at cost and depreciated using the straight-line method over the
estimated useful life of the assets, which range from 15 to 30 years.
Improvements, renewals and extraordinary repairs which increase the value or
extend the life of the asset are capitalized. Repairs and maintenance costs
are expensed as incurred.
Impairment of Long-lived Assets
Majestic evaluates the recoverability of its long-lived assets whenever
adverse events or changes in business climate indicate that the expected
undiscounted future cash flows from the related asset may be less than
previously anticipated. If the net book value of the related asset exceeds the
undiscounted future cash flows of the asset, the carrying amount would be
reduced to the present value of its expected future cash flows and an
impairment loss would be recognized. As of June 27, 1997, management does not
believe that an impairment reserve is required.
Fair Value of Financial Instruments
The carrying amount of Majestic's financial instruments at June 27, 1997,
which includes due from affiliate, accounts receivable and short-term debt,
approximates fair value due to the short maturity of those instruments.
F-48
<PAGE>
MAJESTIC COMMUNICATIONS
(A CARVE-OUT ENTITY OF MAJESTIC COMMUNICATIONS, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition
Rental revenue is recognized on a straight-line basis over the life of the
related lease agreements. Revenue is recorded in the month in which it is due.
Allocation of Expenses
The accompanying financial statements include certain costs and expenses
that have been allocated to the tower business from the Parent. These costs
have been allocated on a pro rata basis primarily on either revenues or total
costs of infrastructure operations, depending upon the nature of the cost.
Management believes this allocation is reasonable.
Income Taxes
Majestic accounts for income taxes using the liability method as required by
Statement No. 109, Accounting for Income Taxes, issued by the Financial
Accounting Standards Board.
Deferred income taxes are provided for temporary differences between the
basis of assets and liabilities for financial reporting and income tax
reporting.
As described in Note 1, Majestic consisted of a C Corporation and of two
sole proprietorships. As such, the combined accounts reflect a tax provision
for only the operations of the C Corporation at June 27, 1997. The Combined
Statement of Operations and Retained Earnings also reflects a tax provision
for the operations of Majestic at June 27, 1997 on a pro-forma basis as if
Majestic were treated as a C Corporation.
3. SHORT-TERM DEBT
At June 27, 1997, $161,712 was outstanding under a bank loan, which provided
secured borrowings for the purchases of land, a building and a tower in
Tennessee. The loan was secured by a mortgage deed of trust on the land, the
tower assets and an assignment of rents and leases. In addition, the loan as
guaranteed by Majestic Communications, Inc. The interest rate on this
borrowing was 7%. The original maturity date was August 1, 1999. However, the
outstanding balance was repaid subsequent to June 27, 1997 as part of the
purchase agreement with Pinnacle Towers Inc. (see Note 7).
4. INCOME TAXES
As described in Note 1, Majestic consisted certain assets of a C Corporation
and of two sole proprietorships. As such, the combined accounts reflect a tax
provision for only the operations of the C Corporation at June 27, 1997. The
Combined Statement of Operations and Retained Earnings also reflects a tax
provision for the operations of Majestic at June 27, 1997 on a pro-forma basis
as if Majestic were treated as a C Corporation.
F-49
<PAGE>
MAJESTIC COMMUNICATIONS
(A CARVE-OUT ENTITY OF MAJESTIC COMMUNICATIONS, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Significant components of the provision for income taxes on a historical and
pro-forma basis were as follows:
<TABLE>
<CAPTION>
PRO-FORMA
JUNE 27, 1997 JUNE 27, 1997
------------- -------------
<S> <C> <C>
Current:
Federal....................................... $ 7,449 $37,610
State......................................... 2,890 6,840
------- -------
Total current............................... 10,339 44,450
Deferred:
Federal....................................... (367) (3,034)
State......................................... (134) (521)
------- -------
Total Deferred.............................. (501) (3,555)
------- -------
Provision for income taxes...................... $ 9,838 $40,895
======= =======
</TABLE>
Significant components of the deferred tax liability on a historical and
pro-forma basis were as follows:
<TABLE>
<CAPTION>
PRO-FORMA
JUNE 27, 1997 JUNE 27, 1997
------------- -------------
<S> <C> <C>
Deferred tax liability:
Tax over book depreciation..................... $48,257 $24,756
======= =======
</TABLE>
The effective tax rate approximates the statutory federal and state rates on
a historical and pro-forma basis as no permanent differences exist for either
the C Corporation or Majestic.
Net income related to sole proprietors was not subject to income taxes as
the income is taxed directly to their owners. The reported amounts for fixed
assets related to these sole proprietors was approximately $169,400 less than
its tax basis.
5. TENANT LEASES
The following is a schedule by year of total future rentals to be received
for tower space under noncancelable lease agreements as of June 27, 1997.
<TABLE>
<S> <C>
PERIOD JUNE 28, 1997
THROUGH DECEMBER 31, 1997.......................................... $187,929
YEAR ENDED DECEMBER 31,
1998.............................................................. 247,633
1999.............................................................. 185,029
2000.............................................................. 155,688
2001.............................................................. 84,493
2002.............................................................. 11,250
2003 and thereafter............................................... 25,860
--------
$897,882
========
</TABLE>
F-50
<PAGE>
MAJESTIC COMMUNICATIONS
(A CARVE-OUT ENTITY OF MAJESTIC COMMUNICATIONS, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
6. RELATED PARTY TRANSACTIONS
Prior to the acquisition by Pinnacle Towers Inc. (as described in Note 1),
the carve out entity of Majestic included transactions with the surviving
Majestic Communications, Inc. ("affiliates"). These transactions are disclosed
as related party transactions in these financial statements.
Affiliates received rent payments related to Majestic's lease agreements. At
June 27, 1997, due from affiliates of $199,944 reflected these receipts.
Affiliates paid tower operating and interest expense as well as short-term
debt related to Majestic. For the period January 1, 1997 through June 27,
1997, Majestic incurred tower operating and interest expense of $19,425 and
$6,036, respectively. Short-term debt of $12,826 was paid by affiliates for
this period.
For the period January 1, 1997 through June 27, 1997, general and
administrative expenses of $27,739 were allocated to Majestic from affiliates.
7. SUBSEQUENT EVENTS
On June 27, 1997, Majestic was sold to Pinnacle Towers Inc. In accordance
with the purchase agreement, the owners of Majestic received approximately
$4,758,500 for four towers and related assets. Also under the agreement, rent
revenue reverted to Pinnacle Towers Inc. as of July 1, 1997. Rent received by
Majestic related to the remaining days in June 1997 was adjusted as part of
the purchase price. Deferred revenue as of June 27, 1997 reflects rent
received by Majestic to be remitted to Pinnacle Towers Inc. Of the total
purchase price, $161,712 was used by Pinnacle Towers Inc. to repay the
outstanding bank loan subsequent to June 27, 1997 in accordance with the
purchase agreement.
F-51
<PAGE>
================================================================================
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized. This Prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any securities other than the securities to
which it relates or an offer to sell or the solicitation of an offer to buy such
securities in any circumstances in which such offer or solicitation is unlawful.
Neither the delivery of this Prospectus nor any sale made hereunder shall under
any circumstances, create an implication that there has been no change in the
affairs of the Company since the date hereof or that the information contained
herein is correct as of any time subsequent to its date.
TABLE OF CONTENTS
PAGE
----
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 19
The Exchange Offer........................................................ 26
Capitalization............................................................ 36
Use of Proceeds........................................................... 36
Recent Developments....................................................... 37
Unaudited Pro Forma Consolidated Financial Statements..................... 38
Selected Historical and Unaudited Pro Forma
Consolidated Financial Data............................................. 42
Management's Discussion and Analysis
of Financial Condition and Results of Operations........................ 45
Business.................................................................. 51
Management................................................................ 68
Principal Stockholders.................................................... 72
Certain Relationships and Transactions.................................... 73
Description of Credit Facilities.......................................... 75
Description of New Notes.................................................. 76
Certain Federal Income Tax Considerations................................. 104
Plan of Distribution...................................................... 105
Legal Opinions............................................................ 105
Experts................................................................... 106
Index to Financial Statements............................................. F-1
================================================================================
================================================================================
$325,000,000
PINNACLE HOLDINGS INC.
10% Senior Discount
Notes due 2008
--------------------
PROSPECTUS
--------------------
June 30, 1998
================================================================================
