<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 5, 1999
REGISTRATION STATEMENT NO. 333-59297
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
PRE-EFFECTIVE
AMENDMENT NO. 4
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PINNACLE HOLDINGS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS GOVERNING INSTRUMENTS)
---------------
DELAWARE 4899 65-0652634
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION IDENTIFICATION NUMBER)
INCORPORATION OR CODE NUMBER)
ORGANIZATION)
1549 RINGLING BOULEVARD, 3RD FLOOR
SARASOTA, FLORIDA 34236
(941) 364-8886
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
STEVEN DAY
VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND SECRETARY
PINNACLE HOLDINGS INC.
1549 RINGLING BOULEVARD, 3RD FLOOR
SARASOTA, FLORIDA 34236
(941) 364-8886
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
---------------
COPIES OF COMMUNICATIONS TO:
CHESTER E. BACHELLER, ESQ. ROBERT E. BUCKHOLZ, JR., ESQ.
HOLLAND & KNIGHT LLP SULLIVAN & CROMWELL
400 NORTH ASHLEY DRIVE, SUITE 2300 125 BROAD STREET
TAMPA, FLORIDA 33602 NEW YORK, NEW YORK 10004
(813) 227-8500 (212) 558-4000
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING
PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT OF 1933, CHECK THE FOLLOWING
BOX AND LIST THE SECURITIES ACT OF 1933 REGISTRATION STATEMENT NUMBER OF
EARLIER EFFECTIVE REGISTRATION STATEMENTS FOR THE SAME OFFERING. [_]
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(C)
UNDER THE SECURITIES ACT OF 1933, CHECK THE FOLLOWING BOX AND LIST THE
SECURITIES ACT OF 1933 REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE
REGISTRATION STATEMENT FOR THE SAME OFFERING. [_]
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(D)
UNDER THE SECURITIES ACT OF 1933, CHECK THE FOLLOWING BOX AND LIST THE
SECURITIES ACT OF 1933 REGISTRATION NUMBER OF THE EARLIER EFFECTIVE
REGISTRATION STATEMENT FOR THE SAME OFFERING. [_]
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434,
PLEASE CHECK THE FOLLOWING BOX. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT MAXIMUM MAXIMUM AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED PER SHARE(2) OFFERING PRICE FEE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.001................. 11,500,000 shares(1) $16.00 $184,000,000(1) $ -- (3)
- ------------------------------------------------------------------------------------------
% Exchangeable
Preferred Stock....... 150,000 shares $1,000 $150,000,000 $23,800(3)
- ------------------------------------------------------------------------------------------
% Exchange Notes due
2009.................. (4) -- (2) (4)
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 1,500,000 shares of Common Stock to cover over-allotments, if
any, pursuant to over-allotment options granted to the Underwriters.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(3) The Company previously paid a registration fee of $73,278 in connection
with the registration of $248,400,000 of Common Stock with the original
Registration Statement filed on July 17, 1998 and with Pre-effective
Amendment No. 1 to the Registration Statement filed on July 27, 1998. The
amount listed above was calculated using the additional amount of the
Proposed Maximum Aggregate Offering Price of $85,600,000 ($334,000,000 for
the currently Proposed Maximum Aggregate Offering Price minus $248,400,000
for the previously Proposed Maximum Aggregate Offering Price).
(4) Such indeterminate principal amount of Registrant's % Exchange Notes due
2009 as may be issuable upon exchange of the % Exchangeable Preferred
Stock. Pursuant to Rule 457(i), no registration fee is required.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains three forms of prospectuses: one to be
used in connection with an offering of Common Stock in the United States (the
"U.S. Prospectus"), one to be used in connection with a concurrent
international offering of Common Stock outside the United States (the
"International Prospectus") and one to be used in connection with a concurrent
offering of New Preferred Stock (the "Preferred Stock Prospectus"). The
complete U.S. Prospectus follows this explanatory note. After the U.S.
Prospectus are the following alternate pages for the International Prospectus:
a front cover page, a separate Underwriting section and a back cover page. All
other pages of the U.S. Prospectus are to be used for both the United States
offering and the international offering. Each alternative page for the
International Prospectus included herein is labeled "Alternate Page for
International Prospectus." The complete Preferred Stock Prospectus will follow
the alternate pages for the International Prospectus.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JANUARY 5, 1999
[LOGO OF PINNACLE 10,000,000 SHARES
HOLDINGS INC PINNACLE HOLDINGS INC.
APPEARS HERE COMMON STOCK
APPEARS HERE] (PAR VALUE $.001 PER SHARE)
Of the 10,000,000 shares of Common Stock offered, 8,000,000 shares are being
offered hereby in the United States and Canada by the U.S. Underwriters and
2,000,000 shares are being offered hereby outside the United States and Canada
by the International Underwriters. The initial public offering price and the
aggregate underwriting discount per share will be identical in both offerings.
See "Underwriting".
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price per share will be between $14 and $16. For factors to be considered in
determining the initial public offering price, see "Underwriting".
Concurrently with this offering, the Company is offering 150,000 shares of
Exchangeable Preferred Stock, par value $.001 per share. This offering is
contingent upon the closing of the Preferred Stock Offering (as defined
herein), and the Preferred Stock Offering is contingent upon the closing of
this offering.
SEE "RISK FACTORS" ON PAGE 15 FOR CERTAIN CONSIDERATIONS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "BIGT".
----------
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.
----------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
-------------- ------------ -----------
<S> <C> <C> <C>
Per Share.............................. $ $ $
Total (3).............................. $ $ $
</TABLE>
- -----
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
(2) Before deducting estimated expenses of $625,000 payable by the Company.
(3) The Company has granted the U.S. Underwriters an option for 30 days to
purchase up to an additional 1,200,000 shares at the initial public
offering price per share, less underwriting discount, solely to cover over-
allotments. Additionally, the Company has granted the International
Underwriters a similar option with respect to an additional 300,000 shares
as part of the concurrent international offering. If such options are
exercised in full, the total initial public offering price, underwriting
discount and proceeds to Company will be $ , $ and $ , respectively.
See "Underwriting".
----------
The shares offered hereby are offered severally by the U.S. Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
certificates for the shares will be ready for delivery in New York, New York,
on or about , 1999, against payment therefor in immediately available
funds.
GOLDMAN, SACHS & CO.
BT ALEX. BROWN
SALOMON SMITH BARNEY
NATIONSBANC MONTGOMERY SECURITIES LLC
RAYMOND JAMES & ASSOCIATES, INC.
----------
The date of this Prospectus is , 1999.
<PAGE>
[PARTIAL MAP OF U.S. INDICATING COMPANY'S CURRENT TOWER SITES AND PROPOSED
TOWER SITES.]
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON STOCK OFFERED HEREBY, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREBY SHALL UNDER ANY
CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF.
----------------
NO ACTION HAS BEEN OR WILL BE TAKEN IN ANY JURISDICTION BY THE COMPANY OR BY
ANY UNDERWRITER THAT WOULD PERMIT A PUBLIC OFFERING OF THE COMMON STOCK OR
POSSESSION OR DISTRIBUTION OF THIS PROSPECTUS IN ANY JURISDICTION WHERE ACTION
FOR THAT PURPOSE IS REQUIRED, OTHER THAN IN THE UNITED STATES. PERSONS INTO
WHOSE POSSESSION THIS PROSPECTUS COMES ARE REQUIRED BY THE COMPANY AND THE
UNDERWRITERS TO INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO
THE OFFERING OF THE COMMON STOCK AND THE DISTRIBUTION OF THIS PROSPECTUS.
----------------
Market data used throughout this Prospectus was obtained from industry
publications that 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.
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SHARES,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERINGS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
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: (i) references in this Prospectus to the "Company"
include Pinnacle Holdings Inc., a Delaware corporation, and its consolidated
subsidiaries; (ii) the information contained in this Prospectus assumes no
exercise of the Underwriters' over-allotment options; and (iii) all references
to Shares of Common Stock, per share amounts and other information set forth in
this Prospectus have been adjusted to reflect certain actions taken by the
Company to effect the Recapitalization (as defined herein), which will result
in a conversion of all shares of Class A, Class B, Class C, Class D and Class E
Common Stock of the Company into shares of Common Stock, effective upon the
closing of the Offerings.
THE COMPANY
The Company is the leading provider of wireless communication tower space in
the Southeastern United States. Since its formation in May 1995, the Company
has focused exclusively on creating a portfolio of dense clusters of
geographically contiguous towers and renting tower space to wireless
communications providers and users. The Company believes that the rental of
tower space is the sector of the tower industry in which it can earn the
highest cash flow margins and risk adjusted return on invested capital. This
strategy also presents significant opportunities for continued revenue and cash
flow growth through the addition of new tenants on its existing towers and
towers that may be acquired in the future.
Since commencing operations in May 1995 and through September 30, 1998, the
Company has completed 195 acquisitions through which it has acquired 766 towers
and has constructed an additional 64 towers in such high growth markets as
Atlanta, Birmingham, New Orleans, Orlando and Tampa. Subsequent to September
30, 1998 and prior to December 18, 1998, the Company acquired an additional 35
towers. As of December 18, 1998, the Company had agreements or letters of
intent to acquire 41 towers. As a result of its extensive existing tower base,
the Company believes it is well-positioned to continue to capitalize on the
growth opportunities available in the rapidly consolidating and highly
fragmented tower rental industry. For the year ended December 31, 1997, on a
pro forma basis, the Company had tower rental revenue and EBITDA of $40.6
million and $27.5 million, respectively. For the nine months ended September
30, 1998, on a pro forma basis, the Company had tower rental revenue and EBITDA
of $34.1 million and $20.0 million, respectively. See "Unaudited Pro Forma
Financial Data."
The Company has a diversified base of over 800 customers consisting of all
forms of wireless communications providers, operators of private networks and
government agencies that include Southern Communications Services, Inc.
("Southern Communications"), Nextel, Sprint PCS, PageNet, Motorola, BellSouth
Mobility, MobileMedia Communications, Inc. ("MobileMedia Communications"),
Teletouch, Skytel, Pagemart, Federal Bureau of Investigation and Bureau of
Alcohol, Tobacco & Firearms. The Company's leases generally range in duration
from three to five years, and many provide for scheduled minimum rent increases
of the greater of a specified percentage (which typically ranges from 3 to 5%)
or the change for the relevant period in the Consumer Price Index ("CPI").
The Company is experiencing strong demand for tower rental space fueled by
the deployment of new wireless technologies and strong underlying growth in
wireless services. The Company believes that "same tower" revenue growth
(measured by comparing the Annualized Run Rate Revenue (as defined herein) 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 a meaningful indicator of
the Company's ability to generate incremental revenue on such towers. Taking
into consideration new leases written as of
1
<PAGE>
September 30, 1998, the Company experienced "same tower" revenue growth in
excess of 20.0% on an annualized basis for the nine months ended September 30,
1998 on its base of towers owned as of December 31, 1997. The Company's
Annualized Run Rate Revenue as of September 30, 1998 was $43.4 million.
BUSINESS AND GROWTH STRATEGY
The Company's objective is to create substantial value from both its position
as the leading provider of wireless communications rental tower space in the
Southeastern United States and its expansion into additional wireless
communications markets. In order to achieve this objective, the Company has
designed and implemented a three-tiered growth strategy that focuses on: (i)
increasing revenue yield per tower through aggressive marketing and
development; (ii) continuing acquisitions of towers in key markets; and (iii)
selective new tower construction.
I. MARKETING AND DEVELOPMENT STRATEGY
The Company aggressively markets rental space on its towers to capitalize on
the operating leverage of its business. The Company's customers are generally
responsible for the installation of their own equipment and the incremental
utility costs associated with that equipment. In addition, adding customers to
an existing tower does not result in increased monitoring, maintenance or
insurance costs. Accordingly, when customers are added to an existing tower,
additional revenue can be achieved at low incremental costs, thereby yielding
increased cash flow margins. The key elements of the Company's marketing and
development strategy include the following:
. OFFER STRATEGICALLY LOCATED CLUSTERS OF TOWERS. By owning and assembling
clusters of towers in high growth regions, the Company believes it is able
to offer its customers the ability to rapidly and efficiently fulfill their
network expansion plans across a particular market or region, which the
Company believes provides it with a significant competitive advantage.
. TARGET A DIVERSIFIED CUSTOMER BASE. The number of antennae a tower can
accommodate varies depending on the type of tower (self-supporting monopole,
guyed, self-supporting lattice), the height of the tower and the nature of
the services provided by such antennae. The substantial majority of the
Company's towers are self-supporting lattice and guyed towers that can
support a large number of antennae and therefore enable the Company to
market its tower space to a diverse group of wireless communication
providers.
. LEVERAGE CUSTOMER RELATIONSHIPS. The Company believes it has established a
reputation among its customers as a highly professional and reliable tower
space provider. This has been achieved through ongoing investment in the
development of relationships at multiple levels of customer organizations.
The Company believes that important factors in generating interest in its
towers are the customer's awareness 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 towers.
. TRACK FCC FILINGS. All FCC licensees must file applications for site
locations. As part of its disciplined approach to acquisitions and new tower
construction activities, the Company tracks these filings, which provide
market intelligence as to existing wireless communications providers' build-
out plans and new market entrants.
II. ACQUISITION STRATEGY
Ownership of rental towers in many parts of the United States remains highly
fragmented, although the consolidation of tower ownership has begun to
accelerate as larger independent owners acquire small local owners in certain
regions. The Company believes that its acquisition strategy has
2
<PAGE>
allowed it to achieve the highest density of towers across nine states located
in the Southeastern United States, which the Company believes provides it with
a significant competitive advantage.
The Company believes that growth through acquisition is an attractive
strategy because it allows the Company to: (i) choose the location of its
towers in key urban and other desired locations; (ii) acquire towers with
existing tenants and the capacity to add multiple, additional tenants; (iii)
not seek build-to-suit mandates from customers, which may result in towers
being built in unprofitable locations; and (iv) lower its risk as cash flow
from existing tenants is predetermined.
The Company's acquisition strategy continues to focus on: (i) rapidly
acquiring towers in key markets as a means to quickly gain critical mass,
thereby discouraging other tower consolidators from entering its markets;
(ii) completing follow-on acquisitions to enhance its coverage in selected
wireless communications markets; and (iii) penetrating new markets as a
platform for future growth. Through September 30, 1998, the Company has
acquired 766 towers at an average of four towers per acquisition and at a pace
of greater than one acquisition per week. The key elements of the Company's
acquisition strategy are set forth below:
. TARGET HIGH GROWTH WIRELESS COMMUNICATIONS MARKETS. The Company targets
population centers and key transportation corridors in wireless
communications markets where there is evidence of high potential growth. The
Southeastern United States is attractive because of its relatively high
population and economic growth rates. Within this region, the Company has
established strong market positions in densely populated areas such as
Atlanta, Birmingham, New Orleans, Orlando and Tampa as well as along several
key traffic corridors. The MobileMedia Acquisition (as defined herein)
provided the Company with strong market positions in Knoxville, Mobile and
Nashville, as well as towers in Southern California and New England that
provide the Company a base for penetrating these attractive wireless
markets.
. FOCUS ON COMPATIBILITY WITH EXISTING TOWER NETWORK. In evaluating a
potential acquisition, the Company considers whether it will be compatible
with the Company's existing tower inventory. In general, the Company aims to
acquire sites that will result in clusters of towers that provide the
critical mass necessary to achieve certain competitive advantages within a
given market. The MobileMedia Acquisition and the Southern Towers
Acquisition (as defined herein) expanded the Company's presence to
contiguous markets in the Southeastern United States.
. EMPLOY A DISCIPLINED VALUATION PROCESS. The Company seeks to acquire towers
that have existing cash flow and identified potential for significant future
cash flow growth from additional tenants. For each potential acquisition,
the Company reviews the current population coverage of each tower to be
acquired, the nature and quality of the existing and potential 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.
Consistent with the Company's acquisition criteria and strategy of
accumulating clusters of towers in regions that are highly attractive to
wireless communications providers, the Company has recently completed the
following major acquisitions:
SOUTHERN TOWERS ACQUISITION: In March 1998, the Company acquired 201 towers
from Southern Communications for approximately $83.5 million plus fees and
expenses (the "Southern Towers Acquisition"). Southern Communications is a
subsidiary of Southern Company, one of the largest utility holding companies in
the United States and an Enhanced Specialized Mobile Radio ("ESMR") provider.
Substantially all of these towers, which are located in Georgia, Alabama,
Mississippi and Florida, were constructed within the prior four years. See
"Business--Southern Towers Acquisition."
3
<PAGE>
The Southern Towers Acquisition represented an attractive opportunity to
significantly accelerate the achievement of the Company's goal of becoming the
leading provider of rental tower space in the Southeastern United States. Prior
to the acquisition, these towers, which had only a limited number of third
party tenants, were principally for the use of Southern Communications and its
affiliates. The towers were generally constructed with capacity significantly
exceeding Southern Communications' specific capacity requirements. Accordingly,
the Company believes that there is substantial potential for additional revenue
from these towers.
As of December 31, 1997, on a pro forma basis, the towers had combined annual
revenue totaling $4.8 million and Tower Level Cash Flow of $3.7 million,
implying a tower level cash flow margin of 77.9%.
MOBILEMEDIA ACQUISITION: In September 1998, the Company acquired 166 towers
from MobileMedia Corporation ("MobileMedia") and its affiliates for
approximately $170.0 million (the "MobileMedia Acquisition"). Subsequent to its
announced merger with Arch Communications, Inc., MobileMedia will be the second
largest paging company in the United States. See "Business-- MobileMedia
Acquisition".
The MobileMedia Acquisition represented an attractive opportunity to acquire
towers that (i) further strengthened the Company's tower portfolio in certain
existing markets, (ii) provided entry into geographically contiguous markets
and (iii) expanded the Company's operations into new markets in Southern
California and New England.
As of December 31, 1997, on a pro forma basis, the towers had combined annual
revenue totaling $13.2 million and Tower Level Cash Flow of $11.8 million,
implying a tower cash flow margin of 89.9%.
III. NEW TOWER CONSTRUCTION STRATEGY
An additional element of the Company's growth strategy is to selectively
construct new towers in and around major markets in which it already has a
presence in order to enhance coverage in existing markets. In addition, the
Company pursues build opportunities in order to expand capacity or otherwise
improve already existing sites. In both cases, the Company adheres to its own
requirements of return on capital invested. The Company does not engage in
speculative construction projects or large scale build-to-suit projects. During
1997 and the nine months ended September 30, 1998, the Company constructed 22
and 34 towers, respectively. As a result of opportunities generated through its
marketing efforts, the Company estimates that it will identify 80 to 100 new
tower build opportunities over the next 12 months. 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 carefully evaluates
such plans to meet customer requirements, which may result in selling space
on an existing tower, acquiring an existing tower, augmenting an existing
tower or constructing a new tower. Tower construction is only initiated
after at least one anchor customer is identified and the Company has
determined, based on market research, that the capital outlay for the
construction project would generate returns that exceed the Company's
minimum required return on invested capital.
. 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 the necessary steps to obtain
zoning approvals and building permits. The Company acquires tower structures
from a variety of vendors and oversees the construction of the tower by
hired sub-contractors.
4
<PAGE>
COMPANY STRENGTHS
The Company believes that its business is characterized by the following
strengths:
. EXCLUSIVE FOCUS ON TOWER RENTAL BUSINESS. The Company exclusively focuses on
the rental of wireless communications tower space as opposed to other
aspects of the tower industry such as site acquisition, tower construction
services and ancillary services. Furthermore, the Company does not engage in
large-scale "build-to-suit" programs, preferring instead to focus on its
core acquisition strategy and complementary selective construction strategy
designed to enhance coverage in targeted markets. The Company believes by
focusing on this sector of the tower industry, it can earn the highest cash
flow margins and risk adjusted return on invested capital.
. DISCIPLINED AND EFFICIENT ACQUIRER OF TOWER ASSETS. At September 30, 1998,
the Company had a network of approximately 755 towers (excluding 35 towers
acquired subsequent to September 30, 1998, and 41 towers to be acquired
pursuant to probable acquisitions), geographically clustered in the
Southeastern United States as well as 75 towers located in Southern
California and New England. The Company's proven acquisition process
identifies towers that typically have an established foundation of existing
cash flow and are geographically complementary to its existing portfolio.
The Company has demonstrated the ability to identify and successfully
negotiate the purchase of what it believes to be value enhancing tower
acquisitions.
. ABILITY TO SUCCESSFULLY INCREASE TOWER RENTAL REVENUE. The Company's
aggressive marketing efforts to all major wireless communication providers
has resulted in the signing of a significant number of new tenants over the
last three years. Additional tenants increase the operating leverage of the
Company's portfolio and generally increase the Company's overall cash flow
margins. In order to measure the revenue growth performance of acquired
towers, the Company tracks the cumulative increase in monthly revenue from
towers acquired during different periods. The Company has generated a
cumulative increase in total monthly revenues for the 29 towers acquired in
1995 of 133.0% through September 1998. In addition, the 119 towers acquired
in 1996 and the 134 towers acquired in 1997 have generated cumulative
increases in total monthly revenues of 68.0% and 14.0%, respectively through
September 1998.
The Company believes that its business will continue to be characterized by
high cash flow margins, stable and predictable cash flow and high barriers to
entry. Moreover, the Company expects to experience strong ongoing growth as it
benefits from additional consolidation opportunities while increasing overall
tower revenues on existing towers.
----------------
The Company's headquarters are located at 1549 Ringling Boulevard, Third
Floor, Sarasota, Florida 34236, and its telephone number is (941) 364-8886. The
Company's website is www.pinnacletowers.com. The information provided on the
Company's website is not incorporated into this Prospectus.
5
<PAGE>
THE OFFERINGS
The offering hereby of 8,000,000 shares of Common Stock in the United States
and Canada (the "U.S. Offering") and the concurrent offering of 2,000,000
shares of Common Stock outside the United States and Canada (the "International
Offering") are collectively referred to as the "Common Stock Offering."
Concurrently with the Common Stock Offering, the Company, is offering 150,000
shares of % Exchangeable Preferred Stock (the "Preferred Stock Offering").
The Common Stock Offering is contingent upon the closing of the Preferred Stock
Offering, and the Preferred Stock Offering is contingent upon the closing of
the Common Stock Offering. The Common Stock Offering and the Preferred Stock
Offering are collectively referred to as the "Offerings."
COMMON STOCK OFFERING(1)
Common Stock offered in:
U.S. Offering ........ 8,000,000 shares
International Offering .... 2,000,000 shares
10,000,000 shares
Total...............
Common Stock to be
Outstanding after the
Offering...................
20,000,000 shares (2)
Nasdaq National Market BIGT
Symbol.................
- --------
(1) Does not include the Underwriters' over-allotment options for an aggregate
of 1,500,000 shares of Common Stock.
(2) Excludes approximately 2,000,000 shares of Common Stock reserved for
issuance pursuant to the Company's stock incentive plan (the "Stock
Incentive Plan"). See "Management--Stock Incentive Plan".
PREFERRED STOCK OFFERING
Preferred Stock Offered..... 150,000 shares of % Exchangeable Preferred
Stock, par value $.001 per share, plus any
additional shares of such stock issued from time
to time in lieu of cash dividends (the "New
Preferred Stock").
Liquidation Preference...... $1,000 per share.
Dividends.............. Dividends will accrue from the date of issue of
the New Preferred Stock and will be payable
quarterly commencing at a rate per annum of
% of the liquidation preference thereof.
Dividends may be paid, at the Company's option,
on any dividend payment date occurring on or
before , 2004 either in cash or by issuing
additional fully paid and nonassessable New
Preferred Stock with an aggregate liquidation
preference equal to the amount of such dividends.
After such date, dividends are payable only in
cash. The Company's Senior Credit Facility, which
matures December 15, 2005, prohibits the payment
of cash dividends on the New Preferred Stock. The
Company currently expects that prior to being
required to pay cash dividends on the New
Preferred Stock it would seek an amendment to the
Senior Credit. Facility to permit such cash
payments.
6
<PAGE>
Mandatory Redemption... The Company is required, subject to certain
conditions, to redeem all of the New Preferred
Stock outstanding on , 2009 at a redemption
price equal to 100% of the liquidation preference
thereof, plus, without duplication, accumulated
and unpaid dividends to the date of redemption.
Optional Redemption.... The Company may at its election in accordance
with the Certificate of Designations (as defined
herein) redeem shares of the New Preferred Stock:
(i) in whole or in part, at any time on or after
, 2004 at the redemption prices set forth
herein, plus, without duplication, accumulated
and unpaid dividends to the date of redemption;
and (ii) on or prior to , 2004, out of all
or a portion of the net proceeds of a Public
Equity Offering or a Strategic Equity Investment
received on or prior to , 2002 in an amount
of at least 5,000 shares and up to an aggregate
amount equal to 35% of the outstanding shares of
New Preferred Stock at a redemption price equal
to % of the liquidation preference thereof,
plus, without duplication, accumulated and unpaid
dividends to the date of redemption; provided,
however, that after any such redemption, the
liquidation preference of New Preferred Stock
outstanding must equal at least (i) 65% of the
initial aggregate liquidation preference of the
New Preferred Stock originally issued in the
Preferred Stock Offering or (ii), in the event of
a partial exchange of New Preferred Stock for
Exchange Notes, an aggregate liquidation
preference of $75.0 million.
Exchange Provision..... The New Preferred Stock will be exchangeable for
Exchange Notes (as defined herein), at the
Company's option, subject to certain conditions,
in whole or in part (in an amount equal to 50% of
the shares of New Preferred Stock then
outstanding, but not less than 75,000 shares) on
any scheduled dividend payment date.
Ranking................ The New Preferred Stock will, with respect to
dividend rights and rights upon liquidation,
winding-up and dissolution of the Company, rank
senior to all Junior Shares of the Company.
Voting Rights.......... The New Preferred Stock will be non-voting,
except as otherwise required by law and except in
certain circumstances described herein, including
amending certain rights of the holders of the New
Preferred Stock. In addition, if: (i) the Company
fails to pay dividends in cash or, to the extent
permitted by the Certificate of Designations, by
the issuance of additional New Preferred Stock in
respect of six or more quarters in the aggregate
(whether or not consecutive); (ii) the Company
fails to make the mandatory redemption on ,
2009 or an Offer to Purchase (as defined herein)
upon a Change of Control; or (iii) the Company
fails to comply with the covenants contained in
the Certificate of Designations
7
<PAGE>
or make certain payments on its indebtedness,
holders of a majority of the outstanding New
Preferred Stock, voting as a class, will be
entitled to elect a number of directors of the
Company equal to the lesser of either two
directors or that number of directors
constituting at least 25% of the Board of
Directors of the Company.
Change of Control...... Within 30 days following a Change of Control, the
holders of New Preferred Stock will have the
right to require the Company to offer to purchase
all or any part outstanding of the New Preferred
Stock at a purchase price equal to 101% of the
liquidation preference thereof, plus, without
duplication, accumulated and unpaid dividends to
the date of purchase.
Certain Covenants...... The Certificate of Designations will contain
covenants that, among other things, limit the
ability of the Company and its subsidiaries to
(i) incur indebtedness, (ii) pay dividends or
make certain other restricted payments, (iii)
restrict dividends or make certain other payments
to the Company by Restricted Subsidiaries, (iv)
enter into certain transactions with affiliates
or (v) merge or consolidate with or sell all or
substantially all of its assets to any other
person. The Certificate of Designations will
contain provisions that allow for the
modification and amendment of the covenants
contained in the Certificate of Designations by a
vote of holders owning a majority of the
outstanding New Preferred Stock, including the
covenant relating to a Change of Control, except
during the pendency of an Offer to Purchase. In
addition, the holders of a majority of the
outstanding New Preferred Stock, on behalf of all
holders of New Preferred Stock, may waive
compliance by the Company with certain provisions
of the Certificate of Designations.
THE EXCHANGE NOTES
Issue.................. % Exchange Notes due 2009 (the "Exchange Notes")
issuable in exchange for the New Preferred Stock
in an aggregate principal amount equal to the
then aggregate liquidation preference of the New
Preferred Stock, plus, without duplication,
accumulated and unpaid dividends to the date
fixed for the exchange thereof (the "Exchange
Date").
Interest............... Interest on the Exchange Notes will be payable
semi-annually in arrears on each and ,
commencing on . Interest may be paid, at the
Company's option, on any interest payment date
occurring on or before , 2004 either in cash
or by issuing additional Exchange Notes in an
aggregate principal amount equal to the amount of
such interest payments. After such date, interest
is payable only in cash.
8
<PAGE>
Maturity............... , 2009.
Ranking................
The Exchange Notes will be subordinated to all
existing and future Senior Debt, which includes
the Senior Discount Notes (as defined herein), of
the Company and effectively subordinated to
obligations of the Company's subsidiaries.
Optional Redemption.... The Exchange Notes will be subject to redemption
at the option of the Company: (i) in whole or in
part, at any time on or after , 2004 at the
redemption prices set forth herein, plus, without
duplication, accrued and unpaid interest to the
date of redemption; and (ii) on or prior to ,
2002, out of all or a portion of the net proceeds
of a Public Equity Offering or a Strategic Equity
Investment received on or prior to , 2002
in an amount of at least $5.0 million and up to
35% of the aggregate principal amount of Exchange
Notes then outstanding (whether issued in
exchange for New Preferred Stock or in lieu of
cash interest payments) plus, without
duplication, accrued and unpaid interest to the
date of redemption; provided, however, that after
any such redemption, the aggregate principal
amount of the Exchange Notes outstanding must
equal at least $75.0 million.
Change of Control...... Within 30 days following a Change of Control, the
Company will be required to offer to purchase all
outstanding Exchange Notes at a purchase price
equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest thereon
to the date of redemption.
Certain Covenants...... The Exchange Indenture (as defined herein) will
contain certain covenants that, among other
things, limit the ability of the Company and its
subsidiaries to (i) incur additional
indebtedness, (ii) pay dividends or make certain
other restricted payments, (iii) restrict
dividends or make certain other payments to the
Company by Restricted Subsidiaries, (iv) create
certain liens, (v) enter into certain
transactions with affiliates or (vi) merge or
consolidate with or sell all or substantially all
of its assets to any other person. The Exchange
Indenture will contain provisions that allow for
the modification and amendment of the covenants
contained in the Exchange Indenture by a vote of
holders owning a majority of the Exchange Notes,
including the covenant relating to a Change of
Control, except during the pendency of an Offer
to Purchase. In addition, the holders of a
majority in aggregate principal amount of the
Exchange Notes, on behalf of all holders of
Exchange Notes, may waive compliance by the
Company with certain restrictive provisions of
the Exchange Indenture.
9
<PAGE>
USE OF PROCEEDS
The Company intends to use the net proceeds of the Offerings as follows: (i)
approximately $30.3 million to redeem the outstanding shares of the Company's
Series A senior preferred stock (the "Senior Preferred Stock");
(ii) approximately $59.1 million to redeem the outstanding shares of the
Company's Series B junior preferred stock (the "Junior Preferred Stock" and
collectively with the Senior Preferred Stock, the "Existing Preferred Stock");
(iii) $15.1 million, including accrued interest, to repay in full and retire
the ABRY Bridge Loan (as defined herein); (iv) approximately $43.7 million to
be distributed to certain stockholders in connection with the Recapitalization
(as defined herein) to occur upon the closing of the Common Stock Offering; and
(v) approximately $135.9 million to repay outstanding borrowings under the
Senior Credit Facility (as defined herein). After giving effect to this use of
proceeds there will be $138.9 million of availability under the Senior Credit
Facility.
10
<PAGE>
THE RECAPITALIZATION
In connection with the Common Stock Offering, pursuant to a recapitalization
agreement between the Company, its largest stockholder, ABRY II (as defined
herein) and certain members of the Company's management that are stockholders
of the Company, the Company will convert all outstanding shares of each class
of the Company's five classes of common stock into shares of a single class of
common stock (the "Common Stock") and pay to the holders of certain of such
classes of common stock preferential amounts and yields. Such actions are
collectively referred to herein as the "Recapitalization." As a result, (i) the
certificate of incorporation of the Company will be amended immediately prior
to the consummation of the Offerings to eliminate the current multiple classes
of the Company's common stock and create a single class of common stock, with
all of the outstanding shares of all the classes of common stock of the Company
other than Class D Common Stock being converted into approximately 8,571,309
shares of Common Stock and all shares of Class D Common Stock being converted
into approximately 1,428,691 shares of Common Stock; (ii) the holders of the
Company's currently outstanding shares of Class A Common Stock, Class B Common
Stock and Class E Common Stock will collectively be paid approximately $38.9
million by the Company from proceeds of the Offerings, which amount equals the
amount of the preferences such shares are entitled to over the other classes of
the Company's common stock pursuant to the Company's certificate of
incorporation in its current form; and (iii) the holders of the Company's
currently outstanding shares of Class A Common Stock will collectively be paid
approximately $4.8 million by the Company from proceeds of the Offerings, which
amount equals the amount of the yield such shares have accrued from the date of
their issuances through June 30, 1997 pursuant to the Company's certificate of
incorporation in its current form.
11
<PAGE>
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table presents summary historical and unaudited pro forma
consolidated financial data of the Company. The summary historical consolidated
financial data, for the period of inception (May 3, 1995) through December 31,
1995 and for the period then ended and as of and for each of the two years
ended December 31, 1996 and 1997, were derived from the audited consolidated
financial statements of the Company. 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 nine months ended September 30, 1997 and 1998, were derived from unaudited
consolidated financial statements and the Unaudited Pro Forma Consolidated
Financial Statements of the Company contained elsewhere herein. The summary
financial information should be read in conjunction with, and are qualified in
their entirety by, the information contained in the audited consolidated
financial statements of the Company and the related notes thereto,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Unaudited Pro Forma Financial Data" and "Selected Historical
Consolidated Financial Data" included elsewhere herein.
The following summary unaudited pro forma statement of operations data has
been prepared to reflect the results of operations of the Company as if each of
the following had been completed as of January 1, 1997: (i) all acquisitions
completed during 1997; (ii) the Southern Towers Acquisition; (iii) the
MobileMedia Acquisition; (iv) acquisitions of other rental towers by the
Company completed since January 1, 1998, in addition to the Southern Towers
Acquisition and the MobileMedia Acquisition; (v) other individually immaterial
acquisitions of rental towers for which the Company has entered into agreements
or letters of intent to acquire as of December 18, 1998, the acquisitions of
which the Company believes are probable; (vi) the financing of the acquisitions
referred to in (i) through (v) above; (vii) the Recapitalization; (viii) the
issuance of the Additional Junior Preferred Stock (as defined herein); and (ix)
the issuance of the Common Stock and the New Preferred Stock and the
application of the net proceeds therefrom as described under "Use of Proceeds"
(collectively, the "Transactions"). The pro forma balance sheet data as of
September 30, 1998 have been prepared as if each such transaction referred to
in (i) through (ix) above not completed by September 30, 1998 had occurred on
that date. The pro forma adjustments are based upon available information and
certain assumptions that the Company believes are reasonable. The pro forma
consolidated financial data do not purport to present what the Company's
results of operations or financial position would actually have been, or to
project the Company's results of operations or financial position at any future
period.
<TABLE>
<CAPTION>
PERIOD FROM PRO FORMA
INCEPTION AS ADJUSTED
(MAY 3, 1995) PRO FORMA NINE MONTHS NINE MONTHS FOR NINE
THROUGH YEAR ENDED YEAR ENDED AS ADJUSTED ENDED ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997 1997 (A) 1997 1998 1998 (B)
------------- ------------ ------------ ------------ ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Tower rental revenue... $ 733 $ 4,842 $12,881 $40,564 $ 7,981 $ 21,128 $ 34,086
Tower operating
expenses, excluding
depreciation and
amortization.......... 181 1,135 2,633 6,900 1,469 3,966 5,639
------ ------- ------- -------- ------- -------- --------
Gross profit, excluding
depreciation and
amortization.......... 552 3,707 10,248 33,664 6,512 17,162 28,447
Other expenses:
General and
administrative (c).... 306 923 1,385 2,377 882 2,861 3,257
Corporate
development (c)....... 369 1,440 3,772 3,772 2,400 5,213 5,213
Depreciation........... 282 2,041 6,335 32,517 4,370 13,357 25,087
------ ------- ------- -------- ------- -------- --------
Loss from operations... (405) (697) (1,244) (5,002) (1,140) (4,269) (5,110)
Interest expense....... 181 1,155 6,925 3,201 4,378 7,276 5,268
Amortization of
original issue
discount and debt
issuance costs ....... 59 164 292 21,411 186 11,636 16,889
------ ------- ------- -------- ------- -------- --------
Net loss............... (645) (2,016) (8,461) (29,614) (5,704) (23,181) (27,267)
Dividends and accretion
on Preferred Stock.... -- -- -- 20,010 -- 683 15,008
------ ------- ------- -------- ------- -------- --------
Net loss attributable
to Common Stock....... $ (645) $(2,016) $(8,461) $(49,624) $(5,704) $(23,864) $(42,275)
====== ======= ======= ======== ======= ======== ========
Loss per Share of
Common Stock.......... $(6.31) $ (8.10) $(27.28) $ (2.48) $(18.66) $ (59.85) $ (2.11)
Weighted average number
of Shares of Common
Stock................. 102 249 310 20,000 306 399 20,000
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
PERIOD FROM PRO FORMA
INCEPTION AS ADJUSTED
(MAY 3, 1995) PRO FORMA NINE MONTHS NINE MONTHS FOR NINE
THROUGH YEAR ENDED YEAR ENDED AS ADJUSTED ENDED ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997 1997 (A) 1997 1998 1998 (B)
------------- ------------ ------------ ------------ -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER OPERATING DATA:
Tower Level Cash Flow
(d)................... $ 552 $ 3,707 $ 10,248 $ 33,664 $ 6,512 $ 17,162 $28,447
Tower Level Cash Flow
Margin (e)............ 75.3% 76.6% 79.6% 83.0% 81.6% 81.2% 83.5%
Adjusted EBITDA (d).... $ 246 $ 2,784 $ 8,863 $ 31,287 $ 5,630 $ 14,301 $25,190
Adjusted EBITDA Margin
(e)................... 33.6% 57.5% 68.8% 77.1% 70.5% 67.7% 73.9%
EBITDA (d)............. $(123) $ 1,344 $ 5,091 $ 27,515 $ 3,230 $ 9,088 $19,977
EBITDA Margin (e)...... -- 27.8% 39.5% 67.8% 40.5% 43.0% 58.6%
Number of Towers: (f)
Beginning of period.... 0 33 156 -- 156 312 --
Towers acquired during
the period............ 29 119 134 -- 92 484 --
Towers constructed
during the period..... 4 4 22 -- 19 34 --
End of period.......... 33 156 312 -- 267 830 906
<CAPTION>
PRO FORMA
DECEMBER 31, SEPTEMBER 30, AS ADJUSTED
--------------------------------------- --------------------------- SEPTEMBER 30,
1995 1996 1997 1997 1998 1998 (B)
------------- ------------ ------------ ------------ -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents........... $ 31 $ 47 $ 1,694 $ 1,735 $ -- $ --
Tower assets, net...... 11,551 48,327 127,946 109,892 459,593 495,964
Total assets........... 14,573 55,566 143,178 121,390 492,078 528,449
Total debt............. 6,124 30,422 120,582 99,228 415,307 274,567
Mandatorily redeemable
stock:
Senior Preferred
Stock................ -- -- -- -- 28,782 --
New Preferred Stock... -- -- -- -- -- 144,875
Class B Common Stock.. 1,200 1,200 1,761 1,200 1,761 --
Class D Common Stock.. -- -- -- -- -- --
Junior Preferred
Stock................. -- -- -- -- 32,571 --
Common Stock........... -- -- -- -- -- 20
Additional paid-in
capital............... 7,051 24,881 25,876 25,343 35,547 131,977
Stock subscription
receivable............ (180) -- -- -- -- --
Common stock warrants.. -- -- -- -- 1,000 --
Accumulated deficit.... (645) (2,661) (11,123) (8,365) (34,304) (34,304)
------- ------- -------- -------- -------- --------
Stockholders' equity... 6,226 22,220 14,753 16,978 34,814 97,693
</TABLE>
- --------
(a) Reflects the historical amounts adjusted for the effects of tower
acquisitions including the adjustment to show a full year of activity for
134 towers acquired in 1997, the acquisitions of 484 towers completed in
the nine months ended September 30, 1998 (including the Southern Towers
Acquisition of 201 towers and the MobileMedia Acquisition of 166 towers),
the acquisition of 35 towers subsequent to September 30, 1998 and before
December 18, 1998, the probable acquisitions as of December 18, 1998 of 41
towers, the effects of the Recapitalization, the issuance of the Additional
Junior Preferred Stock, the Offerings and the redemption of the Existing
Preferred Stock as further described in "Unaudited Pro Forma Financial
Data."
(b) Reflects the historical amounts adjusted for the effects of the
acquisitions of 484 towers completed in the nine months ended September 30,
1998 (including the Southern Towers Acquisition of 201 towers and the
MobileMedia Acquisition of 166 towers), the acquisition of 35 towers
subsequent to September 30, 1998 and before December 18, 1998, the probable
acquisitions as of December 18, 1998 of 41 towers, the effects of the
Recapitalization, the issuance of the Additional Junior Preferred Stock,
the Offerings and the redemption of the Existing Preferred Stock as further
described in "Unaudited Pro Forma Financial Data."
(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 the development of new business
initiatives, and consists primarily of allocated compensation, benefits and
overhead costs that are not directly related to the administration or
management of existing towers.
13
<PAGE>
(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, not including the effect
of accretion and accrued dividends on Existing Preferred Stock and New
Preferred Stock. 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 or as an
indication of the Company's operating performance. Moreover, Tower Level
Cash Flow, Adjusted EBITDA and EBITDA is not a standardized measure and may
be calculated in a number of ways. Accordingly, the Tower Level Cash Flow,
Adjusted EBITDA and EBITDA information provided may not be comparable to
other similarly titled measures provided by other companies.
(e) Represents Tower Level Cash Flow, Adjusted EBITDA and EBITDA each as a
percentage of tower rental revenue.
(f)Includes towers managed by the Company, which at September 30, 1998 were 29
towers.
14
<PAGE>
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. Prospective investors should carefully consider the following risk
factors, in addition to the other information contained in this Prospectus,
before purchasing the Common Stock offered hereby. This Prospectus contains
forward-looking statements within the meaning of the federal securities laws.
Discussions containing such forward-looking statements may be found in the
material set forth below and under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," as well as in
the Prospectus generally. The words "believe," "estimate," "expect," "intend,"
"anticipate," "plan," and similar expressions and variations of such
expressions identify certain of such forward-looking statements that speak
only as of the dates on which they were made. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of
future performance and involve risks and uncertainties. Actual events or
results may differ materially from those discussed in the forward-looking
statements as a result of various factors, including, without limitation, the
risk factors set forth below and the matters set forth in this Prospectus
generally.
SUBSTANTIAL INDEBTEDNESS; ABILITY TO SERVICE INDEBTEDNESS AND SATISFY NEW
PREFERRED STOCK OBLIGATIONS
The Company has a significant amount of indebtedness. As of September 30,
1998, on a pro forma basis, after giving effect to the Transactions, the
Company would have had approximately $273.9 million of consolidated long-term
debt outstanding, $144.9 of redeemable preferred stock (the "New Preferred
Stock"), stockholders' equity of approximately $97.7 million, a ratio of debt
to equity (excluding redeemable stock) of 2.8 to 1.0 and a ratio of debt and
redeemable preferred stock to common equity of 4.3 to 1.0. Subject to the
restrictions in the Senior Credit Facility, an indenture (the "Indenture")
under which the Company issued its 10% senior discount notes due 2008 (the
"Senior Discount Notes") and the certificate of designations governing the New
Preferred Stock (the "Certificate of Designations"), the Company expects to
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
stockholders, 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; (iii) the Company's leveraged
position and covenants contained in the Indenture, the Senior Credit Facility
and the Certificate of Designations could limit its ability to expand and make
capital improvements and acquisitions; (iv) the Indenture, the Senior Credit
Facility and the Certificate of Designations contain restrictive covenants,
including covenants that restrict or prohibit the payment of dividends or
other distributions by the Company to its stockholders; and (v) 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 and pay cash dividends
on, and satisfy its redemption obligations in respect to, the New Preferred
Stock 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 or make required cash payments
with respect to the New Preferred Stock, 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
15
<PAGE>
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 and the implementation of any of these alternative strategies
could have a negative impact on the value of the Common Stock.
The Senior Credit Facility, the Indenture and the Certificate of
Designations 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 these
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 interest, to be immediately due and payable. This could also
result in the triggering of cross-default or cross-acceleration provisions in
other instruments, thereby permitting acceleration of the maturity of
additional indebtedness. 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.
Substantially all the assets of the Company are pledged as security under the
Senior Credit Facility. See "Description of Certain Indebtedness." The Senior
Credit Facility, the Indenture and the Certificate of Designations each limit
the ability of the Company to pay dividends on its Common Stock, other than
the payment of dividends required to maintain the Company's status as a REIT.
Until March 15, 2003, the Company's interest expense on the Senior Discount
Notes will consist solely of the accretion of original issue discount.
Thereafter, the Senior Discount Notes will require annual cash interest
payments of $32.5 million. For all dividend payment dates through and
including , 2004, the Company may elect to pay dividends on the New
Preferred Stock by issuing additional shares of New Preferred Stock with an
aggregate liquidation preference equal to the amount of such dividends. The
Company's ability to make scheduled payments of principal of, or to pay
interest on, its debt obligations and satisfy its redemption obligations with
respect to the New Preferred Stock and its ability to refinance any such
obligations, 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 the 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 may need to refinance all or a portion of its indebtedness 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 on commercially
reasonable terms or at all.
POTENTIAL NEED FOR ADDITIONAL FINANCING
The Company's business plan is materially dependent upon the acquisition of
additional suitable towers at prices the Company considers reasonable in light
of the revenue it believes it will be able to generate from such towers when
acquired. The Company may require significant additional capital to finance
future acquisitions as well as its tower construction plan and other capital
expenditures. During 1996, 1997 and the first nine months of 1998, the Company
made capital investments aggregating approximately $42.2 million, $88.4
million and $349.0 million, respectively, in tower acquisitions, site upgrades
and new tower construction. The Company estimates capital expenditures in each
of 1999 and 2000 to be approximately $150.0 million. The Company historically
has financed its capital expenditures through a combination of borrowings
under bank credit facilities, the Senior Notes
16
<PAGE>
Offering, bridge financings, equity issuances, seller financing and cash flow
from operations. Significant additional acquisition or tower construction
opportunities will create a need for additional capital financing. 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 Senior Credit
Facility or otherwise. There can be no assurance that adequate funding will be
available as needed or, if available, on terms acceptable to the Company or
permitted under the terms of its existing indebtedness. Additional debt
financing could have important consequences to the holders of Common Stock.
See "--Substantial Indebtedness; Ability to Service Indebtedness and Satisfy
New Preferred Stock Obligations." If additional funds are raised by issuing
equity securities, existing stockholders may experience dilution. Insufficient
available funds may require the Company to scale back or eliminate some or all
of its planned expansion. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
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 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 some of which have greater financial and other
resources than the Company. Increased demand for acquisitions 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 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 "--Substantial Indebtedness;
Ability to Service Indebtedness and Satisfy New Preferred Stock Obligations."
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,
increased leverage and debt service requirements, combining disparate company
cultures and facilities and operating towers in geographically diverse
markets. Accordingly, there can be no assurance that one or more of the
Company's past or future acquisitions may not have a material adverse effect
on the Company's financial condition and results of operations.
RISKS ASSOCIATED WITH ACQUIRING REAL PROPERTY
The Company's real property interests relating to its tower sites consist of
fee interests, leasehold interests, private easements and licenses, easements
and rights-of-way. The Company generally obtains title insurance on fee
properties it acquires and relies on title warranties from sellers. The
Company's ability to protect its rights against persons claiming superior
rights in tower sites depends on the Company's ability to (i) recover under
title policies, the policy limits of which may be less than the purchase price
of the particular site; (ii) in the absence of insurance coverage, realize on
title warranties given by the sellers, which warranties often terminate after
the expiration of a specific period, typically one to three years; and (iii)
realize on title covenants from landlords contained in leases.
CUSTOMER CONCENTRATION
The Company has certain customers that account for a significant portion of
its revenue. Southern Communications and its affiliates and MobileMedia
Communications and certain of its
17
<PAGE>
affiliates would have accounted for approximately 12.9% and 26.3%,
respectively, of the Company's revenue, on a pro forma basis, for the nine
months ended September 30, 1998. Southern Communications holds leases with
initial terms of 10 years each. The Master Lease (as defined herein) has an
initial term of 15 years. The loss of one or more of these major customers, or
a reduction in their utilization of the Company's tower rental space due to
their insolvency or other inability or unwillingness to pay, could have a
material adverse effect on the Company's business, results of operations and
financial condition.
Because MobileMedia and certain of its affiliates are currently seeking
reorganization of its business under bankruptcy laws, after emerging from
bankruptcy, there can be no assurance that MobileMedia Communications will be
able to manage its operations successfully and meet its obligations under the
Master Lease nor can there be any assurance regarding who will control
MobileMedia Communications in the future. In the event of a default by
MobileMedia Communications as to the payment of rent, the Company has the
right to terminate the Master Lease with respect to either a particular site
space or all site spaces. Any default by MobileMedia Communications with
respect to some or all of the site spaces covered by the Master Lease, could
have a material adverse effect on the Company's business, operating results
and financial position.
BARRIERS TO NEW CONSTRUCTION
As of September 30, 1998, the Company had four towers under construction and
11 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.
Additionally, there can be no assurance that build opportunities will become
available that meet the Company's economic criteria. 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 have a material adverse effect on the Company's business, 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 that acquire space
on existing towers for wireless communications providers and manage new tower
construction, other 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.
DEPENDENCE ON THE WIRELESS COMMUNICATIONS INDUSTRY
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
18
<PAGE>
wireless communications services. 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 7 for PCS) within a geographic
market competing for subscribers. The demand for rental space on the Company's
towers 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.
Advances in technology could also reduce the need for tower-based transmission
and reception. In addition, wireless services providers often enter into
"roaming" and "resale" arrangements that permit providers to serve customers
in areas where they do not have facilities. Specifically, in most cases, these
arrangements are intended to permit a provider's customers to obtain service
in areas outside the provider's license area or, in the case of resale
arrangements, to permit a provider that does not have any licenses to enter
the wireless marketplace. Current FCC rules, which are subject to sunset
requirements that vary from service to service and market to market, also give
licensed wireless service providers the right to enter into roaming and resale
arrangements with other providers licensed to serve overlapping service areas.
Such roaming and resale arrangements could be viewed by some wireless service
providers as superior alternatives to constructing their own facilities or
leasing space on communications sites owned by the Company. If such
arrangements were to become common, there could be a material adverse effect
on the Company's prospects, financial condition and results of operations. See
"Business--Industry Background." 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.
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. 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
19
<PAGE>
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.
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."
RISK ASSOCIATED WITH NEW TECHNOLOGIES
The emergence of new technologies could reduce the need for tower-based
transmission and reception and, thereby, have a negative impact on the
Company's operations. For example, the FCC has granted license applications
for several low-earth orbiting satellite systems that are intended to provide
mobile voice and/or data services. Although such systems are highly capital-
intensive and are not yet commercially tested, mobile satellite systems could
compete with land-based wireless communications systems, thereby reducing the
demand for the infrastructure services provided by the Company. Additionally,
the growth in delivery of video services by direct broadcast satellites and
the development and implementation of signal combining technologies (which
permit one antenna to service two different frequencies of transmission and,
thereby, two customers) and satellite-delivery systems may reduce the need for
tower-based broadcast transmission. The occurrence of any of these factors
could have a material adverse effect on the Company's prospects, financial
condition and results of operations.
ENVIRONMENTAL MATTERS
The Company's operations and its ownership or leasing of real property 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 jointly
and severally liable for the remediation of hazardous substance contamination
at its facilities or at third-party waste disposal sites regardless of fault
or the legality of the original disposal and could also be held liable for any
personal injury or property damage related to such contamination. Although the
Company is not presently aware of any material environmental liabilities
pertaining to its operation, ownership or use of real property, there can be
no assurance that liability under, or 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."
20
<PAGE>
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, fires 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.
CONTROLLING STOCKHOLDER
After the Offerings, ABRY Broadcast Partners II, L.P. ("ABRY II") the
Company's primary stockholder, will hold approximately 41.0% of the Company's
outstanding voting stock and will control four of seven seats on the Board of
Directors. Therefore, ABRY II has the power to exercise control over the
business, policies and affairs of the Company. See "Certain Relationships and
Transactions."
Purchasers of Common Stock offered hereby will become minority stockholders
of the Company and will be unable to control the management or business
policies of the Company. Moreover, subject to contractual restrictions and
general fiduciary duties, the Company is not prohibited from engaging in
transactions with management and principal stockholders, or with entities in
which such persons are interested. The Company's certificate of incorporation
does not provide for cumulative voting.
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."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of shares of Common Stock in the public market after the Common Stock
Offering under Rule 144 under the Securities Act or otherwise, or the
perception that such sales could occur, may adversely affect prevailing market
prices of the Common Stock and could impair the future ability of the Company
to raise capital through an offering of its equity securities or to consummate
acquisitions using Common Stock as consideration. The Company and its officers
and directors have agreed, subject to certain exceptions, not to offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock, or any
securities convertible into or exercisable or exchangeable for Common Stock,
for a period of 180 days after the date of this Prospectus without the prior
written consent of Goldman, Sachs & Co. See "Shares Eligible for Future Sale"
and "Underwriting."
ANTI-TAKEOVER EFFECT OF CHARTER PROVISIONS, BYLAWS AND STATE LAW
The Company's certificate of incorporation and bylaws as well as Delaware
law contain provisions that may have the effect of inhibiting a non-negotiated
merger or other business combination. These
21
<PAGE>
provisions are intended to encourage a person interested in acquiring the
Company to negotiate with, and to obtain the approval of, the Board of
Directors in connection with the transaction. However, certain of these
provisions may discourage a future acquisition of the Company, including an
acquisition in which stockholders might otherwise receive a premium for their
shares. As a result, stockholders who might desire to participate in such a
transaction may not have the opportunity to do so. Additionally, because the
Company wishes to retain its status as a REIT, there are certain restrictions
on transfers of both the Common Stock and the Preferred Stock. See
"Description of Capital Stock--Certain Provisions of the Company's Certificate
of Incorporation and Bylaws" and "--Certain Provisions of Delaware Law."
After giving effect to the Recapitalization, in addition to its authorized
shares of Common Stock, the Company will be authorized to issue up to
5,000,000 shares of preferred stock, $.001 par value (the "Preferred Stock"),
of which 150,000 shares are being issued as New Preferred Stock. The Board of
Directors has the authority to determine the price, rights, preferences,
privileges and restrictions, including the voting rights of those shares,
without any further vote or action by the stockholders. The rights of holders
of Common Stock will be subject to, and may be adversely affected by, the
rights of holders of any additional Preferred Stock that may be issued in the
future. The issuance of additional Preferred Stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party
to acquire a majority of the outstanding voting stock of the Company.
NO PRIOR PUBLIC MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to the Common Stock Offering, there has been no public market for the
Common Stock, and there can be no assurance that an active trading market will
develop or continue following the Common Stock Offering, or that the market
price of the Common Stock will not decline below the initial public offering
price. The initial public offering price for the Common Stock will be
determined by negotiations among the Company and the Underwriters based on
several factors, and may not be indicative of the market price for the Common
Stock after the Common Stock Offering. See "Underwriting."
The Company believes that various factors, such as general economic
conditions and changes or volatility in the financial markets, announcements
or significant developments with respect to the wireless communications
industry, actual or anticipated variations in the Company's quarterly or
annual financial results, the introduction of new services by the Company or
its competitors, changes in or other trends in the Company's industry or in
the industries of any of the Company's significant customers, changes in
governmental regulation or changes in securities analysts' estimates of the
Company's future performance or that of its competitors or its industry, could
cause the market price of the Common Stock to fluctuate substantially.
DILUTION
Investors purchasing Common Stock in the Common Stock Offering will incur
immediate dilution in net tangible book value of $10.71 per share (assuming an
initial public offering price of $15.00 per share, the midpoint of the range
set forth on the cover page of this Prospectus). See "Dilution."
REIT STATUS
The Company has elected to be taxed as a Real Estate Investment Trust
("REIT") under Sections 856-860 of the Internal Revenue Code of 1986 (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 currently 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 qualification as a REIT during
each taxable year (including prior years) will depend upon
22
<PAGE>
its ability to meet these requirements, through various factual matters and
circumstances not entirely within the Company's control, including actual
annual operating results, income distribution levels, stock ownership
requirements and tests relating to the Company's assets and sources of income.
Although the Company has not requested, and does not expect to request, a
ruling from the Service that it qualifies as a REIT, it has received an
opinion of its counsel that, based on certain assumptions and representations,
it so qualifies. Investors should be aware, however, that opinions of counsel
are not binding on the Service or any court. The REIT qualification opinion
only represents the view of counsel to the Company based on counsel's review
and analysis of existing law, which includes no controlling precedent.
Furthermore, both the validity of the opinion and the qualification of the
Company as a REIT will depend on the Company's continuing ability to meet
various requirements concerning, among other things, the ownership of its
outstanding stock, the nature of its assets, the sources of its income, and
the amount of its distributions to its stockholders. 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. In addition, no assurance can be
given that new legislation, regulation, administrative interpretation or court
decision will not change the requirements with respect to the Company's
qualification as a REIT or the federal income tax consequences of such
qualification. The Company is not, however, aware of any currently pending tax
legislation that would adversely affect its ability to continue to qualify as
a REIT. See "Certain Federal Income Tax Considerations" for a more detailed
discussion of the opinion of counsel and the requirements for qualification 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. Further, if the Company fails to qualify as a
REIT, the Company will be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at corporate rates
unreduced by distribution to stockholders, together with interest and
penalties. However, because the Company has not reported any net taxable
income (determined before the deduction of dividends) in its corporate income
tax returns following its filing of its election to be a REIT, unless its
reported net taxable losses are adjusted, the risk of any corporate income tax
liability with regard to prior periods would be minimal. However, with respect
to any year in which the Company recognizes positive taxable income, the loss
of REIT status may have a material adverse effect on the Company's financial
condition or results from operations. In addition, unless entitled to relief
under certain statutory provisions, the Company will also be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification is lost. This treatment would reduce the net earnings of the
Company available for investment or distribution to shareholders because of
the additional tax liability to the Company for the year or years involved.
Also, distributions would no longer be required to be made. To the extent that
distributions to shareholders would have been made in anticipation of the
Company's qualifying as a REIT, the Company might be required to borrow funds
or to liquidate certain of its investments to pay the applicable tax. Failing
to qualify as a REIT would also constitute a default under certain debt
obligations of the Company which would cause the obligations to become due and
would have a negative impact on the Company's operating results and its
ability to pay dividends. See "Certain Federal Income Tax Considerations" 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.
23
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offerings (after deducting
underwriting discounts and commissions and the estimated expenses of the
Offerings payable by the Company), assuming an initial public offering price
of $15.00 per share for the Common Stock, will be approximately $284.1 million
(approximately $305.1 million if the Underwriters' over-allotment options are
exercised in full).
The Company intends to use such net proceeds of the Offerings as follows:
(i) approximately $30.3 million to redeem the outstanding shares of the Senior
Preferred Stock; (ii) approximately $59.1 million to redeem the outstanding
shares of the Junior Preferred Stock; (iii) $15.1 million, including accrued
interest, to repay in full and retire the ABRY Bridge Loan; (iv) approximately
$43.7 million to be distributed to certain stockholders in connection with the
Recapitalization to occur upon the closing of the Common Stock Offering and
(v) approximately $135.9 million to repay outstanding borrowings under the
Senior Credit Facility.
The Company has entered into a senior credit facility with NationsBank,
N.A., Goldman, Sachs Credit Partners L.P. and certain other lenders (the
"Senior Credit Facility") that provides a revolving line of credit for
borrowings, repayments and reborrowings of up to $250.0 million, of which
$200.0 million is currently committed. Beginning on March 31, 2000 the
availability under the revolving line of credit starts reducing by specific
amounts on a quarterly basis until December 31, 2005 when the availability
will be reduced to zero. Loans under the Senior Credit Facility bear 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 2.0% or the 90-day London
Interbank Offered Rate ("LIBOR") plus a margin ranging from 0% to 3.0%.
Outstanding borrowings under the Senior Credit Facility amounted to $169.8
million at September 30, 1998. Advances under the Senior Credit Facility have
been used primarily to fund acquisitions and construction of towers. Upon the
closing of the Offerings, outstanding borrowings and availability under the
Senior Credit Facility would be approximately $44.1 million and $138.9
million, respectively, after giving effect to (i) repayment of $135.9 million
of outstanding borrowings with a portion of the proceeds of the Offerings and
(ii) consideration of $17.0 million of outstanding letters of credit which
reduce availability under the Senior Credit Facility.
In September 1998, the Company borrowed $15.0 million from ABRY II (the
"ABRY Bridge Loan") to partially finance the MobileMedia Acquisition. The ABRY
Bridge Loan bears interest at a rate of 9.0%. Interest and principal under the
ABRY Bridge Loan are payable within one year from the date of borrowing.
Pending such uses, the Company intends to invest the net proceeds of the
Offerings in short-term, investment grade, interest bearing securities or
money market instruments. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Business--The Pinnacle Approach to the Tower Rental Industry--
Business and Growth Strategy."
24
<PAGE>
DILUTION
As of September 30, 1998, the Company had a pro forma negative net tangible
book value related to common stockholders of approximately $(51.6) million or
$(5.16) per share of Common Stock. Pro forma net tangible book value per
common share represents the amount of total tangible assets less total
liabilities and Preferred Stock, after giving effect to the Recapitalization
divided by the number of shares of Common Stock outstanding, including all
outstanding stock grants and excluding all outstanding stock options. Without
taking into account any other changes in the pro forma net tangible book value
after September 30, 1998, other than to give effect to the receipt by the
Company of the net proceeds from the sale of 10,000,000 shares of Common Stock
offered by the Company hereby (assuming an initial public offering price of
$15.00 per share), the pro forma net tangible book value of the Company as of
September 30, 1998 would have been approximately $85.8 million or $4.29 per
common share. This represents an immediate increase in pro forma net tangible
book value of $9.45 per common share to existing stockholders and an immediate
dilution of $10.71 per common share to new investors. The following table
illustrates this per common share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per common share....... $15.00
------
Pro forma net tangible book value per common share at
September 30, 1998........................................ $(5.16)
Increase per common share attributable to new investors.... 9.45
------
Pro forma net tangible book value per common share after the
Common Stock Offering....................................... 4.29
------
Pro forma net tangible book value dilution per common share
to new investors............................................ $10.71
======
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1998, the differences between existing stockholders and the new investors with
respect to the number of shares of Common Stock purchased from the Company,
the total consideration paid (assuming an initial public offering price of
$15.00 per share) and the average price per share paid:
<TABLE>
<CAPTION>
TOTAL WEIGHTED
SHARES PURCHASED (1) CONSIDERATION AVERAGE
------------------------------------ PRICE PER
NUMBER PERCENT AMOUNT SHARE (2)
------------ ----------------------- ---------
<S> <C> <C> <C> <C>
Existing common stockhold-
ers...................... 10,000,000 50.0% $ (5,224,400) $(0.52)
New common stockholders... 10,000,000 50.0 150,000,000 15.00
------------ ------- ------------
Total................... 20,000,000 100.0% $144,775,600
============ ======= ============
</TABLE>
- --------
(1) These computations assume no exercise of any outstanding stock options or
of the Underwriters' over-allotment options. As of September 30, 1998,
there were no options to purchase Common Stock outstanding. See
"Management--Stock Incentive Plan." To the extent that any stock options
or the Underwriters' over-allotment options are exercised, there will be
further dilution to new investors. See "Underwriting" for information
concerning the Underwriters' over-allotment options.
(2) In connection with the Offerings, the Company will pay $43.7 million to
the existing stockholders, which represents a return of capital
contributed of $38.9 million plus $4.8 million, which amount equals the
amount of the yield on the contributed capital from the date of its
contribution through June 30, 1997. Because of the Recapitalization, the
calculated weighted average price per share is negative.
25
<PAGE>
DIVIDEND POLICY
In order to qualify as a REIT for federal income tax purposes, among other
things, the Company must make distributions each taxable year (not including
any return of capital for federal income tax purposes) equal to at least 95%
of its real estate investment trust taxable income, although the Board of
Directors, in its discretion, may increase that percentage as it deems
appropriate. See "Certain Federal Income Tax Considerations--Requirements for
REIT Qualification--Distribution Requirements." The declaration of
distributions is within the discretion of the Board of Directors and depends
upon the Company's cash available for distribution, current and projected cash
requirements, tax considerations and other factors.
The Company intends to make distributions to holders of the Common Stock
only in the minimum amount necessary to satisfy the REIT distribution
requirements necessary to maintain REIT status and intends to retain available
cash in excess of such amount for future operation and expansion of the
Company's business. In this regard, the Company does not expect for the
foreseeable future that it will have real estate investment trust taxable
income which will be required to be distributed in order to maintain its REIT
status. See "Certain Federal Income Tax Considerations--Requirements for REIT
Qualification--Distribution Requirements." Any determination to declare or pay
dividends in the future will be at the discretion of the Company's Board of
Directors and will depend on the Company's results of operations, financial
condition and any contractual restrictions, considerations imposed by
applicable law and other factors deemed relevant by the Board of Directors.
The Senior Credit Facility, Indenture and Certificate of Designations
currently limit the ability of the Company to make cash distributions, in each
case except for such distributions necessary to maintain its REIT status. See
"Risk Factors--Substantial Indebtedness; Ability to Service Indebtedness and
Satisfy New Preferred Stock Obligations."
26
<PAGE>
CAPITALIZATION
The following table sets forth: (i) the actual capitalization (including
short-term debt) of the Company as of September 30, 1998; (ii) the pro forma
capitalization of the Company after giving effect to (A) all acquisitions
completed after September 30, 1998 and all other individually immaterial
acquisitions of rental towers for which the Company has entered into letters
of intent to acquire as of December 18, 1998 (the acquisitions of which the
Company believes are probable), (B) the effects of the Recapitalization and
(C) the effect of the issuance of the Additional Junior Preferred Stock; and
(iii) the pro forma as adjusted capitalization of the Company after giving
effect to the pro forma adjustments set forth in clause (ii) above, the
Offerings and the application of the proceeds thereof, as described in "Use of
Proceeds," as if each had been completed on September 30, 1998. This table
should be read in conjunction with the information contained in the "Unaudited
Pro Forma Financial Data" and the Company's consolidated financial statements
and the related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
---------------------------------
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED(1)
-------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt:
Current portion of notes payable............. $ 664 $ 664 $ 664
ABRY Bridge Loan............................. 15,000 15,000 --
-------- -------- --------
Total current maturities..................... 15,664 15,664 664
Long-term debt, net of current maturities:
Senior Credit Facility....................... 169,800 223,664 44,060
Senior Discount Notes........................ 210,598 210,598 210,598
Notes payable(2)............................. 19,245 19,245 19,245
-------- -------- --------
Total long-term debt......................... 399,643 453,507 273,903
-------- -------- --------
Redeemable stock:
Senior Preferred Stock....................... 28,782 28,782 --
Class B Common Stock, $0.001 par value,
12,000 shares authorized; 12,000 issued and
outstanding on an actual basis.............. 1,761 -- --
Class D Common Stock, $0.001 par value,
100,000 shares authorized; 40,000 issued and
outstanding on an actual basis.............. -- -- --
New Preferred Stock.......................... -- -- 144,875
-------- -------- --------
Total redeemable stock....................... 30,543 28,782 144,875
-------- -------- --------
Stockholders' equity(3):
Junior Preferred Stock, redeemable, 14%
dividends, $.001 par value; 100 shares
authorized; 32.85 shares issued and
outstanding on an actual basis and 59.05
shares issued and outstanding on a pro forma
basis....................................... 32,571 58,816 --
Class A Common Stock, $0.001 par value,
202,500 shares authorized; 202,500 issued
and outstanding on an actual basis.......... -- -- --
Class E Common Stock, $0.001 par value,
302,500 shares authorized; 174,766 issued
and outstanding on an actual basis.......... -- -- --
Common Stock, $0.001 par value, 100,000,000
shares authorized; 10,000,000 shares issued
and outstanding on a pro forma basis;
20,000,000 shares issued on a pro forma as
adjusted basis.............................. -- 10 20
Common Stock Warrants(4)..................... 1,000 1,000 --
Additional paid-in capital................... 35,547 (6,440) 131,977
Accumulated deficit.......................... (34,304) (34,304) (34,304)
-------- -------- --------
Total stockholders' equity................... 34,814 19,082 97,693
-------- -------- --------
Total capitalization........................ $480,664 $517,035 $517,135
======== ======== ========
</TABLE>
- --------
(1) As adjusted to give effect to the sale by the Company of the Common Stock
at an assumed offering price of $15.00 per share and the sale of the New
Preferred Stock.
(2) Notes payable consists 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.
(3) Does not include approximately 2,000,000 shares of Common Stock reserved
for issuance in connection with incentive stock options expected to be
granted at the time of the Common Stock Offering.
(4) These warrants were issued in connection with the issuance of the Senior
Preferred Stock. The warrants are not exercisable prior to March 3, 2000.
If the Senior Preferred Stock is redeemed prior to March 3, 2000, such
warrants are not exercisable and are cancelled.
27
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The Unaudited Pro Forma Consolidated Balance Sheet at September 30, 1998
gives pro forma effect to: (i) the acquisition of individually immaterial
rental tower businesses completed by the Company in the period subsequent to
September 30, 1998 through December 18, 1998; (ii) other individually
immaterial acquisitions of rental tower businesses for which the Company has
entered into agreements or letters of intent to acquire as of December 18,
1998, and that the Company believes are probable; (iii) the related financing
of the acquisitions referred to in (i) and (ii) above; (iv) the
Recapitalization; and (v) the Offerings and the application of the net
proceeds therefrom as described under "Use of Proceeds," as if each had
occurred as of September 30, 1998.
The Unaudited Pro Forma Consolidated Statements of Operations for the year
ended December 31, 1997 and the nine months ended September 30, 1998 give pro
forma effect to: (i) the Southern Towers Acquisition; (ii) the MobileMedia
Acquisition; (iii) acquisitions of other rental tower businesses by the
Company completed during the period January 1, 1997 through December 18, 1998,
in addition to the Southern Towers Acquisition and the MobileMedia
Acquisition; (iv) other individually immaterial acquisitions of rental tower
businesses for which the Company has entered into agreements or letters of
intent to acquire as of December 18, 1998, and that the Company believes are
probable; (v) the related financing of the acquisitions referred to in (i)
through (iv) above; (vi) the Senior Notes Offering; (vii) the
Recapitalization; and (viii) the Offerings and the application of the net
proceeds therefrom as described under "Use of Proceeds"; as if each had
occurred as of January 1, 1997.
The Company accounts for its acquisitions under the purchase method of
accounting. The total cost of rental tower businesses acquired including
related fees and expenses is allocated to the underlying tangible and
intangible assets acquired and liabilities assumed based on their respective
fair values. The purchase price allocations for the respective acquisitions
included in the unaudited pro forma data are preliminary. However, the Company
does not expect that the final allocation of the purchase price will be
materially different from its preliminary allocation.
The unaudited pro forma financial data are provided for informational
purposes only and are not necessarily indicative of the results of operations
or financial position of the Company had the transactions assumed therein
occurred, nor are they necessarily indicative of the results of operations
which may be expected to occur in the future. There can be no assurance
whether or when any of the probable acquisitions reflected in the unaudited
pro forma data will be completed. Furthermore, the unaudited pro forma
financial data are based upon assumptions that the Company believes are
reasonable and should be read in conjunction with the financial statements and
the accompanying notes thereto included elsewhere in this Prospectus.
28
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS FOR
ACQUISITIONS
PINNACLE COMPLETED
HOLDINGS SUBSEQUENT TO ADJUSTMENTS ADJUSTMENTS
SEPTEMBER 30, SEPTEMBER 30, FOR PROBABLE OTHER PRO FOR THE PRO FORMA
1998 1998 (A) ACQUISITIONS (A) ADJUSTMENTS FORMA OFFERINGS AS ADJUSTED
------------- --------------- ---------------- ----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Accounts receivable... 2,146 -- -- -- 2,146 -- 2,146
Prepaid expenses and
other current
assets............... 1,032 -- -- -- 1,032 -- 1,032
-------- ------- ------- ------- -------- -------- --------
Total current assets.. 3,178 -- -- -- 3,178 -- 3,178
Restricted cash....... 61 -- -- -- 61 -- 61
Tower assets, net..... 459,593 11,528 24,843 -- 495,964 -- 495,964
Fixed assets, net..... 2,311 -- -- -- 2,311 -- 2,311
Land.................. 13,862 -- -- -- 13,862 -- 13,862
Deferred debt costs,
net.................. 11,849 -- -- -- 11,849 -- 11,849
Other assets.......... 1,224 -- -- -- 1,224 -- 1,224
-------- ------- ------- ------- -------- -------- --------
$492,078 $11,528 $24,843 -- $528,449 $ -- $528,449
======== ======= ======= ======= ======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...... $ 2,890 $ -- $ -- $ -- $ 2,890 $ -- $ 2,890
Accrued expenses...... 7,374 -- -- -- 7,374 (100)(e) 7,274
Deferred revenue...... 1,038 -- -- -- 1,038 -- 1,038
Current portion of
long-term debt........ 15,664 -- -- -- 15,664 (15,000)(e) 664
-------- ------- ------- ------- -------- -------- --------
Total current
liabilities........... 26,966 -- -- -- 26,966 (15,100) 11,866
Long-term debt......... 399,643 11,528 24,843 17,493 (g)(h) 453,507 (179,604)(d)(f) 273,903
Other liabilities...... 112 -- -- -- 112 -- 112
-------- ------- ------- ------- -------- -------- --------
426,721 11,528 24,843 17,493 480,585 (194,704) 285,881
-------- ------- ------- ------- -------- -------- --------
REDEEMABLE STOCK:
Senior Preferred
Stock................. 28,782 -- -- -- 28,782 (28,782)(b) --
New Preferred Stock.... -- -- -- -- -- 144,875 (c) 144,875
Class B Common Stock... 1,761 -- -- (1,761)(g) -- -- --
Class D Common Stock... -- -- -- -- -- -- --
-------- ------- ------- ------- -------- -------- --------
30,543 -- -- (1,761) 28,782 116,093 144,875
-------- ------- ------- ------- -------- -------- --------
STOCKHOLDERS' EQUITY:
Junior Preferred
Stock................. 32,571 -- -- 26,245 (h) 58,816 (58,816)(b) --
Common Stock........... -- -- -- 10 (g) 10 10 (c) 20
Common stock warrants.. 1,000 -- 1,000 (1,000)(b) --
Additional paid-in
capital............... 35,547 -- -- (41,987)(g) (6,440) 139,240 (c)
(823)(b) 131,977
Accumulated deficit.... (34,304) -- -- -- (34,304) -- (34,304)
-------- ------- ------- ------- -------- -------- --------
Total stockholders'
equity............... 34,814 -- -- (15,732) 19,082 78,611 97,693
-------- ------- ------- ------- -------- -------- --------
$492,078 $11,528 $24,843 $ -- $528,449 $ -- $528,449
======== ======= ======= ======= ======== ======== ========
</TABLE>
See accompanying notes to Unaudited Pro Forma Consolidated Balance Sheet
29
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
(a) Reflects the Company's preliminary allocation of purchase price in
accordance with the purchase method of accounting for individually
immaterial acquisitions of rental tower assets, and the related debt
financing under the Senior Credit Facility, as follows:
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF NUMBER OF PURCHASE
ACQUISITIONS (1) TOWERS PRICE (2)
---------------- --------- ---------
<S> <C> <C> <C>
(i) Acquisitions of individually
immaterial rental tower businesses
completed by the Company in the
period October 1, 1998 through
December 18, 1998................. 19 35 $11,528
(ii) Other individually immaterial
acquisitions of rental tower
businesses for which the Company
has entered into agreements or
letters of intent to acquire as of
December 18, 1998, and which the
Company believes are probable..... 18 41 $24,843
</TABLE>
--------
(1) Includes the completed acquisitions of two undeveloped zoned tower
sites.
(2) Includes estimated fees and expenses related to the acquisitions of
$478, and $952, respectively.
(b) Adjusted to give effect to the repayment of the Junior Preferred Stock,
the Senior Preferred Stock and the cancellation of the related warrants.
(c) Reflects the estimated net proceeds of the Offerings to the Company of
$144,875 of mandatorily redeemable Preferred Stock and $139,250 of Common
Stock, net of the estimated underwriting discounts and commissions and
offering expenses totaling $15,875.
(d) Represents the use of a portion of the net proceeds from the Offerings to
pay the applicable distribution preference and yield to holders of Class A
Common Stock, Class B Common Stock and Class E Common Stock.
(e) Reflects the use of a portion of the net proceeds from the Offerings to
repay the outstanding balance of the ABRY Bridge Loan and accrued interest
thereon, as required under the ABRY Bridge Loan.
(f) Reflects the use of the remaining net proceeds from the Offerings to repay
a portion of the Senior Credit Facility.
(g) Reflects the effects of the Recapitalization.
(h) Reflects the effects of the issuance of the Additional Junior Preferred
Stock.
30
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADJUSTMENTS
PINNACLE ADJUSTMENTS FOR ADJUSTMENTS ADJUSTMENTS PRO
HOLDINGS FOR SOUTHERN FOR FOR FORMA ADJUSTMENTS
DECEMBER 31, COMPLETED TOWERS MOBILEMEDIA PROBABLE FOR FOR
1997 ACQUISITIONS (A) ACQUISITIONS (B) ACQUISITION (C) ACQUISITION (D) ACQUISITIONS OFFERINGS
------------ ---------------- ---------------- --------------- --------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Tower rental
revenue......... $12,881 $ 7,580 $ 4,780 $ 13,155 $ 2,168 $ 40,564 $ --
Tower operating
expenses
excluding
depreciation and
amortization.... 2,633 1,466 1,058 1,332 411 6,900 --
------- -------- -------- -------- ------- -------- --------
Gross profit
excluding
depreciation and
amortization.... 10,248 6,114 3,722 11,823 1,757 33,664 --
Other expenses:
General and
administrative.. 1,385 293 90 609 -- 2,377 --
Corporate
development.... 3,772 -- -- -- -- 3,772 --
Depreciation.... 6,335 7,342 5,730 11,454 1,656 32,517 --
------- -------- -------- -------- ------- -------- --------
11,492 7,635 5,820 12,063 1,656 38,666 --
Loss from
operations...... (1,244) (1,521) (2,098) (240) 101 (5,002) --
Interest
expense......... 6,925 9,361 (9,450) 7,077 2,112 16,025 (12,824)(e)(f)
Amortization of
original issue
discount and
debt issuance
costs........... 292 -- 21,119 -- -- 21,411 --
------- -------- -------- -------- ------- -------- --------
Net loss......... (8,461) (10,882) (13,767) (7,317) (2,011) (42,438) 12,824
Dividends and
accretion on
Preferred
Stock........... -- -- -- 9,532 (g) -- 9,532 10,478 (k)
------- -------- -------- -------- ------- -------- --------
Net loss
attributable to
Common Stock.... $(8,461) $(10,882) $(13,767) $(16,849)(g) $(2,011) $(51,970) $ 2,346
======= ======== ======== ======== ======= ======== ========
Pro forma net
loss per share
of Common
Stock........... $ (5.20)
Pro forma
weighted average
number of shares
of Common Stock
outstanding..... 10,000
<CAPTION>
PRO
FORMA
AS
ADJUSTED (F)
------------
<S> <C>
Tower rental
revenue......... $ 40,564
Tower operating
expenses
excluding
depreciation and
amortization.... 6,900
------------
Gross profit
excluding
depreciation and
amortization.... 33,664
Other expenses:
General and
administrative.. 2,377
Corporate
development.... 3,772
Depreciation.... 32,517
------------
38,666
Loss from
operations...... (5,002)
Interest
expense......... 3,201
Amortization of
original issue
discount and
debt issuance
costs........... 21,411
------------
Net loss......... (29,614)
Dividends and
accretion on
Preferred
Stock........... 20,010
------------
Net loss
attributable to
Common Stock.... $(49,624)
============
Pro forma net
loss per share
of Common
Stock........... $ (2.48)
Pro forma
weighted average
number of shares
of Common Stock
outstanding..... 20,000
</TABLE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PINNACLE
HOLDINGS
NINE MONTHS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS PRO
ENDED FOR FOR SOUTHERN FOR FOR FORMA ADJUSTMENTS
SEPTEMBER 30, COMPLETED TOWERS MOBILEMEDIA PROBABLE FOR FOR
1998 ACQUISITIONS (H) ACQUISITION (I) ACQUISITION (J) ACQUISITIONS (D) ACQUISITIONS OFFERINGS
------------- ---------------- --------------- --------------- ---------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Tower rental
revenue......... $ 21,128 $ 1,633 $ 836 $ 8,863 $ 1,626 $ 34,086 $ --
Tower operating
expenses
excluding
depreciation and
amortization.... 3,966 344 185 836 308 5,639 --
-------- ------- ------- -------- ------- -------- ------
Gross profit
excluding
depreciation and
amortization.... 17,162 1,289 651 8,027 1,318 28,447 --
Other expenses:
General and
administrative.. 2,861 -- 15 381 -- 3,257 --
Corporate
development.... 5,213 -- -- -- -- 5,213 --
Depreciation.... 13,357 1,897 955 7,636 1,242 25,087 --
-------- ------- ------- -------- ------- -------- ------
21,431 1,897 970 8,017 1,242 33,557 --
Loss from
operations...... (4,269) (608) (319) 10 76 (5,110) --
Interest
expense......... 7,276 2,846 (2,650) 5,551 1,863 14,886 (9,618)(e)(f)
Amortization of
original issue
discount and
debt issuance
costs........... 11,636 -- 5,253 -- -- 16,889
-------- ------- ------- -------- ------- -------- ------
Net loss......... (23,181) (3,454) (2,922) (5,541) (1,787) (36,885) 9,618
Dividends and
accretion on
Preferred
Stock........... 683 -- -- 6,706 (g) -- 7,389 7,619 (k)
-------- ------- ------- -------- ------- -------- ------
Net loss
attributable to
Common Stock.... $(23,864) $(3,454) $(2,922) $(12,247)(g) $(1,787) $(44,274) 1,999
======== ======= ======= ======== ======= ======== ======
Pro forma net
loss per share
of Common
Stock........... $ (4.43)
Pro forma
weighted average
number of shares
of Common Stock
outstanding .... 10,000
<CAPTION>
PRO
FORMA
AS
ADJUSTED (F)
------------
<S> <C>
Tower rental
revenue......... $ 34,086
Tower operating
expenses
excluding
depreciation and
amortization.... 5,639
------------
Gross profit
excluding
depreciation and
amortization.... 28,447
Other expenses:
General and
administrative.. 3,257
Corporate
development.... 5,213
Depreciation.... 25,087
------------
33,557
Loss from
operations...... (5,110)
Interest
expense......... 5,268
Amortization of
original issue
discount and
debt issuance
costs........... 16,889
------------
Net loss......... (27,267)
Dividends and
accretion on
Preferred
Stock........... 15,008
------------
Net loss
attributable to
Common Stock.... $(42,275)
============
Pro forma net
loss per share
of Common
Stock........... $ (2.11)
Pro forma
weighted average
number of shares
of Common Stock
outstanding .... 20,000
</TABLE>
See accompanying notes to Unaudited Consolidated Statements of Operations
31
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(a) Reflects the historical, pre-acquisition results of operations (in
aggregate) for the acquisitions of rental tower businesses completed by the
Company in the period January 1, 1997 through their respective date of
acquisition (but no later than December 18, 1998), and the related debt
financing under the Senior Credit Facility, as follows:
<TABLE>
<CAPTION>
TIDEWATER MAJESTIC
SHORE FOR FOR THE FOR THE
THE PERIOD PERIOD PERIOD OTHER 1997 OTHER 1998
ENDING ENDING ENDING INDIVIDUALLY INDIVIDUALLY PRO FORMA
DECEMBER 31, JULY 31, JUNE 27, IMMATERIAL IMMATERIAL PRO FORMA COMPLETED
1997 1997 1997 ACQUISITIONS (1) ACQUISITIONS (2) ADJUSTMENTS (3) ACQUISITIONS
------------ --------- -------- ---------------- ---------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Tower rental revenues... $667 $368 $192 $ 1,562 $4,791 $ -- $ 7,580
Tower operating
expenses, excluding
depreciation and
amortization........... 146 57 19 336 908 -- 1,466
---- ---- ---- ------- ------- ------- --------
Gross profit excluding
depreciation and
amortization........... 521 311 173 1,226 3,883 -- 6,114
General and
administrative......... 235 30 28 -- -- -- 293
Depreciation............ 97 26 24 2,276 4,919 -- 7,342
---- ---- ---- ------- ------- ------- --------
Income (loss) from
operations............. 189 255 121 (1,050) (1,036) -- (1,521)
Interest expense........ 198 14 6 -- -- 9,143 9,361
Income tax expense
(benefit).............. (22) -- 10 -- -- 12 --
---- ---- ---- ------- ------- ------- --------
Net income (loss)....... $ 13 $241 $105 $(1,050) $(1,036) $(9,155) $(10,882)
==== ==== ==== ======= ======= ======= ========
</TABLE>
-------
(1) Represents the aggregate adjustment to results of operations for 65
separate completed acquisitions of 134 total towers completed during
1997, other than the acquisitions of Shore, Tidewater and Majestic,
each of which acquisitions were individually immaterial, assuming such
transactions were completed as of January 1, 1997.
(2) Represents the aggregate adjustment to results of operations for
acquisitions of 152 total towers completed during the period from
January 1, 1998 through December 18, 1998, other than the Southern
Towers and MobileMedia Acquisitions, each of which acquisitions were
individually immaterial, assuming such transactions were completed as
of January 1, 1997.
(3) Reflects the pro forma increase in interest expense associated with the
financing of respective acquisitions and the elimination of income
taxes due to the REIT status.
32
<PAGE>
(b) Reflects the historical operating results of Southern Towers and the pro
forma effect of tower rental revenue, tower operating expenses and tower
asset depreciation, and the related debt financing of the Southern Towers
Acquisition under the Senior Credit Facility, assuming the transaction
was completed as of January 1, 1997, as follows:
<TABLE>
<CAPTION>
SOUTHERN TOWERS
YEAR ENDED PRO FORMA
DECEMBER 31, SOUTHERN
1997 ADJUSTMENTS TOWERS
--------------- ----------- ---------
<S> <C> <C> <C>
Tower rental revenues............. $ 1,017 $ 3,763 (1) $ 4,780
Tower operating expenses,
excluding depreciation and
amortization..................... 877 181 (1) 1,058
------- -------- --------
Gross profit excluding
depreciation and amortization.... 140 3,582 3,722
General and administrative........ 90 -- 90
Depreciation...................... 1,947 3,783 (2) 5,730
------- -------- --------
Loss from operations.............. (1,897) (201) (2,098)
Interest income................... -- (9,450)(3) (9,450)
Amortization of original issue
discount and deferred debt
costs............................ -- 21,119 (3) 21,119
------- -------- --------
Net loss.......................... $(1,897) $(11,870) $(13,767)
======= ======== ========
</TABLE>
-------
(1) Represents pro forma incremental tower revenue and operating expenses
pursuant to an executed lease agreement with Southern Communications
and its affiliates.
(2) Reflects pro forma increases in tower asset depreciation resulting from
the Company's preliminary application of purchase accounting.
(3) Reflects the pro forma increase in interest expense associated with the
financing of the Southern Towers Acquisition and the subsequent
issuance of the Senior Discount Notes.
(c) Reflects the historical operating results of the MobileMedia
Communications, Inc. and Subsidiaries tower operations and the pro forma
effect of tower rental revenue, tower operating expenses and tower asset
depreciation, and the related financing of the MobileMedia Acquisition,
assuming the transaction was completed as of January 1, 1997, as follows:
<TABLE>
<CAPTION>
MOBILEMEDIA
FOR THE
PERIOD ENDED
DECEMBER 31, PRO FORMA
1997 ADJUSTMENTS MOBILEMEDIA
------------ ----------- -----------
<S> <C> <C> <C>
Tower rental revenues.............. $2,500 $ 10,655 (1) $ 13,155
Tower operating expenses, excluding
depreciation and amortization..... 1,114 218 (1) 1,332
------ -------- --------
Gross profit excluding depreciation
and amortization.................. 1,386 10,437 11,823
General and administrative......... 609 -- 609
Depreciation....................... 521 10,933 (2) 11,454
------ -------- --------
Loss from operations............... 256 (496) (240)
Interest expense................... -- 7,077 (3) 7,077
Income tax expense................. -- -- --
------ -------- --------
Net income (loss).................. 256 (7,573) (7,317)
Dividends and accretion on existing
preferred stock................... -- 9,532 (4) 9,532
------ -------- --------
Net income (loss) attributable to
common stock...................... $ 256 $(17,105) $(16,849)
====== ======== ========
</TABLE>
-------
(1) Represents pro forma incremental tower revenues and operating expenses
pursuant to the executed Master Lease, with MobileMedia.
(2) Reflects pro forma increases in tower asset depreciation resulting from
the Company's preliminary application of purchase accounting.
(3) Reflects the pro forma increase in interest expense associated with the
financing of the MobileMedia Acquisition.
(4) Reflects dividends accrued and accretion to liquidation value on the
Existing Preferred Stock.
(d) Reflects the adjustment to results of operations for 18 separate
acquisitions pending as of December 18, 1998 of 41 total towers, for which
the Company has entered into agreements or letters of intent, and which
the Company believes are probable, each of which are individually
immaterial, assuming such transactions were completed as of January 1,
1997.
(e) Reflects the decrease in pro forma interest expense resulting from the use
of a portion of the net proceeds from both the Senior Notes Offering and
the Offerings to repay pro forma outstanding debt under the Senior Credit
Facility, assuming such transactions were completed as of January 1, 1997.
33
<PAGE>
(f) Reflects the pro forma effect of the Offerings.
(g) Reflects dividends accrued and accretion to liquidation value on the
Existing Preferred Stock.
(h) Relects the historical, pre-acquisition results of operations (in
aggregate) for the acquisitions of rental tower businesses completed by
the Company in the period January 1, 1998 through their respective date of
acquisition (but no later than December 18, 1998), and the related debt
financing under the Senior Credit Facility, as follows:
<TABLE>
<CAPTION>
ACQUISITIONS ACQUISITIONS
COMPLETED COMPLETED ADJUSTMENTS
AS OF SUBSEQUENT TO FOR
SEPTEMBER 30, SEPTEMBER 30, COMPLETED
1998 1998 ACQUISITIONS
------------- ------------- ------------
<S> <C> <C> <C>
Tower rental revenues............. $ 1,236 $ 397 $ 1,633
Tower operating expenses,
excluding depreciation and
amortization..................... 247 97 344
------- ------- -------
Gross profit excluding
depreciation and amortization.... 989 300 1,289
General and administrative........ -- -- --
Depreciation...................... 1,321 576 1,897
------- ------- -------
Loss from operations.............. (332) (276) (608)
Interest expense.................. 1,981 865 2,846
------- ------- -------
Net loss.......................... $(2,313) $(1,141) $(3,454)
======= ======= =======
</TABLE>
(i) Reflects the historical operating results of Southern Communications
Services, Inc. tower operations and the pro forma effect of tower rental
revenue, tower operating expenses and tower asset depreciation, and the
related financing of the Southern Towers Acquisition under the Senior
Credit Facility, assuming the transaction was completed on January 1,
1997, as follows:
<TABLE>
<CAPTION>
SOUTHERN TOWERS ADJUSTMENTS
FOR THE PERIOD FOR SOUTHERN
ENDED TOWERS
MARCH 3, 1998 ADJUSTMENTS ACQUISITIONS
--------------- ----------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Tower rental revenues........... $ 178 $ 658 (1) $ 836
Tower operating expenses,
excluding depreciation and
amortization................... 153 32 (1) 185
----- ------- -------
Gross profit excluding
depreciation and amortization.. 25 626 651
General and administrative...... 15 -- 15
Corporate development........... -- -- --
Depreciation.................... 340 615 (2) 955
----- ------- -------
Loss from operations............ (330) 11 (319)
Interest income................. -- (2,650)(3) (2,650)
Amortization of original issue
discount and debt issuance
costs.......................... -- 5,253 (3) 5,253
----- ------- -------
Net loss........................ (330) (2,592) (2,922)
----- ------- -------
Net loss attributable to Common
Stock.......................... $(330) $(2,592) $(2,922)
===== ======= =======
</TABLE>
34
<PAGE>
--------
(1) Represents incremental increases in pro forma tower revenues and
operating expenses pursuant to the executed lease agreement with
Southern Communications Services, Inc., and related affiliates.
(2) Reflects the increase in pro forma depreciation on tower assets
acquired resulting from the Company's preliminary application of
purchase accounting.
(3) Reflects the pro forma increase in interest expense associated with the
financing of the Southern Towers Acquisition and the subsequent
issuance of the Senior Discount Notes.
(j) Reflects the historical operating results of MobileMedia Communications,
Inc. and Subsidiaries' tower operations and the pro forma effect of tower
rental revenue, tower operating expenses and tower asset depreciation, and
the related financing of the MobileMedia Acquisition, assuming the
transaction was completed on January 1, 1997, as follows:
<TABLE>
<CAPTION>
MOBILEMEDIA
FOR THE ADJUSTMENTS
PERIOD ENDED FOR
SEPTEMBER 2, MOBILEMEDIA
1998 ADJUSTMENTS ACQUISITION
------------ ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Tower rental revenues.............. $1,698 $7,165 (1) $8,863
Tower operating expenses, excluding
depreciation and amortization..... 690 146 (1) 836
------ -------- --------
Gross profit excluding depreciation
and amortization.................. 1,008 7,019 8,027
General and administrative......... 381 -- 381
Corporate development.............. -- -- --
Depreciation....................... 356 7,280 (2) 7,636
------ -------- --------
Income (loss) from operations...... 271 (261) 10
Interest expense................... -- 5,551 (3) 5,551
Amortization of original issue
discount and debt issuance costs.. -- -- --
------ -------- --------
Net income (loss).................. 271 (5,812) (5,541)
Dividends and accretion on Existing
Preferred Stock................... -- 6,706 (4) 6,706
------ -------- --------
Net income (loss) attributable to
Common Stock...................... $ 271 $(12,518) $(12,247)
====== ======== ========
</TABLE>
--------
(1) Represents incremental increases in pro forma tower revenues and
operating expenses pursuant to the executed lease agreement with
MobileMedia Communications, Inc. and its affiliates.
(2) Reflects the increase in pro forma depreciation on tower assets
acquired resulting from the Company's preliminary application of
purchase accounting.
(3) Reflects the increase in pro forma interest expense associated with the
debt financing of the MobileMedia Acquisition under the Senior Credit
Facility.
(4) Reflects dividends accrued and accretion to liquidation value on the
Existing Preferred Stock.
(k) Reflects accretion and dividends on the New Preferred Stock net of the
accretion and dividends on the Existing Preferred Stock.
35
<PAGE>
SELECTED HISTORICAL 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 were derived from consolidated
historical financial statements of the Company, including the related notes
thereto, which have been audited by PricewaterhouseCoopers LLP, independent
certified public accountants. The selected historical consolidated financial
data as of and for the nine months ended September 30, 1997 and 1998 were
derived from the unaudited consolidated financial statements of the Company
which, in the opinion of management, include all adjustments (consisting only
of normal, recurring adjustments) necessary for a fair presentation of the
Company's consolidated results of operations and financial condition for such
periods. The operating results for the respective nine month periods ended
September 30, 1997 and September 30, 1998 are not necessarily indicative of
results to be expected for the full fiscal year. The selected historical
consolidated financial information should be read in conjunction with and are
qualified in their entirety by, the information contained in the consolidated
audited financial statements of the Company and the related notes thereto,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Unaudited Pro Forma Financial Data" included elsewhere
herein.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MAY 3, 1995) NINE MONTHS NINE MONTHS
THROUGH YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997 1997 1998
------------- ------------ ------------ ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Tower rental revenue.... $ 733 $ 4,842 $12,881 $7,981 $ 21,128
Tower operating
expenses, excluding
depreciation and
amortization........... 181 1,135 2,633 1,469 3,966
------ ------- ------- ------- --------
Gross profit, excluding
depreciation and
amortization........... 552 3,707 10,248 6,512 17,162
Other expenses:
General and
administrative (a).... 306 923 1,385 882 2,861
Corporate
development (a)....... 369 1,440 3,772 2,400 5,213
Depreciation........... 282 2,041 6,335 4,370 13,357
------ ------- ------- ------- --------
Loss from operations.... (405) (697) (1,244) (1,140) (4,269)
Interest expense........ 181 1,155 6,925 4,378 7,276
Amortization of original
issue discount......... 59 164 292 186 11,636
------ ------- ------- ------- --------
Net loss................ (645) (2,016) (8,461) (5,704) (23,181)
====== ======= ======= ======= ========
Dividends and accretion
on Existing Preferred
Stock.................. -- -- -- -- 683
------ ------- ------- ------- --------
Net loss attributable to
Common Stock........... $ (645) $(2,016) $(8,461) $(5,704) $(23,864)
====== ======= ======= ======= ========
Loss per share of Common
Stock.................. $(6.31) $ (8.10) $(27.28) $(18.66) $ (59.85)
Weighted average number
of shares of
Common Stock........... 102 249 310 306 399
OTHER OPERATING DATA:
Tower Level Cash Flow
(b).................... $ 552 $ 3,707 $10,248 $ 6,512 $ 17,162
Tower Level Cash Flow
Margin (c)............. 75.3% 76.6% 79.6% 81.6% 81.2%
Adjusted EBITDA (b)..... $ 246 $ 2,784 $ 8,863 $ 5,630 $ 14,301
Adjusted EBITDA Margin
(c).................... 33.6% 57.5% 68.8% 70.5% 67.7%
EBITDA (b).............. $ (123) $ 1,344 $ 5,091 $ 3,230 $ 9,088
EBITDA Margin (c)....... -- 27.8% 39.5% 40.5% 43.0%
Number of Towers:
Beginning of period.... 0 33 156 156 312
Towers acquired during
the period............ 29 119 134 92 484
Towers constructed
during the period..... 4 4 22 19 34
End of period.......... 33 156 312 267 830
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------------- ------------------
1995 1996 1997 1997 1998
------- ------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...... $ 31 $ 47 $ 1,694 $ 1,735 $ --
Tower assets, net.............. 11,551 48,327 127,946 109,892 459,593
Total assets................... 14,573 55,566 143,178 121,390 492,078
Total debt..................... 6,124 30,422 120,582 99,228 415,307
Redeemable stock:
Series A senior preferred
stock........................ -- -- -- -- 28,782
Class B common stock.......... 1,200 1,200 1,761 1,200 1,761
Class D common stock.......... -- -- -- -- --
Series B junior preferred
stock......................... -- -- -- -- 32,571
Common stock................... -- -- -- -- --
Additional paid-in capital..... 7,051 24,881 25,876 25,343 35,547
Stock subscription receivable.. (180) -- -- -- --
Common Stock warrants.......... -- -- -- -- 1,000
Accumulated deficit............ (645) (2,661) (11,123) (8,365) (34,304)
------- ------- -------- -------- --------
Stockholders' equity........... 6,226 22,220 14,753 16,978 34,814
</TABLE>
- --------
(a) "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.
(b) "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 not including the effect
of accretion and accrued dividends on Existing Preferred Stock and New
Preferred Stock. 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 or as an indication of the Company's operating performance.
Moreover, Tower Level Cash Flow, Adjusted EBITDA and EBITDA are
standardized measures and may be calculated in a number of ways.
Accordingly, the Tower Level Cash Flow, Adjusted EBITDA and EBITDA
information provided may not be comparable to other similarly titled
measures provided by other companies.
(c) Represents Tower Level Cash Flow, Adjusted EBITDA and EBITDA each as a
percentage of tower rental revenue.
37
<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 nine months ended September 30, 1997 and
1998. The discussion should be read in conjunction with the Financial
Statements of the Company and the notes thereto included in this Prospectus.
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 such
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 its targeted
markets in order to offer "one-stop shopping" to wireless communications
providers who are deploying or expanding wireless communications networks.
The Company's growth has come primarily from the acquisition and
construction of towers. The Company's business strategy focuses on
aggressively pursuing tower acquisitions and selectively constructing towers
in areas that complement the Company's existing base of rental towers and the
expansion into additional high growth wireless communications markets. Since
commencing operations in May 1995, the Company has completed acquisitions and
builds as follows:
<TABLE>
<CAPTION>
PERIODS ENDED NINE MONTHS
DECEMBER 31, ENDED
-------------- SEPTEMBER 30,
1995 1996 1997 1998 TOTAL(1)
---- ---- ---- ------------- --------
<S> <C> <C> <C> <C> <C>
Number of towers acquired............... 29 119 134 484 766
Number of towers built.................. 4 4 22 34 64
--- --- --- --- ---
Number of towers acquired or built dur-
ing the period......................... 33 123 156 518 830
=== === === === ===
Number of acquisition transactions com-
pleted................................. 13 49 72 61 195
</TABLE>
- --------
(1) Included in the number of towers acquired are 29 tower sites that the
Company manages.
As of September 30, 1998, the Company also had four towers under
construction and 11 additional tower projects in various stages of
development. Subsequent to September 30, 1998 and prior to December 18, 1998,
the Company acquired an additional 35 towers. As of December 18, 1998, the
Company had agreements or letters of intent to acquire 41 towers. In addition,
the Company has identified numerous additional acquisition candidates. The
Company expects that internal growth related to completed acquisitions and the
business potential of pending acquisitions will have a material impact on
future revenues and EBITDA.
The Company believes that significant opportunities for growth exist by
maximizing the use of existing and future towers. Because the costs of
operating a site are largely fixed, increasing tower utilization significantly
improves tower operating margins. The Company 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 a
meaningful indicator of the quality of the Company's towers and its ability to
generate incremental revenue on such towers. Taking into consideration new
leases written as of September 30, 1998, the Company experienced "same tower"
revenue growth in excess of 20.0% on
38
<PAGE>
an annualized basis for the nine months ended September 30, 1998 on its base
of towers owned as of December 31, 1997.
The Company has generated net losses since inception and at September 30,
1998, had an accumulated deficit totalling $34.3 million. Due to the nature of
the Company's business (the leasing of cash-generating assets) and the
Company's plans to continue to grow the business, it is expected that charges
relating to depreciation of existing and future assets and interest expense
associated with related debt balances will be substantial. Accordingly, the
Company expects to continue to generate losses for the foreseeable future.
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 as of such date. The Company believes that growth in its Annualized
Run Rate Revenue is a meaningful indicator of its performance. As of September
30, 1998, the Company's Annualized Run Rate Revenue was $43.4 million.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, each statement of
operations item as a percentage of 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 Company's
consolidated financial statements and notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
PERIOD ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ --------------------
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 ex-
penses, excluding de-
preciation and amorti-
zation................ 24.7 23.4 20.4 18.4 18.8
Gross profit........... 75.3 76.6 79.6 81.6 81.2
Expenses:
General and administra-
tive.................. 41.7 19.1 10.8 11.1 13.5
Corporate development.. 50.3 29.7 29.3 30.1 24.7
Depreciation........... 38.5 42.2 49.2 54.8 63.2
Loss from operations.... (55.2) (14.4) (9.7) (14.4) (20.2)
Interest expense........ 24.7 23.9 53.8 54.9 34.4
Amortization of original
issue discount......... 8.0 3.4 2.3 2.3 55.1
Net loss................ (87.9%) (41.7%) (65.8%) (71.6%) (109.7%)
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
Tower rental revenue increased 164.7% to $21.1 million for the nine month
period ended September 30, 1998 from $8.0 million for the nine month period
ended September 30, 1997. This increase is attributable to the acquisition and
construction of 563 towers during the twelve month period ended September 30,
1998. In addition, the increase is due to growth in per tower revenue as 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
170.0% to $4.0 million for the nine month period ended September 30, 1998 from
$1.5 million for the nine months ended September 30, 1997. This increase is
consistent with the purchase and construction of towers as discussed above.
During the period, tower operating expenses (as a percentage of tower rental
revenue) remained relatively constant at 18.8% in 1998 compared to 18.4% in
1997.
39
<PAGE>
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,
advertising, professional and consulting fees, office rent and related
expenses and travel costs as a percentage of revenue, increased to 13.5% of
revenue for the nine month period ended September 30, 1998 from 11.1% for the
nine month period ended September 30, 1997. This increase resulted from
increases in staffing to the Company becoming a public registrant and related
increases in professional fees and travel costs, increased levels of
advertising and marketing expenditures and increases in rent and related
costs.
Corporate development expenses, which represent costs incurred in connection
with acquisitions and construction of new towers, increased 117.2% to $5.2
million for the nine month period ended September 30, 1998 from $2.4 million
for the nine month period ended September 30, 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
30.1% for the nine months ended September 30, 1997 to 24.7% for the nine
months ended September 30, 1998 because of the incremental increase in tower
rental revenue from the comparative period in 1997 and economies resulting
from such growth.
Interest expense, net of amortization of original issue discount, increased
66.2% to $7.3 million for the nine months ended September 30, 1998 from $4.4
million for the nine months ended September 30, 1997. The increase in interest
expense 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 primarily attributable to the acquisition
and construction of 156 towers during 1997 and, to a lesser extent, 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 due primarily to the
addition of 156 towers during the year. However, 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 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 levels 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.
40
<PAGE>
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.
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
during 1996. 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, 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 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 due to 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 necessitated by
the Company's increased acquisition activity.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs arise from its acquisition-related activities,
debt service, working capital and capital expenditures. The Company has
historically funded its liquidity needs with proceeds from equity
contributions, bank borrowings, cash flow from operations and the offering of
its Senior Discount Notes (the "Senior Notes Offering"). The Company had a
working capital deficit of $23.8 million (inclusive of the $15.0 million ABRY
Bridge Loan), $12.8 million and $1.5 million as of September 30, 1998 and
December 31, 1997 and 1996, respectively. Excluding the current portion of
long-term debt, current liabilities exceeded current assets by $8.1 million,
$1.7 million and $0.8 million as of September 30, 1998 and December 31, 1997
and 1996, respectively. The Company's ratio of total debt to stockholders'
equity was 11.9 to 1.0 at September 30, 1998, 8.2 to 1.0 at December 31, 1997
and 1.4 to 1.0 as of December 31, 1996. On a pro forma as adjusted basis as of
September 30, 1998, after giving effect to the Transactions, the Company would
have had consolidated cash and cash equivalents of $0, $273.9 million of
consolidated long-term debt outstanding, consolidated stockholders' equity of
$97.7 million and a ratio of total debt to stockholders' equity of 2.8 to 1.0.
The Company has a Senior Credit Facility that provides the Company a
revolving line of credit for borrowings of up to $250 million, of which $200
million is currently committed. The Company may make borrowings and repayments
until December 31, 2005. Beginning March 31, 2000, the availability under the
revolving line of credit starts decreasing by specified amounts on a quarterly
basis until December 31, 2005 when the availability will be reduced to zero.
Loans under the Senior Credit Facility bear interest at a rate per annum, at
the borrower's request, equal to the agent bank's prime rate plus a margin of
up to 2.0% or the 90-day LIBOR plus a margin of up to 3.0%. Outstanding
borrowings under the Senior Credit Facility are currently approximately $169.8
million. Advances under the Senior Credit Facility have been used primarily to
fund acquisitions and construction of towers. As of September 30, 1998, after
giving effect to the Transactions, there would have been approximately $138.9
million available under the Senior Credit Facility, after giving effect to
approximately $17.0 million of outstanding letters of credit, which reduce
availability thereunder.
41
<PAGE>
The principal stockholders of the Company (ABRY II, and Messrs. Wolsey,
Dell'Apa and Day) are parties to a Subscription and Stockholders Agreement,
dated as of May 16, 1996, as amended (the "Stockholders Agreement"). Pursuant
to the Stockholders Agreement, ABRY II agreed to make capital contributions to
the Company, up to an aggregate capital contribution of $50.0 million. As of
September 30, 1998, ABRY II had contributed $37.2 million and had guaranteed
an additional $3.9 million of other debt under the aggregate $50.0 million
capital contribution commitment. Such capital contribution commitment will
terminate upon the closing of the Offerings. Additionally, as of September 30,
1998, ABRY II or an affiliate had contributed separately $47.5 million to the
Company, including $15.0 million outstanding under the ABRY Bridge Loan and
$32.5 million of Junior Preferred Stock.
The Company also uses seller financing to fund certain of its tower
acquisitions. The Company had outstanding notes that it issued to sellers
bearing interest at rates ranging from 8.5% to 13.0% per annum in the
aggregate amount of $19.9 million at September 30, 1998.
In March 1998, the Company completed its Senior Notes Offering. The Company
received net proceeds of approximately $192.8 million from the Senior Notes
Offering. The proceeds were used to repay outstanding borrowings under the
Senior Credit Facility, to repay in full and retire a $12.5 million bridge
loan from ABRY II and accrued interest thereon and a $20 million subordinated
term loan and accrued interest thereon and to pay a distribution preference to
holders of Class B Common Stock. The Senior Discount Notes were issued under
the Indenture and will mature on March 15, 2008. Until March 15, 2003, the
Company's interest expense on the Senior Discount Notes will consist solely of
the accretion of original issue discount. Thereafter, the Senior Discount
Notes will require annual cash interest payments of $32.5 million.
In September 1998, in order to finance the MobileMedia Acquisition, the
Company sold two newly issued series of Preferred Stock, the Senior Preferred
Stock with a liquidation preference of $30.0 million and the Junior Preferred
Stock with a liquidation preference of $32.5 million (the "Original Junior
Preferred Stock"). Included in the sale of the Senior Preferred Stock were
warrants to purchase approximately .75% of the Company's outstanding common
stock. The warrants will be cancelled upon the redemption of the Senior
Preferred Stock. ABRY/Pinnacle, Inc., an affiliate of ABRY II, purchased the
Original Junior Preferred Stock. In addition to the proceeds from the above
sales, the MobileMedia Acquisition was funded with the ABRY Bridge Loan and
borrowings under the Senior Credit Facility. In December 1998, the Company
issued $26.2 million of additional Junior Preferred Stock (the "Additional
Junior Preferred Stock") to ABRY/Pinnacle, Inc. The Original Junior Preferred
Stock and the Additional Junior Preferred Stock are collectively referred to
as the "Junior Preferred Stock". The Junior Preferred Stock currently has a
liquidation preference of $59.1 million. The proceeds from the sale of the
Additional Junior Preferred Stock were used to partially repay the Senior
Credit Facility. The Existing Preferred Stock is entitled to receive
dividends, payable quarterly, at a current rate of 14% per annum. The Existing
Preferred Stock is redeemable, at the option of the Company, in whole (but not
in part), at any time at a redemption price equal to the aggregate liquidation
preference thereof, plus all accumulated but unpaid dividends to the date of
redemption.
The Company intends to use the net proceeds of the Offerings, assuming an
initial public offering price of $15.00 per Share of Common Stock, as follows:
(i) approximately $30.3 million to redeem the outstanding shares of the Senior
Preferred Stock; (ii) approximately $59.1 million to redeem the outstanding
shares of the Junior Preferred Stock; (iii) $15.1 million, including accrued
interest, to repay in full and retire the ABRY Bridge Loan; (iv) approximately
$43.7 million to be distributed to certain stockholders in connection with the
Recapitalization to occur upon the closing of the Common Stock Offering; and
(v) approximately $135.9 million to repay outstanding borrowings under the
Senior Credit Facility.
Total capital expenditures, including tower acquisitions and fixed assets,
for the nine months ended September 30, 1998 were $350.3 million, compared to
$64.0 million in the comparable 1997
42
<PAGE>
period. Capital expenditures, including acquisitions, were $12.7 million,
$42.8 million and $89.4 million for the periods ended December 31, 1995, 1996
and 1997, respectively, and related primarily to acquisitions.
The Company anticipates that it will spend approximately $23.3 million on
capital expenditures in the last quarter of 1998, including $22.1 million for
the acquisition, construction and upgrading of additional towers. The Company
estimates capital expenditures in each of 1999 and 2000 to be approximately
$150.0 million.
The Company believes that cash flow from operations and existing cash
balances will be sufficient to meet working capital requirements for existing
properties. To the extent that the Company pursues additional acquisitions,
construction activity and other capital expenditures, however, the Company
will be required to obtain additional financing. There can be no assurance
that such financing will be commercially available through an increased
commitment under the Senior Credit Facility or otherwise 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 may not be able to
achieve its current business strategy.
INFLATION
Because of the relatively low levels of inflation experienced in 1995, 1996,
1997 and as of September 30, 1998, inflation did not have a significant effect
on the Company's results in such years.
YEAR 2000
The Company utilizes management information systems and software technology
that may be affected by Year 2000 issues throughout its businesses. During
fiscal 1996, the Company began to implement plans to ensure those systems
continue to meet its internal and external requirements. During fiscal 1998,
the Company completed the modifications and testing of its information systems
and is Year 2000 compliant. The Company has developed questionnaires and
contacted key suppliers and customers regarding their Year 2000 compliance to
determine any impact on its operation. In general, the suppliers and customers
have developed or are in the process of developing plans to address Year 2000
issues. The Company will continue to monitor and evaluate the progress of its
suppliers and customers on this critical matter.
The Year 2000 is not expected to have a material impact on the Company's
current information systems as a result of the steps already completed to make
the Company's systems Year 2000 compliant. 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 prior to
the Year 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information," was issued, establishing standards for public
enterprises to disclose certain information about operating segments and
related disclosures about products and services, geographic areas and
significant customers. The Company will adopt this pronouncement in 1998 in
accordance with the implementation requirements. Management believes that the
adoption of SFAS No. 131 will not have a material impact on the Company's
financial statements.
43
<PAGE>
BUSINESS
COMPANY OVERVIEW
The Company is the leading provider of wireless communication tower space in
the Southeastern United States. Since its formation in May 1995, the Company
has focused exclusively on creating a portfolio of dense clusters of
geographically contiguous towers and renting tower space to wireless
communications providers and users. The Company believes that the rental of
tower space is the sector of the tower industry in which it can earn the
highest cash flow margins and risk adjusted return on invested capital. This
strategy also presents significant opportunities for continued revenue and
cash flow growth through the addition of new tenants on its existing towers
and towers that may be acquired in the future.
Since commencing operations in May 1995 and through September 30, 1998, the
Company has completed 195 acquisitions through which it has acquired 766
towers and has constructed an additional 64 towers in such high growth markets
as Atlanta, Birmingham, New Orleans, Orlando and Tampa. Subsequent to
September 30, 1998 and prior to December 18, 1998, the Company acquired an
additional 35 towers. As of December 18, 1998, the Company had agreements or
letters of intent to acquire 41 towers. As a result of its extensive existing
tower base, the Company believes it is well-positioned to continue to
capitalize on the growth opportunities available in the rapidly consolidating
and highly fragmented tower rental industry. For the year ended December 31,
1997 on a pro forma basis, the Company had tower rental revenue and EBITDA of
$40.6 million and $27.5 million, respectively. For the nine months ended
September 30, 1998, on a pro forma basis, the Company had tower rental revenue
and EBITDA of $34.1 million and $20.0 million, respectively. See "Unaudited
Pro Forma Financial Data."
The Company has a diversified base of over 800 customers consisting of all
forms of wireless communications providers, operators of private networks and
government agencies that include Southern Communications, Nextel, Sprint PCS,
PageNet, Motorola, BellSouth Mobility, MobileMedia, Teletouch, Skytel,
Pagemart, Federal Bureau of Investigation and Bureau of Alcohol, Tobacco &
Firearms. The Company's leases generally range in duration from three to five
years and many provide for scheduled minimum rent increases of the greater of
a specified percentage (which typically ranges from 3 to 5%) or the change for
the relevant period in the CPI.
The Company is experiencing strong demand for tower rental space fueled by
the deployment of new wireless technologies and strong underlying growth in
wireless services. The Company 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 a meaningful indicator of the Company's
ability to generate incremental revenue on such towers. Taking into
consideration new leases written as of September 30, 1998, the Company
experienced "same tower" revenue growth in excess of 20.0% on an annualized
basis for the nine months ended September 30, 1998 on its base of towers owned
as of December 31, 1997. The Company's Annualized Run Rate Revenue as of
September 30, 1998 was $43.4 million.
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 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 may be placed. Wireless communications providers design their
network and select their communications sites in order
44
<PAGE>
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 is expected to continue to increase 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 1998.
[BAR CHART SHOWING GROWTH IN THE UNITED STATES' WIRELESS COMMUNICATIONS
INDUSTRY BY SUBSCRIBERS.]
US Wireless Subscribers
Total Subscribers
June 1985 - June 1998
---------------------
1985 203,600
1986 500,000
1987 883,778
1988 1,608,697
1989 2,691,793
1990 4,368,686
1991 6,380,063
1992 8,892,636
1993 13,067,318
1994 19,283,306
1995 28,154,414
1996 38,196,466
1997 48,705,563
1998 60,831,431
45
<PAGE>
. 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.
. 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 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.
46
<PAGE>
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.
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. As of September 30, 1998, the
Company's tower inventory was comprised of 625 guyed, 172 self-supporting
lattices and 33 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
47
<PAGE>
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.
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 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
(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.
THE PINNACLE APPROACH TO THE TOWER RENTAL INDUSTRY
As a result of the recent developments in the wireless communications
industry and the highly fragmented nature of the tower rental industry, the
Company's founders recognized a significant opportunity to consolidate
strategically located wireless communications towers and enhance rental
revenue on those towers. In particular, the Company's founders developed a
strategy of acquiring clusters of towers that would provide strong positions
in selected, high growth wireless communications markets in the Southeastern
United States.
BUSINESS AND GROWTH STRATEGY
The Company's objective is to create substantial value from both its
position as the leading provider of wireless communications rental tower space
in the Southeastern United States and its expansion into additional wireless
communication markets. In order to achieve this objective, the Company has
designed and implemented a three-tiered growth strategy that focuses on:
(i) increasing revenue yield per tower through aggressively marketing
available rental space; (ii) continuing acquisitions of towers in key markets;
and (iii) implementing a selective tower construction program
48
<PAGE>
designed to complement its acquisition 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 aggressively markets rental space on its towers to capitalize on
the operating leverage of its business. The Company's customers are generally
responsible for the installation of their own equipment and the incremental
utility costs associated with that equipment. In addition, adding customers to
an existing tower does not result in increased monitoring, maintenance or
insurance costs. Accordingly, when customers are added to an existing tower,
additional revenue can be achieved at low incremental costs, thereby yielding
increased cash flow margins. The key elements of the Company's marketing and
development strategy include the following:
. OFFER STRATEGICALLY LOCATED CLUSTERS OF TOWERS. By owning and assembling
clusters of towers in high growth regions, the Company believes it is able
to offer its customers the ability to rapidly and efficiently fulfill the
network expansion plans across a particular market or region, which the
Company believes provides it with a significant competitive advantage.
. TARGET A DIVERSIFIED CUSTOMER BASE. The number of antennae a tower can
accommodate varies depending on the type of tower (self-supporting
monopole, guyed, self-supporting lattice), the height of the tower and the
nature of the services provided by such antennae. The substantial majority
of the Company's towers are self-supporting lattice and guyed towers that
can support a large number of antennae and therefore enable the Company to
market its tower space to a diverse group of wireless communications
providers.
. LEVERAGE CUSTOMER RELATIONSHIPS. The Company believes it has established a
reputation among its customers as a highly professional and reliable tower
space provider. This has been achieved through ongoing investment in the
development of relationships at multiple levels of customer organizations.
The Company believes that important factors in generating interest in its
towers are the customer's awareness 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 towers.
. TRACK FCC FILINGS. All FCC licensees must file applications for site
locations. As part of a disciplined approach to acquisitions and new tower
construction activities, the Company tracks these filings, which provide
market intelligence as to existing wireless communications providers'
build-out plans and new market entrants.
II. ACQUISITION STRATEGY
Ownership of rental towers in many parts of the United States remains highly
fragmented, although the consolidation of tower ownership has begun to
accelerate as larger independent owners acquire small local owners in certain
regions. The Company believes that its acquisition strategy has allowed it to
achieve the highest density of towers across nine states located in the
Southeastern United States, which the Company believes provides it with a
significant competitive advantage.
The Company believes that growth through acquisition is an attractive
strategy because it allows the Company to: (i) choose the location of its
towers in key urban and other desired locations; (ii) acquire towers with
existing tenants and the capacity to add multiple, additional tenants; (iii)
not seek build-to-suit mandates from customers, which may result in towers
being built in unprofitable locations; and (iv) lower its risk as cash flow
from existing tenants is predetermined and immediate.
The Company's acquisition strategy continue to focus on: (i) rapidly
acquiring towers in key markets as a means to quickly gain critical mass,
thereby discouraging other tower consolidators from entering its markets; (ii)
completing follow-on acquisitions to enhance its coverage in selected wireless
49
<PAGE>
communications markets; and (iii) penetrating new markets as a platform for
future growth. In executing its acquisition strategy, the Company generally
targets strategically located individual towers or small groups of towers. The
Company's focus on individual towers or small groups of towers, however, does
not preclude potential acquisitions of a large number of towers in a single
transaction. The Company's completion of the Southern Towers Acquisition (201
towers) in March 1998 and the MobileMedia Acquisition in September 1998 (166
towers) are two of the largest acquisition transactions in the industry to
date. Since commencing operations in 1995 and through September 30, 1998, the
Company has completed the acquisition of 766 towers in 195 separate
transactions. Subsequent to September 30, 1998 and prior to December 18, 1998,
the Company acquired an additional 35 towers. As of December 18, 1998, the
Company had agreements or letters of intent to acquire 41 towers.
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 102 total employees, 25% are dedicated to
completing acquisitions. The Company utilizes 10 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 key elements of the Company's acquisition strategy are set forth below:
. TARGET HIGH GROWTH WIRELESS COMMUNICATIONS MARKETS. The Company targets
population centers and key transportation corridors in wireless
communications markets where there is evidence of high potential growth.
The Southeastern United States is attractive because of its relatively high
population and economic growth rates with 4 of the top 10 fastest growing
cities in the United States located in this region, according to the U.S.
Census Bureau. In addition, according to the U.S. Census Bureau, the
population growth rate in Florida for the three years ending July 1, 1997,
was 5.0%, nearly double that of the overall rate of 2.8% for the United
States. Within the Southeastern United States, the Company has established
strong market positions in densely populated areas such as Atlanta,
Birmingham, New Orleans, Orlando and Tampa. The MobileMedia Acquisition
provided the Company with strong market positions in Knoxville, Mobile and
Nashville, as well as towers in Southern California and New England that
provide the Company a base for penetrating these attractive wireless
markets. The Company has also established strong market positions along key
transportation corridors in the Southeastern United States.
. FOCUS ON COMPATIBILITY WITH EXISTING TOWER NETWORK. The Company considers
many factors when evaluating a potential acquisition. In particular, 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
and competitive advantage. The Company also considers whether the towers in
a particular acquisition meet demand for enhanced coverage that 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. The MobileMedia
50
<PAGE>
Acquisition and the Southern Towers Acquisition expanded the Company's
presence to contiguous markets in the Southeastern United States.
. EMPLOY A DISCIPLINED VALUATION PROCESS. The Company seeks to acquire towers
that have existing cash flow and identified potential for significant
future cash flow growth from additional tenants. For each potential
acquisition, the Company reviews the current population coverage of each
tower to be acquired, the nature and quality of the existing and potential
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.
Consistent with the Company's acquisition criteria and strategy of
accumulating clusters of towers in regions that are highly attractive to
wireless communications providers, the Company has recently completed the
following major acquisitions:
SOUTHERN TOWERS ACQUISITION. In March 1998, the Company acquired 201 towers
from Southern Communications for approximately $83.5 million plus fees and
expenses. Southern Communications is a subsidiary of Southern Company, one of
the largest utility holding companies in the United States and an ESMR
provider. Substantially all of the towers, which are located in Georgia,
Alabama, Mississippi and Florida, were constructed within the past four years.
The Southern Towers Acquisition represented an attractive opportunity to
significantly accelerate the achievement of the Company's goal of becoming the
leading provider of rental tower space in the Southeastern United States.
In connection with the Southern Towers Acquisition, the Company entered into
leases with Southern Communications and its affiliates to provide tower space
for their ESMR network. The leases provide for an initial ten-year term with
five optional renewal periods of five-years each exercisable at the customer's
option on the same terms as the original leases (the "Southern Communications
Leases"). In addition, the Company has entered into an option agreement with
Southern Communications whereby Southern Communications may require the
Company to use commercially reasonable efforts to supply, acquire or construct
an additional 80 towers for rental by Southern Communications or its
affiliates. The Company has initiated construction on approximately half of
the tower opportunities presented by Southern Communications to date. The
Company evaluates these opportunities with respect to the towers' potential
strategic fit with the Company's existing tower portfolio and ability to
capture additional third party tenants.
Prior to the acquisition, these towers, which had only a limited number of
third party tenants, were principally for the use of Southern Communications
and its affiliates. The towers were generally constructed with capacity
significantly exceeding Southern Communications' specific capacity
requirements. Accordingly, the Company believes that there is substantial
potential for additional revenue from these towers. Since the closing of the
Southern Towers Acquisition, the Company has already experienced significant
interest from potential customers in the towers and has negotiated new leases
totaling approximately $632,000 in annualized lease revenue. As of December
31, 1997, on a pro forma basis, the towers had combined annual revenue
totaling $4.8 million and Tower Level Cash Flow of $3.7 million, implying a
tower level cash flow margin of 77.9%.
MOBILEMEDIA ACQUISITION: In September 1998, the Company acquired 166 towers
from MobileMedia and its affiliates for approximately $170.0 million.
Subsequent to its announced merger with Arch Communications, Inc., MobileMedia
will be the second largest paging company in the United States.
51
<PAGE>
The MobileMedia Acquisition represented an attractive opportunity to acquire
towers that (i) further strengthened the Company's tower portfolio in certain
existing markets, (ii) provided entry into geographically contiguous markets
and (iii) expanded the Company's operations into new markets in Southern
California and New England.
In connection with this acquisition, the Company entered into a lease
arrangement to provide rental tower space to MobileMedia Communications, an
affiliate of MobileMedia (the "Master Lease"). The Master Lease provides for
an initial 15 year noncancellable term with one five-year renewal period,
exercisable at the option of the lessee. Under the Master Lease, MobileMedia
Communications secured tower space for its currently existing 683 transmitters
on the acquired towers at a monthly rental rate of $1,300 per transmitter or
$888,000 per month. The monthly rental rate reflects (i) current pricing
available to other customers of the Company for similar equipment
configurations, (ii) the request of MobileMedia that the rental rate be fixed
and not subject to escalation during the initial lease term, (iii) the ability
of MobileMedia Communications to transfer its existing transmitters on the 166
towers to the Company's other towers and (iv) the reservation of space to
accommodate the full complement of equipment necessary for the deployment of
MobileMedia Communications' two-way paging services.
In connection with the Master Lease, the Company has also given MobileMedia
Communications the right to a defined pricing discount for additional tower
space on the Company's tower portfolio, which, MobileMedia Communications may
lease in the future as it continues to expand its paging network. The Company
believes this favorable pricing arrangement may benefit the Company in two
ways. First, the Company is positioned to benefit from additional revenues for
new sites required by MobileMedia Communications as its network expands.
Second, as MobileMedia Communications continues to rationalize its network, it
will need to eliminate redundancy of transmitter systems at certain towers and
will therefore need to relocate these transmitters on new towers, many of
which may be provided by the Company. The Company believes that this discount
arrangement is an incentive for MobileMedia Communications to utilize the
Company as a preferred provider of rental tower space for new tower locations
it may require in the future.
The acquired towers had previously only been marketed on a limited basis,
despite the fact that they are predominantly either self-supporting or guyed
towers capable of supporting multiple tenants. The Company believes these
towers are attractively located and therefore highly marketable to a diverse
group of additional wireless communications providers. Further, the location
of these towers enhances and strengthens the Company's existing portfolio of
towers in the Southeastern United States and, with respect to the towers in
Southern California and New England, provides the basis for penetrating these
new markets. Since the closing of the MobileMedia Acquisition, the Company has
already experienced significant interest from potential customers in the
towers and has negotiated new leases totaling $243,000 in annualized lease
revenue. Additionally, when acquired, the towers had existing third party
tenants that generated annual revenue of approximately $2.2 million. As of
December 31, 1997, on a pro forma basis, the combined annual revenue totaling
$13.2 million resulted in Tower Level Cash Flow of $11.8 million, implying a
tower cash flow margin of 89.9%.
III. NEW TOWER CONSTRUCTION STRATEGY
An additional element of the Company's growth strategy is to selectively
construct new towers in and around major markets in which it already has a
presence in order to enhance coverage in existing markets. In addition, the
Company intends to pursue new build opportunities in order to expand capacity
or otherwise improve already existing sites. In both cases, the Company
adheres to its own requirements of return on invested capital. The Company
does not engage in speculative construction projects or large scale build-to-
suit projects. During 1997 and the nine months ended September 30, 1998, the
Company constructed 22 and 34 towers, respectively. As a result of
opportunities generated through its marketing efforts, the Company estimates
that it will identify 80 to 120 new tower build
52
<PAGE>
opportunities over the next 12 months. As of September 30, 1998 four new
towers were under construction by the Company and there was in excess of 11
additional tower projects in various stages of development. 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 carefully evaluates
such plans to meet customer requirements, which may result in 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. Tower 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 generate returns that exceed the Company's minimum required
return on invested capital.
. 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 the necessary steps to obtain
zoning approvals and building permits. The Company acquires tower
structures from a variety of vendors and oversees the construction of the
tower by hired sub-contractors.
COMPANY STRENGTHS
The Company believes its business is characterized by the following
strengths:
. EXCLUSIVE FOCUS ON TOWER RENTAL BUSINESS. The Company exclusively focuses
on the rental of wireless communications tower space as opposed to other
aspects of the tower industry such as site acquisition services, tower
construction services and ancillary services. Furthermore, the Company does
not engage in large scale build-to-suit programs, preferring instead to
focus on its core acquisition strategy and complimentary selective
construction strategy designed to enhance coverage in targeted markets. The
Company believes that by focusing on this sector of the tower industry, it
can earn the highest risk adjusted return on invested capital.
. DISCIPLINED AND EFFICIENT ACQUIRER OF TOWER ASSETS. At September 30, 1998
the Company had a network of approximately 755 towers (excluding 35 towers
acquired subsequent to September 30, 1998, and 41 towers to be acquired
pursuant to probable acquisitions), geographically clustered in the
Southeastern United States as well as 75 towers located in Southern
California and New England. The Company's proven acquisition process
identifies towers that typically have an established foundation of existing
cash flow and are geographically complementary to its existing portfolio.
The Company has demonstrated the ability to identify and successfully
negotiate the purchase of what it believes to be value enhancing tower
acquisitions.
. ABILITY TO SUCCESSFULLY INCREASE TOWER RENTAL REVENUE. The Company's
aggressive marketing efforts to all major wireless communication providers
has resulted in the signing of a significant number of new tenants over the
last three years. Additional tenants increase the operating leverage of the
Company's portfolio and generally increase the Company's overall cash flow
margins. In order to measure the revenue growth performance of acquired
towers, the Company tracks the cumulative increase in monthly revenue from
towers acquired during different periods. The Company has generated a
cumulative increase in total monthly revenues for the 29 towers acquired in
1995 of 133.0% through September 1998. In addition, the 119 towers acquired
53
<PAGE>
in 1996 and the 134 towers acquired in 1997 have generated cumulative
increases in total monthly revenues of 68.0% and 14.0%, respectively
through September 1998.
In addition to the above strengths, the Company believes that its
business will be characterized by the following:
. HIGH CASH FLOW MARGINS WITH SIGNIFICANT OPERATING LEVERAGE. 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, the Company can generate
increasing operating margins when new customers are added, resulting in
high incremental free cash flow. For the nine months ended September 30,
1998, the Company's Tower Level Cash Flow Margin was 81.2%.
. CONSOLIDATION OPPORTUNITIES IN A HIGHLY FRAGMENTED INDUSTRY. The tower
rental industry remains highly fragmented, with few independent operators
owning a large number of towers. The pace of consolidation has begun to
accelerate, however, as the larger independent operators continue to
acquire small local or regional operators and purchase communications sites
and related assets from wireless communications carriers. The Company
further believes that significant opportunities for growth exist in this
current industry environment and that it is well-positioned to continue to
be a significant consolidator of towers. Since commencing operations in May
1995, through September 30, 1998, the Company has successfully completed
195 acquisitions through which it has acquired 766 towers.
. ATTRACTIVE GROWTH 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 provide basic infrastructure components for all major wireless
communications services, including cellular, PCS, paging, two-way radio,
broadcast television, microwave, wireless data transmission and SMR
customers. As a result, the Company believes that it can achieve a level of
growth in its tower rental revenue that will in general reflect the growth
of its customer base over the next several years.
. 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, many of the
Company's leases provide built-in annual rate increases of the greater of a
specified percentage (which typically ranges from 3 to 5%) the change for
the relevant period in the CPI. Furthermore, because a significant
proportion of tower rental revenue is received from customers that are
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 addition, the
Company has a broad representation of wireless communications providers and
underlying technologies reflected in its customer base of over 800
customers, which the Company believes enhance the stability and
predictability of its cash flow.
. BARRIERS TO ENTRY. Towers are subject to a variety of federal and local
regulations that make the construction of towers difficult and increase the
time and expense associated with their construction, especially in highly
populated or high transmission areas. As a result, the Company believes
that in areas where it has established a critical mass of rental tower
inventory, 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 tower rental industry typically experiences low
customer churn as a result of the high relocation costs incurred by
customers. When customers enter into long-term
54
<PAGE>
contracts for tower space, those customers generally make significant
capital and network engineering commitments to the related site. The time
and costs associated with network reconfiguration and obtaining FCC and
municipal or local approval may also discourage customer relocation. The
Company believes that the high levels of commitment made by its customers
benefit the Company in the form of recurring and highly predictable revenue
stream. The Company experienced customer churn of approximately 1.0% per
annum for the twelve month period ended September 30, 1998.
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. As the Company seeks to expand its
size, it will continue to evaluate the need to supplement its current
workforce.
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 rapidly integrate new acquisitions and tower
construction activity and initiate sales and marketing efforts immediately
upon closing or completion.
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
55
<PAGE>
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.
CUSTOMERS AND CUSTOMER LEASES
As of September 30, 1998, the Company had over 4,000 separate tower space
leases. The Company has a diversified base of over 800 customers. MobileMedia
Communications and certain of its affiliates and Southern Communications and
certain of its affiliates would have accounted for 12.9% and 26.3% of the
Company's revenues, respectively, for the nine months ended September 30, 1998
on a pro forma basis. See "Risk Factors--Customer Concentration."
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
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 September 30, 1998:
<TABLE>
<CAPTION>
PERCENTAGE OF
CUSTOMER TYPE REVENUE
------------- -------------
<S> <C>
Paging......................................................... 43%
SMR............................................................ 19
2-Way Services................................................. 14
PCS............................................................ 12
Cellular....................................................... 4
Broadcasting................................................... 4
Government..................................................... 3
Data........................................................... 1
---
Total........................................................ 100%
===
</TABLE>
In connection with the Southern Towers Acquisition, the Company and Southern
Communications entered into leases providing that Southern Communications or
one of its affiliates would be a customer on each of the 201 towers acquired.
Under the Southern Communications Leases, Southern Communications and its
affiliates 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. 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 also entered into a 10 year option agreement with Southern
Communications whereby Southern Communications may require the Company to use
commercially reasonable efforts to supply, acquire or construct an additional
80 sites within Alabama, Florida, Georgia or Mississippi at locations
designated by Southern Communications, for rental of sites thereon 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.
In connection with the MobileMedia Acquisition, the Company entered into the
Master Lease with affiliates of MobileMedia leasing the "site spaces" at the
towers that were previously utilized by MobileMedia and its affiliates for the
installation and operation of transmitter systems. The Master Lease has a 15
year term with one five-year renewal term exercisable at the option of the
lessee. Rent under the Master Lease during the initial 15 year term is $1,300
per month per site space. During the renewal term, rent will be determined
based on then existing market rental rates.
56
<PAGE>
PROPERTIES
The Company both owns and leases the real property upon which its towers are
located. As of September 30, 1998, the Company owned 281 towers on parcels of
real estate that are leased and 520 towers on parcels of real estate that are
owned. Additionally, the Company currently manages 29 tower sites.
The following is a summary of the Company's sites by state, as of September
30, 1998:
<TABLE>
<CAPTION>
NUMBER NUMBER TOTAL
OF TOWER OF TOWER NUMBER OF
STATE SITES OWNED SITES LEASED TOWER SITES*
----- ----------- ------------ ------------
<S> <C> <C> <C>
Florida................................ 90 69 176
Georgia................................ 65 77 142
Alabama................................ 81 25 106
Louisiana.............................. 58 15 73
Mississippi............................ 31 24 66
Tennessee.............................. 39 11 50
North Carolina......................... 38 11 49
California............................. 29 12 41
Texas.................................. 19 10 29
South Carolina......................... 19 8 27
Virginia............................... 17 2 19
Maryland............................... 13 0 13
New Hampshire.......................... 3 6 9
New York............................... 2 4 7
Rhode Island........................... 1 4 5
Arkansas............................... 3 2 5
Ohio................................... 2 0 2
Connecticut............................ 2 0 2
New Mexico............................. 2 0 2
Massachusetts.......................... 2 0 2
Maine.................................. 1 0 1
Wisconsin.............................. 1 0 1
Michigan............................... 1 0 1
New Jersey............................. 0 1 1
Delaware............................... 1 0 1
--- --- ---
Total................................ 520 281 830
=== === ===
</TABLE>
* Includes 29 tower sites managed by the Company.
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 September
30, 1998, the Company had 39 towers in the Orlando, Florida market, 38 towers
in the Atlanta, Georgia market, 46 towers in the Birmingham, Alabama market,
37 towers in the Tampa/Sarasota, Florida market and 28 towers in the New
Orleans, Louisiana market.
In rural areas, a tower site typically consists of a three to five acre
tract that supports the tower, equipment shelter and guy wires that stabilize
the tower. Less than 2,500 square feet are needed for a self-supporting tower
that is typically used in metropolitan areas. Leases generally have 10 to 25
year terms, with options for the Company to renew the leases for an average of
approximately 10 years. Pursuant to the Senior Credit Facility, the senior
lenders have liens on, among other things, tenant leases, equipment, inventory
and interests in all real property of the Company on which towers are located
or which constitute a tower.
A significant portion of the ground leases assumed in connection with the
MobileMedia Acquisition are subject to renewal within the next five years. In
the event that the Company is not satisfied with
57
<PAGE>
the renewal terms with respect to such leases, the Company has the right to
put back these properties to MobileMedia and MobileMedia will still be
obligated to pay its rent on these properties. The Company may incur
significant additional operating expenses in connection with the renewal of
such leases. There can be no assurances regarding the extent of such increases
or whether such increases could have an adverse effect on the Company's
results of operations.
The Company leases its corporate headquarters in Sarasota, Florida. The
aggregate square 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. See "Risk Factors--
Competition."
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 maintain
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.
58
<PAGE>
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.
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 current cost of
complying with those laws is not material to the Company's financial condition
or results of operations.
EMPLOYEES
As of September 30, 1998, the Company had approximately 102 full-time
employees, of which 75 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 others. 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 Internal Revenue Service (the "Service") 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. See "Certain Federal Income Tax Considerations" for a detailed
discussion of the REIT qualification requirements.
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.
59
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
Set forth below is certain information concerning the Company's directors,
executive officers and key employees. All of the directors have served as
directors of the Company since the Company's inception, except for Steven Day
who has served since February 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert Wolsey............... 48 Director, President and Chief Executive Officer
James Dell'Apa.............. 41 Director, Executive Vice President and Chief
Operating Officer
Steven Day.................. 45 Director, Vice President, Secretary and Chief
Financial Officer
David Zahn.................. 33 Vice President of Operations
Ben Gaboury................. 47 Vice President of Sales and Marketing
Martin Alvarez.............. 44 Chief Information Officer
Andrew Banks................ 44 Director
Peni Garber................. 35 Director
Peggy Koenig................ 42 Director
Royce Yudkoff............... 43 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 raised over $74 million in its
initial public offering. At the time of Mr. Wolsey's departure from PCI in
April 1994, PCI 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.
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,
60
<PAGE>
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 that have filed initial public offerings.
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.
DAVID ZAHN is primarily responsible for the ongoing maintenance of the
Company's existing tower inventory, new site construction, capacity
augmentation and new customer equipment integration. He joined Pinnacle in
September 1996. From 1987 to 1996, Mr. Zahn worked for 360(degrees)
Communications (formerly Sprint Cellular and Centel Cellular) where he held a
variety of positions including 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.
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.
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 (or the equivalent) of DirecTel. 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 and secretary of 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 (or the equivalent) of Nexstar Broadcasting Group LLC, Network Music
Holdings LLC, Quorum Broadcast Holdings Inc. and Audio Communications Network,
LLC. 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 (or the
equivalent) of Connoisseur Communications Partners, L.P., Avalon Cable
Holdings LLC and Network Music Holdings LLC. She
61
<PAGE>
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 (or the equivalent) of Quorum Broadcast Holdings Inc.,
Nexstar Broadcasting Group, LLC, Audio Communications Network, LLC and
Metrocall. He graduated as a Baker Scholar from the Harvard Business School
and is an honors graduate of Dartmouth College.
COMPOSITION OF THE BOARD OF DIRECTORS
Pursuant to the terms of the Company's Certificate of Incorporation and
Bylaws, the Board of Directors has the power to set the number of directors
(not less than one nor more than 10) by resolution adopted by the directors of
the Company. Each director is elected to serve until the next annual meeting
of the stockholders, except in the case of removal or vacancy, and until his
successor is duly elected and qualified or until his death or retirement or
until he resigns or is removed. Currently, the number of directors is set at
seven. The Company intends to maintain at all times at least two independent
directors on its Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee. The Company has established an Audit Committee composed of
Ms. Garber and Ms. Koenig. The Audit Committee makes recommendations
concerning the engagement of independent public accountants, reviews with the
independent public accountants the plans and results of the audit engagement,
approves professional services provided by the accountants, reviews the
independence of the accountants, considers the range of audit and non-audit
fees and reviews the adequacy of the Company's internal accounting controls.
The Audit Committee is also responsible for the review of transactions between
the Company and any affiliate or entity in which a Company affiliate has a
material interest.
Compensation Committee. The Company has established a Compensation
Committee, consisting of Mr. Yudkoff and Ms. Koenig. The Compensation
Committee establishes the compensation of the Company's executive officers.
The Compensation Committee also administers the Company's Stock Incentive Plan
and determines the amount, exercise price and vesting schedules of stock
options awarded thereunder.
Executive Committee. The Company has established an Executive Committee
consisting of Mr. Wolsey, Ms. Koenig and Mr. Yudkoff. The Executive Committee
has the authority to act in place of the Board of Directors on all matters
which would otherwise come before the Board, except for such matters which are
required by law or by the Company's Certificate of Incorporation or Bylaws to
be acted upon exclusively by the Board.
Other Committees. The Board of Directors may establish other committees as
deemed necessary or appropriate from time to time.
COMPENSATION OF DIRECTORS
All directors receive reimbursement of reasonable out-of-pocket expenses
incurred in connection with meetings of the Board of Directors. Directors who
are employees of the Company do not receive any fee in addition to their
regular salary for serving on the Board of Directors. Non-employee directors
currently do not receive any fee, but will be eligible to participate in the
Company's Stock Incentive Plan.
62
<PAGE>
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) YEAR SALARY ($) BONUS ($) SATION ($) AWARDS ($) OPTIONS (#) PAYOUTS ($) SATION ($)
- ------------------------------ ---- ---------- --------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert Wolsey........... 1997 156,000 70,000 6,500(b) -- -- -- --
President, Chief 1996 129,698 30,000 -- -- -- -- --
Executive
Officer 1995 50,000 -- -- 11,000 -- -- --
James Dell'Apa.......... 1997 156,248 -- -- -- -- -- --
Executive Vice 1996 128,125 30,000 -- -- -- -- --
President and Chief 1995 50,000 -- -- 10,000 -- -- --
Operating Officer
Steven Day.............. 1997 131,250 -- -- 10,000 -- -- --
Vice President, 1996 -- -- -- -- -- -- --
Secretary and 1995 -- -- -- -- -- -- --
Chief Financial Officer
David Zahn.............. 1997 126,260 -- -- -- -- -- --
Vice President of 1996 36,102 -- -- 1,200 -- -- --
Operations 1995 -- -- -- -- -- -- --
Ben Gaboury............. 1997 126,094 -- -- -- -- -- --
Vice President of Sales 1996 31,789 -- -- 1,200 -- -- --
and Marketing 1995 -- -- -- -- -- -- --
</TABLE>
- -------
(a) See also, "Employment Agreements".
(b) Amount of reimbursement for payment of income taxes.
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 those provided 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.
STOCK OPTIONS
There were no stock options granted or exercised during the last fiscal
year. The Company currently intends to grant no more than one-half of the
options available under its Stock Incentive Plan to its
63
<PAGE>
employees during the next twelve months. A significant portion of those
options are expected to be granted on or about the date of the consummation of
the Offerings. The Company currently anticipates that less than one-half of
such options granted during such twelve months will be granted to Named
Executive Officers and that substantially all such options will have an
exercise price no less than the fair market value of the Common Stock on the
date of grant.
STOCK INCENTIVE PLAN
GENERAL
The Pinnacle Holdings Inc. Stock Incentive Plan became effective July 1,
1998. The Stock Incentive Plan provides for awards consisting of stock option
and restricted stock grants ("Awards") to employees, non-employee directors,
and other persons who perform services for the Company.
ADMINISTRATION
The Stock Incentive Plan is administered by a committee consisting of at
least two directors of the Company who are "non-employee directors" within the
meaning of Rule 16b-3 promulgated under Section 16(b) of the Exchange Act and
who are "outside directors" within the meaning of Section 162(m) of the Code
and the regulations promulgated under Section 162(m) of the Code (the
"Committee"). The Committee is authorized to select the individuals to whom
Awards will be granted, determine the type, size and terms and conditions of
Awards, and construe and interpret the Stock Incentive Plan. The Company's
Board of Directors may appoint a different committee for the purpose of
approving Awards to persons who are not subject to the requirements of Section
16(b) of the Exchange Act and Section 162(m) of the Code.
SHARES
The maximum number of shares of Common Stock that may be made subject to
Awards granted under the Stock Incentive Plan is approximately 2,000,000. In
the event of any change in capitalization of the Company, however, the
Committee shall adjust the maximum number and class of shares with respect to
which Awards may be granted, the number and class of shares which are subject
to outstanding Awards and the purchase price therefor. In addition, if any
Award expires or terminates without having been exercised, the shares of
Common Stock subject to the Award again become available for grant under the
Stock Incentive Plan.
ELIGIBILITY
The Committee may grant Awards to any employee, non-employee director,
consultant, advisor or independent contractor of the Company.
STOCK OPTIONS
The Committee is authorized to grant to eligible persons options to purchase
a specified number of shares of Common Stock at a stated price per share
("Options"). During any calendar year, the Committee shall not grant to any
eligible person Options to purchase more than 1,000,000 shares of Common
Stock. An Option may be intended to qualify as an "incentive stock option"
("ISO") pursuant to the Code, or may be intended to be a nonqualified option
("NSO"). The term of an ISO cannot exceed 10 years, and the exercise price of
any ISO must be equal to or greater than the fair market value of the shares
of Common Stock on the date of the grant. Any ISO granted to a holder of 10%
or more of the combined voting power of the capital stock of the Company must
have an exercise price equal to or greater than 110% of the fair market value
of the Common Stock on the date of grant and may not have a term exceeding
five years from the grant date. The exercise price and the term of an NSO
shall be determined by the Committee on the date that the NSO is granted.
64
<PAGE>
Options shall become exercisable in whole or in part by the Optionee on the
date or dates specified by the Committee. The Committee may provide that an
Option becomes exercisable in installments over a period of years or upon the
attainment of stated goals. The Committee, in its sole discretion, may
accelerate the date or dates on which an Option becomes exercisable.
Each Option shall expire on such date or dates as the Committee shall
determine at the time the Option is granted. Upon termination of an Optionee's
employment with the Company (including by reason of the Optionee's death),
each unexercised Option (whether or not then exercisable) shall terminate and
be forfeited, except that any such Options which are then exercisable shall
remain exercisable for such period after termination of the Optionee's
employment as the Committee may have determined at the time the Option was
granted. If an Optionee's employment with the Company is terminated for cause
(as defined in the Stock Incentive Plan), all of such person's Options shall
immediately terminate.
Payment for shares of Common Stock purchased upon exercise of an Option must
be made in full at the time of purchase. Payment may be made in cash or in any
other manner as may be authorized by the Committee. Each Option shall be
evidenced by a written agreement containing such terms and conditions
consistent with the Incentive Plan as shall be established by the Committee.
RESTRICTED STOCK
The Committee may grant to an eligible person an award of Common Stock
subject to future service and such other restrictions and conditions as the
Committee may determine ("Restricted Stock"). The Committee will determine the
terms of such Restricted Stock, including the price, if any, to be paid by the
recipient for the restricted stock, the restrictions placed on the shares and
the time or times when the restrictions will lapse, at the time of the
granting thereof.
65
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of September 30, 1998, after giving
effect to the Recapitalization, 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 capital stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER THE
THE OFFERINGS OFFERINGS(B)
NAME AND ADDRESS OF BENEFICIAL ----------------------- -----------------------
OWNER(S)(A) NUMBER PERCENT NUMBER PERCENT
------------------------------ ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
ABRY II (c).................... 8,196,983 82.0% 8,196,983 41.0%
Robert Wolsey (d).............. 613,082 6.1 613,082 3.1
James M. Dell'Apa (e).......... 408,632 4.1 408,632 2.0
Steven Day (f)................. 368,182 3.7 368,182 1.8
David Zahn..................... 35,717 * 35,717 *
Ben Gaboury.................... 35,717 * 35,717 *
Andrew Banks (g)............... 550 * 550 *
Peni Garber.................... 550 * 550 *
Peggy Koenig (h)............... 1,100 * 1,100 *
Royce Yudkoff (i).............. 8,198,084 82.0 8,198,084 41.0
------------ ------- ------------ -------
All directors and executive
officers as a group
(10 persons).................. 9,697,273 97.0% 9,697,273 48.5%
</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) Assumes no exercise of the Underwriters' over-allotment options to
purchase up to an aggregate of 1,500,000 shares of Common Stock from the
Company.
(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) Includes 5,774 shares of Common Stock held by Pantera, Inc. and 288,682
shares of Common Stock held by Pantera Partnership Ltd.
(e) Excludes 36,618 shares of Common Stock held by relatives of Mr. Dell'Apa
of which he disclaims beneficial ownership.
(f) Includes 67,863 shares of Common Stock held by Mr. Day's spouse, 7,143
shares of Common Stock held by South Creek, Inc. and 214,304 shares of
Common Stock held by South Creek Partnership Ltd.
(g) Mr. Banks beneficially owns 550 shares of Common Stock held by Audemi
Corporation.
(h) Includes 550 shares of Common Stock held by Ms. Koenig's spouse.
(i) 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. Also includes
550 shares of Common Stock held by Mr. Yudkoff's spouse.
66
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Common Stock Offering, the Company will have a total
of 20,000,000 shares of Common Stock outstanding (21,500,000 shares if the
Underwriters' over-allotment options are exercised in full). Of these shares,
the 10,000,000 shares of Common Stock offered hereby (11,500,000 shares if the
Underwriters' over-allotment options are exercised in full) will be freely
tradeable without restriction or registration under the Securities Act by
persons other than "affiliates" of the Company, as defined in the Securities
Act, who would otherwise be required to sell such shares under Rule 144 under
the Securities Act ("Rule 144"). The remaining 10,000,000 shares of Common
Stock outstanding will be "restricted securities" as defined by Rule 144 (the
"Restricted Shares") and may not be resold in the absence of registration
under the Securities Act or pursuant to exemptions from such registration,
including among others, the exemption provided by Rule 144 under the
Securities Act. The Restricted Shares were issued and sold by the Company in
private transactions in reliance upon exemptions from registration under the
Securities Act.
In general, pursuant to Rule 144, a person (or persons whose shares are
aggregated) who has beneficially owned restricted securities for at least one
year (including the holding period of any prior owner except an affiliate),
including persons who may be deemed "affiliates" of the Company, is entitled
to sell within any three-month period a number of shares that does not exceed
the greater of one percent of the number of shares of Common Stock then
outstanding (approximately 200,000 shares upon completion of the Common Stock
Offering) or the average weekly trading volume of the Common Stock during the
four calendar weeks preceding the filing of a Form 144 with respect to such
sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements, and to the availability of current public
information about the Company. In addition, a person who is not deemed to have
been an affiliate of the Company at the time during the 90 days preceding a
sale, and who has beneficially owned the shares proposed to be sold for at
least two years (including the holding period of any prior owner except an
affiliate), is entitled to sell such shares under Rule 144(k) without regard
to the requirements described above. Rule 144 also provides that affiliates
who are selling shares that are not restricted securities must nonetheless
maintain the same restrictions applicable to restricted securities, with the
exception of the holding period requirement.
Each of the Company, each of the directors and executive officers of the
Company have agreed that, without the prior written consent of Goldman, Sachs
& Co. on behalf of the Underwriters, they will not, during the period ending
180 days after the date of this Prospectus, engage in specified transactions
relating to the Common Stock. See "Underwriting."
Pursuant to the Registration Rights Agreement, ABRY II and its assigns may
require the Company, subject to certain conditions and limitations, to
register with the Commission in accordance with the Securities Act all or part
of the shares of Common Stock currently owned by ABRY II at the request of the
holders of a majority of such shares of Common Stock. The Company may be
required on three separate occasions to register shares of Common Stock on a
Form S-1 Registration Statement and on unlimited number of occasions to
register shares of Common Stock on a Form S-2 or Form S-3 Registration
Statement. If the Company proposes to file on its own behalf or on behalf of
any holders of its equity securities a registration statement under the
Securities Act, then the Company is required, subject to certain conditions
and limitations, to give notice thereof to the parties to the Registration
Rights Agreement and to offer to include shares of Common Stock in such
registration. The Company may not cause any registration statement to be
declared effective by the Commission within 180 days after the effective date
of any other registration statement registering equity securities of the
Company. The Company is generally required to bear the expenses of all such
registrations, except underwriting discounts and commissions. The parties to
the Stockholders Agreement will own approximately 47.9% of the shares of
Common Stock immediately after the Common Stock Offering.
67
<PAGE>
Approximately 2,000,000 shares of Common Stock are reserved for issuance
under the Stock Incentive Plan. The Company currently intends to file a
registration statement on Form S-8 under the Securities Act to register all
shares of Common Stock issuable pursuant to the Stock Incentive Plan. The
Company expects to file such registration statement within 90 days following
the date of this Prospectus, and such registration statement will become
effective upon filing. Shares covered by the registration statement on Form S-
8 will thereon be eligible for sale in the public markets, subject to Rule 144
under the Securities Act limitations applicable to affiliates.
Prior to the Common Stock Offering, there has been no public market for the
Common Stock, and no predictions can be made of the effect, if any, that the
sale or availability for sale of shares of additional Common Stock will have
on the market price of the Common Stock. Nevertheless, sales of substantial
amounts of such shares in the public market, or the perception that such sales
could occur, could materially and adversely affect the market price of the
Common Stock and could impair the Company's future ability to raise capital
through a future offering of its equity securities.
68
<PAGE>
CERTAIN RELATIONSHIPS AND TRANSACTIONS
SUBSCRIPTION AND STOCKHOLDERS AGREEMENT
The principal stockholders of the Company (ABRY II, and Messrs. Wolsey,
Dell'Apa and Day) are parties to 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
Company. The following issuances are exempt from this preemptive right: (a) to
any employee of the Company; (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 shares of 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 Company. This
preemptive right will terminate upon the closing of the Offerings. The
Stockholders Agreement also provides that ABRY II will make a capital
contribution of up to an aggregate of $50 million. Such capital contribution
commitment will terminate upon the closing of the Offerings.
Parties to the Stockholders Agreement have certain rights and obligations in
connection with (i) a sale by ABRY II of shares in the Company, (ii) a sale of
the Company, and (iii) a reorganization or recapitalization of the Company in
anticipation of a sale of the Company or a public offering. In the case of a
sale by ABRY II of shares in the Company, the other stockholders party to the
Stockholders Agreement will have the right to participate pro rata in such a
sale, but such right to participate will terminate upon the closing of the
Offerings. In the case of a sale of the Company 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 Company. Pursuant to
the Agreement, all shares of Class D Common stock issued and outstanding will
automatically vest and convert into Class C Common stock upon the consummation
of the Offerings (and thereafter will convert into Common Stock). The
Stockholders Agreement also provides for certain put and call rights among the
Company 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.
The parties to the Stockholders Agreement have also entered into an
agreement to effect the Recapitalization.
CAPITAL CONTRIBUTION AGREEMENT
The Company and ABRY II entered into a capital contribution agreement with
NationsBank of Texas, N.A. (the "Capital Contribution Agreement"), pursuant to
which ABRY II agreed to make capital contributions to the Company, up to an
aggregate capital contribution of $50.0 million, in an amount equal to (i)
100.0% of the Company'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
September 30, 1998, ABRY II had contributed $37.2 million, not including $15.0
million of the ABRY Bridge Loan and had guaranteed an additional $3.9 million
of other debt of the aggregate $50.0 million associated with capital
contribution commitment.
JUNIOR PREFERRED STOCK
In September 1998, ABRY/Pinnacle, Inc., an affiliate of ABRY II, purchased
32.5 shares of Original Junior Preferred Stock with a liquidation preference
of $32.5 million. The proceeds of the sale were used to partially finance the
MobileMedia Acquisition. In December 1998, ABRY/Pinnacle Inc. purchased an
additional 26.2 shares of Additional Junior Preferred Stock with a liquidation
preference of $26.2 million. The proceeds of the sale were used to partially
pay down the Senior Credit Facility.
69
<PAGE>
MANAGEMENT AND CONSULTING SERVICES AGREEMENT
The Company and ABRY entered into a Management Services and Consulting
Agreement as of April 17, 1995, pursuant to which the Company pays up to
$75,000 per year plus reimbursable expenses in exchange for certain consulting
services. The Company paid approximately $12,500 for such services and
expenses from the period of inception through December 31, 1995 and
approximately $55,162 and $78,166 for such services and expenses for the years
ended December 31, 1996 and 1997, respectively. The Company paid approximately
$70,636 for such services through September 30, 1998. The Management Services
and Consulting Agreement is terminable at any time by either party with prior
written notice.
REGISTRATION RIGHTS AGREEMENT
The parties to the Stockholders Agreement have entered into a registration
rights agreement (the "Registration Rights Agreement") pursuant to which ABRY
II and its assigns may require the Company, subject to certain conditions and
limitations, to register with the Securities and Exchange Commission (the
"Commission") in accordance with the Securities Act of 1933, as amended (the
"Securities Act") all or part of the shares of Common Stock currently owned by
ABRY II at the request of the holders of a majority of such shares of Common
Stock. If the Company proposes to file on its own behalf or on behalf of any
holders of its equity securities a registration statement under the Securities
Act, then the Company is required, subject to certain conditions and
limitations, to give notice thereof to the parties to the Registration Rights
Agreement and to offer to include such parties shares of Common Stock in such
registration. The Company may not cause any registration statement to be
declared effective by the Commission within 180 days after the effective date
of any other registration statement registering equity securities of the
Company. The Company is generally required to bear the expenses of all such
registrations, except underwriting discounts and commissions. See "Shares
Eligible for Future Sale."
PINNACLE TOWERS II INC.
In November 1997, certain Company stockholders formed Pinnacle Towers II
Inc. ("PTI II"). PTI II is under common control with, and therefore is an
affiliate of the Company, because ABRY II and certain executives of the
Company 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.
In November 1997, the Company sold to PTI II, for approximately $2.2
million, certain of its towers and projects-in-progress. Effective April 30,
1998, the Company repurchased all of those assets from PTI II. Currently, PTI
II has minimal assets and is an inactive company.
MANAGEMENT INDEBTEDNESS
During the 1998 fiscal year, the Company had a loan receivable from Mr.
Dell'Apa, an executive officer, in the amount of $94,000. The loan to Mr.
Dell'Apa was 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 bore
interest payable quarterly at a rate equal to the Company's bank rate less 600
basis points. This loan was repaid in August 1998.
70
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
SENIOR CREDIT FACILITY
The Company has entered into the Senior Credit Facility with NationsBank,
N.A., Goldman, Sachs Credit Partners L.P. and certain other lenders that
provides a revolving line of credit for borrowings of up to $250.0 million, of
which $200.0 million is currently committed. The Company may make borrowings
and repayments until December 31, 2005. Beginning March 31, 2000, the
availability under the revolving line of credit starts reducing by specified
amounts on a quarterly basis until December 31, 2005 when the availability
will be reduced to zero. Loans under the Senior Credit Facility bear interest
at a rate per annum, at the borrower's request, equal to the agent bank's
prime rate plus a margin of up to 2.0% or the 90-day LIBOR plus a margin of up
to 3.0%. Outstanding borrowings under the Senior Credit Facility amounted to
$169.8 million at September 30, 1998. Advances under the Senior Credit
Facility have been used primarily to fund acquisitions and construction of
towers. As of September 30, 1998, after giving effect to the Transactions,
there would have been approximately $138.9 million available under the Senior
Credit Facility, after giving effect to approximately $17.0 million of
outstanding letters of credit, which reduce availability under 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 the subsidiaries and the Company has guaranteed the
obligations of Pinnacle Towers, Inc. under the Senior Credit Facility. 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
to prepay subordinated debt. In addition, the Company may not permit the
Leverage Ratio (as defined therein) to exceed certain amounts.
ABRY BRIDGE LOAN
As of September 30, 1998, ABRY II had advanced to the Company a total of
$15.0 million to partially finance the MobileMedia Acquisition and certain
other acquisitions. The ABRY Bridge Loan will be repaid in full with a portion
of the proceeds from the Offerings. ABRY II may continue to make such
advances. Amounts outstanding under the ABRY Bridge Loan bear 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.
10% SENIOR DISCOUNT NOTES
The Senior Discount Notes were initially issued in aggregate principal
amount of $325 million and are senior unsecured obligations of the Company.
The Senior Discount Notes will mature on March 15, 2008. Prior to March 15,
2003, the Company's interest expense on the Senior Discount Notes will be
comprised solely of the accretion of original issue discount. Thereafter, the
Senior Discount Notes will accrue cash interest at a rate of 10.0% per annum,
payable semi-annually in arrears on March 15 and September 15 of each year,
commencing September 15, 2003.
The Senior Discount Notes are redeemable at the option of the Company, in
whole or in part, at any time on or after March 15, 2003 at a redemption price
equal to 105.0% of the principal amount thereof during the twelve-month period
beginning March 15, 2003, 103.333% of the principal amount thereof during the
twelve-month period beginning March 15, 2004, 101.667% of the principal amount
thereof during the twelve-month period beginning March 15, 2005 and 100.0% of
the principal amount thereof on or after March 15, 2006, together with accrued
and unpaid interest to the redemption date. In addition, the Company at its
option, may redeem at least $5.0 million and in the aggregate up to 35% of the
original principal amount of the Senior Discount Notes at any time on or
before March 15, 2001, at a redemption price equal to 110.0% of the Accreted
Value (as defined in the Indenture) thereof to but excluding the redemption
date plus accrued and unpaid Liquidated Damages (as defined
71
<PAGE>
in the Indenture) to the redemption date with the net proceeds of one or more
Public Equity Offerings (as defined in the Indenture); provided, however, that
at least 65% of the original principal amount remains outstanding and that
such redemption occurs within 60 days following the closing any such Public
Equity Offering.
In the event of a Change of Control (as defined in the Indenture) of the
Company, the Company will be required to make an offer to purchase all
outstanding Senior Discount Notes at a price equal to 101% of the principal
amount thereof plus accrued and unpaid interest and Liquidated Damages to the
date of purchase. If such offer to purchase is to be consummated prior to
March 15, 2003, the purchase price will be equal to 101% of the Accreted Value
thereof on the date of purchase plus accrued and unpaid Liquidated Damages
thereon to the date of purchase.
The Indenture contains covenants for the benefit of the holders of the
Senior Discount Notes that, among other things, and subject to certain
exceptions, restrict the ability of the Company and its Restricted
Subsidiaries (as defined in the Indenture) to: (i) incur additional
indebtedness; (ii) guarantee payment of debt; (iii) pay dividends and make
distributions; (iv) restrict dividend or other payments of Restricted
Subsidiaries; (v) create liens; (vi) issue stock of subsidiaries; (vii) enter
into transactions with affiliates; (viii) merge or consolidate the Company;
and (ix) transfer and sell assets.
72
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's capital stock currently consists of 1,817,000 shares of common
stock with a par value of $.001 per share and 1,000,000 shares of preferred
stock with a par value of $.001 per share. Of the 1,817,000 shares of common
stock that the Company is authorized to issue: (a) 202,500 shares are
designated as Class A Common Stock (the "Class A Common Stock"); (b) 12,000
shares are designated as Class B Common Stock (the "Class B Common Stock");
(c) 200,000 shares are designated as Class C Common Stock; (d) 100,000 shares
are designated as Class D Common Stock (the "Class D Common Stock"); (e)
302,500 shares are designated as Class E Common Stock (the "Class E Common
Stock"); and (f) 1,000,000 shares are designated as Class F Common Stock (the
"Class F Common Stock"). Currently, 202,500 shares of Class A Common Stock,
12,000 shares of Class B Common Stock, 40,000 shares of Class D Common Stock
and 174,766 shares of Class E Common Stock are outstanding. There are no
shares of Class C Common Stock or Class F Common Stock currently outstanding.
The Existing Preferred Stock is to be redeemed from the proceeds of the
Offerings and is treated as no longer outstanding for purposes of the
discussion below.
As a result of the Recapitalization, effective immediately prior to the
closing of the Common Stock Offering, the following will occur: (i) the
holders of Class B and Class E Common Stock will receive cash in payment of
the distribution preference; (ii) the holders of Class A Common Stock will
receive cash in payment of both the distribution preference and guaranteed
yield related to such stock (iii) the holders of Class A, Class B and Class E
Common Stock will receive approximately 22.02 shares of the Company's Common
Stock for each of such shares; (iv) all of the outstanding Class D Common
Stock will immediately become vested and will convert into 1.6221 shares of
Class C Common Stock; (v) each of the shares of Class C Common Stock will
convert into approximately 22.02 shares of Common Stock; (vi) certain amounts
equal to the amount of the existing preferential amounts and accreted yield on
the Class A Common Stock, Class B Common Stock and Class E Common Stock will
be paid to the holders thereof out of the proceeds of the Offerings; and (vii)
the Company's certificate of incorporation will be amended to reflect that
only the Common Stock and Preferred Stock is authorized. In addition,
approximately 2,000,000 shares of Common Stock will be reserved for issuance
with respect to the exercise of certain rights under the Stock Incentive Plan.
Therefore, upon the completion of the Common Stock Offering, there will be
outstanding only one class of common stock, to be known as the "Common Stock."
After giving effect to the Recapitalization, the authorized capital stock of
the Company will consist of 100,000,000 shares of Common Stock and 5,000,000
shares of Preferred Stock.
COMMON STOCK
Each holder of Common Stock will be entitled to one vote for each share
held. Stockholders will not have the right to cumulate their votes in
elections of directors. Accordingly, holders of a majority of the issued and
outstanding Common Stock will have the right to elect all the Company's
directors and otherwise control the affairs of the Company, subject to any
voting rights of the then outstanding preferred stock, if any. See "Risk
Factors--Controlling Stockholder" and "Risk Factors--Anti-Takeover Effect of
Charter Provisions, Bylaws and State Law."
Holders of Common Stock will be entitled to dividends on a pro rata basis
upon declaration of dividends by the Board of Directors. Dividends will be
payable only out of unreserved and unrestricted surplus that is legally
available for the payment of dividends. Any determination to declare or pay
dividends in the future will be at the discretion of the Company's Board of
Directors and will depend on the Company's results of operations, financial
condition, contractual or legal restrictions and other factors deemed relevant
by the Board of Directors. In order to maintain the Company's REIT status,
however, the Company is required to distribute to stockholders 95% of its
taxable income. The Senior
73
<PAGE>
Credit Facility and Indenture currently prohibit the Company from paying any
dividends other than those required to be paid to maintain the Company's REIT
Status. See "Dividend Policy."
Upon a liquidation of the Company, holders of the Common Stock will be
entitled to a pro rata distribution of the assets of the Company, after
payment of all amounts owed to the Company's creditors, and subject to any
preferential amount payable to holders of Preferred Stock of the Company, if
any.
PREFERRED STOCK
The Company's certificate of incorporation permits the Company's Board of
Directors to issue shares of Preferred Stock in one or more series, and to fix
the relative rights, preferences and limitations of each series. Among such
rights, preferences and limitations are dividend rights and rates, provisions
for redemption, rights upon liquidation, conversion privileges and voting
powers. Any issuance of Preferred Stock with a dividend preference over the
Common Stock could adversely affect the dividend rights of holders of Common
Stock.
At the consummation of the Preferred Stock Offering, the Company will be
authorized to issue 5,000,000 shares of Preferred Stock as designated by the
Company's Board of Directors, of which 150,000 shares initially will be
authorized, issued and outstanding pursuant to the Preferred Stock Offering
and up to shares will be designated and reserved for issuance to pay
dividends on the New Preferred Stock if the Company elects to pay dividends on
the New Preferred Stock in additional shares of New Preferred Stock on or
prior to , 2004 in accordance with the terms thereof. All of such
shares will be designated as New Preferred Stock and will have a liquidation
preference of $1,000 per share. Subject to certain conditions, the shares of
New Preferred Stock will be exchangeable for the Exchange Notes at the option
of the Company on any dividend payment date on or after the date of original
issue of the New Preferred Stock. The New Preferred Stock, when issued and
paid for by the Underwriters in accordance with the terms of an underwriting
agreement, will be fully paid and non-assessable and the holders thereof will
not have any subscription or preemptive rights in connection therewith.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
Restrictions on Transfer. Because the Company wishes to retain its status as
a REIT, the Company's certificate of incorporation provides that no holder of
Common Stock may transfer any such share or interest therein, if as a result,
either (a) the total number of stockholders would thereby drop to less than
100 (the "Aggregate Ownership Limit"), or (b) a violation of the Percentage
Ownership Limit (as defined herein) would occur. The certificate of
incorporation also provides that no share of any series of Preferred Stock may
be sold or otherwise transferred to any individual if such transfer would
result in the ownership by such individual in combination with four or fewer
individuals of more than 50% of the aggregate value of all shares of all
classes of capital stock of the Company (the "Percentage Ownership Limit").
Any transfer of shares of Common Stock or Preferred Stock which would violate
the Aggregate Ownership Limit or the Percentage Ownership Limit will be void
and of no legal effect. Any such purported transfer will cause such shares to
be transferred to the Company, as trustee, in trust for the benefit of one or
more qualified charitable organizations. The Company will be deemed to own
such shares as trustee on the day prior to the purported transfer. While such
shares are held in trust, any dividends or distributions paid to the purported
transferee of the shares will be disgorged and repaid to the Company as
trustee, and any vote taken by the purported transferee prior to the discovery
of such purported transfer will be void ab initio. All certificates
representing shares of Common Stock or Preferred Stock will bear a legend
referring to the restrictions described above.
Such restrictions may delay or make more difficult acquisitions or changes
of control of the Company.
74
<PAGE>
Preferred Stock and Additional Common Stock. As discussed above, the
Company's Board of Directors has the authority to provide by board resolution
for the issuance of shares of one or more series of Preferred Stock. The
Company's Board of Directors is authorized to fix by resolution the terms and
conditions of each such series.
The Company believes that the availability of additional Preferred Stock,
issuable in series, and additional shares of Common Stock could facilitate
certain financings and acquisitions and provide a means for meeting other
corporate needs that might arise. The authorized shares of Preferred Stock, as
well as authorized but unissued shares of Common Stock, will be available for
issuance without further action by the Company's stockholders, unless
stockholder action is required by applicable law or by the rules of any stock
exchange on which any series of the Company's stock may then be listed.
These provisions give the Company's Board of Directors the power to approve
the issuance of a series of Preferred Stock, or additional shares of Common
Stock, that could, depending on its terms, either impede or facilitate the
completion of a merger, tender offer or other takeover attempt.
Limitation of Liability and Indemnification. As permitted by the Delaware
General Corporation Law (the "DGCL"), the Company's Certificate of
Incorporation provides that directors of the Company shall not be personally
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director. In addition, the Company's Bylaws provide that
the Company shall, to the fullest extent authorized by Section 145 of the
DGCL, as amended from time to time, indemnify all directors and officers and
all persons serving at the request of the Company as director, trustee,
officer, employee or agent of another corporation or of a partnership, trust
or other enterprise. Insofar as indemnification for liabilities arising under
the Securities Act may be permitted to directors, officers or persons
controlling the Company pursuant to the foregoing provisions, the Company has
been informed that, in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act and, therefore, is
unenforceable.
CERTAIN PROVISIONS OF DELAWARE LAW
Delaware Business Combination Statute. Section 203 of the DGCL ("Section
203") provides that, subject to certain exceptions specified therein, an
interested stockholder of a Delaware corporation shall not engage in any
business combination with the corporation for a three-year period following
the date that such stockholder becomes an interested stockholder unless (i)
prior to such date, the board of directors of the corporation approved either
the business combination or the transaction which resulted in the stockholder
becoming an interested stockholder, (ii) upon consummation of the transaction
which resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced (excluding
certain shares) or (iii) on or subsequent to such date, the business
combination is approved by the board of directors of the corporation and
authorized at an annual or special meeting of stockholders by the affirmative
vote of at least 66 2/3% of the outstanding voting stock which is not owned by
the interested stockholder. Except as otherwise specified in Section 203, an
interested stockholder is defined to include (x) any person that is the owner
of 15% or more of the outstanding voting stock of the corporation, or is an
affiliate or associate of the corporation and was the owner of 15% or more of
the outstanding voting stock of the corporation at any time within three years
immediately prior to the relevant date and (y) the affiliates and associates
of any such person.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an interested stockholder to effect various business
combinations with a corporation for a three-year period, although the
stockholders may elect to exclude a corporation from the restrictions imposed
thereunder. The certificate of incorporation does not exclude the Company from
the restrictions imposed under Section 203. The provisions of Section 203 may
encourage companies interested in
75
<PAGE>
acquiring the Company to negotiate in advance with the Company's board of
directors because the stockholder approval requirement can be avoided if a
majority of the directors then in office approve either the business
combination or the transaction which results in the stockholder becoming an
interested stockholder. Such provisions also may have the effect of preventing
changes in the management of the Company. It is possible that such provisions
could make it more difficult to accomplish transactions that stockholders may
otherwise deem to be in their best interests.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is First Union
National Bank.
76
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain material federal income tax
considerations that may be relevant to a holder of Common Stock. The summary
does not address all aspects of taxation that may be relevant to particular
shareholders in light of their personal investment or tax circumstances, or to
certain types of shareholders (including insurance companies, tax-exempt
organizations (except as described herein), financial institutions or broker-
dealers, foreign corporations and persons who are not citizens or residents of
the U.S. (except as described herein), and persons who acquired their Common
Stock pursuant to the exercise of an employee stock option or otherwise as
compensation) subject to special treatment under the federal income tax laws.
This summary discusses only Common Stock which is held as a capital asset
within Section 1221 of the Code. The summary is based on current provisions of
the Code, existing, temporary, and currently proposed Treasury Regulations
promulgated under the Code, the legislative history of the Code, existing
administrative rulings and practices of the IRS, and judicial decisions. No
assurance can be given that future legislative, judicial, or administrative
actions or decisions, which may be retroactive in effect, will not affect the
accuracy of statements in the summary as applicable to transactions entered
into or contemplated prior to the effective date of such changes.
THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION ONLY. EACH SHAREHOLDER
IS ADVISED TO CONSULT HIS OWN TAX ADVISOR REGARDING THE SPECIFIC TAX
CONSEQUENCES TO HIM OF THE ACQUISITION, OWNERSHIP AND SALE OF THE COMMON STOCK
AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT, INCLUDING THE FEDERAL,
STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH ACQUISITION,
OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE TAX
LAWS.
TAXATION OF THE COMPANY
The Company currently has in effect an election to be taxed as a REIT under
Sections 856 through 860 of the Code. The Company believes that it has since
its inception been organized and operated in such a manner as to qualify for
taxation as a REIT under the Code and its proposed method of operation will
enable it to continue to meet the requirements for continued qualification and
taxation as a REIT under the Code. The Company's continued qualification as a
REIT will depend upon the Company's qualification as a REIT in prior years.
The Company intends to continue to operate in a manner so as to qualify as a
REIT, but no assurance can be given that the Company will qualify or remain
qualified as a REIT. In the opinion of Holland & Knight LLP, the Company has
been organized and operated in conformity with the requirements for
qualification as a REIT under the Code and the continued operation of the
Company in a manner consistent with the statements made in the Management
Representation Certificate and the requirements for REIT qualification as
described in this Prospectus will enable it to continue to meet the
requirements for qualification and taxation as a REIT. It must be emphasized
that such opinion of counsel as to REIT qualification is based on certain
customary assumptions and factual representations regarding, among other
things, the ownership of stock of the Company, the nature of the Company's
assets, the conduct of its business, the sources of its revenues, the amounts
distributed by it to shareholders and other matters germane to the
requirements for qualification as a REIT. In addition, Holland & Knight LLP
will not review the Company's compliance with these requirements on an ongoing
basis, and there can be no assurance that the Company, the sources of its
income, the composition of its assets, the level of its dividends or the
diversity of its share ownership for any given year will satisfy the
requirements for qualification and taxation as a REIT. Prospective investors
also should be aware that an opinion of counsel is not binding on the Service
or any court, but merely represents counsel's best judgment with respect to
the probable outcome on the merits based on counsel's review and analysis of
existing law, regulations and interpretations, which include no controlling
precedent. In certain instances, due to the lack of relevant precedent,
counsel's opinion is based on administrative policies and practices of the
Service
77
<PAGE>
as indicated in existing private letter rulings (which rulings are not binding
on the Service) or authority considered by counsel to be analogous. There can
be no assurance that a position contrary to the opinion of counsel will not be
taken by the Service, or that any court considering the issues would not hold
contrary to such opinion.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex, and only limited judicial or administrative
interpretations are available. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its shareholders. The discussion is qualified in its
entirety by the applicable Code provisions, Treasury Regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all of
which are subject to change prospectively or retroactively.
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income tax on its net income that is distributed
currently to its shareholders. That treatment substantially eliminates the
"double taxation" (i.e., taxation at both the corporate and shareholder
levels) that generally results from investment in a corporation. However, the
Company will be subject to federal income tax in the following circumstances.
First, the Company will be taxed at regular corporate rates on any
undistributed REIT taxable income, including undistributed net capital gains.
Second, under certain circumstances, the Company may be subject to the
"alternative minimum tax" on undistributed items of tax preference, if any.
Third, if the Company has (i) net income from the sale or other disposition of
"foreclosure property" that is held primarily for sale to customers in the
ordinary course of business or (ii) other nonqualifying income from
foreclosure property, it will be subject to tax at the highest corporate rate
on such income. Fourth, if the Company has net income from prohibited
transactions (which are, in general, certain sales or other dispositions of
property (other than foreclosure property) held primarily for sale to
customers in the ordinary course of business), such income will be subject to
a 100% tax. Fifth, if the Company should fail to satisfy the 75% gross income
test or the 95% gross income test (as discussed below), and nonetheless has
maintained its qualification as a REIT because certain other requirements have
been met, it will be subject to tax in an amount equal to (a) the gross income
attributable to the greater of the amount by which it fails the 75% or 95%
gross income test, multiplied by (b) a fraction intended to reflect its
profitability. Sixth, if the Company should fail to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain net income for such year, and (iii)
any undistributed taxable income from prior periods, it would be subject to a
4% excise tax on the excess of such required distribution over the amounts
actually distributed. If the Company elects to retain and pay income tax on
its net long-term capital gain in a taxable year, any retained amounts would
be treated as having been distributed for purposes of the 4% excise tax. See
"--Requirements for REIT Qualification--Distribution Requirements." Seventh,
if the Company acquires any asset from a C corporation (i.e., a corporation
generally subject to full corporate-level tax) in a transaction in which the
basis of the asset in the Company's hands is determined by reference to the
basis of the asset (or any other asset) in the hands of the C corporation and
the Company recognizes gain on the disposition of such asset during the 10-
year period beginning on the date on which such asset was acquired by it, then
to the extent of such asset's "built-in-gain" (i.e., the excess of the fair
market value of such asset at the time of acquisition by the Company over the
adjusted basis in such asset at such time), such gain will be subject to tax
at the highest regular corporate rate applicable (as to be provided in
Treasury Regulations that have not yet been promulgated). The results
described above with respect to the recognition of "built-in-gain" assume that
the Company has made an election pursuant to IRS Notice 88-19 as to such
acquisitions and will do so as to any future such acquisition.
REQUIREMENTS FOR REIT QUALIFICATION
The Code defines a REIT as a corporation, trust, or association (i) that is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation,
but
78
<PAGE>
for sections 856 through 860 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the
Code; (v) the beneficial ownership of which is held by 100 or more persons;
(vi) not more than 50% in value of the outstanding shares of which is owned,
directly or indirectly, by five or fewer individuals (as defined in the Code
to include certain entities) during the last half of each taxable year (the
"5/50 Rule"); (vii) that makes an election to be a REIT (or has made such
election for a previous taxable year) and satisfies all relevant filing and
other administrative requirements established by the Service that must be met
in order to elect and maintain REIT status; (viii) that uses a calendar year
for federal income tax purposes and complies with the recordkeeping
requirements of the Code and Treasury Regulations promulgated thereunder; and
(ix) that meets certain other tests, described below, regarding the nature of
its income and assets. The Code provides that conditions (i) to (iv),
inclusive, must be met during the entire taxable year and that condition (v)
must be met during at least 335 days of a taxable year of 12 months, or during
a proportionate part of a taxable year of less than 12 months. For purposes of
determining stock ownership under the 5/50 Rule, a supplemental unemployment
compensation benefits plan, a private foundation, or a portion of a trust
permanently set aside or used exclusively for charitable purposes generally is
considered an individual. A trust that is a qualified trust under Code section
401(a), however, generally is not considered an individual and beneficiaries
of such trust are treated as holding shares of a REIT in proportion to their
actuarial interests in such trust for purposes of the 5/50 Rule.
The Company's certificate of incorporation contains restrictions regarding
transfer of its shares that are intended to assist the Company in continuing
to satisfy the share ownership requirements described in clauses (v) and (vi)
above. Such transfer restrictions are described in "Description of Capital
Stock--Certain Provisions of the Company's Certificate of Incorporation and
Bylaws."
In connection with the Common Stock Offering, the Company's executive
officers and directors, who will own in the aggregate approximately 48.5% of
the stock of the Company outstanding after the completion of the Offerings
have entered into agreements (the "Lock-Up Agreements") not to, without prior
written consent of the Underwriters, sell, offer, contract to sell, pledge,
grant any option to purchase, or otherwise transfer or dispose of any such
shares for a period of 180 days after the date of this Prospectus. See
"Underwriting." In addition, since the time the Company was organized, an
agreement among the Company and its major stockholders has imposed certain
restrictions on the transfers of shares of the stock of the Company under
certain circumstances (the "Stockholders Agreement"). See "Certain
Relationships and Transactions--Subscription and Stockholders Agreement."
Futhermore, in connection with the issuance of certain classes of its stock,
the Company has imposed certain restrictions on the transferability of such
shares (the "Restrictive Legends"). As described above, one of the REIT
qualification requirements is that the shares of a REIT be transferable. The
opinion of Holland & Knight LLP is based in part on the conclusion that none
of the Lock-Up Agreements, the Stockholders Agreement or the Restrictive
Legends will render the shares of stock restricted thereby to be deemed other
than transferable for purposes of such REIT qualification requirement.
Investors should be aware that there is no relevant authority involving
transfer restrictions similar to those contained in any of the Lock-Up
Agreements, the Stockholders Agreement or the Restrictive Legends or that
discuss whether such restrictions may violate such transferability
requirement. Therefore, the opinion of Holland & Knight LLP with respect to
the transferability requirement is based upon the plain language of the REIT
provisions of the Code and authorities addressing transferability in
situations that are considered to be analogous, certain of which authorities
have been rendered obsolete for unrelated reasons by more recent
administrative pronouncements. Opinions of counsel are not binding upon the
Service or the courts, and there can be no assurance that the Service will not
assert successfully a contrary position. If any of the Lock-Up Agreements, the
Stockholders Agreement or the Restrictive Legends is deemed to be a transfer
restriction contrary to the transferability requirement for REIT
qualification, the Company may not currently qualify as a REIT or may, in
connection with the completion of the Offering, lose its REIT status and
possibly incur other adverse tax consequences. See "Risk Factors--REIT
Status."
79
<PAGE>
The Company currently has wholly-owned corporate subsidiaries (the
"Corporate Subsidiaries"). The Company may have additional corporate
subsidiaries in the future. Code section 856(i) provides that a corporation
that is a "qualified REIT subsidiary" will not be treated as a separate
corporation, and all assets, liabilities, and items of income, deduction, and
credit of a "qualified REIT subsidiary" will be treated as assets,
liabilities, and items of income, deduction, and credit of the REIT. For
taxable years beginning after December 31, 1997, a "qualified REIT subsidiary"
is a corporation all of the capital stock of which is owned by the REIT.
However, for taxable years beginning before January 1, 1998, a "qualified REIT
subsidiary" was a corporation, all of the capital stock of which was owned by
the REIT at all times during the period such corporation was in existence.
Legislative history provided, however, that an existing corporation acquired
by a REIT would be deemed to satisfy this requirement if a Section 338
election was made by the corporation. Thus, in applying the requirements
described herein, any "qualified REIT subsidiaries" of the Company will be
ignored, and all assets, liabilities, and items of income, deduction, and
credit of such subsidiaries will be treated as assets, liabilities, and items
of income, deduction, and credit of the Company. The Company believes its
current Corporate Subsidiaries are "qualified REIT subsidiaries" and will
continue to be "qualified REIT subsidiaries", such that no Corporate
Subsidiary will be subject to federal corporate income taxation (although it
may be subject to state and local taxation).
In addition, in order to become qualified and remain qualified as a REIT, as
of the close of each taxable year, a REIT must not have any accumulated
"earnings and profits" attributable to a non-REIT year, including for this
purpose any such accumulated "earnings and profits" carried over or deemed
carried over to it from a C corporation. The Company believes that neither it
has, nor any acquisition by it of a C corporation has resulted in the Company
having, any such accumulated "earnings and profits." However, an adjustment of
the Company's earnings and profits for a prior year, resulting from an audit
adjustment of the Service or otherwise, could cause the Company to fail to
satisfy such requirement effective for the year of such adjustment and
subsequent years.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate
share of the assets of the partnership and will be deemed to be entitled to
the gross income of the partnership attributable to such share. In addition,
the assets and gross income of the partnership will retain the same character
in the hands of the REIT for purposes of section 856 of the Code, including
satisfying the gross income and asset tests described below.
INCOME TESTS
In order for the Company to qualify and to maintain its qualification as a
REIT, two requirements relating to gross income must be satisfied annually.
First, at least 75% of its gross income (excluding gross income from
prohibited transactions) for each taxable year must consist of defined types
of income derived directly or indirectly from investments relating to real
property or mortgages on real property (including "rents from real property"
and, in certain circumstances, interest) or from certain types of temporary
investments. Second, at least 95% of its gross income (excluding gross income
from prohibited transactions) for each taxable year must be derived from such
real property or temporary investments, and from dividends, other types of
interest, and gain from the sale or disposition of stock or securities, or
from any combination of the foregoing. The specific application of these tests
to the Company is discussed below.
The rent received by the Company from its tenants ("Rent") will qualify as
"rents from real property" in satisfying the gross income requirements for a
REIT described above only if several conditions are met. First, the amount of
Rent must not be based, in whole or in part, on the income or profits of any
person. However, an amount received or accrued generally will not be excluded
from the term "rents from real property" solely by reason of being based on a
fixed percentage or percentages of receipts or sales. Second, the Code
provides that rents received from a tenant of the Company will
80
<PAGE>
not qualify as "rents from real property" in satisfying the gross income tests
if the Company or a direct or indirect owner of 10% or more of the Company
directly or constructively owns 10% or more of the ownership interests in such
tenant (a "Related Party Tenant"). Third, if rent attributable to personal
property, leased in connection with a lease of real property, is greater than
15% of the total rent received under the lease, then the portion of rent
attributable to such personal property will not qualify as "rents from real
property." Finally, for the Rent to qualify as "rents from real property," the
Company generally must not operate or manage its properties or furnish or
render services to the tenants of such properties, other than through an
"independent contractor" who is adequately compensated and from whom the
Company derives no revenue. The "independent contractor" requirement, however,
does not apply to the extent the services provided by the Company are "usually
or customarily rendered" in connection with the rental of space for occupancy
only and are not otherwise considered "rendered to the occupant." In addition,
beginning with its 1998 taxable year, the Company may render a de minimis
amount of "noncustomary" services to the tenants of a property other than
through an independent contractor as long as the amount the Company receives
with respect to such services does not exceed 1% of its total receipts from
the property. For that purpose, the amount attributable to such services will
be at least equal to 150% of the Company's direct cost of providing the
services.
The Company does not charge Rent for any portion of any property that is
based, in whole or in part, on the sales, receipts, income or profits of any
person. In addition, the Company has not received and does not anticipate
receiving any Rent from a Related Party Tenant. Also, the Rent attributable to
personal property leased in connection with any lease (a "Lease") of real
property by the Company does not exceed 15% of the total Rent received under
the Lease. Finally, subject to the 1% de minimis exception, the Company
provides no noncustomary services to its tenants, other than through an
independent contractor.
If any portion of the Rent does not qualify as "rents from real property"
because the Rent attributable to personal property leased in connection with
any Lease of real property exceeds 15% of the total Rent received under the
Lease for a taxable year, the portion of the Rent that is attributable to
personal property will not be qualifying income for purposes of either the 75%
or 95% gross income test. Thus, if the Rent attributable to personal
property,plus any other income received by the Company during a taxable year
that is not qualifying income for purposes of the 95% gross income test,
exceeds 5% of its gross income during such year, it likely would lose its REIT
status. If, however, any portion of the Rent received under a Lease does not
qualify as "rents from real property" because either (i) the Rent is
considered based on the income or profits of any person or (ii) the tenant is
a Related Party Tenant, none of the Rent received by the Company under such
Lease would qualify as "rents from real property." In that case, if the Rent
received by the Company under such Lease, plus any other income received by it
during the taxable year that is not qualifying income for purposes of the 95%
gross income test, exceeds 5% of its gross income for such year, it likely
would lose its REIT status. Finally, subject to the 1% de minimis exception,
if any portion of the Rent does not qualify as "rents from real property"
because the Company furnishes noncustomary services with respect to a property
other than through a qualifying independent contractor, none of the Rent
received by it with respect to the such property would qualify as "rents from
real property." In that case, if the Rent received by the Company with respect
to such property, plus any other income received by it during the taxable year
that is not qualifying income for purposes of the 95% gross income test,
exceeds 5% of its gross income for such year, it would lose its REIT status.
In addition to the Rent, certain of the Company's tenants may be required to
pay additional charges, such as late fees. To the extent that such charges
represent either (i) reimbursements of amounts a tenant is obligated to pay to
third parties or (ii) penalties for nonpayment or late payment of such
amounts, such charges should qualify as "rents from real property." To the
extent that additional charges represent interest that is accrued on the late
payment of the Rent or such additional charges, such should be treated as
interest that qualifies for the 95% gross income test, but not the 75% gross
income test.
81
<PAGE>
From time to time, the Company has entered into hedging transactions with
respect to one or more of its assets or liabilities, and the Company may
continue to enter into such hedging transactions. Such transactions include or
may include interest rate swap contracts, interest rate cap or floor
contracts, futures or forward contracts, and options. To the extent that the
Company has entered or enters into an interest rate swap or cap contract,
option, futures contract, forward rate agreement, or similar financial
instrument to reduce the interest rate risk with respect to any indebtedness
incurred or to be incurred to acquire or carry real estate assets, any
periodic income or gain from the disposition of such contract will be
qualifying income for purposes of the 95% gross income test, but not the 75%
gross income test. To the extent that the Company hedges with other types of
financial instruments or in other situations, it is not entirely clear how the
income from those transactions will be treated for purposes of the income
tests that apply to REITs under the Code. The Company has structured, and the
Company intends to structure in the future, any hedging transactions in a
manner that will not jeopardize its status as a REIT.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it nevertheless may qualify as a REIT for such
year if it is entitled to relief under certain provisions of the Code. Those
relief provisions generally will be available if the Company's failure to meet
such tests is due to reasonable cause and not due to willful neglect, the
Company attaches a schedule of the sources of its income to its return, and
any incorrect information on the schedule was not due to fraud with intent to
evade tax. It is not possible, however, to state whether in all circumstances
the Company would be entitled to the benefit of those relief provisions. As
discussed above in "Certain Federal Income Tax Considerations--Taxation of the
Company," even if those relief provisions apply, the Company will be subject
to a tax in an amount equal to (a) the gross income attributable to the
greater of the amount by which the 75% and 95% gross income tests are failed,
multiplied by (b) a fraction intended to reflect profitability.
ASSET TESTS
The Company, at the close of each quarter of each taxable year, also must
satisfy two tests relating to the nature of its assets. First, at least 75% of
the value of its total assets must be represented by cash or cash items
(including certain receivables), government securities, "real estate assets,"
or, in cases where it raises new capital through stock or long-term (at least
five-year) debt offerings, temporary investments in stock or debt instruments
during the one-year period following its receipt of such capital. The term
"real estate assets" includes interests in real property, interests in
mortgages on real property to the extent the principal balance of a mortgage
does not exceed the value of the associated real property, and shares of other
REITs. For purposes of the 75% asset test, the term "interest in real
property" includes an interest in land and improvements thereon, such as
buildings or other inherently permanent structures (including items that are
structural components of such buildings or structures), a leasehold of real
property, and an option to acquire real property (or a leasehold of real
property). The Service 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 constitute inherently permanent structures
and are therefore real estate assets. Second, of the investments not included
in the 75% asset class, the value of any one issuer's securities owned by the
Company may not exceed 5% of the value of its total assets and the Company may
not own more than 10% of any one issuer's outstanding voting securities
(except for the interest of the Company in any qualified REIT subsidiary).
If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied the asset tests at the close of the preceding calendar
quarter and (ii) the discrepancy between the value of its assets and the asset
test requirements was not wholly or partly caused by an acquisition of non-
qualifying assets and arose from changes in the market values of its assets.
If the condition described in clause (ii) of the preceding
82
<PAGE>
sentence were not satisfied, the Company still could avoid disqualification by
eliminating any discrepancy within 30 days after the close of the calendar
quarter in which it arose.
DISTRIBUTION REQUIREMENTS
The Company, in order to qualify as a REIT, is required to distribute with
respect to each taxable year dividends (other than capital gain dividends or
retained capital gains) to its shareholders in an aggregate amount at least
equal to (i) the sum of (A) 95% of its "REIT taxable income" (computed without
regard to the dividends paid deduction and its net capital gain) and (B) 95%
of the net income (after tax), if any, from foreclosure property, minus (ii)
the sum of certain items of noncash income. Such distributions must be paid in
the taxable year to which they relate, or in the following taxable year if
declared before the Company timely files its federal income tax return for
such year and if paid on or before the first regular dividend payment date
after such declaration. To the extent that the Company does not distribute all
of its net capital gain or distributes at least 95%, but less than 100%, of
its "REIT taxable income," as adjusted, it will be subject to tax thereon at
capital gains and regular ordinary corporate tax rates, as the case may be.
Furthermore, if the Company should fail to distribute during each calendar
year at least the sum of (i) 85% of its REIT ordinary income for such year,
(ii) 95% of its REIT capital gain income for such year, and (iii) any
undistributed taxable income from prior periods, it would be subject to a 4%
nondeductible excise tax on the excess of such required distribution over the
amounts actually distributed. To the extent that the Company elects to retain
and pay income tax on its long-term capital gain in a taxable year, as
described in "--Taxation of Taxable U.S. Shareholders," such retained amount
will be treated as having been distributed for purposes of the 4% excise tax.
To the extent that the Company is required to include items in "REIT taxable
income" in advance of the receipt of cash payments associated with such income
or is required to expend cash for the repayment of debt or in any other manner
for which no current deduction is available in computing the Company's "REIT
taxable income," the Company may find it necessary to arrange for short-term
(or possibly long-term) borrowings, raise funds through the issuance of
additional shares of Common or Preferred Stock, or pay dividends in the form
of taxable share dividends in order to meet the 95% distribution requirement
necessary to maintain its REIT qualification.
Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirements for a year by paying "deficiency dividends"
to its shareholders in a later year, which may be included in its deduction
for dividends paid for the earlier year. Although the Company may be able to
avoid being taxed on amounts distributed as deficiency dividends, it will be
required to pay to the Service interest based upon the amount of any deduction
taken for deficiency dividends.
RECORDKEEPING REQUIREMENTS
Pursuant to applicable Treasury Regulations, in order to qualify as a REIT,
the Company must maintain certain records. In addition, to avoid a monetary
penalty, the Company must request on an annual basis certain information from
its shareholders designed to disclose the actual ownership of its outstanding
shares.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, it will be subject to tax (including
any applicable alternative minimum tax) on its taxable income at regular
corporate rates. Distributions to shareholders in any year in which the
Company fails to qualify will not be deductible nor will they be required to
be made. In such event, to the extent of current and accumulated earnings and
profits, all distributions to shareholders will be taxable as ordinary income
and, subject to certain limitations of the Code, corporate distributees may be
eligible for the dividends received deduction. Unless entitled to relief under
specific statutory provisions, the Company also will be disqualified from
taxation as a REIT for the four taxable years following the year
83
<PAGE>
during which it ceased to qualify as a REIT. It is not possible to predict
whether in all circumstances the Company would be entitled to such statutory
relief.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
As used herein, the term "U.S. Shareholder" means a holder of Common Stock
that for U.S. federal income tax purposes is (i) a citizen or resident of the
United States, (ii) a corporation, partnership, or other entity created or
organized in or under the laws of the United States or of any political
subdivision thereof, (iii) an estate whose income from sources without the
United States is includible in gross income for U.S. federal income tax
purposes regardless of its connection with the conduct of a trade or business
within the United States, or (iv) any trust with respect to which (A) a U.S.
court is able to exercise primary supervision over the administration of such
trust and (B) one or more U.S. fiduciaries have the authority to control all
substantial decisions of the trust.
TAXATION OF SHAREHOLDERS ON DISTRIBUTIONS
As long as the Company qualifies as a REIT, distributions made to taxable
U.S. Shareholders out of current or accumulated earnings and profits (and not
designated as capital gain dividends or retained capital gains) will be taken
into account by such U.S. Shareholders as ordinary income and will not be
eligible for the dividends received deduction generally available to
corporations. For purposes of determining whether distributions are out of
current or accumulated earnings and profits, earnings and profits are first
allocated to preferred stock and then allocated to common stock. Distributions
that are designated as capital gain dividends will be taxed as long-term
capital gains (to the extent they do not exceed the Company's actual net
capital gain for the taxable year) without regard to the period for which the
shareholder has held his shares. However, corporate shareholders may be
required to treat up to 20% of certain capital gain dividends as ordinary
income. Beginning with its 1998 taxable year, the Company may elect to retain
and pay income tax on its net long-term capital gains. In that case, the
Company's shareholders would include in income as long-term capital gain their
proportionate share of its undistributed long-term capital gains. In addition,
the shareholders would be deemed to have paid their proportionate share of the
tax paid by the Company, which would be credited or refunded to the
shareholders. Each shareholder's basis in his shares would be increased by the
amount of the undistributed long-term capital gains included in the
shareholder's income, less the shareholder's share of the tax paid by the
Company.
Distributions in excess of current and accumulated earnings and profits will
not be taxable to a shareholder to the extent that they do not exceed the
adjusted basis of the shareholder's shares, but rather will reduce the
adjusted basis of such shares. To the extent that such distributions in excess
of current and accumulated earnings and profits exceed the adjusted basis of a
shareholder's shares, such distributions will be included in income as long-
term capital gain (or short-term capital gain if such shares have been held
for one year or less), assuming that such shares are capital assets in the
hands of the shareholder. In addition, any distribution declared by the
Company in October, November, or December of any year and payable to a
shareholder of record on a specified date in any such month shall be treated
as both paid by the Company and received by the shareholder on December 31 of
such year, provided that the distribution is actually paid by the Company
during January of the following calendar year. The Company may be required to
withhold a portion of capital gain distributions to shareholders who fail to
certify their nonforeign status to the Company.
Shareholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. Instead, such losses would
be carried over by the Company for potential offset against its future income
(subject to certain limitations). Taxable distributions from the Company and
gain from the disposition of Common Stock will not be treated as passive
activity income and, therefore, shareholders generally will not be able to
apply any "passive activity losses" (such as losses from certain types of
limited partnerships in which a shareholder is a limited partner) against
84
<PAGE>
such income. In addition, taxable distributions from the Company generally
will be treated as investment income for purposes of the investment interest
limitations. Capital gains from the disposition of Common Stock (or
distributions treated as such), however, will be treated as investment income
only if the shareholder so elects, in which case such capital gains will be
taxed at ordinary income rates. The Company will notify shareholders after the
close of the Company's taxable year as to the portions of the distributions
attributable to that year that constitute ordinary income, return of capital,
and capital gain.
TAXATION OF SHAREHOLDERS ON THE DISPOSITION OF COMMON STOCK
In general, any gain or loss realized upon a taxable disposition of shares
of Common Stock by a shareholder who is not a dealer in securities will be
treated as long-term capital gain or loss if the shares have been held for
more than one year and otherwise as short-term capital gain or loss. However,
any loss upon a sale or exchange by a shareholder who has held such shares for
six months or less (after applying certain holding period rules), will be
treated as a long-term capital loss to the extent that a distribution from the
Company is required to be treated by such shareholder as long-term capital
gain. All or a portion of any loss realized upon a taxable disposition of
shares of Common Stock may be disallowed if other shares of the same Common
Shares are purchased within 30 days before or after the disposition.
CAPITAL GAINS AND LOSSES
A capital asset generally must be held for more than one year in order for
gain or loss derived from its sale or exchange to be treated as long-term
capital gain or loss. The highest marginal individual income tax rate is
39.6%. For taxable years ending after 1997, the maximum tax rate on net
capital gains applicable to noncorporate taxpayers is 20% for sales and
exchanges of assets held for more than one year. The maximum tax rate on long-
term capital gain applicable to noncorporate taxpayers from the sale or
exchange of "section 1250 property" (i.e., depreciable real property) is 25%
to the extent that such gain would have been treated as ordinary income if the
property were "section 1245 property."
With respect to distributions designated by the Company as capital gain
dividends and any retained capital gains that the Company is deemed to
distribute in taxable years beginning on and after January 1, 1998, the
Company may designate (subject to certain limits) whether such a dividend or
distribution is taxable to its noncorporate shareholders at a 20% or 25% rate.
Thus, the tax rate differential between capital gain and ordinary income for
individuals may be significant. In addition, the characterization of income as
capital or ordinary may affect the deductibility of capital losses. Capital
losses not offset by capital gains may be deducted against an individual's
ordinary income only up to a maximum annual amount of $3,000, and capital
losses not currently deductible due to such limitation may be carried forward
indefinitely. All net capital gain of a corporate taxpayer is subject to tax
at ordinary corporate rates. A corporate taxpayer can deduct capital losses
only to the extent of capital gains, with unused losses being carried back
three years and forward five years.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Company will report to its U.S. Shareholders and to the Service the
amount of distributions paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a shareholder may be
subject to backup withholding at the rate of 31% with respect to distributions
paid unless such holder (i) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact or (ii) provides
a taxpayer identification number, certifies as to no loss of exemption from
backup withholding, and otherwise complies with the applicable requirements of
the backup withholding rules. A shareholder who does not provide the Company
with his correct taxpayer identification number also may be subject to
penalties imposed by
85
<PAGE>
the Service. Any amount paid as backup withholding will be creditable against
the shareholder's income tax liability.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Tax-exempt entities, including qualified employee pension and profit sharing
trusts and individual retirement accounts ("Exempt Organizations"), generally
are exempt from federal income taxation. However, they are subject to taxation
on their unrelated business taxable income ("UBTI"). While many investments in
real estate generate UBTI, the Service has issued a published ruling that
dividend distributions from a REIT to an exempt employee pension trust do not
constitute UBTI, provided that the shares of the REIT are not otherwise used
in an unrelated trade or business of the exempt employee pension trust. Based
on that ruling, amounts distributed by the Company to Exempt Organizations
generally will not constitute UBTI, provided that (i) the Exempt Organization
has not financed its acquisition of shares of Common Stock with acquisition
indebtedness within the meaning of the Code and (ii) the shares of Common
Stock are not otherwise used by the Exempt Organization in an unrelated trade
or business. Furthermore, social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts, and qualified group
legal services plans that are exempt from taxation under paragraphs (7), (9),
(17), and (20), respectively, of Code section 501(c) are subject to different
UBTI rules, which generally will require them to characterize distributions
from the Company as UBTI. In addition, in certain circumstances, a pension
trust that owns more than 10% of the stock of the Company may be required to
treat a percentage of the dividends received with respect to its Company
shares as UBTI (the "UBTI Percentage"). The UBTI Percentage is the gross
income derived by the Company from an unrelated trade or business (determined
as if the Company were a pension trust) divided by the gross income of the
Company for the year in which the dividends are paid. The UBTI rule applies to
a pension trust holding more than 10% of the Common Stock of the Company only
if (i) the UBTI Percentage is at least 5%, (ii) the Company qualifies as a
REIT by reason of the modification of the 5/50 Rule that allows the
beneficiaries of the pension trust to be treated as holding shares of the
Company in proportion to their actuarial interests in the pension trust, and
(iii) either (A) one pension trust owns more than 25% of the value of the
Company's shares or (B) a group of pension trusts individually holding more
than 10% of the value of the Company's shares collectively owns more than 50%
of the value of the Company's shares.
TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
holders of Common Stock (collectively, "Non-U.S. Shareholders") are complex
and no attempt will be made herein to provide more than a summary of such
rules. NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO
DETERMINE THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS WITH REGARD
TO AN INVESTMENT IN COMMON STOCK, INCLUDING ANY REPORTING REQUIREMENTS.
TAXATION OF SHAREHOLDERS ON DISTRIBUTIONS
Distributions to Non-U.S. Shareholders that are not attributable to gain
from sales or exchanges of U.S. real property interests and are not designated
by the Company as capital gains dividends or retained capital gains (i.e.,
undistributed capital gains to the extent so designated by the Company) will
be treated as dividends of ordinary income to the extent that they are made
out of the Company's current or accumulated earnings and profits. For purposes
of determining whether distributions are made out of current or accumulated
earnings and profits, earnings and profits are allocated first to preferred
stock and then to common stock. Such distributions ordinarily will be subject
to a withholding tax equal to 30% of the gross amount of the distribution
unless an applicable tax treaty reduces or eliminates that tax. However, if
income from the investment in Common Stock is treated as effectively
86
<PAGE>
connected with the Non-U.S. Shareholder's conduct of a U.S. trade or business,
the Non-U.S. Shareholder generally will be subject to federal income tax at
graduated rates, in the same manner as U.S. Shareholders are taxed with
respect to such distributions (and also may be subject to the 30% branch
profits tax in the case of a Non-U.S. Shareholder that is a non-U.S.
corporation). The Company expects to withhold U.S. income tax at the rate of
30% on the gross amount of any such distributions made to a Non-U.S.
Shareholder unless (i) a lower treaty rate applies and any required form
evidencing eligibility for that reduced rate is filed with the Company or (ii)
the Non-U.S. Shareholder files an IRS Form 4224 with the Company claiming that
the distribution is effectively connected income. The Service has issued
regulations that modify the manner in which the Company must comply with the
withholding requirements. Those regulations are effective for distributions
made after December 31, 1999.
Distributions in excess of current and accumulated earnings and profits of
the Company will not be taxable to a shareholder to the extent that such
distributions do not exceed the adjusted basis of the shareholder's Common
Stock but rather will reduce the adjusted basis of such shares. To the extent
that distributions in excess of current and accumulated earnings and profits
exceed the adjusted basis of a Non-U.S. Shareholder's Common Stock, such
distributions will give rise to tax liability if the Non-U.S. Shareholder
would otherwise be subject to tax on any gain from the sale or disposition of
his Common Stock, as described below. Because it generally cannot be
determined at the time a distribution is made whether or not such distribution
will be in excess of the Company's current and accumulated earnings and
profits, the entire amount of any distribution normally will be subject to
withholding at the same rate applicable to dividend distributions. However,
amounts so withheld are refundable to the extent it is determined subsequently
that such distribution was, in fact, in excess of the Company's current and
accumulated earnings and profits.
For any year in which the Company qualifies as a REIT, to the extent that a
distribution is attributable to gain from sales or exchanges of U.S. real
property interests, the distribution will be taxed to a Non-U.S. Shareholder
under the provisions of the Foreign Investment in Real Property Tax Act of
1980 ("FIRPTA"). Under FIRPTA, distributions attributable to gain from sales
of U.S. real property interests are taxed to a Non-U.S. Shareholder as if such
gain were effectively connected with a U.S. business without regard to whether
the Company designates such distribution as capital gain dividends. Non-U.S.
Shareholders thus would be taxed at the normal capital gain rates applicable
to U.S. Shareholders (subject to applicable alternative minimum tax and a
special alternative minimum tax in the case of nonresident alien individuals).
Distributions subject to FIRPTA also may be subject to the 30% branch profits
tax in the hands of a non-U.S. corporate shareholder not entitled to treaty
relief or exemption. The Company is required to withhold 35% of any
distribution that is designated or could be designated by it as a capital
gains dividend. The amount withheld is creditable against the Non-U.S.
Shareholder's FIRPTA tax liability.
TAXATION OF SHAREHOLDERS ON THE DISPOSITION OF COMMON STOCK
Gain recognized by a Non-U.S. Shareholder upon a sale of his Common Stock
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the stock was held directly
or indirectly by non-U.S. persons. The Company believes that it is currently,
and expects to continue to be, a "domestically controlled REIT" and,
therefore, the sale of Common Stock will not be subject to taxation under
FIRPTA. However, no assurance can be given that the Company will continue to
be a "domestically controlled REIT." Furthermore, gain not subject to taxation
under FIRPTA will be taxable to a Non-U.S. Shareholder if (i) investment in
Common Stock is effectively connected with the Non-U.S. Shareholder's U.S.
trade or business, in which case the Non-U.S. Shareholder will be subject to
the same treatment as U.S. Shareholders with respect to such gain, or (ii) the
Non-U.S. Shareholder is a nonresident alien individual who was present in the
U.S. for 183 days or more during the taxable year and certain other conditions
apply, in which case the nonresident alien
87
<PAGE>
individual will be subject to a 30% tax on the individual's capital gains. If
the Company were not a "domestically controlled REIT, " gain recognized upon
the sale of Common Stock by a Non-U.S. Shareholder generally will not be
subject to tax under FIRPTA provided that (a) the Common Stock is regularly
traded, as defined in applicable Treasury Regulations, on an established
securities market and (b) the Non-U.S. Shareholder held 5% or less of the
Common Stock of the Company at all times within a specified testing period. If
the gain on the sale of Common Stock were to be subject to taxation under
FIRPTA, the Non-U.S. Shareholder would be subject to the same treatment as
U.S. Shareholders with respect to such gain (subject to applicable alternative
minimum tax, a special alternative minimum tax in the case of nonresident
alien individuals, and the possible application of the 30% branch profits tax
in the case of non-U.S. corporations). In addition, the purchaser would be
required to withhold 10% of the purchase price and remit such amount to the
Service.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Company will report to its Non-U.S. Shareholders and to the Service the
amount of distributions paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a Non-U.S. Shareholder
may be subject to backup withholding at the rate of 31% with respect to
distributions paid unless such holder certifies as to its Non-U.S. status
under penalties of perjury or otherwise establishes an exemption (provided
that neither the Company nor its paying agent has actual knowledge that the
holder is a U.S. person or that the conditions of any other exemption are not,
in fact, satisfied). The Service has issued final regulations regarding the
backup withholding rules that apply to Non-U.S. Shareholders. Those
regulations alter the current system of backup withholding compliance and are
effective for distributions made after December 31, 1999. Such regulations do
not significantly alter the substantive withholding and information reporting
requirements but rather unify current certification procedures and forms and
clarify reliance standards.
ESTATE TAX
Common stock held (or treated as held) by an individual who is not a citizen
or resident (as specially defined for U.S. Federal estate tax purposes) of the
United States at the time of his or her death will be includable in the
individual's estate for U.S. Federal estate tax purposes unless an applicable
estate tax treaty provides otherwise. Such individual's estate may be subject
to U.S. Federal estate tax on the property includable in the estate for U.S.
Federal estate tax purposes.
POSSIBLE LEGISLATIVE OR OTHER ACTIONS AFFECTING TAX CONSEQUENCES
Prospective holders of Common Stock should recognize that the present
federal income tax treatment of the Company and an investment in the Company
may be modified by legislative, judicial or administrative action at any time,
and that any such action may affect the Company and investments and
commitments previously made. The rules dealing with federal income taxation
are constantly under review by persons involved in the legislative process and
by the Service and Treasury Department, resulting in revisions of regulations
and revised interpretations of established concepts as well as statutory
changes. Revisions in federal tax laws and the interpretations thereof could
adversely affect the tax consequences to the Company or of an investment in
the Company.
OTHER TAX CONSEQUENCES
The Company, the Corporate Subsidiaries, or the shareholders of the Company
may be subject to state or local taxation in various state or local
jurisdictions, including those in which it or they own property, transact
business, or reside. The state and local tax treatment of the Company and its
shareholders may not conform to the federal income tax consequences discussed
above. CONSEQUENTLY, PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE EFFECT OF STATE AND LOCAL TAX LAWS ON AN INVESTMENT IN
THE COMPANY.
88
<PAGE>
VALIDITY OF COMMON STOCK AND NEW PREFERRED STOCK
The validity of the shares of Common Stock and New Preferred Stock offered
hereby will be passed upon for the Company by its counsel, Holland & Knight
LLP, Tampa, Florida, and passed upon for the Underwriters by Sullivan &
Cromwell, New York, New York.
EXPERTS
The financial statements 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
PricewaterhouseCoopers 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.
The financial statements of MobileMedia Communications, Inc. and
Subsidiaries Tower Operations at December 31, 1997 and 1996, and for the years
then ended, appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
89
<PAGE>
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files, or will file when appropriate,
reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information may be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices at Seven World Trade Center, 13th Floor, New
York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material may also be obtained from the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W. Washington, D.C. 20549 at prescribed rates. In addition, the
Commission maintains a Web site at http://www.sec.gov containing reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission, including the Company.
The Company has filed with the Commission a registration statement on Form
S-11 (the "Registration Statement") under the Securities Act with respect to
the Common Stock offered hereby. For the purposes hereof, the term
"Registration Statement" means the original registration statement and any and
all amendments thereto. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Common Stock, reference is hereby made to such Registration Statement,
including the exhibits and schedules filed as part thereof. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete and in each instance reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. The Registration Statement, including the exhibits filed as a
part thereof, may be inspected and copied at the public reference facilities
maintained by the Commission as set forth above.
90
<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, 1996, 1997 and
September 30, 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 nine months ended September 30, 1997 and 1998 (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 nine months ended September 30, 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 nine months ended September 30, 1997 and 1998 (un-
audited)................................................................ F-6
Notes to Consolidated Financial Statements............................... F-7
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES TOWER OPERATIONS
Report of Independent Auditors........................................... F-19
Balance Sheets as of June 30, 1998 (unaudited) and December 31, 1997 and
1996 ................................................................... F-20
Statements of Income for the six months ended June 30, 1998 and 1997 (un-
audited) and for each of the two years ended December 31, 1997 and 1996
........................................................................ F-21
Statements of Changes in Net Tower Operation Assets as of December 31,
1996 and 1997 and June 30, 1998 (unaudited)............................. F-22
Statements of Cash Flows for the six months ended June 30, 1998 and 1997
(unaudited) and for each of the two years ended December 31, 1997 and
1996 ................................................................... F-23
Notes to Financial Statements............................................ F-24
SOUTHERN COMMUNICATIONS SERVICES, INC. TOWER OPERATIONS
Report of Independent Public Accountants................................. F-27
Balance Sheets as of December 31, 1997 and 1996.......................... F-28
Statements of Operations for the years ended December 31, 1997 and 1996.. F-29
Statements of Changes in Accumulated Deficit for the years ended
December 31, 1997 and 1996.............................................. F-30
Statements of Cash Flows for the years ended December 31, 1997 and 1996.. F-31
Notes to Financial Statements............................................ F-32
SHORE COMMUNICATIONS
Report of Independent Certified Public Accountants....................... F-35
Combined Balance Sheet as of December 3, 1997............................ F-36
Combined Statement of Operations and Retained Earnings for the period
from
January 1, 1997 through December 3, 1997................................ F-37
Combined Statement of Cash Flows for the period from January 1, 1997
through
December 3, 1997........................................................ F-38
Notes to Combined Financial Statements................................... F-39
TIDEWATER COMMUNICATIONS
Report of Independent Certified Public Accountants....................... F-44
Combined Balance Sheet as of July 31, 1997............................... F-45
Combined Statement of Operations and Retained Earnings for the period
from
January 1, 1997 through July 31, 1997................................... F-46
Combined Statement of Cash Flows for the period from January 1, 1997
through
July 31, 1997........................................................... F-47
Notes to Combined Financial Statements................................... F-48
MAJESTIC COMMUNICATIONS
Report of Independent Certified Public Accountants....................... F-53
Combined Balance Sheet as of June 27, 1997............................... F-54
Combined Statement of Operations and Retained Earnings for the period
from
January 1, 1997 through June 27, 1997................................... F-55
Combined Statement of Cash Flows for the period from January 1, 1997
through
June 27, 1997........................................................... F-56
Notes to Combined Financial Statements................................... F-57
</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/ PricewaterhouseCoopers LLP
Price Waterhouse LLP
Tampa, Florida
March 4, 1998
F-2
<PAGE>
PINNACLE HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER
DECEMBER 31, DECEMBER 31, 30,
1996 1997 1998
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $ 47,419 $ 1,693,923 $ --
Accounts receivable, less allowance
for doubtful accounts
of $45,000, $70,000, and $356,905,
respectively....................... 483,883 1,577,575 2,145,696
Prepaid expenses and other current
assets............................. 291,148 1,037,447 1,032,619
----------- ------------ ------------
Total current assets............... 822,450 4,308,945 3,178,315
Restricted cash....................... 34,072 59,822 60,976
Tower assets, net of accumulated
depreciation of $2,229,274,
$8,278,524, and $15,223,593,
respectively......................... 48,327,035 127,946,070 459,593,332
Fixed assets, net..................... 757,595 1,495,121 2,311,318
Land.................................. 4,112,000 6,850,951 13,861,872
Deferred debt issue costs, net of
accumulated amortization of $222,755,
$514,898 and $827,619, respectively.. 1,159,080 1,871,242 11,848,530
Other assets.......................... 353,405 645,752 1,223,925
----------- ------------ ------------
$55,565,637 $143,177,903 $492,078,268
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................... $ 807,092 $ 2,242,397 $ 2,889,655
Accrued expenses.................... 723,444 3,095,049 7,374,058
Deferred revenue.................... 132,423 639,460 1,038,862
Current portion of long-term debt... 636,214 11,122,077 15,663,791
----------- ------------ ------------
Total current liabilities.......... 2,299,173 17,098,983 26,966,366
Long-term debt........................ 29,785,966 109,459,790 399,642,563
Other liabilities..................... 60,759 105,012 112,089
----------- ------------ ------------
32,145,898 126,663,785 426,721,018
----------- ------------ ------------
Commitments and contingencies (Note 7)
Redeemable stock:
Series A senior preferred stock,
mandatorily redeemable, dividends
payable-in-kind; $.001 par value;
145,000 shares authorized; 0, 0 and
30,322 shares issued and
outstanding at December 31, 1996
and 1997 and September 30, 1998,
respectively; includes accrued
dividends of $322,192 at September
30, 1998 (Note 12)................. -- -- 28,782,220
Class B common stock, 12,000 shares
issued and outstanding at December
31, 1996 and 1997 and September 30,
1998............................... 1,200,000 1,761,000 1,761,000
Class D common stock, $.001 par
value; 38,000, 39,000, and 40,000
shares issued and outstanding at
December 31, 1996 and 1997 and
September 30, 1998, respectively... 38 39 40
----------- ------------ ------------
1,200,038 1,761,039 30,543,260
----------- ------------ ------------
Stockholders' equity:
Series B junior preferred stock,
redeemable, 14% dividends, $.001
par value; 100 shares authorized;
0, 0 and 32.85 shares issued and
outstanding at December 31, 1996
and 1997 and September 30, 1998,
respectively (Note 12)............. -- -- 32,570,731
Common stock:
Class A common stock--202,500 shares
issued and outstanding at December
31, 1996 and 1997 and June 30,
1998............................... 203 203 203
Class E common stock--51,300,
67,089, and 174,766 shares issued
and outstanding at December 31,
1996, 1997 and September 30, 1998,
respectively....................... 51 67 175
Warrants (Note 12).................. -- -- 1,000,000
Additional paid-in capital.......... 24,881,219 25,875,752 35,547,160
Accumulated deficit................. (2,661,772) (11,122,943) (34,304,279)
----------- ------------ ------------
22,219,701 14,753,079 34,813,990
----------- ------------ ------------
$55,565,637 $143,177,903 $492,078,268
=========== ============ ============
</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) NINE MONTHS ENDED
THROUGH YEAR ENDED YEAR ENDED SEPTEMBER 30,
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 $ 7,981,381 $ 21,127,633
Tower operating
expenses, excluding
depreciation and
amortization........... 180,919 1,135,023 2,632,274 1,469,490 3,965,511
--------- ----------- ----------- ----------- ------------
Gross margin.......... 552,084 3,706,729 10,248,357 6,511,891 17,162,122
--------- ----------- ----------- ----------- ------------
Other expenses:
General and
administrative....... 306,180 923,168 1,385,382 881,656 2,861,133
Corporate
development.......... 369,496 1,439,749 3,772,140 2,400,587 5,212,815
Depreciation.......... 281,950 2,041,085 6,334,769 4,369,632 13,357,626
--------- ----------- ----------- ----------- ------------
957,626 4,404,002 11,492,291 7,651,875 21,431,574
--------- ----------- ----------- ----------- ------------
Loss from operations.... (405,542) (697,273) (1,243,934) (1,139,984) (4,269,452)
Interest expense........ 181,212 1,154,990 6,925,094 4,377,952 7,276,265
Amortization of original
issue discount and debt
issuance costs......... 58,664 164,091 292,143 185,569 11,635,619
--------- ----------- ----------- ----------- ------------
Net loss................ $(645,418) $(2,016,354) $(8,461,171) $(5,703,505) $(23,181,336)
========= =========== =========== =========== ============
Payable-in-kind
preferred dividends and
accretion.............. -- -- -- -- 683,304
Net loss attributable to
common shareholders.... $(645,418) $(2,016,354) $(8,461,171) $(5,703,505) $(23,864,640)
========= =========== =========== =========== ============
Basic loss per common
share.................. $ (6.31) $ (8.10) $ (27.28) $ (18.66) $ (59.85)
========= =========== =========== =========== ============
Weighted average number
of common shares
outstanding............ 102,250 248,950 310,122 305,666 398,708
========= =========== =========== =========== ============
</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>
SERIES B JUNIOR CLASS A CLASS E
PREFERRED STOCK COMMON STOCK COMMON STOCK ADDITIONAL STOCK
------------------ -------------- -------------- PAID-IN SUBSCRIPTIONS ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT WARRANTS CAPITAL RECEIVABLE DEFICIT
------ ----------- ------- ------ ------- ------ ---------- ----------- ------------- ------------
<S> <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.........
Class D.........
Stock
subscription..... $(180,015)
Net loss........ $ (645,418)
----- ----------- ------- ---- ------- ---- ---------- ----------- --------- ------------
Balance at
December 31,
1995............. -- -- 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.........
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............. -- -- 202,500 203 51,300 51 -- 24,881,219 -- (2,661,772)
Issuance of
common stock, net
of issuance
costs:
Class B.........
Class D.........
Class E......... 15,789 16 1,555,533
Retirement of
common stock:
Class B.........
Class D.........
Net loss......... (8,461,171)
Adjustment to
Class B common
stock............ (561,000)
----- ----------- ------- ---- ------- ---- ---------- ----------- --------- ------------
Balance at
December 31,
1997............. -- -- 202,500 203 67,089 67 -- 25,875,752 -- (11,122,943)
(UNAUDITED):
Issuance of
common stock,
net of issuance
costs:
Class D.........
Class E......... 107,677 108 10,767,600
Distribution to
Class B common
stockholders
(Note 6)........ (412,888)
Issuance of
preferred stock,
net of issuance
costs:
Series A senior
preferred
stock........... $1,000,000
Series B junior
preferred
stock........... 32.50 32,221,690
Dividends and
accretion on
preferred
stock........... 0.35 349,041 (683,304)
Net loss........ (23,181,336)
----- ----------- ------- ---- ------- ---- ---------- ----------- --------- ------------
Balance at
September 30,
1998............ 32.85 $32,570,731 202,500 $203 174,766 $175 $1,000,000 $35,547,160 -- $(34,304,279)
===== =========== ======= ==== ======= ==== ========== =========== ========= ============
<CAPTION>
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Issuance of
common stock, net
of issuance
costs:
Class A......... $ 7,051,481
Class B.........
Class D.........
Stock
subscription..... (180,015)
Net loss........ (645,418)
-------------
Balance at
December 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
December 31,
1997............. 14,753,079
(UNAUDITED):
Issuance of
common stock,
net of issuance
costs:
Class D.........
Class E......... 10,767,708
Distribution to
Class B common
stockholders
(Note 6)........ (412,888)
Issuance of
preferred stock,
net of issuance
costs:
Series A senior
preferred
stock........... $ 1,000,000
Series B junior
preferred
stock........... 32,221,690
Dividends and
accretion on
preferred
stock........... (334,263)
Net loss........ (23,181,336)
-------------
Balance at
September 30,
1998............ $34,813,990
=============
</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) NINE MONTHS ENDED
THROUGH YEAR ENDED YEAR ENDED SEPTEMBER 30,
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) $ (5,703,505) $(23,181,336)
----------- ----------- ----------- ------------ ------------
Adjustments to
reconcile net loss to
net cash provided by
operating activities:
Depreciation........... 281,950 2,041,085 6,334,769 4,369,632 13,357,626
Amortization of
original issue
discount and debt
issuance costs........ 58,664 164,091 292,143 185,569 11,635,619
Provision for doubtful
accounts.............. -- 45,000 25,000 25,000 286,905
(Increase) decrease
in:
Accounts receivable,
gross............... (74,818) (454,065) (1,118,692) (415,469) (855,026)
Notes receivable..... (387,455) 387,455 -- -- --
Prepaid expenses and
other current
assets.............. (13,544) (277,604) (746,299) 97,759 4,828
Deferred debt costs.. -- -- -- (450,000) (4,977,403)
Other assets......... (175,172) (237,408) (358,587) (150,485) (609,486)
Increase (decrease)
in:
Accounts payable..... 173,381 633,711 1,435,305 2,242,679 647,258
Accrued expenses..... 293,665 429,779 2,371,605 20,312 4,279,009
Deferred revenue..... 55,006 77,417 507,037 (104,947) 399,402
Other current
liabilities......... 490,000 (490,000) -- -- --
Other liabilities.... -- 49,491 44,253 101,930 7,077
----------- ----------- ----------- ------------ ------------
Total adjustments.... 701,677 2,368,952 8,786,534 5,921,980 24,175,809
----------- ----------- ----------- ------------ ------------
Net cash provided by
operating activities... 56,259 352,598 325,363 218,475 994,473
----------- ----------- ----------- ------------ ------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Payments made in
connection with
acquisitions:
Tower assets......... (10,553,958) (31,845,153) (70,852,422) (47,777,002) (310,720,053)
Land................. (774,153) (3,337,847) (2,738,951) (1,071,953) (7,010,921)
Capital expenditures:
Tower assets......... (1,121,150) (7,036,048) (14,815,863) (14,346,502) (31,312,021)
Fixed assets......... (287,711) (563,646) (1,023,513) (783,566) (1,244,500)
(Increase) decrease in
restricted cash....... (297,118) 138,157 (25,750) (25,750) (1,154)
----------- ----------- ----------- ------------ ------------
Net cash used in
investing activities... (13,034,090) (42,644,537) (89,456,499) (64,004,773) (350,288,649)
----------- ----------- ----------- ------------ ------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Borrowings under
long-term debt, net
...................... 4,937,200 24,866,994 89,918,073 85,814,601 479,713,785
Repayment of long-term
debt.................. -- (568,516) (695,982) (20,798,943) (204,138,000)
Proceeds from issuance
of redeemable stock,
net................... 1,200,030 8 -- -- 28,782,220
Proceeds from issuance
of PIK preferred
stock and warrants,
net................... -- -- -- -- 32,887,427
Proceeds from issuance
of common stock,
net................... 6,871,466 18,010,007 1,555,549 458,457 10,767,709
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 65,474,115 347,600,253
----------- ----------- ----------- ------------ ------------
Net increase (decrease)
in cash and
cash equivalents....... 30,865 16,554 1,646,504 1,687,817 (1,693,923)
Cash and cash
equivalents,
beginning of period.... -- 30,865 47,419 47,419 1,693,923
----------- ----------- ----------- ------------ ------------
Cash and cash
equivalents, end of
period................. $ 30,865 $ 47,419 $ 1,693,923 $ 1,735,236 $ --
=========== =========== =========== ============ ============
SUPPLEMENTAL DISCLOSURE
OF CASH FLOWS:
Cash paid for inter-
est................... $ 185,980 $ 1,037,452 $ 5,786,816 $ 4,124,306 $ 7,840,878
=========== =========== =========== ============ ============
Non-cash transactions:
Seller debt issued in
connection with
acquisitions.......... $ 1,715,520 $ 7,493,255 $19,251,850 $ 10,235,131 $ 2,347,107
Payable-in-kind
preferred dividends
and accretion......... $ -- $ -- $ -- $ -- $ 683,304
</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 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.
F-7
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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 (LOSS) PER SHARE
Basic net income (loss) per common share is based on the weighted average
number of shares of common stock outstanding during each period. The
computation of diluted earnings (loss) per share, assuming conversion of the
Class D common shares described in Note 9, has an antidilutive effect on
earnings per share.
F-8
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
RECLASSIFICATIONS
Certain amounts from prior years have been reclassified for consistency with
current presentation. These reclassifications were not material to the
consolidated 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 72 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.
The Company completed the acquisition of 201 towers from Southern
Communications Services, Inc. on March 4, 1998. On September 3, 1998, the
Company completed the acquisition of 166 towers from MobileMedia Corporation
and affiliates. (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 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,
--------------------------
1996 1997
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Tower rental revenue........................... $ 9,427,245 $ 15,547,242
Gross profit, excluding depreciation and
amortization.................................. 7,375,124 12,381,646
Net loss....................................... (11,117,283) (11,780,246)
Basic net loss per common share................ $ (44.66) $ (37.99)
</TABLE>
F-9
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
equipment................................. 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>
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
----------- ------------
<S> <C> <C>
Senior Credit Facility, monthly interest at variable
rates (7.75% and 8.25% at December 31, 1996 and
1997, respectively), secured, quarterly principal
installments beginning June 30, 2000, maturing
December 31, 2004.................................. $21,100,000 $ 72,000,000
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, 2021, secured by various letters of
credit............................................. 9,322,180 28,581,867
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
Less current portion of long-term debt.............. (636,214) (11,122,077)
----------- ------------
$29,785,966 $109,459,790
=========== ============
</TABLE>
F-10
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $56,883,692.
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.
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.
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.
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
F-11
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
at December 31, 1997 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-12
<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-13
<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
F-14
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
In connection with the Subordinated-Term Loan Agreement (see Note 6), the
Company issued warrants to the lenders for shares of the Company's Class F
Common Stock (see Note 12).
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.
F-15
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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).
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.
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.
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.
EVENTS SUBSEQUENT TO THE DATE OF INDEPENDENT ACCOUNTANT'S REPORT (UNAUDITED)
ACQUISITIONS
On September 3, 1998, the Company acquired from MobileMedia Corporation
("MobileMedia") and several of its affiliates 166 towers for an aggregate
purchase price of approximately $170 million. MobileMedia assigned its
existing tenant leases on the towers to the Company. The Company entered into
a lease (the "Lease") with MobileMedia Communications, Inc., an affiliate of
MobileMedia, providing such affiliate of MobileMedia the non-exclusive right
to install a certain amount of its equipment on the acquired towers for an
aggregate rent of $10.7 million per year. The Lease has an initial term of 15
years and one five-year renewal term exercisable at the option of the lessee.
Prior to this acquisition, space on the towers was primarily for the exclusive
use of MobileMedia and its
F-16
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
affiliates. The Company has integrated these towers into its rental tower
business and is leasing space on these towers to other third party wireless
communications providers. The towers are located in the Southeastern United
States, Southern California and New England.
The MobileMedia transaction was funded with proceeds from the sale of two
separate newly authorized series of preferred stock of the Company described
below, a loan from ABRY Broadcast Partners II, L.P., a controlling stockholder
of the Company, and borrowings under the Company's senior credit facility with
NationsBank, N.A. and certain other lenders.
Including the Southern Communications and MobileMedia transactions described
above, for December 31, 1997 through December 18, 1998, the Company purchased
a total of 519 towers for an aggregate consideration of approximately
$330,836,121. Also subsequent to December 31, 1997 the Company entered into
several letters of intent with various third parties to purchase 41 towers,
reflecting an aggregate commitment to pay approximately $24,843,111.
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 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>
SEPTEMBER 30,
--------------------------
1997 1998
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Tower rental revenue........................... $ 31,553,628 $ 32,846,267
Gross profit, excluding depreciation and
amortization.................................. 26,857,397 27,430,522
Net loss....................................... (27,879,135) (32,240,666)
Net loss attributable to common shareholders... (34,732,945) (41,002,782)
Basic net loss per common share................ (113.63) (102.84)
</TABLE>
PREFERRED STOCK
On September 30, 1998, in connection with the MobileMedia Acquisition the
Company sold 30,000 shares of newly authorized Series A Senior Preferred Stock
(the "Senior Preferred Stock") for $30 million. These shares carry a
liquidation preference of $30 million in the aggregate, and were sold with an
attached warrant to purchase, for a nominal price, approximately 0.75% of the
Company's outstanding common stock. Dividends on the Senior Preferred Stock
accrue at a rate of 14% through March 31, 1999, 14.75% from April 1, 1999
through June 30, 1999, 15.5% from July 1, 1999 through September 30, 1999 and
16% thereafter. At the Company's option, such dividends can be paid by the
issuance of additional shares of such stock. The Senior Preferred Stock is
redeemable at the Company's option at no premium at any time upon 30 days
advance notice. The Senior Preferred Stock is mandatorily redeemable on
September 30, 2008. The warrants (valued using the Black-Scholes option
pricing model) are recorded at fair value and are exercisable at a nominal
price for a period of eight and one-half years commencing 18 months following
the issuance of the Senior Preferred Stock. If the Senior Preferred Stock in
redeemed prior to 18 months after its initial issuance, the warrants may not
be exercised and will be cancelled. The warrants expire on September 3, 2008.
ABRY/Pinnacle, Inc., an affiliate of ABRY Broadcast Partners II, L.P.,
purchased newly authorized Series B Junior Preferred Stock of the Company (the
"Junior Preferred Stock") with a liquidation preference of $32.5 million.
Dividends accrue at a rate of 14% and at the Company's option may be paid by
the issuance of additional shares of such stock. The Junior Preferred Stock is
redeemable at the Company's option at no premium at any time. The Junior
Preferred Stock is not mandatorily redeemable.
F-17
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Senior Preferred Stock and the Junior Preferred Stock have not been and
will not be registered under the Securities Act of 1933 and may not be offered
or sold in the United States absent registration or an applicable exemption
from the registration requirements.
In December 1998, the Company sold additional shares of the Series B Junior
Preferred Stock with a liquidation preference of $32.8 million, which resulted
in net proceeds of approximately $26.2 million.
CAPITAL CONTRIBUTION
As of September 30, 1998, approximately $8.9 million remained outstanding
under the Capital Contribution Agreement (see Note 9).
LONG-TERM DEBT
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 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, 2005. 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.
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 Company has the right 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 liquidated 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.
In September 1998, the Company borrowed $15,000,000 from ABRY II, the
Company's principal stockholder (the "ABRY Bridge Loan"), to partially finance
the MobileMedia Acquisition. The ABRY Bridge Loan bears interest at a rate of
9.0%. Interest and principal under the ABRY Bridge Loan are payable within one
year from the date of borrowing.
F-18
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
MobileMedia Communications, Inc. and
Subsidiaries
We have audited the accompanying balance sheets of the tower operations (the
"Tower Operations") of MobileMedia Communications, Inc. and Subsidiaries (the
"Parent") as of December 31, 1997 and 1996 and the related statements of
income, changes in net tower operation assets, and cash flows for the years
then ended. These financial statements are the responsibility of the Parent'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
MobileMedia Communications, Inc. and Subsidiaries as of December 31, 1997 and
1996 and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
As discussed in Note 4, on July 7, 1998, MobileMedia Corporation and the
Parent entered into an agreement to sell certain assets of the Tower
Operations to Pinnacle Towers Inc. Tower Operations is not a separate legal
entity, subsidiary, division or segment of the Parent and, accordingly, it has
no independent financing sources. On January 30, 1997, MobileMedia, the Parent
and all seventeen of the Parent's subsidiaries (collectively with the Parent
and MobileMedia, the "Debtors"), filed for protection under Chapter 11 of
Title 11 of the United States Code. The Debtors are operating as debtors-in-
possession and are subject to the jurisdiction of the United State Bankruptcy
Court for the District of Delaware (the "Bankruptcy Court"). Accordingly, the
aforementioned sale transaction is subject to Bankruptcy Court approval.
Management believes it will receive the consent of its debt holders and the
Bankruptcy Court for the sale of the Tower Operations free and clear of all
liens. As a result of the uncertainties of the Debtor's bankruptcy and the
collateralization of the Tower Operations' assets, and the potential effect on
the Tower Operations' assets, there is substantial doubt that the Tower
Operations would continue as a going concern if the necessary consents are not
received or if for some other reason the sale transaction is not consummated.
The accompanying financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classifications
of assets or the amounts and classification of liabilities that may result
from the outcome of this uncertainty.
/s/ Ernst & Young LLP
MetroPark, New Jersey
July 13, 1998
F-19
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
TOWER OPERATIONS
(A CARVE-OUT ENTITY OF MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------------
1998 1997 1996
----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Accounts receivable (net of allowance
for doubtful accounts of $80,000,
$57,000 and $18,000 at June 30, 1998,
December 31, 1997 and 1996, respective-
ly).................................... $ 283,294 $ 196,307 $ 179,960
Prepaid site lease rentals.............. 46,248 49,710 46,934
----------- ----------- ----------
Total current assets................. 329,542 246,017 226,894
Property and equipment:
Land.................................... 2,401,987 2,401,987 2,401,987
Tower assets and other equipment........ 4,910,330 4,891,859 4,670,431
Less accumulated depreciation........... (1,544,396) (1,279,937) (758,456)
----------- ----------- ----------
Net property and equipment............... 5,767,921 6,013,909 6,313,962
----------- ----------- ----------
Total assets......................... $ 6,097,463 $ 6,259,926 $6,540,856
=========== =========== ==========
LIABILITIES AND NET TOWER OPERATION
ASSETS
Liabilities:
Accounts payable........................ $ 214,316 $ 520,318 $ 282,045
Unearned revenue........................ 172,829 165,241 29,411
----------- ----------- ----------
387,145 685,559 311,456
Commitments and contingencies
Net tower operation assets............... 5,710,318 5,574,367 6,229,400
----------- ----------- ----------
Total liabilities and net tower oper-
ation assets........................ $ 6,097,463 $ 6,259,926 $6,540,856
=========== =========== ==========
</TABLE>
See accompanying notes.
F-20
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
TOWER OPERATIONS
(A CARVE-OUT ENTITY OF MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------
YEAR ENDED DECEMBER 31,
JUNE 30, JUNE 30, -----------------------
1998 1997 1997 1996
----------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues........................ $1,262,201 $1,246,855 $ 2,500,185 $ 2,608,321
Expenses:
Operations..................... 513,105 525,572 1,113,663 1,001,018
General and administrative..... 283,413 292,413 609,179 540,015
Depreciation................... 264,459 257,576 521,481 489,271
---------- ---------- ----------- -----------
Total expenses.............. 1,060,977 1,075,561 2,244,323 2,030,304
---------- ---------- ----------- -----------
Net income...................... $ 201,224 $ 171,294 $ 255,862 $ 578,017
========== ========== =========== ===========
</TABLE>
See accompanying notes.
F-21
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
TOWER OPERATIONS
(A CARVE-OUT ENTITY OF MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES)
STATEMENTS OF CHANGES IN NET TOWER OPERATION ASSETS
<TABLE>
<S> <C>
Net tower operation assets as of December 31, 1995.................. $3,958,877
Net income......................................................... 578,017
Net activity with Parent........................................... 1,692,506
----------
Net tower operation assets as of December 31, 1996.................. 6,229,400
Net income......................................................... 255,862
Net activity with Parent........................................... (910,895)
----------
Net tower operation assets as of December 31, 1997.................. 5,574,367
Net income (unaudited)............................................. 201,224
Net activity with Parent (unaudited)............................... (65,273)
----------
Net tower operation assets as of June 30, 1998 (unaudited).......... $5,710,318
==========
</TABLE>
See accompanying notes.
F-22
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
TOWER OPERATIONS
(A CARVE-OUT ENTITY OF MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------
YEAR ENDED DECEMBER 31,
JUNE 30, JUNE 30, -------------------------
1998 1997 1997 1996
----------- ---------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income................. $ 201,224 $ 171,294 $ 255,862 $ 578,017
Adjustments to reconcile
net income to net cash
provided by operating ac-
tivities:
Depreciation............. 264,459 257,576 521,481 489,271
Change in operating as-
sets and liabilities:
Accounts receivable.... (86,987) (6,186) (16,347) (50,889)
Prepaid expenses....... 3,462 (2,777) (2,776) --
Accounts payable....... (306,002) 131,694 238,273 248,015
Unearned revenue....... 7,588 89,654 135,830 (27,082)
--------- --------- ----------- ------------
Net cash provided by oper-
ating activities.......... 83,744 641,255 1,132,323 1,237,332
INVESTING ACTIVITIES
Tower acquisitions and cap-
ital expenditures......... (18,471) (216,973) (221,428) (2,929,838)
--------- --------- ----------- ------------
Net cash used in investing
activities................ (18,471) (216,973) (221,428) (2,929,838)
FINANCING ACTIVITIES
Net activity with Parent... (65,273) (424,282) (910,895) 1,692,506
--------- --------- ----------- ------------
Net cash (used in) provided
by financing activities... (65,273) (424,282) (910,895) 1,692,506
--------- --------- ----------- ------------
Net increase in cash....... -- -- -- --
Cash at beginning of peri-
od........................ -- -- -- --
--------- --------- ----------- ------------
Cash at end of period...... $ -- $ -- $ -- $ --
========= ========= =========== ============
</TABLE>
See accompanying notes.
F-23
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
TOWER OPERATIONS
(A CARVE-OUT ENTITY OF MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES)
NOTES TO FINANCIAL STATEMENTS
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 "Tower Operations") of
MobileMedia Communications, Inc. and Subsidiaries (the "Parent"), which
includes the Parent's business of leasing space on the 163 tower sites that
are being acquired by Pinnacle Towers Inc. ("Pinnacle") (see Note 4) to
customers in the broadcast and wireless communication industries. The Parent
also utilizes the tower sites for its own transmitter systems.
Tower Operations is not a separate legal entity, subsidiary, division or
segment of the Parent and, accordingly, it has no independent financing
sources. All funding has been summarized in the accompanying financial
statements as "Net activity with 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
based upon revenues or total costs of certain infrastructure operations,
depending upon the nature of the cost.
On January 30, 1997, MobileMedia Corporation ("MobileMedia"), the Parent and
all seventeen of the Parent's subsidiaries (collectively with the Parent and
MobileMedia, the "Debtors"), filed for protection under Chapter 11 of Title 11
of the United States Code. The Debtors are operating as debtors-in-possession
and are subject to the jurisdiction of the United States Bankruptcy Court for
the District of Delaware (the "Bankruptcy Court").
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
CONCENTRATIONS OF CREDIT RISK
The owned tower site lease receivables potentially subject the business to
credit risk, as the Tower Operations generally does not require collateral or
other security to support customer receivables. The carrying amount of the
Tower Operations receivables approximates fair value.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives, which vary from 5 to
29 years.
IMPAIRMENT OF LONG-LIVED ASSETS
Management periodically reviews the values assigned to long-lived assets to
determine whether any impairments are other than temporary. Management
believes that no impairment exists with respect to the long-lived assets in
the accompanying balance sheets.
F-24
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
TOWER OPERATIONS
(A CARVE-OUT ENTITY OF MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Tower Operations 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
periodic basis over the non-cancelable lease term. The effect of escalation
clauses within such leases is not material. No revenue is recognized in the
accompanying financial statements related to the Parent's usage of space on
the Tower Operations towers.
ALLOCATION OF EXPENSES
Certain administrative expenses were allocated from the Parent based on the
ratio of revenue generated from the Tower Operations to the Parent's revenues
from services, rents and maintenance. Additionally, certain operational
expenses were allocated from the Parent based on the estimated percentage of
such costs which are deemed to be applicable to the Tower Operations.
Management believes that these are the most appropriate methodologies for
allocating such expenses.
INCOME TAXES
The Tower Operations is not in itself a taxable entity and no provision or
benefit for United States federal or state income taxes has been recorded.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial information as of June 30, 1998 and the six months
ended June 30, 1998 and 1997 contained herein is unaudited but, in the opinion
of management, includes all adjustments of a normal recurring nature which are
necessary for a fair presentation of the financial position, results of
operations, and cash flows for the periods presented. Results of operations
for the periods presented herein are not necessarily indicative of results of
operations for the entire year.
2. COMMITMENTS AND CONTINGENCIES
The Tower Operations' property and equipment are part of the collateral for
MobileMedia's secured debt. MobileMedia is seeking the consent of the secured
debt holders and the Bankruptcy Court for the sale of certain assets of the
Tower Operations to Pinnacle free and clear of the liens (see Note 4).
Management believes it will receive such consents from the secured debt
holders and the Bankruptcy Court.
The land on which certain towers are constructed is leased pursuant to
operating leases. Rental expenses under operating leases were approximately
$277,000, $298,000, $597,000 and $563,000 for the six months ended June 30,
1998 (unaudited) and 1997 (unaudited) and the years ended December 31, 1997
and 1996, respectively. The effect of escalation clauses within such leases is
not material. At December 31, 1997, the aggregate minimum rental commitments
under leases were as follows:
<TABLE>
<S> <C>
1998........................................................... $ 570,916
1999........................................................... 454,913
2000........................................................... 330,408
2001........................................................... 203,091
2002........................................................... 177,582
Thereafter..................................................... 639,760
----------
$2,376,670
==========
</TABLE>
F-25
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
TOWER OPERATIONS
(A CARVE-OUT ENTITY OF MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. COMMITMENTS AND CONTINGENCIES (CONTINUED)
One ground lease, which extends until October 2003, stipulates that the
tower on the land becomes the property of the city in which it is located upon
expiration of the lease.
One tower asset represents an exclusive lease agreement for use of the tower
by the Tower Operations. Additionally, the Company believes that it has title
to all Tower Operations land; however, for one such parcel, the Tower
Operations may only have an easement to use the property.
3. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Parent's
computer programs that have time-sensitive software may recognize a date using
"00" as the Year 1900 rather than the Year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
While the Parent is aware that certain of its software requires
modification, it is in the process of determining the full extent that it will
be required to modify or replace significant portions of its software so that
its computer systems function properly with respect to dates in the Year 2000
and thereafter. If such modifications and conversions are not made, or are not
completed timely, the Year 2000 issue could have a material impact on the
operations of the Parent and the Tower Operations.
4. SUBSEQUENT EVENT--SALE AND LEASEBACK OF TOWER ASSETS
On July 7, 1998, MobileMedia and the Parent entered into an agreement to
sell 163 towers and 49 parcels of land related to the Tower Operations to
Pinnacle Towers Inc. for $170,000,000. The transaction also includes the
assignment of leases and related lease payments for 89 land leases related to
towers included in the sale. It is anticipated that such transaction will
close on August 25, 1998, subject to the approval of the Bankruptcy Court.
In connection with the transaction, MobileMedia and the Parent will enter
into a lease agreement with Pinnacle in which the Parent will lease space on
towers for 683 transmitters for a period of fifteen years at a cost of $1,300
per month per transmitter.
F-26
<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-27
<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-28
<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-29
<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-30
<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-31
<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-32
<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
F-33
<PAGE>
SOUTHERN COMMUNICATIONS SERVICES, INC.
TOWER OPERATIONS
(A CARVE-OUT ENTITY OF SOUTHERN COMMUNICATIONS SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
as a nonrefundable deposit for the transaction. The transaction also includes
the assignment 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-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 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/PricewaterhouseCoopers LLP
Price Waterhouse LLP
Tampa, Florida
February 9, 1998
F-35
<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-36
<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-37
<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 income.......................................... $ 13,761
Adjustments to reconcile net income to net cash pro-
vided 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............. 479,366
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures:
Tower assets...................................... (571,259)
Fixed assets...................................... (3,023)
---------
Net cash used in investing activities................. (574,282)
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-38
<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-39
<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-40
<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-41
<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-42
<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-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 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/PricewaterhouseCoopers LLP
Price Waterhouse LLP
Tampa, Florida
February 9, 1998
F-44
<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-45
<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-46
<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-47
<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
F-48
<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)
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.
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-49
<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-50
<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-51
<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-52
<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/PricewaterhouseCoopers LLP
Price Waterhouse LLP
Tampa, Florida
February 9, 1998
F-53
<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-54
<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-55
<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 pro-
vided 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-56
<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-57
<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-58
<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-59
<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-60
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the U.S. Underwriters named below, and
each of such U.S. Underwriters, for whom Goldman, Sachs & Co., BT Alex. Brown
Incorporated, Salomon Smith Barney Inc., NationsBanc Montgomery Securities LLC
and Raymond James & Associates, Inc. are acting as representatives, has
severally agreed to purchase from the Company, the respective number of shares
of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON
STOCK
---------
<S> <C>
Underwriter
-----------
Goldman, Sachs & Co. ..............................................
BT Alex. Brown Incorporated........................................
Salomon Smith Barney Inc...........................................
NationsBanc Montgomery Securities LLC..............................
Raymond James & Associates, Inc. ..................................
---
Total............................................................
===
</TABLE>
The U.S. Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at
such price less a concession of $ per share. The U.S. Underwriters may allow,
and such dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time
to time be varied by the representatives.
The Company has entered into an underwriting agreement (the "International
Underwriting Agreement") with the underwriters of the International Offering
(the "International Underwriters") providing for the concurrent offer and sale
of 2,000,000 shares of Common Stock in an International Offering outside the
United States and Canada. The offering price and aggregate underwriting
discounts and commissions per share for the two offerings are identical. The
closing of the Offering made hereby is a condition to the closing of the
International Offering, and vice versa. The representatives of the
International Underwriters are Goldman Sachs International, BT Alex. Brown
International, Salomon Brothers International Limited, NationsBanc Montgomery
Securities LLC and Raymond James & Associates, Inc.
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the two offerings, each of
the U.S. Underwriters named herein has agreed that, as a part of the
distribution of the shares offered hereby and subject to certain exceptions,
it will offer, sell or deliver the shares of Common Stock, directly or
indirectly, only in the United States of America (including the States and the
District of Columbia), its territories, its possessions and other areas
subject to its jurisdiction (the "United States") and to U.S. persons, which
term shall mean, for purposes of this paragraph: (a) any individual who is a
resident of the United States or (b) any corporation, partnership or other
entity organized in or under the laws of the United States or any political
subdivision thereof and whose office most directly involved with the purchase
is located in the United States. Each of the International Underwriters has
agreed pursuant to the Agreement Between that, as a part of the distribution
of the shares offered as a part of the international offering, and subject to
certain exceptions, it will (i) not, directly or indirectly, offer, sell or
deliver shares of Common Stock (a) in the United States or to any U.S. persons
or (b) to any person who it believes intends to reoffer, resell or deliver the
shares in the United States or to any U.S. persons, and (ii) cause any dealer
to whom it may sell such shares at any concession to agree to observe a
similar restriction.
U-1
<PAGE>
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Underwriters of such number of shares of
Common Stock as may be mutually agreed. The price of any shares so sold shall
be the initial public offering price, less an amount not greater than the
selling concession.
The Company has granted the U.S. Underwriters an option exercisable for 30
days after the date of this Prospectus to purchase up to aggregate of
1,200,000 additional shares of Common Stock solely to cover over-allotments,
if any. If the U.S. Underwriters exercise their over-allotment option, the
U.S. Underwriters have severally agreed, subject to certain conditions, to
purchase approximately the same percentage thereof that the number of shares
to be purchased by each of them, as shown in the foregoing table, bears to the
8,000,000 shares of Common Stock offered. The Company has granted the
International Underwriters a similar option to purchase up to an aggregate of
300,000 additional shares of Common Stock.
The Company and its directors and executive officers have agreed that during
the period beginning from the date of this Prospectus and continuing to and
including the date 180 days after the date of the Prospectus, they will not
offer, sell, contract to sell or otherwise dispose of any securities of the
Company (other than pursuant to employee stock option plans existing, or on
the conversion or exchange of convertible or exchangeable securities
outstanding, on the date of this Prospectus) which are substantially similar
to the shares of the Common Stock or which are convertible into or
exchangeable for securities which are substantially similar to the shares of
the Common Stock without the prior written consent of the representatives,
except for the shares of Common Stock offered in connection with the
concurrent U.S. and International Offerings.
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares
of Common Stock offered by them.
At the request of the Company, the Underwriters have reserved up to 500,000
shares of Common Stock offered hereby for sale at the initial public offering
price to certain employees of the Company. The number of shares available for
sale to the general public will be reduced to the extent that such persons
purchase such reserved shares. Any reserved shares not so purchased will be
offered by the Underwriters to the general public on the same basis as the
other shares of Common Stock offered hereby.
In connection with the Offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover syndicate short positions
created in connection with the Offering. Stabilizing transactions consist of
certain bids or purchases for the purpose of preventing or retarding a decline
in the market price of the Common Stock; and syndicate short positions involve
the sale by the Underwriters of a greater number of shares of Common Stock
than they are required to purchase from the Company in the Offering. The
Underwriters also may impose a penalty bid, whereby selling concessions
allowed to syndicate members or other broker-dealers in respect of the
securities sold in the Offering for their account may be reclaimed by the
syndicate if such shares of Common Stock are repurchased by the syndicate in
stabilizing or covering transactions. These activities may stabilize, maintain
or otherwise affect the market price of the Common Stock, which may be higher
than the price that might otherwise prevail in the open market; and these
activities, if commenced, may be discontinued at any time. These transactions
may be effected in the over-the-counter market or otherwise.
Prior to the Offering, there has been no public market for the Shares. The
initial public offering price will be negotiated among the Company and the
U.S. Representatives. Among the factors to be considered in determining the
initial public offering price of the Common Stock in addition to prevailing
market conditions will be the Company's historical performance, estimates of
the business potential
U-2
<PAGE>
and earnings prospects of the Company, an assessment of the Company's
management and the consideration of the above factors in relation to market
valuation of companies in related businesses.
The Common Stock will be quoted on the Nasdaq National Market under the
symbol "BIGT".
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
Certain of the Underwriters have performed various investment banking
services for the Company in the past and may do so from time to time in the
future.
This Prospectus may be used by underwriters and dealers in connection with
offers and sales of Common Stock, including shares sold initially in the
International Offering, to persons located in the United States.
Because of relationships between certain existing stockholders of the
Company and members of the NASD, the Company is subject to the "Venture
Capital Restrictions" of the National Association of Securities Dealers, Inc.
(the "NASD"). In accordance with the Venture Capital Restrictions, the public
offering price of the shares offered hereby can be no higher than that
recommended by a "qualified independent underwriter" (as defined in Schedule E
of the NASD By-Laws) meeting certain standards and who must also perform
certain other functions in connection with the offering. Goldman, Sachs & Co.
has assumed the responsibilities of acting as a "qualified independent
underwriter" in pricing the offering and conducting due diligence with respect
thereto, and the public offering price of the Common Stock is not higher than
that recommended by Goldman, Sachs & Co.
Goldman Sachs Credit Partners L.P. ("GSCP") and NationsBank, N.A.
("NationsBank") are lenders under the Senior Credit Facility. GSCP is an
affiliate of Goldman, Sachs & Co., and NationsBank is an affiliate of
NationsBanc Montgomery Securities LLC. A portion of the outstanding
indebtedness under the Senior Credit Facility will be repaid with a portion of
the net proceeds of the Offerings. See "Use of Proceeds".
U-3
<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 any 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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 15
Use of Proceeds.......................................................... 24
Dilution................................................................. 25
Dividend Policy.......................................................... 26
Capitalization........................................................... 27
Unaudited Pro Forma Financial Data....................................... 28
Selected Historical Consolidated Financial Data.......................... 36
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 38
Business................................................................. 44
Management............................................................... 60
Principal Stockholders................................................... 66
Shares Eligible for Future Sale.......................................... 67
Certain Relationships and Transactions................................... 69
Description of Certain Indebtedness...................................... 71
Description of Capital Stock ............................................ 73
Certain Federal Income Tax Considerations ............................... 77
Validity of Common Stock and New Preferred Stock......................... 89
Experts.................................................................. 89
Additional Information................................................... 90
Index to Consolidated Financial Statements............................... F-1
Underwriting............................................................. U-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
10,000,000 SHARES
PINNACLE HOLDINGS INC.
COMMON STOCK
(PAR VALUE $.001 PER SHARE)
-----------------
[LOGO OF PINNACLE HOLDINGS INC. APPEARS HERE]
-----------------
GOLDMAN, SACHS & CO.
BT ALEX. BROWN
SALOMON SMITH BARNEY
NATIONSBANC MONTGOMERY SECURITIES LLC
RAYMOND JAMES & ASSOCIATES, INC.
REPRESENTATIVES OF THE UNDERWRITERS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+ INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JANUARY 5, 1999
10,000,000 SHARES
PINNACLE HOLDINGS INC.
COMMON STOCK
(PAR VALUE $.001 PER SHARE)
[LOGO OF PINNACLE
HOLDINGS INC.
APPEARS HERE]
Of the 10,000,000 shares of Common Stock offered, 2,000,000 shares are being
offered hereby in an international offering outside the United States and
Canada by the International Underwriters and 8,000,000 shares are being offered
in a concurrent United States and Canada offering by the U.S. Underwriters. The
initial public offering price and the aggregate underwriting discount will be
identical in both offerings. See "Underwriting".
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price per share will be between $14 and $16. For factors to be considered in
determining the initial public offering price, see "Underwriting".
Concurrently with this offering, the Company is offering 150,000 shares of
Exchangeable Preferred Stock, par value $.001 per share. This offering is
contingent upon the closing of the Preferred Stock Offering (as defined
herein), and the Preferred Stock Offering is contingent upon the closing of
this offering.
SEE "RISK FACTORS" ON PAGE 15 FOR CERTAIN CONSIDERATIONS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "BIGT".
----------
THIS INTERNATIONAL PROSPECTUS IS INTENDED FOR USE ONLY IN CONNECTION WITH
OFFERS AND SALES OF THE COMMON STOCK OUTSIDE THE UNITED STATES AND IS NOT TO
BE SENT OR GIVEN TO ANY PERSON WITHIN THE UNITED STATES. THE COMMON STOCK
OFFERED HEREBY IS NOT BEING REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933
FOR THE PURPOSE OF SALES OUTSIDE THE UNITED STATES.
----------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
-------------- ------------ -----------
<S> <C> <C> <C>
Per Share.............................. $ $ $
Total (3).............................. $ $ $
</TABLE>
- -----
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
(2) Before deducting estimated expenses of $625,000 payable by the Company.
(3) The Company has granted the International Underwriters an option for 30
days to purchase up to an additional 300,000 shares at the initial public
offering price per share, less underwriting discount, solely to cover over-
allotments. Additionally, the Company has granted the U.S. Underwriters a
similar option with respect to an additional 1,200,000 shares as part of
the concurrent U.S. offering. If such options are exercised in full, the
total initial public offering price, underwriting discount and proceeds to
Company will be $ , $ and $ , respectively. See "Underwriting".
----------
The shares offered hereby are offered severally by the International
Underwriters, as specified herein, subject to receipt and acceptance by them
and subject to their right to reject any order in whole or in part. It is
expected that certificates for the shares will be ready for delivery in New
York, New York, on or about , 1999, against payment therefor in immediately
available funds.
GOLDMAN SACHS INTERNATIONAL
BT ALEX. BROWN INTERNATIONAL
SALOMON SMITH BARNEY INTERNATIONAL
NATIONSBANC MONTGOMERY SECURITIES LLC
RAYMOND JAMES & ASSOCIATES, INC.
----------
The date of this Prospectus is , 1999.
<PAGE>
[Alternate Page for International Prospectus]
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the International Underwriters named
below, and each of such International Underwriters, for whom Goldman Sachs
International, BT Alex. Brown International, Salomon Brothers International
Limited, NationsBanc Montgomery Securities LLC and Raymond James & Associates,
Inc. are acting as representatives, has severally agreed to purchase from the
Company, the respective number of shares of Common Stock set forth opposite
its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON
UNDERWRITER STOCK
----------- ---------
<S> <C>
Goldman Sachs International........................................
BT Alex. Brown International.......................................
Salomon Brothers International Limited.............................
NationsBanc Montgomery Securities LLC..............................
Raymond James & Associates, Inc. ..................................
---
Total..........................................................
===
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
International Underwriters are committed to take and pay for all of the shares
offered hereby, if any are taken.
The International Underwriters propose to offer the shares of Common Stock
in part directly to the public at the initial public offering price set forth
on the cover page of this Prospectus and in part to certain securities dealers
at such price less a concession of $ per share. The International
Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ per share to certain brokers and dealers. After the shares of
Common Stock are released for sale to the public, the offering price and other
selling terms may from time to time be varied by the representatives.
The Company has entered into an underwriting agreement (the "U.S.
Underwriting Agreement") with the underwriters of the U.S. Offering (the "U.S.
Underwriters") providing for the concurrent offer and sale of 8,000,000 shares
of Common Stock in a U.S. Offering in the United States and Canada. The
offering price and aggregate underwriting discounts and commissions per share
of the two offerings are identical. The closing of the offering made hereby is
a condition to the closing of the U.S. Offering, and vice versa. The
representatives of the U.S. Underwriters are Goldman, Sachs & Co., BT Alex.
Brown Incorporated, Salomon Smith Barney Inc., NationsBanc Montgomery
Securities LLC and Raymond James & Associates, Inc.
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the two offerings, each of
the U.S. Underwriters has agreed that, as a part of the distribution of the
shares offered hereby and subject to certain exceptions, it will offer, sell
or deliver the shares of Common Stock, directly or indirectly, only in the
United States of America (including the States and the District of Columbia),
its territories, its possessions and other areas subject to its jurisdiction
(the "United States") and to U.S. persons which term shall mean, for purposes
of this paragraph: (a) any Individual who is a resident of the United States
or (b) any corporation, partnership or other entity organized in or under the
laws of the United States or any political subdivision thereof and whose
office most directly involved with the purchase is located in the United
States. Each of the International Underwriters named herein has agreed
pursuant to the Agreement Between that, as a part of the distribution of the
shares offered as a part of the International offering, and subject to certain
exceptions, it will (i) not, directly of indirectly, offer, sell or deliver
shares of Common Stock (a) in the United States or to any U.S. persons or (b)
to any person who it believes intends to reoffer, resell or deliver the shares
in the United States or to any U.S. persons, and (ii) cause any dealer to whom
it may sell such shares at any concession to agree to observe a similar
restriction.
U-1
<PAGE>
[Alternate Page for International Prospectus]
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Underwriters of such number of shares of
Common Stock as may be mutually agreed. The price of any shares so sold shall
be the initial public offering price, less an amount not greater than the
selling concession.
The Company has granted the International Underwriters an option exercisable
for 30 days after the date of this Prospectus to purchase up to an aggregate
of 300,000 additional shares of Common Stock solely to cover over-allotments,
if any. If the International Underwriters exercise their over-allotment
option, the International Underwriters have severally agreed, subject to
certain conditions, to purchase approximately the same percentage thereof that
the number of shares to be purchased by each of them, as shown in the
foregoing table, bears to the 2,000,000 shares of Common Stock offered hereby.
The Company has granted the U.S. Underwriters a similar option to purchase up
to an aggregate of 1,200,000 additional shares of Common Stock.
The Company and its directors and executive officers have agreed that,
during the period beginning from the date of this Prospectus and continuing to
and including the date 180 days after the date of the Prospectus, they will
not offer, sell, contract to sell or otherwise dispose of any securities of
the Company (other than pursuant to employee stock option plans existing, or
on the conversion or exchange of convertible or exchangeable securities
outstanding, on the date of this Prospectus) which are substantially similar
to the shares of the Common Stock or which are convertible into or
exchangeable for securities which are substantially similar to the shares of
the Common Stock without the prior written consent of the representatives,
except for the shares of Common Stock offered in connection with the
concurrent U.S. and International offerings.
Pursuant to the Agreement Between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (a) it has not
offered or sold and, prior to the date six months after the closing date for
the sale of the Shares to the International Underwriters, will not offer or
sell any Shares in the United Kingdom except to persons whose ordinary
activities involve them in acquiring, holding, managing, or disposing of
investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995; (b) it has complied and will comply
with all applicable provisions of the Financial Services Act 1986 with respect
to anything done by it in relation to the Shares in, from, or otherwise
involving the United Kingdom; and (c) it has only issued or passed on and will
only issue or pass on in the United Kingdom any document received by it in
connection with the offering of the Shares to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996, or to any person to whom such
document may lawfully be issued or passed on.
Buyers of shares of Common Stock offered hereby may be required to pay stamp
taxes and other charges in accordance with the laws and practices of the
country of purchase in addition to the initial public offering price.
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares
of Common Stock offered by them.
In connection with the Common Stock Offering, the Underwriters may purchase
and sell the Common Stock in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions created in connection with the Common Stock Offering.
Stabilizing transactions consist of certain bids or purchases for the purpose
of preventing or retarding a decline in the market price of the Common Stock;
and syndicate short positions involve the sale by the Underwriters of a
greater number of shares of Common Stock than
U-2
<PAGE>
[Alternate Page for International Prospectus]
they are required to purchase from the Company in the Common Stock Offering.
The Underwriters also may impose a penalty bid, whereby selling concessions
allowed to syndicate members or other broker-dealers in respect of the
securities sold in the Common Stock Offering for their account may be
reclaimed by the syndicate if such shares of Common Stock are repurchased by
the syndicate in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Common Stock,
which may be higher than the price that might otherwise prevail in the open
market; and these activities, if commenced, may be discontinued at any time.
These transactions may be effected in the over-the-counter market or
otherwise.
Prior to this offering, there has been no public market for the shares. The
initial public offering price was negotiated among the Company and the
representatives of the U.S. Underwriters and the international Underwriters.
Among the factors considered in determining the initial public offering price
of the Common Stock, in addition to prevailing market conditions, were the
Company's historical
performance, estimates of the business potential and earnings prospects of the
Company, an assessment of the Company's management and the consideration of
the above factors in relation to market valuation of companies in related
businesses.
The Common Stock will be quoted on the Nasdaq National Market under the
symbol "BIGT".
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
Because of relationships between certain existing stockholders of the
Company and members of the NASD, the Company is subject to the "Venture
Capital Restrictions" of the National Association of Securities Dealers, Inc.
(the "NASD"). In accordance with the Venture Capital Restrictions, the public
offering price of the shares offered hereby can be no higher than that
recommended by a "qualified independent underwriter" (as defined in Schedule E
of the NASD By-Laws) meeting certain standards and who must also perform
certain other functions in connection with the offering. Goldman, Sachs & Co.
has assumed the responsibilities of acting as a "qualified independent
underwriter" in pricing the offering and conducting due diligence with respect
thereto, and the public offering price of the Common Stock is not higher than
that recommended by Goldman, Sachs & Co.
Goldman Sachs Credit Partners, L.P. ("GSCP") and NationsBank, N.A.
("NationsBank") are lenders under the Senior Credit Facility. GSCP is an
affiliate of Goldman, Sachs & Co., and NationsBank is an affiliate of
NationsBanc Montgomery Securities LLC. A portion of the outstanding
indebtedness under the Senior Credit Facility will be repaid with a portion of
the net proceeds of the Offerings. See "Use of Proceeds".
U-3
<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 any 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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 15
Use of Proceeds.......................................................... 24
Dilution................................................................. 25
Dividend Policy.......................................................... 26
Capitalization........................................................... 27
Unaudited Pro Forma Financial Data....................................... 28
Selected Historical Consolidated Financial Data.......................... 36
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 38
Business................................................................. 44
Management............................................................... 60
Principal Stockholders................................................... 66
Shares Eligible for Future Sale.......................................... 67
Certain Relationships and Transactions................................... 69
Description of Certain Indebtedness...................................... 71
Description of Capital Stock ............................................ 73
Certain Federal Income Tax Considerations ............................... 77
Validity of Common Stock and New Preferred Stock......................... 89
Experts.................................................................. 89
Additional Information................................................... 90
Index to Consolidated Financial Statements............................... F-1
Underwriting............................................................. U-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
10,000,000 SHARES
PINNACLE HOLDINGS INC.
COMMON STOCK
(PAR VALUE $.001 PER SHARE)
----------------
[LOGO OF PINNACLE HOLDINGS INC. APPEARS HERE]
----------------
GOLDMAN SACHS INTERNATIONAL
BT ALEX. BROWN INTERNATIONAL
SALOMON SMITH BARNEY INTERNATIONAL
NATIONSBANC MONTGOMERY SECURITIES LLC
RAYMOND JAMES & ASSOCIATES, INC.
REPRESENTATIVES OF THE UNDERWRITERS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JANUARY 5, 1999
150,000 SHARES
PINNACLE HOLDINGS INC.
% EXCHANGEABLE PREFERRED STOCK
(LIQUIDATION PREFERENCE $1,000 PER SHARE)
----------
[LOGO OF PINNACLE
HOLDINGS INC.
APPEARS HERE]
Pinnacle Holdings Inc. (the "Company") is offering (the "Preferred Stock
Offering") 150,000 shares of % Exchangeable Preferred Stock, par value $.001
per share (the "New Preferred Stock"), at a price of $1,000 per share.
Concurrently with the Preferred Stock Offering, the Company is offering (the
"Common Stock Offering") 10,000,000 shares of Common Stock, par value $.001 per
share (the "Common Stock"). This Preferred Stock Offering is contingent upon
the Closing of the Common Stock Offering and the Common Stock Offering is
contingent upon the Closing of this Preferred Stock Offering.
Dividends on the New Preferred Stock will accumulate from its date of
issuance and will be payable quarterly in arrears on each , , and
, at a rate per annum of % of the liquidation preference per share.
Dividends may be paid at the Company's option on any dividend payment date
occurring on or before , 2004 either in cash or by issuing additional fully
paid and nonassessable New Preferred Stock with an aggregate liquidation
preference equal to the amount of such dividends. After , 2004, dividends
on New Preferred Stock are payable in cash.
The New Preferred Stock will be redeemable, at the Company's option, in whole
or in part, at any time on or after , 2004, at the redemption prices set
forth herein, plus, without duplication accumulated and unpaid dividends to the
date of redemption. In addition, prior to , 2004, the Company may, at its
option, use the net proceeds of one or more Public Equity Offerings or
Strategic Equity Investments (as defined herein) received prior to , 2002,
to redeem an amount of at least 5,000 shares and up to an aggregate of 35% of
the outstanding shares of New Preferred Stock at % of the aggregate
liquidation preference thereof, plus, without duplication, accumulated and
unpaid dividends to the redemption date; provided, however, that after any such
redemption, the liquidation preference of New Preferred Stock remaining
outstanding must equal at least (i) 65% of the liquidation preference of New
Preferred Stock originally issued in the Preferred Stock Offering or (ii), in
the event of a partial exchange of New Preferred Stock for Exchange Notes, (as
defined herein), shares with an aggregate liquidation preference of $75
million. The Company is required to redeem all of the then outstanding New
Preferred Stock on , 2009 at a redemption price of 100% of the
liquidation preference plus accumulated and unpaid dividends to the date of
redemption. Upon a Change of Control, the Company is required to offer to
purchase each holder's New Preferred Stock at a price equal to 101% of the
liquidation preference thereof, plus, without duplication, accumulated and
unpaid dividends to the date of purchase. The Company is also required to offer
to purchase outstanding New Preferred Stock on a pro rata basis at a price
equal to 100% of the liquidation preference thereof, plus, without duplication,
accumulated and unpaid dividends to the date of purchase, with any Excess
Proceeds (as defined herein) from certain Asset Dispositions (as defined
herein). As of September 30, 1998, pro forma for the Transactions (as defined
herein), there would have been outstanding $274.6 million of Debt. (Continued
opposite inside cover page).
SEE "RISK FACTORS" ON PAGE 14 FOR CERTAIN CONSIDERATIONS RELEVANT TO AN
INVESTMENT IN THE NEW PREFERRED STOCK.
----------
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.
----------
<TABLE>
<CAPTION>
INITIAL PUBLIC
OFFERING UNDERWRITING PROCEEDS TO
PRICE(1) DISCOUNT(2) COMPANY(3)
-------------- ------------ -----------
<S> <C> <C> <C>
Per Share.............................. $1,000 $ $
Total (3).............................. $150,000,000 $ $
</TABLE>
- -----
(1) Plus accrued dividends, if any, from , 1999.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
(3) Before deducting estimated expenses of $625,000 payable by the Company.
----------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
certificates for the shares will be ready for delivery in New York, New York,
on or about , 1999, against payment therefor in immediately available
funds.
----------
GOLDMAN, SACHS & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
SALOMON SMITH BARNEY
----------
The date of this Prospectus is , 1999.
<PAGE>
[PARTIAL MAP OF U.S. INDICATING COMPANY'S CURRENT TOWER SITES AND PROPOSED
TOWER SITES.]
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITY OTHER THAN THE NEW PREFERRED STOCK OFFERED HEREBY,
NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY
ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION TO SUCH PERSON.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREBY SHALL UNDER
ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
----------------
NO ACTION HAS BEEN OR WILL BE TAKEN IN ANY JURISDICTION BY THE COMPANY OR BY
ANY UNDERWRITER THAT WOULD PERMIT A PUBLIC OFFERING OF THE NEW PREFERRED STOCK
OR POSSESSION OR DISTRIBUTION OF THIS PROSPECTUS IN ANY JURISDICTION WHERE
ACTION FOR THAT PURPOSE IS REQUIRED, OTHER THAN IN THE UNITED STATES. PERSONS
INTO WHOSE POSSESSION THIS PROSPECTUS COMES ARE REQUIRED BY THE COMPANY AND
THE UNDERWRITERS TO INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS
TO THE OFFERING OF THE NEW PREFERRED STOCK AND THE DISTRIBUTION OF THIS
PROSPECTUS.
----------------
Market data used throughout this Prospectus was obtained from industry
publications that 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.
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NEW PREFERRED
STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS
IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH
THE OFFERINGS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
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: (i) references in this Prospectus to the "Company"
include Pinnacle Holdings Inc., a Delaware corporation, and its consolidated
subsidiaries; (ii) the information contained in this Prospectus assumes no
exercise of the Underwriters' over-allotment options; and (iii) all references
to Shares of Common Stock, per share amounts and other information set forth in
this Prospectus have been adjusted to reflect certain actions taken by the
Company to effect the Recapitalization (as defined herein), which will result
in a conversion of all shares of Class A, Class B, Class C, Class D and Class E
Common Stock of the Company into shares of Common Stock, effective upon the
closing of the Offerings.
THE COMPANY
The Company is the leading provider of wireless communication tower space in
the Southeastern United States. Since its formation in May 1995, the Company
has focused exclusively on creating a portfolio of dense clusters of
geographically contiguous towers and renting tower space to wireless
communications providers and users. The Company believes that the rental of
tower space is the sector of the tower industry in which it can earn the
highest cash flow margins and risk adjusted return on invested capital. This
strategy also presents significant opportunities for continued revenue and cash
flow growth through the addition of new tenants on its existing towers and
towers that may be acquired in the future.
Since commencing operations in May 1995 and through September 30, 1998, the
Company has completed 195 acquisitions through which it has acquired 766 towers
and has constructed an additional 64 towers in such high growth markets as
Atlanta, Birmingham, New Orleans, Orlando and Tampa. Subsequent to September
30, 1998 and prior to December 18, 1998 the Company acquired an additional 35
towers. As of December 18, 1998 the Company had agreements or letters of intent
to acquire 41 additional towers. As a result of its extensive existing tower
base, the Company believes it is well-positioned to continue to capitalize on
the growth opportunities available in the rapidly consolidating and highly
fragmented tower rental industry. For the year ended December 31, 1997, on a
pro forma basis, the Company had tower rental revenue and EBITDA of $40.6
million and $27.5 million, respectively. For the nine months ended September
30, 1998, on a pro forma basis, the Company had tower rental revenue and EBITDA
of $34.1 million and $20.0 million, respectively. See "Unaudited Pro Forma
Financial Data."
The Company has a diversified base of over 800 customers consisting of all
forms of wireless communications providers, operators of private networks and
government agencies that include Southern Communications Services, Inc.
("Southern Communications"), Nextel, Sprint PCS, PageNet, Motorola, BellSouth
Mobility, MobileMedia Communications, Inc. ("MobileMedia Communications"),
Teletouch, Skytel, Pagemart, Federal Bureau of Investigation and Bureau of
Alcohol, Tobacco & Firearms. The Company's leases generally range in duration
from three to five years, and many provide for scheduled minimum rent increases
of the greater of a specified percentage (which typically ranges from 3 to 5%)
or the change for the relevant period in the Consumer Price Index ("CPI").
The Company is experiencing strong demand for tower rental space fueled by
the deployment of new wireless technologies and strong underlying growth in
wireless services. The Company believes that "same tower" revenue growth
(measured by comparing the Annualized Run Rate Revenue (as defined herein) 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 a meaningful indicator of
the Company's ability to generate incremental revenue on such towers. Taking
into consideration new leases written as of
1
<PAGE>
September 30, 1998, the Company experienced "same tower" revenue growth in
excess of 20.0% on an annualized basis for the nine months ended September 30,
1998 on its base of towers owned as of December 31, 1997. The Company's
Annualized Run Rate Revenue as of September 30, 1998 was $43.4 million.
BUSINESS AND GROWTH STRATEGY
The Company's objective is to create substantial value from both its position
as the leading provider of wireless communications rental tower space in the
Southeastern United States and its expansion into additional wireless
communications markets. In order to achieve this objective, the Company has
designed and implemented a three-tiered growth strategy that focuses on: (i)
increasing revenue yield per tower through aggressive marketing and
development; (ii) continuing acquisitions of towers in key markets; and (iii)
selective new tower construction.
I. MARKETING AND DEVELOPMENT STRATEGY
The Company aggressively markets rental space on its towers to capitalize on
the operating leverage of its business. The Company's customers are generally
responsible for the installation of their own equipment and the incremental
utility costs associated with that equipment. In addition, adding customers to
an existing tower does not result in increased monitoring, maintenance or
insurance costs. Accordingly, when customers are added to an existing tower,
additional revenue can be achieved at low incremental costs, thereby yielding
increased cash flow margins. The key elements of the Company's marketing and
development strategy include the following:
. OFFER STRATEGICALLY LOCATED CLUSTERS OF TOWERS. By owning and assembling
clusters of towers in high growth regions, the Company believes it is able
to offer its customers the ability to rapidly and efficiently fulfill their
network expansion plans across a particular market or region, which the
Company believes provides it with a significant competitive advantage.
. TARGET A DIVERSIFIED CUSTOMER BASE. The number of antennae a tower can
accommodate varies depending on the type of tower (self-supporting monopole,
guyed, self-supporting lattice), the height of the tower and the nature of
the services provided by such antennae. The substantial majority of the
Company's towers are self-supporting lattice and guyed towers that can
support a large number of antennae and therefore enable the Company to
market its tower space to a diverse group of wireless communication
providers.
. LEVERAGE CUSTOMER RELATIONSHIPS. The Company believes it has established a
reputation among its customers as a highly professional and reliable tower
space provider. This has been achieved through ongoing investment in the
development of relationships at multiple levels of customer organizations.
The Company believes that important factors in generating interest in its
towers are the customer's awareness 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 towers.
. TRACK FCC FILINGS. All FCC licensees must file applications for site
locations. As part of its disciplined approach to acquisitions and new tower
construction activities, the Company tracks these filings, which provide
market intelligence as to existing wireless communications providers' build-
out plans and new market entrants.
II. ACQUISITION STRATEGY
Ownership of rental towers in many parts of the United States remains highly
fragmented, although the consolidation of tower ownership has begun to
accelerate as larger independent owners acquire small local owners in certain
regions. The Company believes that its acquisition strategy has
2
<PAGE>
allowed it to achieve the highest density of towers across nine states located
in the Southeastern United States, which the Company believes provides it with
a significant competitive advantage.
The Company believes that growth through acquisition is an attractive
strategy because it allows the Company to: (i) choose the location of its
towers in key urban and other desired locations; (ii) acquire towers with
existing tenants and the capacity to add multiple, additional tenants; (iii)
not seek build-to-suit mandates from customers, which may result in towers
being built in unprofitable locations; and (iv) lower its risk as cash flow
from existing tenants is predetermined.
The Company's acquisition strategy continues to focus on: (i) rapidly
acquiring towers in key markets as a means to quickly gain critical mass,
thereby discouraging other tower consolidators from entering its markets;
(ii) completing follow-on acquisitions to enhance its coverage in selected
wireless communications markets; and (iii) penetrating new markets as a
platform for future growth. Through September 30, 1998, the Company has
acquired 766 towers at an average of four towers per acquisition and at a pace
of greater than one acquisition per week. The key elements of the Company's
acquisition strategy are set forth below:
. TARGET HIGH GROWTH WIRELESS COMMUNICATIONS MARKETS. The Company targets
population centers and key transportation corridors in wireless
communications markets where there is evidence of high potential growth. The
Southeastern United States is attractive because of its relatively high
population and economic growth rates. Within this region, the Company has
established strong market positions in densely populated areas such as
Atlanta, Birmingham, New Orleans, Orlando and Tampa as well as along several
key traffic corridors. The MobileMedia Acquisition (as defined herein)
provided the Company with strong market positions in Knoxville, Mobile and
Nashville, as well as towers in Southern California and New England that
provide the Company a base for penetrating these attractive wireless
markets.
. FOCUS ON COMPATIBILITY WITH EXISTING TOWER NETWORK. In evaluating a
potential acquisition, the Company considers whether it will be compatible
with the Company's existing tower inventory. In general, the Company aims to
acquire sites that will result in clusters of towers that provide the
critical mass necessary to achieve certain competitive advantages within a
given market. The MobileMedia Acquisition and the Southern Towers
Acquisition (as defined herein) expanded the Company's presence to
contiguous markets in the Southeastern United States.
. EMPLOY A DISCIPLINED VALUATION PROCESS. The Company seeks to acquire towers
that have existing cash flow and identified potential for significant future
cash flow growth from additional tenants. For each potential acquisition,
the Company reviews the current population coverage of each tower to be
acquired, the nature and quality of the existing and potential 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.
Consistent with the Company's acquisition criteria and strategy of
accumulating clusters of towers in regions that are highly attractive to
wireless communications providers, the Company has recently completed the
following major acquisitions:
SOUTHERN TOWERS ACQUISITION: In March 1998, the Company acquired 201 towers
from Southern Communications for approximately $83.5 million plus fees and
expenses (the "Southern Towers Acquisition"). Southern Communications is a
subsidiary of Southern Company, one of the largest utility holding companies in
the United States and an Enhanced Specialized Mobile Radio ("ESMR") provider.
Substantially all of these towers, which are located in Georgia, Alabama,
Mississippi and Florida, were constructed within the prior four years. See
"Business--Southern Towers Acquisition."
3
<PAGE>
The Southern Towers Acquisition represented an attractive opportunity to
significantly accelerate the achievement of the Company's goal of becoming the
leading provider of rental tower space in the Southeastern United States. Prior
to the acquisition, these towers, which had only a limited number of third
party tenants, were principally for the use of Southern Communications and its
affiliates. The towers were generally constructed with capacity significantly
exceeding Southern Communications' specific capacity requirements. Accordingly,
the Company believes that there is substantial potential for additional revenue
from these towers.
As of December 31, 1997 on a pro forma basis, the towers had combined annual
revenue totaling $4.8 million and Tower Level Cash Flow of $3.7 million,
implying a tower level cash flow margin of 77.9%.
MOBILEMEDIA ACQUISITION: In September 1998, the Company acquired 166 towers
from MobileMedia Corporation ("MobileMedia") and its affiliates for
approximately $170.0 million (the "MobileMedia Acquisition"). Subsequent to its
announced merger with Arch Communications, Inc., MobileMedia will be the second
largest paging company in the United States. See "Business-- MobileMedia
Acquisition".
The MobileMedia Acquisition represented an attractive opportunity to acquire
towers that (i) further strengthened the Company's tower portfolio in certain
existing markets, (ii) provided entry into geographically contiguous markets
and (iii) expanded the Company's operations into new markets in Southern
California and New England.
As of December 31, 1997 on a pro forma basis, the towers had combined annual
revenue totaling $13.2 million and Tower Level Cash Flow of $11.8 million,
implying a tower cash flow margin of 89.9%.
III. NEW TOWER CONSTRUCTION STRATEGY
An additional element of the Company's growth strategy is to selectively
construct new towers in and around major markets in which it already has a
presence in order to enhance coverage in existing markets. In addition, the
Company pursues build opportunities in order to expand capacity or otherwise
improve already existing sites. In both cases, the Company adheres to its own
requirements of return on capital invested. The Company does not engage in
speculative construction projects or large scale build-to-suit projects. During
1997 and the nine months ended September 30, 1998, the Company constructed 22
and 34 towers, respectively. As a result of opportunities generated through its
marketing efforts, the Company estimates that it will identify 80 to 100 new
tower build opportunities over the next 12 months. 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 carefully evaluates
such plans to meet customer requirements, which may result in selling space
on an existing tower, acquiring an existing tower, augmenting an existing
tower or constructing a new tower. Tower construction is only initiated
after at least one anchor customer is identified and the Company has
determined, based on market research, that the capital outlay for the
construction project would generate returns that exceed the Company's
minimum required return on invested capital.
. 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 the necessary steps to obtain
zoning approvals and building permits. The Company acquires tower structures
from a variety of vendors and oversees the construction of the tower by
hired sub-contractors.
4
<PAGE>
COMPANY STRENGTHS
The Company believes that its business is characterized by the following
strengths:
. EXCLUSIVE FOCUS ON TOWER RENTAL BUSINESS. The Company exclusively focuses on
the rental of wireless communications tower space as opposed to other
aspects of the tower industry such as site acquisition, tower construction
services and ancillary services. Furthermore, the Company does not engage in
large-scale "build-to-suit" programs, preferring instead to focus on its
core acquisition strategy and complementary selective construction strategy
designed to enhance coverage in targeted markets. The Company believes by
focusing on this sector of the tower industry, it can earn the highest cash
flow margins and risk adjusted return on invested capital.
. DISCIPLINED AND EFFICIENT ACQUIRER OF TOWER ASSETS. At September 30, 1998,
the Company had a network of approximately 755 towers (excluding 35 towers
acquired subsequent to September 30, 1998, and 41 towers to be acquired
pursuant to probable acquisition), geographically clustered in the
Southeastern United States as well as 75 towers located in Southern
California and New England. The Company's proven acquisition process
identifies towers that typically have an established foundation of existing
cash flow and are geographically complementary to its existing portfolio.
The Company has demonstrated the ability to identify and successfully
negotiate the purchase of what it believes to be value enhancing tower
acquisitions.
. ABILITY TO SUCCESSFULLY INCREASE TOWER RENTAL REVENUE. The Company's
aggressive marketing efforts to all major wireless communication providers
has resulted in the signing of a significant number of new tenants over the
last three years. Additional tenants increase the operating leverage of the
Company's portfolio and generally increase the Company's overall cash flow
margins. In order to measure the revenue growth performance of acquired
towers, the Company tracks the cumulative increase in monthly revenue from
towers acquired during different periods. The Company has generated a
cumulative increase in total monthly revenues for the 29 towers acquired in
1995 of 133.0% through September 1998. In addition, the 119 towers acquired
in 1996 and the 134 towers acquired in 1997 have generated cumulative
increases in total monthly revenues of 68.0% and 14.0%, respectively through
September 1998.
The Company believes that its business will continue to be characterized by
high cash flow margins, stable and predictable cash flow and high barriers to
entry. Moreover, the Company expects to experience strong ongoing growth as it
benefits from additional consolidation opportunities while increasing overall
tower revenues on existing towers.
----------------
The Company's headquarters are located at 1549 Ringling Boulevard, Third
Floor, Sarasota, Florida 34236, and its telephone number is (941) 364-8886. The
Company's website is www.pinnacletowers.com. The information provided on the
Company's website is not incorporated into this Prospectus.
5
<PAGE>
THE OFFERINGS
Concurrently with this Preferred Stock Offering, the Company is offering
10,000,000 shares of Common Stock (the "Common Stock Offering"). This Preferred
Stock Offering is contingent upon the closing of the Common Stock Offering, and
the Common Stock Offering is contingent upon the closing of this Preferred
Stock Offering. The Common Stock Offering and the Preferred Stock Offering are
collectively referred to as the "Offerings."
PREFERRED STOCK OFFERING
Preferred Stock Offered..... 150,000 shares of % Exchangeable Preferred
Stock, par value $.001 per share, plus any
additional shares of such stock issued from time
to time in lieu of cash dividends (the "New
Preferred Stock").
Liquidation Preference...... $1,000 per share.
Dividends................... Dividends will accrue from the date of issue of
the New Preferred Stock and will be payable
quarterly commencing at a rate per annum of
% of the liquidation preference thereof.
Dividends may be paid, at the Company's option,
on any dividend payment date occurring on or
before , 2004 either in cash or by issuing
additional fully paid and nonassessable New
Preferred Stock with an aggregate liquidation
preference equal to the amount of such dividends.
After such date, dividends are payable only in
cash. The Company's Senior Credit Facility, which
matures December 15, 2005, prohibits the payment
of cash dividends on the New Preferred Stock. The
Company currently expects that prior to being
required to pay cash dividends on the New
Preferred Stock it would seek an amendment to the
Senior Credit Facility to permit such cash
payments.
Mandatory Redemption........ The Company is required, subject to certain
conditions, to redeem all of the New Preferred
Stock outstanding on , 2009 at a redemption
price equal to 100% of the liquidation preference
thereof, plus, without duplication, accumulated
and unpaid dividends to the date of redemption.
Optional Redemption......... The Company may at its election in accordance
with the Certificate of Designations (as defined
herein) redeem shares of the New Preferred Stock:
(i) in whole or in part, at any time on or after
, 2004 at the redemption prices set forth
herein, plus, without duplication, accumulated
and unpaid dividends to the date of redemption;
and (ii) on or prior to , 2004, out of all
or a portion of the net proceeds of a Public
Equity Offering or a Strategic Equity Investment
received on or prior to , 2002 in an amount
of at least 5,000 shares and up to an aggregate
amount equal to 35% of the outstanding shares of
New Preferred Stock at a redemption price equal
to % of the liquidation preference thereof,
plus, without duplication, accumulated and unpaid
6
<PAGE>
dividends to the date of redemption; provided,
however, that after any such redemption, the
liquidation preference of New Preferred Stock
outstanding must equal at least (i) 65% of the
initial aggregate liquidation preference of the
New Preferred Stock originally issued in the
Preferred Stock Offering or (ii), in the event of
a partial exchange of New Preferred Stock for
Exchange Notes, an aggregate liquidation
preference of $75.0 million.
Exchange Provision.......... The New Preferred Stock will be exchangeable for
Exchange Notes (as defined herein), at the
Company's option, subject to certain conditions,
in whole or in part (in an amount equal to 50% of
the shares of New Preferred Stock then
outstanding but not less than 75,000 shares) on
any scheduled dividend payment date.
Ranking..................... The New Preferred Stock will, with respect to
dividend rights and rights upon liquidation,
winding-up and dissolution of the Company, rank
senior to all Junior Shares of the Company.
Voting Rights............... The New Preferred Stock will be non-voting,
except as otherwise required by law and except in
certain circumstances described herein, including
amending certain rights of the holders of the New
Preferred Stock. In addition, if: (i) the Company
fails to pay dividends in cash or, to the extent
permitted by the Certificate of Designations, by
the issuance of additional New Preferred Stock in
respect of six or more quarters in the aggregate
(whether or not consecutive); (ii) the Company
fails to make the mandatory redemption on ,
2009 or an Offer to Purchase (as defined herein)
upon a Change of Control; or (iii) the Company
fails to comply with the covenants contained in
the Certificate of Designations or make certain
payments on its indebtedness, holders of a
majority of the outstanding New Preferred Stock,
voting as a class, will be entitled to elect a
number of directors of the Company equal to the
lesser of either two directors or that number of
directors constituting at least 25% of the Board
of Directors of the Company.
Change of Control........... Within 30 days following a Change of Control, the
holders of New Preferred Stock will have the
right to require the Company to offer to purchase
all or any part outstanding of the New Preferred
Stock at a purchase price equal to 101% of the
liquidation preference thereof, plus, without
duplication, accumulated and unpaid dividends to
the date of purchase.
Certain Covenants........... The Certificate of Designations will contain
covenants that, among other things, limit the
ability of the Company and its subsidiaries to
(i) incur indebtedness, (ii) pay dividends or
make certain other restricted payments, (iii)
restrict dividends or make certain other payments
to the Company by Restricted Subsidiaries, (iv)
enter into certain transactions with affiliates
or (v) merge or consolidate with or sell all or
substantially all of its assets to any other
person. The Certificate of Designations will
contain provisions that allow for the
modification and amendment of the covenants
contained in the Certificate of Designations by a
vote of holders owning a
7
<PAGE>
majority of the outstanding New Preferred Stock,
including the covenant relating to a Change of
Control, except during the pendency of an Offer
to Purchase. In addition, the holders of a
majority of the outstanding Preferred Shares, on
behalf of all holders of New Preferred Stock, may
waive compliance by the Company with certain
provisions of the Certificate of Designations.
THE EXCHANGE NOTES
Issue....................... % Exchange Notes due 2009 (the "Exchange Notes")
issuable in exchange for the New Preferred Stock
in an aggregate principal amount equal to the
then aggregate liquidation preference of the New
Preferred Stock, plus, without duplication,
accumulated and unpaid dividends to the date
fixed for the exchange thereof (the "Exchange
Date").
Interest.................... Interest on the Exchange Notes will be payable
semi-annually in arrears on each and ,
commencing on . Interest may be paid, at the
Company's option, on any interest payment date
occurring on or before , 2004 either in cash
or by issuing additional Exchange Notes in an
aggregate principal amount equal to the amount of
such interest payments. After such date, interest
is payable only in cash.
Maturity.................... , 2009.
Ranking..................... The Exchange Notes will be subordinated to all
existing and future Senior Debt, which includes
the Senior Discount Notes (as defined herein), of
the Company and effectively subordinated to
obligations of the Company's subsidiaries.
Optional Redemption......... The Exchange Notes will be subject to redemption
at the option of the Company: (i) in whole or in
part, at any time on or after , 2004 at the
redemption prices set forth herein, plus, without
duplication, accrued and unpaid interest to the
date of redemption; and (ii) on or prior to ,
2002, out of all or a portion of the net proceeds
of a Public Equity Offering or a Strategic Equity
Investment received on or prior to , 2002
in an amount of at least $5.0 million and up to
35% of the aggregate principal amount of Exchange
Notes then outstanding plus (whether issued in
exchange for New Preferred Stock or in lieu of
cash interest payments), without duplication,
accrued and unpaid interest to the date of
redemption; provided, however, that after any
such redemption, the aggregate principal amount
of the Exchange Notes outstanding must equal at
least $75.0 million.
Change of Control........... Within 30 days following a Change of Control, the
Company will be required to offer to purchase all
outstanding Exchange Notes at a purchase price
equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest thereon
to the date of redemption.
8
<PAGE>
The Exchange Indenture (as defined herein) will
Certain Covenants........... contain certain covenants that, among other
things, limit the ability of the Company and its
subsidiaries to (i) incur additional
indebtedness, (ii) pay dividends or make certain
other restricted payments, (iii) restrict
dividends or make certain other payments to the
Company by Restricted Subsidiaries, (iv) create
certain liens, (v) enter into certain
transactions with affiliates or (vi) merge or
consolidate with or sell all or substantially all
of its assets to any other person. The Exchange
Indenture will contain provisions that allow for
the modification and amendment of the covenants
contained in the Exchange Indenture by a vote of
holders owning a majority of the Exchange Notes,
including the covenant relating to a Change of
Control, except during the pendency of an Offer
to Purchase. In addition, the holders of a
majority in aggregate principal amount of the
Exchange Notes, on behalf of all holders of
Exchange Notes, may waive compliance by the
Company with certain restrictive provisions of
the Exchange Indenture. See "Description of the
Exchange Notes--Modification and Waiver."
COMMON STOCK OFFERING(1)
Common Stock offered in:
U.S. Offering ............. 8,000,000 shares
International Offering .... 2,000,000 shares
Total.................... 10,000,000 shares
Common Stock to be
Outstanding after the 20,000,000 shares (2)
Offering...................
Nasdaq National Market BIGT
Symbol......................
- --------
(1) Does not include the Underwriters' over-allotment options for an aggregate
of 1,500,000 shares of Common Stock.
(2) Excludes approximately 2,000,000 shares of Common Stock reserved for
issuance pursuant to the Company's stock incentive plan (the "Stock
Incentive Plan"). See "Management--Stock Incentive Plan".
USE OF PROCEEDS
The Company intends to use the net proceeds of the Offerings as follows: (i)
approximately $30.3 million to redeem the outstanding shares of the Company's
Series A senior preferred stock (the "Senior Preferred Stock");
(ii) approximately $59.1 million to redeem the outstanding shares of the
Company' Series B junior preferred stock (the "Junior Preferred Stock" and
collectively with the Senior Preferred Stock, the "Existing Preferred Stock");
(iii) $15.1 million, including accrued interest, to repay in full and retire
the ABRY Bridge Loan (as defined herein); (iv) approximately $43.7 million to
be distributed to certain stockholders in connection with the Recapitalization
to occur upon the closing of the Common Stock Offering and (v) approximately
$135.9 million to repay outstanding borrowings under the Senior Credit Facility
(as defined herein). After giving effect to this use of proceeds there will be
$138.9 million of availability under the Senior Credit Facility.
9
<PAGE>
THE RECAPITALIZATION
In connection with the Common Stock Offering, pursuant to a recapitalization
agreement between the Company, its largest stockholder, ABRY II (as defined
herein) and certain members of the Company's management that are stockholders
of the Company, the Company will convert all outstanding shares of each class
of the Company's five classes of common stock into shares of a single class of
common stock (the "Common Stock") and pay to the holders of certain of such
classes of common stock preferential amounts and yields. Such actions are
collectively referred to herein as the "Recapitalization." As a result, (i) the
certificate of incorporation of the Company will be amended immediately prior
to the consummation of the Offerings to eliminate the current multiple classes
of the Company's common stock and create a single class of common stock, with
all of the outstanding shares of all the classes of common stock of the Company
other than Class D Common Stock being converted into approximately 8,571,309
shares of Common Stock and all shares of Class D Common Stock being converted
into approximately 1,428,691 shares of Common Stock; (ii) the holders of the
Company's currently outstanding shares of Class A Common Stock, Class B Common
Stock and Class E Common Stock will collectively be paid approximately $38.9
million by the Company from proceeds of the Offerings, which amount equals the
amount of the preferences such shares are entitled to over the other classes of
the Company's common stock pursuant to the Company's certificate of
incorporation in its current form; and (iii) the holders of the Company's
currently outstanding shares of Class A Common Stock will collectively be paid
approximately $4.8 million by the Company from proceeds of the Offerings, which
amount equals the amount of the yield such shares have accrued from the date of
their issuances through June 30, 1997 pursuant to the Company's certificate of
incorporation in its current form.
10
<PAGE>
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table presents summary historical and unaudited pro forma
consolidated financial data of the Company. The summary historical consolidated
financial data, for the period of inception (May 3, 1995) through December 31,
1995 and for the period then ended and as of and for each of the two years
ended December 31, 1996 and 1997, were derived from the audited consolidated
financial statements of the Company. 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 nine months ended September 30, 1997 and 1998, were derived from unaudited
consolidated financial statements and the Unaudited Pro Forma Consolidated
Financial Statements of the Company contained elsewhere herein. The summary
financial information should be read in conjunction with, and are qualified in
their entirety by, the information contained in the audited consolidated
financial statements of the Company and the related notes thereto,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Unaudited Pro Forma Financial Data" and "Selected Historical
Consolidated Financial Data" included elsewhere herein.
The following summary unaudited pro forma statement of operations data has
been prepared to reflect the results of operations of the Company as if each of
the following had been completed as of January 1, 1997: (i) all acquisitions
completed during 1997; (ii) the Southern Towers Acquisition; (iii) the
MobileMedia Acquisition; (iv) acquisitions of other rental towers by the
Company completed since January 1, 1998, in addition to the Southern Towers
Acquisition and the MobileMedia Acquisition; (v) other individually immaterial
acquisitions of rental towers for which the Company has entered into agreements
or letters of intent to acquire as of December 18, 1998, the acquisitions of
which the Company believes are probable; (vi) the financing of the acquisitions
referred to in (i) through (v) above; (vii) the Recapitalization; (viii) the
issuance of the Additional Junior Preferred Stock (as defined herein); and (ix)
the issuance of the Common Stock and the New Preferred Stock and the
application of the net proceeds therefrom as described under "Use of Proceeds"
(collectively, the "Transactions"). The pro forma balance sheet data as of
September 30, 1998 have been prepared as if each such transaction referred to
in (i) through (ix) above not completed by September 30, 1998 had occurred on
that date. The pro forma adjustments are based upon available information and
certain assumptions that the Company believes are reasonable. The pro forma
consolidated financial data do not purport to present what the Company's
results of operations or financial position would actually have been, or to
project the Company's results of operations or financial position at any future
period.
<TABLE>
<CAPTION>
PERIOD FROM PRO FORMA
INCEPTION AS ADJUSTED
(MAY 3, 1995) PRO FORMA NINE MONTHS NINE MONTHS FOR NINE
THROUGH YEAR ENDED YEAR ENDED AS ADJUSTED ENDED ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997 1997 (A) 1997 1998 1998 (B)
------------- ------------ ------------ ------------ ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Tower rental revenue... $ 733 $ 4,842 $12,881 $40,564 $ 7,981 $ 21,128 $ 34,086
Tower operating
expenses, excluding
depreciation and
amortization.......... 181 1,135 2,633 6,900 1,469 3,966 5,639
------ ------- ------- -------- ------- -------- --------
Gross profit, excluding
depreciation and
amortization.......... 552 3,707 10,248 33,664 6,512 17,162 28,447
Other expenses:
General and
administrative (c).... 306 923 1,385 2,377 882 2,861 3,257
Corporate
development (c)....... 369 1,440 3,772 3,772 2,400 5,213 5,213
Depreciation........... 282 2,041 6,335 32,517 4,370 13,357 25,087
------ ------- ------- -------- ------- -------- --------
Loss from operations... (405) (697) (1,244) (5,002) (1,140) (4,269) (5,110)
Interest expense....... 181 1,155 6,925 3,201 4,378 7,276 5,268
Amortization of
original issue
discount and debt
issuance costs ....... 59 164 292 21,411 186 11,636 16,889
------ ------- ------- -------- ------- -------- --------
Net loss............... (645) (2,016) (8,461) (29,614) (5,704) (23,181) (27,267)
Dividends and accretion
on Preferred Stock.... -- -- -- 20,010 -- 683 15,008
------ ------- ------- -------- ------- -------- --------
Net loss attributable
to Common Stock....... $ (645) $(2,016) $(8,461) $(49,624) $(5,704) $(23,864) $(42,275)
====== ======= ======= ======== ======= ======== ========
Loss per Share of
Common Stock.......... $(6.31) $ (8.10) $(27.28) $ (2.48) $(18.66) $ (59.85) $ (2.11)
Weighted average number
of Shares of Common
Stock................. 102 249 310 20,000 306 399 20,000
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
PERIOD FROM PRO FORMA
INCEPTION AS ADJUSTED
(MAY 3, 1995) PRO FORMA NINE MONTHS NINE MONTHS FOR NINE
THROUGH YEAR ENDED YEAR ENDED AS ADJUSTED ENDED ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997 1997 (A) 1997 1998 1998 (B)
------------- ------------ ------------ ------------ -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER OPERATING DATA:
Tower Level Cash Flow
(d)................... $ 552 $ 3,707 $ 10,248 $ 33,664 $ 6,512 $ 17,162 $28,447
Tower Level Cash Flow
Margin (e)............ 75.3% 76.6% 79.6% 83.0% 81.6% 81.2% 83.5%
Adjusted EBITDA (d).... $ 246 $ 2,784 $ 8,863 $ 31,287 $ 5,630 $ 14,301 $25,190
Adjusted EBITDA Margin
(e)................... 33.6% 57.5% 68.8% 77.1% 70.5% 67.7% 73.9%
EBITDA (d)............. $(123) $ 1,344 $ 5,091 $ 27,515 $ 3,230 $ 9,088 $19,977
EBITDA Margin (e)...... -- 27.8% 39.5% 67.8% 40.5% 43.0% 58.6%
Number of Towers: (f)
Beginning of period.... 0 33 156 -- 156 312 --
Towers acquired during
the period............ 29 119 134 -- 92 484 --
Towers constructed
during the period..... 4 4 22 -- 19 34 --
End of period.......... 33 156 312 -- 267 830 906
<CAPTION>
PRO FORMA
DECEMBER 31, SEPTEMBER 30, AS ADJUSTED
--------------------------------------- --------------------------- SEPTEMBER 30,
1995 1996 1997 1997 1998 1998 (B)
------------- ------------ ------------ ------------ -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents........... $ 31 $ 47 $ 1,694 $ 1,735 $ -- $ --
Tower assets, net...... 11,551 48,327 127,946 109,892 459,593 495,964
Total assets........... 14,573 55,566 143,178 121,390 492,078 528,449
Total debt............. 6,124 30,422 120,582 99,228 415,307 274,567
Mandatorily redeemable
stock:
Senior Preferred
Stock................ -- -- -- -- 28,782 --
New Preferred Stock... -- -- -- -- -- 144,875
Class B Common Stock.. 1,200 1,200 1,761 1,200 1,761 --
Class D Common Stock.. -- -- -- -- -- --
Junior Preferred
Stock................. -- -- -- -- 32,571 --
Common Stock........... -- -- -- -- -- 20
Additional paid-in
capital............... 7,051 24,881 25,876 25,343 35,547 131,977
Stock subscription
receivable............ (180) -- -- -- -- --
Common stock warrants.. -- -- -- -- 1,000 --
Accumulated deficit.... (645) (2,661) (11,123) (8,365) (34,304) (34,304)
------- ------- -------- -------- -------- --------
Stockholders' equity... 6,226 22,220 14,753 16,978 34,814 97,693
</TABLE>
- --------
(a) Reflects the historical amounts adjusted for the effects of tower
acquisitions including the adjustment to show a full year of activity for
134 towers acquired in 1997, the acquisitions of 484 towers completed in
the nine months ended September 30, 1998 (including the Southern Towers
Acquisition of 201 towers and the MobileMedia Acquisition of 166 towers),
the acquisition of 35 towers subsequent to September 30, 1998 and before
December 18, 1998, the probable acquisitions as of December 18, 1998 of 41
towers, the effects of the Recapitalization, the issuance of the Additional
Junior Preferred Stock, the Offerings and the redemption of the Existing
Preferred Stock as further described in "Unaudited Pro Forma Financial
Data."
(b) Reflects the historical amounts adjusted for the effects of the
acquisitions of 484 towers completed in the nine months ended September 30,
1998 (including the Southern Towers Acquisition of 201 towers and the
MobileMedia Acquisition of 166 towers), the acquisition of 35 towers
subsequent to September 30, 1998 and before December 18, 1998, the probable
acquisitions as of December 18, 1998 of 41 towers, the effects of the
Recapitalization, the issuance of the Additional Junior Preferred Stock,
the Offerings and the redemption of the Existing Preferred Stock as further
described in "Unaudited Pro Forma Financial Data."
(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 the development of new business
initiatives, and consists primarily of allocated compensation, benefits and
overhead costs that are not directly related to the administration or
management of existing towers.
12
<PAGE>
(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, not including the effect
of accretion and accrued dividends on Existing Preferred Stock and the New
Preferred Stock. 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 or as an
indication of the Company's operating performance. Moreover, Tower Level
Cash Flow, Adjusted EBITDA and EBITDA is not a standardized measure and may
be calculated in a number of ways. Accordingly, the Tower Level Cash Flow,
Adjusted EBITDA and EBITDA information provided may not be comparable to
other similarly titled measures provided by other companies.
(e) Represents Tower Level Cash Flow, Adjusted EBITDA and EBITDA each as a
percentage of tower rental revenue.
(f)Includes towers managed by the Company, which at September 30, 1998 were 29
towers.
13
<PAGE>
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. Prospective investors should carefully consider the following risk
factors, in addition to the other information contained in this Prospectus,
before purchasing the Common Stock offered hereby. This Prospectus contains
forward-looking statements within the meaning of the federal securities laws.
Discussions containing such forward-looking statements may be found in the
material set forth below and under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," as well as in
the Prospectus generally. The words "believe," "estimate," "expect," "intend,"
"anticipate," "plan," and similar expressions and variations of such
expressions identify certain of such forward-looking statements that speak
only as of the dates on which they were made. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of
future performance and involve risks and uncertainties. Actual events or
results may differ materially from those discussed in the forward-looking
statements as a result of various factors, including, without limitation, the
risk factors set forth below and the matters set forth in this Prospectus
generally.
SUBSTANTIAL INDEBTEDNESS; ABILITY TO SERVICE INDEBTEDNESS AND SATISFY NEW
PREFERRED STOCK OBLIGATIONS
The Company has a significant amount of indebtedness. As of September 30,
1998, on a pro forma basis, after giving effect to the Transactions, the
Company would have had approximately $273.9 million of consolidated long-term
debt outstanding, $144.9 of redeemable preferred stock (the "New Preferred
Stock"), stockholders' equity of approximately $97.7 million, a ratio of debt
to equity (excluding redeemable stock) of 2.8 to 1.0 and a ratio of debt and
redeemable preferred stock to common equity of 4.3 to 1.0. Subject to the
restrictions in the Senior Credit Facility, an indenture (the "Indenture")
under which the Company issued its 10% senior discount notes due 2008 (the
"Senior Discount Notes") and the certificate of designations governing the New
Preferred Stock (the "Certificate of Designations"), the Company expects to
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
stockholders, 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; (iii) the Company's leveraged
position and covenants contained in the Indenture, the Senior Credit Facility
and the Certificate of Designations could limit its ability to expand and make
capital improvements and acquisitions; (iv) the Indenture, the Senior Credit
Facility and the Certificate of Designations contain restrictive covenants,
including covenants that restrict or prohibit the payment of dividends or
other distributions by the Company to its stockholders; and (v) 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 and pay cash dividends
on, and satisfy its redemption obligations in respect to, the New Preferred
Stock 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 or make required cash payments
with respect to the New Preferred Stock, 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
14
<PAGE>
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 and the implementation of any of these alternative strategies
could have a negative impact on the value of the Common Stock.
The Senior Credit Facility, the Indenture and the Certificate of Designations
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 these 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
interest, to be immediately due and payable. This could also result in the
triggering of cross-default or cross-acceleration provisions in other
instruments, thereby permitting acceleration of the maturity of additional
indebtedness. 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. Substantially all
the assets of the Company are pledged as security under the Senior Credit
Facility. See "Description of Certain Indebtedness." The Senior Credit
Facility, the Indenture and the Certificate of Designations each limit the
ability of the Company to pay dividends on its Common Stock, other than the
payment of dividends required to maintain the Company's status as a REIT.
Until March 15, 2003, the Company's interest expense on the Senior Discount
Notes will consist solely of the accretion of original issue discount.
Thereafter, the Senior Discount Notes will require annual cash interest
payments of $32.5 million. For all dividend payment dates through and including
, 2004, the Company may elect to pay dividends on the New Preferred
Stock by issuing additional shares of New Preferred Stock with an aggregate
liquidation preference equal to the amount of such dividends. The Company's
ability to make scheduled payments of principal of, or to pay interest on, its
debt obligations and satisfy its redemption obligations with respect to the New
Preferred Stock and its ability to refinance any such obligations, 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 the 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 may need to refinance all or a
portion of its indebtedness 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 on commercially reasonable terms or at all.
LIMITATIONS ON ABILITY TO PAY DIVIDENDS
The Senior Credit Facility prohibits the payment of cash dividends on the New
Preferred Stock through the maturity of the Senior Credit Facility. The Company
currently expects that prior to being required to pay cash dividends on the New
Preferred Stock it would seek an amendment to the Senior Credit Facility to
permit such cash payments. The Company may, at its option, pay dividends on the
New Preferred Stock by issuing additional shares of New Preferred Stock with an
aggregate liquidation preference equal to the amount of such dividends. If the
Company is in arrears in the payment of dividends for six or more quarterly
dividend periods, the holders of the New Preferred Stock will be permitted to
elect the lesser of either two directors or that number of directors
constituting 25% of the Board of Directors of the Company.
15
<PAGE>
In addition to the limitations imposed on the payment of dividends by the
Senior Credit Facility or the Indenture, under Delaware law, the Company is
permitted to pay dividends on its capital stock,
including the New Preferred Stock, only out of its surplus or, in the event
that it has no surplus, out its net profits for the year in which a dividend
is declared or for the immediately preceding fiscal year. Surplus is defined
as the excess of a company's total assets over the sum of its total
liabilities plus the par value of its outstanding capital stock. In order to
pay dividends in cash, the Company must have surplus or net profits equal to
the full amount of the cash dividend at the time such dividend is declared. In
determining the Company's ability to pay dividends, Delaware law permits the
Board of Directors of the Company to revalue the Company's assets and
liabilities from time to time to their fair market values in order to create
surplus. The Company cannot predict what the value of its assets or the amount
of its liabilities will be in the future and, accordingly, there can be no
assurance that the Company will be able to pay cash dividends on the New
Preferred Stock.
RANKING OF THE NEW PREFERRED STOCK; SUBORDINATION OF EXCHANGE NOTES
The New Preferred Stock will rank junior in right of payment upon
liquidation to all existing and future indebtedness of the Company and to all
shares of Preferred Stock of the Company other than Preferred Stock which by
its terms ranks on a parity with or junior to the New Preferred Stock. The New
Preferred Stock will rank senior in right of payment upon liquidation to the
Common Stock. The payment of principal, premium, if any, and interest on, and
any other amounts owing in respect of, the Exchange Notes, if issued, will be
subordinated to the prior payment in favor of all existing and future Senior
Debt of the Company. As of September 30, 1998, on a pro forma basis after
giving effect to the Transactions, approximately $274.6 million of Debt
ranking senior to the Exchange Notes, if issued, would have been outstanding,
of which $44.1 million would have been outstanding under the Senior Credit
Facility and the Company would have had borrowing availability of $138.9
million (after giving effect to $17.0 million of letters of credit). The
Indenture, the Senior Credit Facility and the Exchange Indenture limit the
incurrence by the Company of additional indebtedness. In the event of the
bankruptcy, liquidation, dissolution, reorganization or other winding up of
the Company, the assets of the Company will be available to pay obligations on
the Exchange Notes only after all Senior Debt has been paid in full, and there
may not be sufficient assets remaining to pay amounts due on any or all of the
Exchange Notes. In addition, under certain circumstances, the Company may not
pay principal of, premium, if any, or interest on, or any other amounts owing
in respect of, the Exchange Notes, or purchase, redeem or otherwise retire the
Exchange Notes, if a payment default or a non-payment default exists with
respect to certain Senior Debt, including Senior Debt under the Indenture and
the Credit Facility. See "Description of the Exchange Notes--Subordination."
CHANGE OF CONTROL
Upon a Change of Control (as defined herein), the Company will be required
to offer to purchase all of the shares of New Preferred Stock then outstanding
at 101% of the then effective liquidation preference plus, without
duplication, accumulated and unpaid dividends to the repurchase date. There
can be no assurance that, were a Change of Control to occur, the Company would
have sufficient funds to pay the purchase price for all the shares of New
Preferred Stock that the Company might be required to purchase. In such event,
the Company could be required to seek third party financing to the extent it
did not have sufficient available funds to meet its purchase obligations, and
there can be no assurance that the Company would be able to obtain such
financing on favorable terms, if at all. Further, the Senior Credit Facility
and the Indenture restrict the Company's ability to repurchase shares of New
Preferred Stock, including upon a Change of Control.
A "change of control" (as defined in the Senior Credit Facility) constitutes
an event of default under the Senior Credit Facility. In the event of a
"change of control" (as defined in the Indenture), the Company will be
required to offer to repurchase all of the outstanding Notes at a price equal
to 101%
16
<PAGE>
of the principal amount thereof plus any accrued and unpaid interest thereon
to the date of the
purchase. The repurchase by the Company of the Senior Discount Notes upon a
change of control could also cause a default under the Senior Credit Facility.
There can be no assurance that in the event of any such change of control, the
Company will have, or will have access to, sufficient funds or will be
contractually permitted under the terms of outstanding indebtedness to repay
its indebtedness under the Senior Credit Facility or pay the required purchase
price for all Senior Discount Notes or shares of New Preferred Stock tendered
by holders upon a change of control, repay other outstanding indebtedness and
it is unlikely that in such event the Company would be able to repurchase
shares of New Preferred Stock.
CERTAIN TAX CONSIDERATIONS
Distributions on the New Preferred Stock, whether paid in cash or in
additional shares of New Preferred Stock, will be taxable as ordinary dividend
income to the extent of the Company's current and accumulated earnings and
profits. A holder's initial tax basis in any additional shares of New
Preferred Stock distributed by the Company in lieu of cash dividend payments
on the New Preferred Stock ("Dividend Shares") will equal the fair market
value of such Dividend Shares on their date of distribution. In addition,
depending on the fair market value of shares of New Preferred Stock on the
date of their issuance, holders may be required to include additional amounts
of income based on the difference between (x) the fair market value of such
shares on the date of their issuance and (y) the amount payable in redemption
of such shares, unless the difference is de minimis under the applicable
standard (such difference being referred to as "Preferred Stock Discount").
See "Certain Federal Income Tax Considerations--Preferred Stock Discount." If
shares of Preferred Stock (including Dividend Shares) bear Preferred Stock
Discount, such shares generally will have different tax characteristics from
other shares of New Preferred Stock and might trade separately, which might
adversely affect the liquidity of such shares.
Upon an exchange of New Preferred Stock for Exchange Notes, the holder
generally should have capital gain or loss equal to the difference between the
issue price of the Exchange Notes received and the holder's adjusted basis in
the New Preferred Stock redeemed. For a discussion of how to determine the
issue price of the Exchange Notes see "Certain Federal Income Tax
Considerations--Redemption and Exchange of Preferred Stock." Holders should
also note that if shares of New Preferred Stock are exchanged for Exchange
Notes and the stated redemption price at maturity of such Exchange Notes
exceeds their issue price by more than a de minimis amount, the Exchange Notes
will be treated as having original issue discount ("OID") equal to the entire
amount of such excess.
For a discussion of these and other relevant tax issues, see "Certain
Federal Income Tax Considerations."
HOLDING COMPANY STRUCTURE
The Company 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. Any Exchange Notes issued will be obligations exclusively of
the Company. Because substantially all of the Company's operations are
conducted through subsidiaries, the Company's cash flow and, consequently, its
ability to meet its debt service obligations, including payment of principal,
premium, if any, and interest on any Exchange Notes issued, is dependent upon
the cash flow of dividends, fees or otherwise. The Company's subsidiaries are
separate and distinct legal entities and will have no obligation, contingent
or otherwise, to pay any amounts due pursuant to any Exchange Notes issued or
to make any funds available therefor, whether in the form of loans, dividends
or otherwise. Under the terms of the Senior Credit Facility and Indenture, the
ability of the Company's subsidiaries to make loans or distributions to the
17
<PAGE>
Company 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
Company will need sufficient funds available to repay any Exchange Notes
issued when required. The Company would be unable to fulfill such obligations
under the current terms of the Senior Credit Facility and Indenture unless it
obtained a waiver or refinanced the indebtedness borrowed under the Senior
Credit Facility, the Indenture or the Exchange Indenture. There can be no
assurance that the Company would be able to obtain such waiver or refinancing
on terms favorable to it, if at all.
In addition, because the Company's subsidiaries will not guarantee the
payment of principal of or interest on any Exchange Notes issued, any right of
the Company to receive assets of any of its subsidiaries upon its liquidation
or reorganization (and the consequent right of the holders of any Exchange
Notes issued 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 Company is itself a creditor of such subsidiary,
in which case the Company'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 Company. Pinnacle Towers Inc. (the principal
subsidiary and operating company of the Company) 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 Company's financial condition and the value of any
Exchange Notes issued could be materially adversely affected. As of September
30, 1998, on a pro forma basis giving effect to the Transactions, the Issuer's
subsidiaries would have had approximately $66.9 million of indebtedness and
other liabilities outstanding (including trade payables and capital lease
obligations), $64.0 million of which is secured and all of which would have
been effectively senior to any Exchange Notes issued. This amount includes
substantially all of the Company's consolidating indebtedness. The Certificate
of Designation and Exchange Indenture permits the Issuer's subsidiaries to
incur additional indebtedness under certain circumstances. See "Description of
Exchange Notes".
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 Company, a court were to
find that, at the time any Exchange Notes issued were issued (i) the Company
issued any Exchange Notes issued with the intent of hindering, delaying or
defrauding current or future creditors or (ii) (A) the Company received less
than reasonably equivalent value or fair consideration for issuing such
Exchange Notes and (B) the Company (1) was insolvent or was rendered insolvent
by reason of the transactions contemplated in connection with the issuing the
Exchange Notes, (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 any Exchange Notes issued
then existing and future indebtedness of the Company and take other action
detrimental to the holders of any Exchange Notes issued, including, under
certain circumstances, invalidating such Exchange Notes.
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 Company
18
<PAGE>
would be considered insolvent if, at the time it incurs the indebtedness
constituting any Exchange Notes issued, 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.
POTENTIAL NEED FOR ADDITIONAL FINANCING
The Company's business plan is materially dependent upon the acquisition of
additional suitable towers at prices the Company considers reasonable in light
of the revenue it believes it will be able to generate from such towers when
acquired. The Company may require significant additional capital to finance
future acquisitions as well as its tower construction plan and other capital
expenditures. During 1996, 1997 and the first nine months of 1998, the Company
made capital investments aggregating approximately $42.2 million, $88.4
million and $349.0 million, respectively, in tower acquisitions, site upgrades
and new tower construction. The Company estimates capital expenditures in each
of 1999 and 2000 to be approximately $150.0 million. The Company historically
has financed its capital expenditures through a combination of borrowings
under bank credit facilities, the Senior Notes Offering, bridge financings,
equity issuances, seller financing and cash flow from operations. Significant
additional acquisition or tower construction opportunities will create a need
for additional capital financing. 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 Senior Credit Facility or otherwise. There can be
no assurance that adequate funding will be available as needed or, if
available, on terms acceptable to the Company or permitted under the terms of
its existing indebtedness. Additional debt financing could have important
consequences to the holders of Common Stock. See "--Substantial Indebtedness;
Ability to Service Indebtedness and Satisfy New Preferred Stock Obligations."
If additional funds are raised by issuing equity securities, existing
stockholders may experience dilution. Insufficient available funds may require
the Company to scale back or eliminate some or all of its planned expansion.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
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 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 some of which have greater financial and other
resources than the Company. Increased demand for acquisitions 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 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 "--Substantial Indebtedness;
Ability to Service Indebtedness and Satisfy New Preferred Stock Obligations."
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,
increased leverage and debt service requirements, combining disparate company
cultures and facilities and operating towers in geographically diverse
markets. Accordingly,
19
<PAGE>
there can be no assurance that one or more of the Company's past or future
acquisitions may not have a material adverse effect on the Company's financial
condition and results of operations.
RISKS ASSOCIATED WITH ACQUIRING REAL PROPERTY
The Company's real property interests relating to its tower sites consist of
fee interests, leasehold interests, private easements and licenses, easements
and rights-of-way. The Company generally obtains title insurance on fee
properties it acquires and relies on title warranties from sellers. The
Company's ability to protect its rights against persons claiming superior
rights in tower sites depends on the Company's ability to (i) recover under
title policies, the policy limits of which may be less than the purchase price
of the particular site; (ii) in the absence of insurance coverage, realize on
title warranties given by the sellers, which warranties often terminate after
the expiration of a specific period, typically one to three years; and (iii)
realize on title covenants from landlords contained in leases.
CUSTOMER CONCENTRATION
The Company has certain customers that account for a significant portion of
its revenue. Southern Communications and its affiliates and MobileMedia
Communications and certain of its affiliates would have accounted for
approximately 12.9% and 26.3%, respectively, of the Company's revenue, on a
pro forma basis, for the nine months ended September 30, 1998. Southern
Communications holds leases with initial terms of 10 years each. The Master
Lease (as defined herein) has an initial term of 15 years. The loss of one or
more of these major customers, or a reduction in their utilization of the
Company's tower rental space due to their insolvency or other inability or
unwillingness to pay, could have a material adverse effect on the Company's
business, results of operations and financial condition.
Because MobileMedia and certain of its affiliates are currently seeking
reorganization of its business under bankruptcy laws, after emerging from
bankruptcy, there can be no assurance that MobileMedia Communications will be
able to manage its operations successfully and meet its obligations under the
Master Lease nor can there be any assurance regarding who will control
MobileMedia Communications in the future. In the event of a default by
MobileMedia Communications as to the payment of rent, the Company has the
right to terminate the Master Lease with respect to either a particular site
space or all site spaces. Any default by MobileMedia Communications with
respect to some or all of the site spaces covered by the Master Lease, could
have a material adverse effect on the Company's business, operating results
and financial position.
BARRIERS TO NEW CONSTRUCTION
As of September 30, 1998, the Company had four towers under construction and
11 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.
Additionally, there can be no assurance that build opportunities will become
available that meet the Company's economic criteria. 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 have a material adverse effect on the Company's business, financial
condition and results of operations.
20
<PAGE>
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 that acquire space
on existing towers for wireless communications providers and manage new tower
construction, other 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.
DEPENDENCE ON THE WIRELESS COMMUNICATIONS INDUSTRY
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 services. 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 7 for PCS) within a geographic
market competing for subscribers. The demand for rental space on the Company's
towers 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.
Advances in technology could also reduce the need for tower-based transmission
and reception. In addition, wireless services providers often enter into
"roaming" and "resale" arrangements that permit providers to serve customers
in areas where they do not have facilities. Specifically, in most cases, these
arrangements are intended to permit a provider's customers to obtain service
in areas outside the provider's license area or, in the case of resale
arrangements, to permit a provider that does not have any licenses to enter
the wireless marketplace. Current FCC rules, which are subject to sunset
requirements that vary from service to service and market to market, also give
licensed wireless service providers the right to enter into roaming and resale
arrangements with other providers licensed to serve overlapping service areas.
Such roaming and resale arrangements could be viewed by some wireless service
providers as superior alternatives to constructing their own facilities or
leasing space on communications sites owned by the Company. If such
arrangements were to become common, there could be a material adverse effect
on the Company's prospects, financial condition and results of operations. See
"Business--Industry Background." 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.
21
<PAGE>
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. 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.
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."
RISK ASSOCIATED WITH NEW TECHNOLOGIES
The emergence of new technologies could reduce the need for tower-based
transmission and reception and, thereby, have a negative impact on the
Company's operations. For example, the FCC has granted license applications
for several low-earth orbiting satellite systems that are intended to provide
mobile voice and/or data services. Although such systems are highly capital-
intensive and are not yet commercially tested, mobile satellite systems could
compete with land-based wireless communications systems, thereby reducing the
demand for the infrastructure services provided by the Company. Additionally,
the growth in delivery of video services by direct broadcast satellites and
the
22
<PAGE>
development and implementation of signal combining technologies (which permit
one antenna to service two different frequencies of transmission and, thereby,
two customers) and satellite-delivery systems may reduce the need for tower-
based broadcast transmission. The occurrence of any of these factors could
have a material adverse effect on the Company's prospects, financial condition
and results of operations.
ENVIRONMENTAL MATTERS
The Company's operations and its ownership or leasing of real property 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 jointly
and severally liable for the remediation of hazardous substance contamination
at its facilities or at third-party waste disposal sites regardless of fault
or the legality of the original disposal and could also be held liable for any
personal injury or property damage related to such contamination. Although the
Company is not presently aware of any material environmental liabilities
pertaining to its operation, ownership or use of real property, there can be
no assurance that liability under, or 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."
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, fires 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.
CONTROLLING STOCKHOLDER
After the Offerings, ABRY Broadcast Partners II, L.P. ("ABRY II") the
Company's primary stockholder, will hold approximately 41.0% of the Company's
outstanding voting stock and will control four of seven seats on the Board of
Directors. Therefore, ABRY II has the power to exercise control over the
business, policies and affairs of the Company. See "Certain Relationships and
Transactions."
Purchasers of Common Stock offered in the Common Stock Offering will become
minority stockholders of the Company and will be unable to control the
management or business policies of the Company. Moreover, subject to
contractual restrictions and general fiduciary duties, the Company is not
prohibited from engaging in transactions with management and principal
stockholders, or with entities in which such persons are interested. The
Company's certificate of incorporation does not provide for cumulative voting.
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
23
<PAGE>
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."
NO PRIOR MARKET
The New Preferred Stock is a new issue of securities with no established
trading market. The Company has been advised by the Underwriters that the
Underwriters intend to make a market in the New Preferred Stock but are not
obligated to do so and may discontinue market making at any time without
notice. No assurance can be given as to the liquidity of the trading market
for the New Preferred Stock. See "Underwriting".
REIT STATUS
The Company has elected to be taxed as a Real Estate Investment Trust
("REIT") under Sections 856-860 of the Internal Revenue Code of 1986 (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 currently 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 qualification as a REIT during
each taxable year (including prior years) will depend upon its ability to meet
these requirements, through various factual matters and circumstances not
entirely within the Company's control, including actual annual operating
results, income distribution levels, stock ownership requirements and tests
relating to the Company's assets and sources of income. Although the Company
has not requested, and does not expect to request, a ruling from the Service
that it qualifies as a REIT, it has received an opinion of its counsel that,
based on certain assumptions and representations, it so qualifies. Investors
should be aware, however, that opinions of counsel are not binding on the
Service or any court. The REIT qualification opinion only represents the view
of counsel to the Company based on counsel's review and analysis of existing
law, which includes no controlling precedent. Furthermore, both the validity
of the opinion and the qualification of the Company as a REIT will depend on
the Company's continuing ability to meet various requirements concerning,
among other things, the ownership of its outstanding stock, the nature of its
assets, the sources of its income, and the amount of its distributions to its
stockholders. 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. In addition, no assurance can be given that new legislation, regulation,
administrative interpretation or court decision will not change the
requirements with respect to the Company's qualification as a REIT or the
federal income tax consequences of such qualification. The Company is not,
however, aware of any currently pending tax legislation that would adversely
affect its ability to continue to qualify as a REIT. See "Certain Federal
Income Tax Considerations" for a more detailed discussion of the opinion of
counsel and the requirements for qualification 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. Further, if the Company fails to qualify as a
REIT, the Company will be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at corporate rates
unreduced by distribution to stockholders, together with interest and
penalties. However, because the Company has not reported any net taxable
income (determined before the deduction of dividends) in its corporate income
tax returns following its filing of its election to be a REIT, unless its
reported net taxable losses are adjusted, the risk of any corporate income tax
liability with regard to prior periods would be minimal. However, with respect
to any year in which the Company recognizes positive taxable income, the loss
of REIT status may have a material adverse effect on the Company's financial
condition or results from operations. In addition, unless entitled to relief
under certain statutory provisions, the Company will also be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification is lost. This treatment
24
<PAGE>
would reduce the net earnings of the Company available for investment or
distribution to shareholders because of the additional tax liability to the
Company for the year or years involved. Also, distributions would no longer be
required to be made. To the extent that distributions to shareholders would
have been made in anticipation of the Company's qualifying as a REIT, the
Company might be required to borrow funds or to liquidate certain of its
investments to pay the applicable tax. Failing to qualify as a REIT would also
constitute a default under certain debt obligations of the Company which would
cause the obligations to become due and would have a negative impact on the
Company's operating results and its ability to pay dividends. See "Certain
Federal Income Tax Considerations" 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.
25
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offerings (after deducting
underwriting discounts and commissions and the estimated expenses of the
Offerings payable by the Company), assuming an initial public offering price
of $15.00 per share for the Common Stock, will be approximately $284.1 million
(approximately $305.1 million if the Underwriters' over-allotment options are
exercised in full).
The Company intends to use such net proceeds of the Offerings as follows:
(i) approximately $30.3 million to redeem the outstanding shares of the Senior
Preferred Stock; (ii) approximately $59.1 million to redeem the outstanding
shares of the Junior Preferred Stock; (iii) $15.1 million, including accrued
interest, to repay in full and retire the ABRY Bridge Loan; (iv) approximately
$43.7 million to be distributed to certain stockholders in connection with the
Recapitalization to occur upon the closing of the Common Stock Offering and
(v) approximately $135.9 million to repay outstanding borrowings under the
Senior Credit Facility.
The Company has entered into a senior credit facility with NationsBank,
N.A., Goldman, Sachs Credit Partners L.P. and certain other lenders (the
"Senior Credit Facility") that provides a revolving line of credit for
borrowings, repayments and reborrowings of up to $250.0 million, of which
$200.0 million is currently committed. Beginning on March 31, 2000 the
availability under the revolving line of credit starts reducing by specific
amounts on a quarterly basis until December 31, 2005 when the availability
will be reduced to zero. Loans under the Senior Credit Facility bear 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 2.0% or the 90-day London
Interbank Offered Rate ("LIBOR") plus a margin ranging from 0% to 3.0%.
Outstanding borrowings under the Senior Credit Facility amounted to $169.8
million at September 30, 1998. Advances under the Senior Credit Facility have
been used primarily to fund acquisitions and construction of towers. Upon the
closing of the Offerings, outstanding borrowings and availability under the
Senior Credit Facility would be approximately $44.1 million and $138.9
million, respectively, after giving effect to (i) repayment of $135.9 million
of outstanding borrowings with a portion of the proceeds of the Offerings and
(ii) consideration of $17.0 million of outstanding letters of credit which
reduce availability under the Senior Credit Facility.
In September 1998, the Company borrowed $15.0 million from ABRY II (the
"ABRY Bridge Loan") to partially finance the MobileMedia Acquisition. The ABRY
Bridge Loan bears interest at a rate of 9.0%. Interest and principal under the
ABRY Bridge Loan are payable within one year from the date of borrowing.
Pending such uses, the Company intends to invest the net proceeds of the
Offerings in short-term, investment grade, interest bearing securities or
money market instruments. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Business--The Pinnacle Approach to the Tower Rental Industry--
Business and Growth Strategy."
26
<PAGE>
DIVIDEND POLICY
In order to qualify as a REIT for federal income tax purposes, among other
things, the Company must make distributions each taxable year (not including
any return of capital for federal income tax purposes) equal to at least 95%
of its real estate investment trust taxable income, although the Board of
Directors, in its discretion, may increase that percentage as it deems
appropriate. See "Certain Federal Income Tax Considerations--Requirements for
REIT Qualification--Distribution Requirements." The declaration of
distributions is within the discretion of the Board of Directors and depends
upon the Company's cash available for distribution, current and projected cash
requirements, tax considerations and other factors.
The Company intends to make distributions to holders of the Common Stock
only in the minimum amount necessary to satisfy the REIT distribution
requirements necessary to maintain REIT status and intends to retain available
cash in excess of such amount for future operation and expansion of the
Company's business. In this regard, the Company does not expect for the
foreseeable future that it will have real estate investment trust taxable
income which will be required to be distributed in order to maintain its REIT
status. See "Certain Federal Income Tax Considerations--Requirements for REIT
Qualification--Distribution Requirements." Any determination to declare or pay
dividends in the future will be at the discretion of the Company's Board of
Directors and will depend on the Company's results of operations, financial
condition and any contractual restrictions, considerations imposed by
applicable law and other factors deemed relevant by the Board of Directors.
The Senior Credit Facility, Indenture and Certificate of Designations
currently limit the ability of the Company to make cash distributions, in each
case except for such distributions necessary to maintain its REIT status. See
"Risk Factors--Substantial Indebtedness; Ability to Service Indebtedness and
Satisfy New Preferred Stock Obligations."
27
<PAGE>
CAPITALIZATION
The following table sets forth: (i) the actual capitalization (including
short-term debt) of the Company as of September 30, 1998; (ii) the pro forma
capitalization of the Company after giving effect to (A) all acquisitions
completed after September 30, 1998 and all other individually immaterial
acquisitions of rental towers for which the Company has entered into letters
of intent to acquire as of December 18, 1998 (the acquisitions of which the
Company believes are probable), (B) the effects of the Recapitalization and
(C) the effect of the issuance of the Additional Junior Preferred Stock; and
(iii) the pro forma as adjusted capitalization of the Company after giving
effect to the pro forma adjustments set forth in clause (ii) above, the
Offerings and the application of the proceeds thereof, as described in "Use of
Proceeds," as if each had been completed on September 30, 1998. This table
should be read in conjunction with the information contained in the "Unaudited
Pro Forma Financial Data" and the Company's consolidated financial statements
and the related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
---------------------------------
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED(1)
-------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt:
Current portion of notes payable............. $ 664 $ 664 $ 664
ABRY Bridge Loan............................. 15,000 15,000 --
-------- -------- --------
Total current maturities..................... 15,664 15,664 664
-------- -------- --------
Long-term debt, net of current maturities:
Senior Credit Facility....................... 169,800 223,664 44,060
Senior Discount Notes........................ 210,598 210,598 210,598
Notes payable(2)............................. 19,245 19,245 19,245
-------- -------- --------
Total long-term debt......................... 399,643 453,507 273,903
-------- -------- --------
Redeemable stock:
Senior Preferred Stock....................... 28,782 28,782 --
Class B Common Stock, $0.001 par value,
12,000 shares authorized; 12,000 issued and
outstanding on an actual basis.............. 1,761 -- --
Class D Common Stock, $0.001 par value,
100,000 shares authorized; 40,000 issued and
outstanding on an actual basis.............. -- -- --
New Preferred Stock.......................... -- -- 144,875
-------- -------- --------
Total redeemable stock....................... 30,543 28,782 144,875
-------- -------- --------
Stockholders' equity(3):
Junior Preferred Stock, redeemable, 14%
dividends, $.001 par value; 100 shares
authorized; 32.85 shares issued and
outstanding on an actual basis and 59.05
shares issued and outstanding on a pro forma
basis....................................... 32,571 58,816 --
Class A Common Stock, $0.001 par value,
202,500 shares authorized; 202,500 issued
and outstanding on an actual basis.......... -- -- --
Class E Common Stock, $0.001 par value,
302,500 shares authorized; 174,766 issued
and outstanding on an actual basis.......... -- -- --
Common Stock, $0.001 par value, 100,000,000
shares authorized; 10,000,000 shares issued
and outstanding on a pro forma basis;
20,000,000 shares issued on a pro forma as
adjusted basis.............................. -- 10 20
Common Stock Warrants(4)..................... 1,000 1,000 --
Additional paid-in capital................... 35,547 (6,440) 131,977
Accumulated deficit.......................... (34,304) (34,304) (34,304)
-------- -------- --------
Total stockholders' equity................... 34,814 19,082 97,693
-------- -------- --------
Total capitalization........................ $480,664 $517,035 $517,135
======== ======== ========
</TABLE>
- -------
(1) As adjusted to give effect to the sale by the Company of the Common Stock
at an assumed offering price of $15.00 per share and the sale of the New
Preferred Stock.
(2) Notes payable consists 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.
(3) Does not include approximately 2,000,000 shares of Common Stock reserved
for issuance in connection with incentive stock options expected to be
granted at the time of the Common Stock Offering.
(4) These warrants were issued in connection with the issuance of the Senior
Preferred Stock. The warrants are not exercisable prior to March 3, 2000.
If the Senior Preferred Stock is redeemed prior to March 3, 2000, such
warrants are not exercisable and are cancelled.
28
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The Unaudited Pro Forma Consolidated Balance Sheet at September 30, 1998
gives pro forma effect to: (i) the acquisition of individually immaterial
rental tower businesses completed by the Company in the period subsequent to
September 30, 1998 through December 18, 1998; (ii) other individually
immaterial acquisitions of rental tower businesses for which the Company has
entered into agreements or letters of intent to acquire as of December 18,
1998, and that the Company believes are probable; (iii) the related financing
of the acquisitions referred to in (i) and (ii) above; (iv) the
Recapitalization; and (v) the Offerings and the application of the net
proceeds therefrom as described under "Use of Proceeds," as if each had
occurred as of September 30, 1998.
The Unaudited Pro Forma Consolidated Statements of Operations for the year
ended December 31, 1997 and the nine months ended September 30, 1998 give pro
forma effect to: (i) the Southern Towers Acquisition; (ii) the MobileMedia
Acquisition; (iii) acquisitions of other rental tower businesses by the
Company completed during the period January 1, 1997 through December 18, 1998,
in addition to the Southern Towers Acquisition and the MobileMedia
Acquisition; (iv) other individually immaterial acquisitions of rental tower
businesses for which the Company has entered into agreements or letters of
intent to acquire as of December 18, 1998, and that the Company believes are
probable; (v) the related financing of the acquisitions referred to in (i)
through (iv) above; (vi) the Senior Notes Offering; (vii) the
Recapitalization; and (viii) the Offerings and the application of the net
proceeds therefrom as described under "Use of Proceeds"; as if each had
occurred as of January 1, 1997.
The Company accounts for its acquisitions under the purchase method of
accounting. The total cost of rental tower businesses acquired including
related fees and expenses is allocated to the underlying tangible and
intangible assets acquired and liabilities assumed based on their respective
fair values. The purchase price allocations for the respective acquisitions
included in the unaudited pro forma data are preliminary. However, the Company
does not expect that the final allocation of the purchase price will be
materially different from its preliminary allocation.
The unaudited pro forma financial data are provided for informational
purposes only and are not necessarily indicative of the results of operations
or financial position of the Company had the transactions assumed therein
occurred, nor are they necessarily indicative of the results of operations
which may be expected to occur in the future. There can be no assurance
whether or when any of the probable acquisitions reflected in the unaudited
pro forma data will be completed. Furthermore, the unaudited pro forma
financial data are based upon assumptions that the Company believes are
reasonable and should be read in conjunction with the financial statements and
the accompanying notes thereto included elsewhere in this Prospectus.
29
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS FOR
ACQUISITIONS
PINNACLE COMPLETED
HOLDINGS SUBSEQUENT TO ADJUSTMENTS ADJUSTMENTS
SEPTEMBER 30, SEPTEMBER 30, FOR PROBABLE OTHER PRO FOR THE PRO FORMA
1998 1998 (A) ACQUISITIONS (A) ADJUSTMENTS FORMA OFFERINGS AS ADJUSTED
------------- --------------- ---------------- ----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Accounts receivable... 2,146 -- -- -- 2,146 -- 2,146
Prepaid expenses and
other current
assets............... 1,032 -- -- -- 1,032 -- 1,032
-------- ------- ------- ------- -------- -------- --------
Total current assets.. 3,178 -- -- -- 3,178 -- 3,178
Restricted cash....... 61 -- -- -- 61 -- 61
Tower assets, net..... 459,593 11,528 24,843 -- 495,964 -- 495,964
Fixed assets, net..... 2,311 -- -- -- 2,311 -- 2,311
Land.................. 13,862 -- -- -- 13,862 -- 13,862
Deferred debt costs,
net.................. 11,849 -- -- -- 11,849 -- 11,849
Other assets.......... 1,224 -- -- -- 1,224 -- 1,224
-------- ------- ------- ------- -------- -------- --------
$492,078 $11,528 $24,843 -- $528,449 $ -- $528,449
======== ======= ======= ======= ======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...... $ 2,890 $ -- $ -- $ -- $ 2,890 $ -- $ 2,890
Accrued expenses...... 7,374 -- -- -- 7,374 (100)(e) 7,274
Deferred revenue...... 1,038 -- -- -- 1,038 -- 1,038
Current portion of
long-term debt........ 15,664 -- -- -- 15,664 (15,000)(e) 664
-------- ------- ------- ------- -------- -------- --------
Total current
liabilities........... 26,966 -- -- -- 26,966 (15,100) 11,866
Long-term debt......... 399,643 11,528 24,843 17,493 (g)(h) 453,507 (179,604)(d)(f) 273,903
Other liabilities...... 112 -- -- -- 112 -- 112
-------- ------- ------- ------- -------- -------- --------
426,721 11,528 24,843 17,493 480,585 (194,704) 285,881
-------- ------- ------- ------- -------- -------- --------
REDEEMABLE STOCK:
Senior Preferred
Stock................. 28,782 -- 28,782 (28,782)(b) --
New Preferred Stock.... 144,875 (c) 144,875
Class B Common Stock... 1,761 (1,761)(g) -- -- --
Class D Common Stock... -- -- -- -- --
-------- ------- ------- ------- -------- -------- --------
30,543 -- -- (1,761) 28,782 116,093 144,875
-------- ------- ------- ------- -------- -------- --------
STOCKHOLDERS' EQUITY:
Junior Preferred
Stock................. 32,571 -- -- 26,245 (h) 58,816 (58,816)(b) --
Common Stock........... -- -- -- 10 (g) 10 10 (c) 20
Common stock warrants.. 1,000 -- 1,000 (1,000)(b) --
Additional paid-in
capital............... 35,547 -- -- (41,987)(g) (6,440) 139,240 (c)
(823)(b) 131,977
Accumulated deficit.... (34,304) -- -- -- (34,304) -- (34,304)
-------- ------- ------- ------- -------- -------- --------
Total stockholders'
equity............... 34,814 -- -- (15,732) 19,082 78,611 97,693
-------- ------- ------- ------- -------- -------- --------
$492,078 $11,528 $24,843 $ -- $528,449 $ -- $528,449
======== ======= ======= ======= ======== ======== ========
</TABLE>
See accompanying notes to Unaudited Pro Forma Consolidated Balance Sheet
30
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
(a) Reflects the Company's preliminary allocation of purchase price in
accordance with the purchase method of accounting for individually
immaterial acquisitions of rental tower assets, and the related debt
financing under the Senior Credit Facility, as follows:
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF NUMBER OF PURCHASE
ACQUISITIONS (1) TOWERS PRICE (2)
---------------- --------- ---------
<S> <C> <C> <C>
(i) Acquisitions of individually
immaterial rental tower businesses
completed by the Company in the
period October 1, 1998 through
December 18, 1998................. 19 35 $11,528
(ii) Other individually immaterial
acquisitions of rental tower
businesses for which the Company
has entered into agreements or
letters of intent to acquire as of
December 18, 1998, and which the
Company believes are probable..... 18 41 $24,843
</TABLE>
--------
(1) Includes the completed acquisitions of two undeveloped zoned tower
sites.
(2) Includes estimated fees and expenses related to the acquisitions of
$478, and $952, respectively.
(b) Adjusted to give effect to the repayment of the Junior Preferred Stock,
the Senior Preferred Stock and the cancellation of the related warrants.
(c) Reflects the estimated net proceeds of the Offerings to the Company of
$144,875 of mandatorily redeemable Preferred Stock and $139,250 of Common
Stock, net of the estimated underwriting discounts and commissions and
offering expenses totaling $15,875.
(d) Represents the use of a portion of the net proceeds from the Offerings to
pay the applicable distribution preference and yield to holders of Class A
Common Stock, Class B Common Stock and Class E Common Stock.
(e) Reflects the use of a portion of the net proceeds from the Offerings to
repay the outstanding balance of the ABRY Bridge Loan and accrued interest
thereon, as required under the ABRY Bridge Loan.
(f) Reflects the use of the remaining net proceeds from the Offerings to repay
a portion of the Senior Credit Facility.
(g) Reflects the effects of the Recapitalization.
(h) Reflects the effects of the issuance of the Additional Junior Preferred
Stock.
31
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADJUSTMENTS
PINNACLE ADJUSTMENTS FOR ADJUSTMENTS ADJUSTMENTS PRO
HOLDINGS FOR SOUTHERN FOR FOR FORMA ADJUSTMENTS
DECEMBER 31, COMPLETED TOWERS MOBILEMEDIA PROBABLE FOR FOR
1997 ACQUISITIONS (A) ACQUISITIONS (B) ACQUISITION (C) ACQUISITION (D) ACQUISITIONS OFFERINGS
------------ ---------------- ---------------- --------------- --------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Tower rental
revenue......... $12,881 $ 7,580 $ 4,780 $ 13,155 $ 2,168 $ 40,564 $ --
Tower operating
expenses
excluding
depreciation and
amortization.... 2,633 1,466 1,058 1,322 411 6,900 --
------- -------- -------- -------- ------- -------- --------
Gross profit
excluding
depreciation and
amortization.... 10,248 6,114 3,722 11,823 1,757 33,664 --
Other expenses:
General and
administrative.. 1,385 293 90 609 -- 2,377 --
Corporate
development.... 3,772 -- -- -- -- 3,772 --
Depreciation.... 6,335 7,342 5,730 11,454 1,656 32,517 --
------- -------- -------- -------- ------- -------- --------
11,492 7,635 5,820 12,063 1,656 38,666 --
Loss from
operations...... (1,244) (1,521) (2,098) (240) 101 (5,002) --
Interest
expense......... 6,925 9,361 (9,450) 7,077 2,112 16,025 (12,824)(e)(f)
Amortization of
original issue
discount and
debt issuance
costs........... 292 -- 21,119 -- -- 21,411 --
------- -------- -------- -------- ------- -------- --------
Net loss......... (8,461) (10,882) (13,767) (7,317) (2,011) (42,438) 12,824
Dividends and
accretion on
Preferred
Stock........... -- -- -- 9,532 (g) -- 9,532 10,478 (k)
------- -------- -------- -------- ------- -------- --------
Net loss
attributable to
Common Stock.... $(8,461) $(10,882) $(13,767) $(16,849)(g) $(2,011) $(51,970) $ 2,346
======= ======== ======== ======== ======= ======== ========
Pro forma net
loss per share
of Common
Stock........... $ (5.20)
Pro forma
weighted average
number of shares
of Common Stock
outstanding..... 10,000
<CAPTION>
PRO
FORMA
AS
ADJUSTED (F)
------------
<S> <C>
Tower rental
revenue......... $ 40,564
Tower operating
expenses
excluding
depreciation and
amortization.... 6,900
------------
Gross profit
excluding
depreciation and
amortization.... 33,664
Other expenses:
General and
administrative.. 2,377
Corporate
development.... 3,772
Depreciation.... 32,517
------------
38,666
Loss from
operations...... (5,002)
Interest
expense......... 3,201
Amortization of
original issue
discount and
debt issuance
costs........... 21,411
------------
Net loss......... (29,614)
Dividends and
accretion on
Preferred
Stock........... 20,010
------------
Net loss
attributable to
Common Stock.... $(49,624)
============
Pro forma net
loss per share
of Common
Stock........... $ (2.48)
Pro forma
weighted average
number of shares
of Common Stock
outstanding..... 20,000
</TABLE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PINNACLE
HOLDINGS
NINE MONTHS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS PRO
ENDED FOR FOR SOUTHERN FOR FOR FORMA ADJUSTMENTS
SEPTEMBER 30, COMPLETED TOWERS MOBILEMEDIA PROBABLE FOR FOR
1998 ACQUISITIONS (H) ACQUISITION (I) ACQUISITION (J) ACQUISITIONS (D) ACQUISITIONS OFFERINGS
------------- ---------------- --------------- --------------- ---------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Tower rental
revenue......... $ 21,128 $ 1,633 $ 836 $ 8,863 $ 1,626 $ 34,086 $ --
Tower operating
expenses
excluding
depreciation and
amortization.... 3,966 344 185 836 308 5,639 --
-------- ------- ------- -------- ------- -------- ------
Gross profit
excluding
depreciation and
amortization.... 17,162 1,289 651 8,027 1,318 28,447 --
Other expenses:
General and
administrative.. 2,861 -- 15 381 -- 3,257 --
Corporate
development.... 5,213 -- -- -- -- 5,213 --
Depreciation.... 13,357 1,897 955 7,636 1,242 25,087 --
-------- ------- ------- -------- ------- -------- ------
21,431 1,897 970 8,017 1,242 33,557 --
Loss from
operations...... (4,269) (608) (319) 10 76 (5,110) --
Interest
expense......... 7,276 2,846 (2,650) 5,551 1,863 14,886 (9,618)(e)(f)
Amortization of
original issue
discount and
debt issuance
costs........... 11,636 -- 5,253 -- -- 16,889
-------- ------- ------- -------- ------- -------- ------
Net loss......... (23,181) (3,454) (2,922) (5,541) (1,787) (36,885) 9,618
Dividends and
accretion on
Preferred
Stock........... 683 -- -- 6,706 (g) -- 7,389 7,619 (k)
-------- ------- ------- -------- ------- -------- ------
Net loss
attributable to
Common Stock.... $(23,864) $(3,454) $(2,922) $(12,247)(g) $(1,787) $(44,274) 1,999
======== ======= ======= ======== ======= ======== ======
Pro forma net
loss per share
of Common
Stock........... $ (4.43)
Pro forma
weighted average
number of shares
of Common Stock
outstanding .... 10,000
<CAPTION>
PRO
FORMA
AS
ADJUSTED (F)
------------
<S> <C>
Tower rental
revenue......... $ 34,086
Tower operating
expenses
excluding
depreciation and
amortization.... 5,639
------------
Gross profit
excluding
depreciation and
amortization.... 28,447
Other expenses:
General and
administrative.. 3,257
Corporate
development.... 5,213
Depreciation.... 25,087
------------
33,557
Loss from
operations...... (5,110)
Interest
expense......... 5,268
Amortization of
original issue
discount and
debt issuance
costs........... 16,889
------------
Net loss......... (27,267)
Dividends and
accretion on
Preferred
Stock........... 15,008
------------
Net loss
attributable to
Common Stock.... $(42,275)
============
Pro forma net
loss per share
of Common
Stock........... $ (2.11)
Pro forma
weighted average
number of shares
of Common Stock
outstanding .... 20,000
</TABLE>
See accompanying notes to Unaudited Consolidated Statements of Operations
32
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(a) Reflects the historical, pre-acquisition results of operations (in
aggregate) for the acquisitions of rental tower businesses completed by the
Company in the period January 1, 1997 through their respective date of
acquisition (but no later than December 18, 1998), and the related debt
financing under the Senior Credit Facility, as follows:
<TABLE>
<CAPTION>
TIDEWATER MAJESTIC
SHORE FOR FOR THE FOR THE
THE PERIOD PERIOD PERIOD OTHER 1997 OTHER 1998
ENDING ENDING ENDING INDIVIDUALLY INDIVIDUALLY PRO FORMA
DECEMBER 31, JULY 31, JUNE 27, IMMATERIAL IMMATERIAL PRO FORMA COMPLETED
1997 1997 1997 ACQUISITIONS (1) ACQUISITIONS (2) ADJUSTMENTS (3) ACQUISITIONS
------------ --------- -------- ---------------- ---------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Tower rental revenues... $667 $368 $192 $ 1,562 $4,791 $ -- $ 7,580
Tower operating
expenses, excluding
depreciation and
amortization........... 146 57 19 336 908 -- 1,466
---- ---- ---- ------- ------- ------- --------
Gross profit excluding
depreciation and
amortization........... 521 311 173 1,226 3,883 -- 6,114
General and
administrative......... 235 30 28 -- -- -- 293
Depreciation............ 97 26 24 2,276 4,919 -- 7,342
---- ---- ---- ------- ------- ------- --------
Income (loss) from
operations............. 189 255 121 (1,050) (1,036) -- (1,521)
Interest expense........ 198 14 6 -- -- 9,143 9,361
Income tax expense
(benefit).............. (22) -- 10 -- -- 12 --
---- ---- ---- ------- ------- ------- --------
Net income (loss)....... $ 13 $241 $105 $(1,050) $(1,036) $(9,155) $(10,882)
==== ==== ==== ======= ======= ======= ========
</TABLE>
-------
(1) Represents the aggregate adjustment to results of operations for 65
separate completed acquisitions of 134 total towers completed during
1997, other than the acquisitions of Shore, Tidewater and Majestic,
each of which acquisitions were individually immaterial, assuming such
transactions were completed as of January 1, 1997.
(2) Represents the aggregate adjustment to results of operations for
acquisitions of 152 total towers completed during the period from
January 1, 1998 through December 18, 1998, other than the Southern
Towers and MobileMedia Acquisitions, each of which acquisitions were
individually immaterial, assuming such transactions were completed as
of January 1, 1997.
(3) Reflects the pro forma increase in interest expense associated with the
financing of respective acquisitions and the elimination of income
taxes due to the REIT status.
33
<PAGE>
(b) Reflects the historical operating results of Southern Towers and the pro
forma effect of tower rental revenue, tower operating expenses and tower
asset depreciation, and the related debt financing of the Southern Towers
Acquisition under the Senior Credit Facility, assuming the transaction
was completed as of January 1, 1997, as follows:
<TABLE>
<CAPTION>
SOUTHERN TOWERS
YEAR ENDED PRO FORMA
DECEMBER 31, SOUTHERN
1997 ADJUSTMENTS TOWERS
--------------- ----------- ---------
<S> <C> <C> <C>
Tower rental revenues............. $ 1,017 $ 3,763 (1) $ 4,780
Tower operating expenses,
excluding depreciation and
amortization..................... 877 181 (1) 1,058
------- -------- --------
Gross profit excluding
depreciation and amortization.... 140 3,582 3,722
General and administrative........ 90 -- 90
Depreciation...................... 1,947 3,783 (2) 5,730
------- -------- --------
Loss from operations.............. (1,897) (201) (2,098)
Interest income................... -- (9,450)(3) (9,450)
Amortization of original issue
discount and deferred debt
costs............................ -- 21,119 (3) 21,119
------- -------- --------
Net loss.......................... $(1,897) $(11,870) $(13,767)
======= ======== ========
</TABLE>
-------
(1) Represents pro forma incremental tower revenue and operating expenses
pursuant to an executed lease agreement with Southern Communications
and its affiliates.
(2) Reflects pro forma increases in tower asset depreciation resulting from
the Company's preliminary application of purchase accounting.
(3) Reflects the pro forma increase in interest expense associated with the
financing of the Southern Towers Acquisition and the subsequent
issuance of the Senior Discount Notes.
(c) Reflects the historical operating results of the MobileMedia
Communications, Inc. and Subsidiaries tower operations and the pro forma
effect of tower rental revenue, tower operating expenses and tower asset
depreciation, and the related financing of the MobileMedia Acquisition
assuming the transaction was completed as of January 1, 1997, as follows:
<TABLE>
<CAPTION>
MOBILEMEDIA
FOR THE
PERIOD ENDED
DECEMBER 31, PRO FORMA
1997 ADJUSTMENTS MOBILEMEDIA
------------ ----------- -----------
<S> <C> <C> <C>
Tower rental revenues.............. $2,500 $ 10,655 (1) $ 13,155
Tower operating expenses, excluding
depreciation and amortization..... 1,114 218 (1) 1,332
------ -------- --------
Gross profit excluding depreciation
and amortization.................. 1,386 10,437 11,823
General and administrative......... 609 -- 609
Depreciation....................... 521 10,933 (2) 11,454
------ -------- --------
Loss from operations............... 256 (496) (240)
Interest expense................... -- 7,077 (3) 7,077
Income tax expense................. -- -- --
------ -------- --------
Net income (loss).................. 256 (7,537) (7,317)
Dividends and accretion on existing
preferred stock................... -- 9,532 (4) 9,532
------ -------- --------
Net income (loss) attributable to
common stock...................... $ 256 $(17,105) $(16,849)
====== ======== ========
</TABLE>
-------
(1) Represents pro forma incremental tower revenues and operating expenses
pursuant to the executed Master Lease, with MobileMedia.
(2) Reflects pro forma increases in tower asset depreciation resulting from
the Company's preliminary application of purchase accounting.
(3) Reflects the pro forma increase in interest expense associated with the
financing of the MobileMedia Acquisition.
(4) Reflects dividends accrued and accretion to liquidation value on the
Existing Preferred Stock.
(d) Reflects the adjustment to results of operations for 18 separate
acquisitions pending as of December 18, 1998 of 41 total towers, for which
the Company has entered into agreements or letters of intent, and which
the Company believes are probable, each of which are individually
immaterial, assuming such transactions were completed as of January 1,
1997.
(e) Reflects the decrease in pro forma interest expense resulting from the use
of a portion of the net proceeds from both the Senior Notes Offering and
the Offerings to repay pro forma outstanding debt under the Senior Credit
Facility, assuming such transactions were completed as of January 1, 1997.
34
<PAGE>
(f) Reflects the pro forma effect of the Offerings.
(g) Reflects dividends accrued and accretion to liquidation value on the
Existing Preferred Stock.
(h) Reflects the historical, pre-acquisition results of operations (in
aggregate) for the acquisitions of rental tower businesses completed by
the Company in the period January 1, 1998 through their respective date of
acquisition (but no later than December 18, 1998), and the related debt
financing under the Senior Credit Facility, as follows:
<TABLE>
<CAPTION>
ACQUISITIONS ACQUISITIONS
COMPLETED COMPLETED ADJUSTMENTS
AS OF SUBSEQUENT TO FOR
SEPTEMBER 30, SEPTEMBER 30, COMPLETED
1998 1998 ACQUISITIONS
------------- ------------- ------------
<S> <C> <C> <C>
Tower rental revenues............. $ 1,236 $ 397 $ 1,633
Tower operating expenses,
excluding depreciation and
amortization..................... 247 97 344
------- ------- -------
Gross profit excluding
depreciation and amortization.... 989 300 1,289
General and administrative........ -- -- --
Depreciation...................... 1,321 576 1,897
------- ------- -------
Loss from operations.............. (332) (276) (608)
Interest expense.................. 1,981 865 2,846
------- ------- -------
Net loss.......................... $(2,313) $(1,141) $(3,454)
======= ======= =======
</TABLE>
(i)Reflects the historical operating results of Southern Communications
Services, Inc. tower operations and the pro forma effect of tower rental
revenue, tower operating expenses and tower asset depreciation, and the
related financing of the Southern Towers Acquisition under the Senior Credit
Facility, assuming the transaction was completed on January 1, 1997, as
follows:
<TABLE>
<CAPTION>
SOUTHERN TOWERS ADJUSTMENTS
FOR THE PERIOD FOR SOUTHERN
ENDED TOWERS
MARCH 3, 1998 ADJUSTMENTS ACQUISITIONS
--------------- ----------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Tower rental revenues........... $ 178 $ 658 (1) $ 836
Tower operating expenses,
excluding depreciation and
amortization................... 153 32 (1) 185
----- ------- -------
Gross profit excluding
depreciation and amortization.. 25 626 651
General and administrative...... 15 -- 15
Corporate development........... -- -- --
Depreciation.................... 340 615 (2) 955
----- ------- -------
Loss from operations............ (330) 11 (319)
Interest income................. -- (2,650)(3) (2,650)
Amortization of original issue
discount and debt issuance
costs.......................... -- 5,253 (3) 5,253
----- ------- -------
Net loss........................ (330) (2,592) (2,922)
----- ------- -------
Net loss attributable to Common
Stock.......................... $(330) $(2,592) $(2,922)
===== ======= =======
</TABLE>
35
<PAGE>
--------
(1) Represents incremental increases in pro forma tower revenues and
operating expenses pursuant to the executed lease agreement with
Southern Communications Services, Inc., and related affiliates.
(2) Reflects the increase in pro forma depreciation on tower assets
acquired resulting from the Company's preliminary application of
purchase accounting.
(3) Reflects the increase in pro forma interest expense associated with the
financing of the Southern Towers Acquisition and the subsequent
issuance of the Senior Discount Notes.
(j) Reflects the historical operating results of MobileMedia Communications,
Inc. and Subsidiaries' tower operations and the pro forma effect of tower
rental revenue, tower operating expenses and tower asset depreciation, and
the related financing of the MobileMedia Acquisition assuming the
transaction was completed on January 1, 1997, as follows:
<TABLE>
<CAPTION>
MOBILEMEDIA
FOR THE ADJUSTMENTS
PERIOD ENDED FOR
SEPTEMBER 2, MOBILEMEDIA
1998 ADJUSTMENTS ACQUISITION
------------ ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Tower rental revenues.............. $1,698 $7,165 (1) $8,863
Tower operating expenses, excluding
depreciation and amortization..... 690 146 (1) 836
------ -------- --------
Gross profit excluding depreciation
and amortization.................. 1,008 7,019 8,027
General and administrative......... 381 -- 381
Corporate development.............. -- -- --
Depreciation....................... 356 7,280 (2) 7,636
------ -------- --------
Income (loss) from operations...... 271 (261) 10
Interest expense................... -- 5,551 (3) 5,551
Amortization of original issue
discount and debt issuance costs.. -- -- --
------ -------- --------
Net income (loss).................. 271 (5,812) (5,541)
Dividends and accretion on Existing
Preferred Stock................... -- 6,706 (4) 6,706
------ -------- --------
Net income (loss) attributable to
Common Stock...................... $ 271 $(12,518) $(12,247)
====== ======== ========
</TABLE>
--------
(1) Represents incremental increases in pro forma tower revenues and
operating expenses pursuant to the executed lease agreement with
MobileMedia Communications, Inc. and its affiliates.
(2) Reflects the increase in pro forma depreciation on tower assets
acquired resulting from the Company's preliminary application of
purchase accounting.
(3) Reflects the increase in pro forma interest expense associated with the
debt financing of the MobileMedia Acquisition under the Senior Credit
Facility.
(4) Reflects dividends accrued and accretion to liquidation value on the
Existing Preferred Stock.
(k) Reflects accretion and dividends on the New Preferred Stock net of the
accretion and dividends on the Existing Preferred Stock.
36
<PAGE>
SELECTED HISTORICAL 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 were derived from consolidated
historical financial statements of the Company, including the related notes
thereto, which have been audited by PricewaterhouseCoopers LLP, independent
certified public accountants. The selected historical consolidated financial
data as of and for the nine months ended September 30, 1997 and 1998 were
derived from the unaudited consolidated financial statements of the Company
which, in the opinion of management, include all adjustments (consisting only
of normal, recurring adjustments) necessary for a fair presentation of the
Company's consolidated results of operations and financial condition for such
periods. The operating results for the respective nine month periods ended
September 30, 1997 and September 30, 1998 are not necessarily indicative of
results to be expected for the full fiscal year. The selected historical
consolidated financial information should be read in conjunction with and are
qualified in their entirety by, the information contained in the consolidated
audited financial statements of the Company and the related notes thereto,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Unaudited Pro Forma Financial Data" included elsewhere
herein.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MAY 3, 1995) NINE MONTHS NINE MONTHS
THROUGH YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997 1997 1998
------------- ------------ ------------ ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Tower rental revenue.... $ 733 $ 4,842 $12,881 $7,981 $ 21,128
Tower operating
expenses, excluding
depreciation and
amortization........... 181 1,135 2,633 1,469 3,966
------ ------- ------- ------- --------
Gross profit, excluding
depreciation and
amortization........... 552 3,707 10,248 6,512 17,162
Other expenses:
General and
administrative (a).... 306 923 1,385 882 2,861
Corporate
development (a)....... 369 1,440 3,772 2,400 5,213
Depreciation........... 282 2,041 6,335 4,370 13,357
------ ------- ------- ------- --------
Loss from operations.... (405) (697) (1,244) (1,140) (4,269)
Interest expense........ 181 1,155 6,925 4,378 7,276
Amortization of original
issue discount......... 59 164 292 186 11,636
------ ------- ------- ------- --------
Net loss................ (645) (2,016) (8,461) (5,704) (23,181)
====== ======= ======= ======= ========
Dividends and accretion
on Existing Preferred
Stock.................. -- -- -- -- 683
------ ------- ------- ------- --------
Net loss attributable to
Common Stock........... $ (645) $(2,016) $(8,461) $(5,704) $(23,864)
====== ======= ======= ======= ========
Loss per share of Common
Stock.................. $(6.31) $ (8.10) $(27.28) $(18.66) $ (59.85)
Weighted average number
of shares of
Common Stock........... 102 249 310 306 399
OTHER OPERATING DATA:
Tower Level Cash Flow
(b).................... $ 552 $ 3,707 $10,248 $ 6,512 $ 17,162
Tower Level Cash Flow
Margin (c)............. 75.3% 76.6% 79.6% 81.6% 81.2%
Adjusted EBITDA (b)..... $ 246 $ 2,784 $ 8,863 $ 5,630 $ 14,301
Adjusted EBITDA Margin
(c).................... 33.6% 57.5% 68.8% 70.5% 67.7%
EBITDA (b).............. $ (123) $ 1,344 $ 5,091 $ 3,230 $ 9,088
EBITDA Margin (c)....... -- 27.8% 39.5% 40.5% 43.0%
Number of Towers:
Beginning of period.... 0 33 156 156 312
Towers acquired during
the period............ 29 119 134 92 484
Towers constructed
during the period..... 4 4 22 19 34
End of period.......... 33 156 312 267 830
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------------- ------------------
1995 1996 1997 1997 1998
------- ------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...... $ 31 $ 47 $ 1,694 $ 1,735 $ --
Tower assets, net.............. 11,551 48,327 127,946 109,892 459,593
Total assets................... 14,573 55,566 143,178 121,390 492,078
Total debt..................... 6,124 30,422 120,582 99,228 415,307
Redeemable stock:
Series A senior preferred
stock........................ -- -- -- -- 28,782
Class B common stock.......... 1,200 1,200 1,761 1,200 1,761
Class D common stock.......... -- -- -- -- --
Series B junior preferred
stock......................... -- -- -- -- 32,571
Common stock................... -- -- -- -- --
Additional paid-in capital..... 7,051 24,881 25,876 25,343 35,547
Stock subscription receivable.. (180) -- -- -- --
Common Stock warrants.......... -- -- -- -- 1,000
Accumulated deficit............ (645) (2,661) (11,123) (8,365) (34,304)
------- ------- -------- -------- --------
Stockholders' equity........... 6,226 22,220 14,753 16,978 34,814
</TABLE>
- --------
(a) "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.
(b) "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, not including the effect
of accretion and accrued dividends on Existing Preferred Stock and the New
Preferred Stock. 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 or as an indication of the Company's operating performance.
Moreover, Tower Level Cash Flow, Adjusted EBITDA and EBITDA are
standardized measures and may be calculated in a number of ways.
Accordingly, the Tower Level Cash Flow, Adjusted EBITDA and EBITDA
information provided may not be comparable to other similarly titled
measures provided by other companies.
(c) Represents Tower Level Cash Flow, Adjusted EBITDA and EBITDA each as a
percentage of tower rental revenue.
38
<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 nine months ended September 30, 1997 and
1998. The discussion should be read in conjunction with the Financial
Statements of the Company and the notes thereto included in this Prospectus.
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 such
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 its targeted
markets in order to offer "one-stop shopping" to wireless communications
providers who are deploying or expanding wireless communications networks.
The Company's growth has come primarily from the acquisition and
construction of towers. The Company's business strategy focuses on
aggressively pursuing tower acquisitions and selectively constructing towers
in areas that complement the Company's existing base of rental towers and the
expansion into additional high growth wireless communications markets. Since
commencing operations in May 1995, the Company has completed acquisitions and
builds as follows:
<TABLE>
<CAPTION>
PERIODS ENDED NINE MONTHS
DECEMBER 31, ENDED
-------------- SEPTEMBER 30,
1995 1996 1997 1998 TOTAL(1)
---- ---- ---- ------------- --------
<S> <C> <C> <C> <C> <C>
Number of towers acquired............... 29 119 134 484 766
Number of towers built.................. 4 4 22 34 64
--- --- --- --- ---
Number of towers acquired or built dur-
ing the period......................... 33 123 156 518 830
=== === === === ===
Number of acquisition transactions com-
pleted................................. 13 49 72 61 195
</TABLE>
- --------
(1) Included in the number of towers acquired are 29 tower sites that the
Company manages.
As of September 30, 1998, the Company also had four towers under
construction and 11 additional tower projects in various stages of
development. Subsequent to September 30, 1998 and prior to December 18, 1998,
the Company acquired an additional 35 towers. As of December 18, 1998, the
Company had agreements or letters of intent to acquire 41 towers. In addition,
the Company has identified numerous additional acquisition candidates. The
Company expects that internal growth related to completed acquisitions and the
business potential of pending acquisitions will have a material impact on
future revenues and EBITDA.
The Company believes that significant opportunities for growth exist by
maximizing the use of existing and future towers. Because the costs of
operating a site are largely fixed, increasing tower utilization significantly
improves tower operating margins. The Company 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 a
meaningful indicator of the quality of the Company's towers and its ability to
generate incremental revenue on such towers. Taking into consideration new
leases written as of September 30, 1998, the Company experienced "same tower"
revenue growth in excess of 20.0% on
39
<PAGE>
an annualized basis for the nine months ended September 30, 1998 on its base
of towers owned as of December 31, 1997.
The Company has generated net losses since inception and at September 30,
1998, had an accumulated deficit totalling $34.3 million. Due to the nature of
the Company's business (the leasing of cash-generating assets) and the
Company's plans to continue to grow the business, it is expected that charges
relating to depreciation of existing and future assets and interest expense
associated with related debt balances will be substantial. Accordingly, the
Company expects to continue to generate losses for the foreseeable future.
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 as of such date. The Company believes that growth in its Annualized
Run Rate Revenue is a meaningful indicator of its performance. As of September
30, 1998, the Company's Annualized Run Rate Revenue was $43.4 million.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, each statement of
operations item as a percentage of 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 Company's
consolidated financial statements and notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
PERIOD ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ --------------------
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 ex-
penses, excluding de-
preciation and amorti-
zation................ 24.7 23.4 20.4 18.4 18.8
Gross profit........... 75.3 76.6 79.6 81.6 81.2
Expenses:
General and administra-
tive.................. 41.7 19.1 10.8 11.1 13.5
Corporate development.. 50.3 29.7 29.3 30.1 24.7
Depreciation........... 38.2 42.2 49.2 54.8 63.2
Loss from operations.... (55.2) (14.4) (9.7) (14.4) (20.2)
Interest expense........ 24.7 23.9 53.8 54.9 34.4
Amortization of original
issue discount......... 8.0 3.4 2.3 2.3 55.1
Net loss................ (87.9%) (41.7%) (65.8%) (71.6%) (109.7%)
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
Tower rental revenue increased 164.7% to $21.1 million for the nine month
period ended September 30, 1998 from $8.0 million for the nine month period
ended September 30, 1997. This increase is attributable to the acquisition and
construction of 563 towers during the twelve month period ended September 30,
1998. In addition, the increase is due to growth in per tower revenue as 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
170.0% to $4.0 million for the nine month period ended September 30, 1998 from
$1.5 million for the nine months ended September 30, 1997. This increase is
consistent with the purchase and construction of towers as discussed above.
During the period, tower operating expenses (as a percentage of tower rental
revenue) remained relatively constant at 18.8% in 1998 compared to 18.4% in
1997.
40
<PAGE>
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,
advertising, professional and consulting fees, office rent and related
expenses and travel costs as a percentage of revenue, increased to 13.5% of
revenue for the nine month period ended September 30, 1998 from 11.1% for the
nine month period ended September 30, 1997. This increase resulted from
increases in staffing to the Company becoming a public registrant and related
increases in professional fees and travel costs, increased levels of
advertising and marketing expenditures and increases in rent and related
costs.
Corporate development expenses, which represent costs incurred in connection
with acquisitions and construction of new towers, increased 117.2% to $5.2
million for the nine month period ended September 30, 1998 from $2.4 million
for the nine month period ended September 30, 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
30.1% for the nine months ended September 30, 1997 to 24.7% for the nine
months ended September 30, 1998 because of the incremental increase in tower
rental revenue from the comparative period in 1997 and economies resulting
from such growth.
Interest expense, net of amortization of original issue discount, increased
66.2% to $7.3 million for the nine months ended September 30, 1998 from $4.4
million for the nine months ended September 30, 1997. The increase in interest
expense 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 primarily attributable to the acquisition
and construction of 156 towers during 1997 and, to a lesser extent, 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 due primarily to the
addition of 156 towers during the year. However, 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 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 levels 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.
41
<PAGE>
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.
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
during 1996. 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, 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 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 due to 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 necessitated by
the Company's increased acquisition activity.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs arise from its acquisition-related activities,
debt service, working capital and capital expenditures. The Company has
historically funded its liquidity needs with proceeds from equity
contributions, bank borrowings, cash flow from operations and the offering of
its Senior Discount Notes (the "Senior Notes Offering"). The Company had a
working capital deficit of $23.8 million (inclusive of the $15.0 million ABRY
Bridge Loan), $12.8 million and $1.5 million as of September 30, 1998 and
December 31, 1997 and 1996, respectively. Excluding the current portion of
long-term debt, current liabilities exceeded current assets by $8.1 million,
$1.7 million and $0.8 million as of September 30, 1998 and December 31, 1997
and 1996, respectively. The Company's ratio of total debt to stockholders'
equity was 11.9 to 1.0 at September 30, 1998, 8.2 to 1.0 at December 31, 1997
and 1.4 to 1.0 as of December 31, 1996. On a pro forma as adjusted basis as of
September 30, 1998, after giving effect to the Transactions, the Company would
have had consolidated cash and cash equivalents of $0, $273.9 million of
consolidated long-term debt outstanding, consolidated stockholders' equity of
$97.7 million and a ratio of total debt to stockholders' equity of 2.8 to 1.0.
The Company has a Senior Credit Facility that provides the Company a
revolving line of credit for borrowings of up to $250 million, of which $200
million is currently committed. The Company may make borrowings and repayments
until December 31, 2005. Beginning March 31, 2000, the availability under the
revolving line of credit starts decreasing by specified amounts on a quarterly
basis until December 31, 2005 when the availability will be reduced to zero.
Loans under the Senior Credit Facility bear interest at a rate per annum, at
the borrower's request, equal to the agent bank's prime rate plus a margin of
up to 2.0% or the 90-day LIBOR plus a margin of up to 3.0%. Outstanding
borrowings under the Senior Credit Facility are currently approximately $169.8
million. Advances under the Senior Credit Facility have been used primarily to
fund acquisitions and construction of towers. As of September 30, 1998, after
giving effect to the Transactions, there would have been approximately $138.9
million available under the Senior Credit Facility, after giving effect to
approximately $17.0 million of outstanding letters of credit, which reduce
availability thereunder.
42
<PAGE>
The principal stockholders of the Company (ABRY II, and Messrs. Wolsey,
Dell'Apa and Day) are parties to a Subscription and Stockholders Agreement,
dated as of May 16, 1996, as amended (the "Stockholders Agreement"). Pursuant
to the Stockholders Agreement, ABRY II agreed to make capital contributions to
the Company, up to an aggregate capital contribution of $50.0 million. As of
September 30, 1998, ABRY II had contributed $37.2 million and had guaranteed
an additional $3.9 million of other debt under the aggregate $50.0 million
capital contribution commitment. Such capital contribution commitment will
terminate upon the closing of the Offerings. Additionally, as of September 30,
1998, ABRY II or an affiliate had contributed separately $47.5 million to the
Company, including $15.0 million outstanding under the ABRY Bridge Loan and
$32.5 million of Junior Preferred Stock.
The Company also uses seller financing to fund certain of its tower
acquisitions. The Company had outstanding notes that it issued to sellers
bearing interest at rates ranging from 8.5% to 13.0% per annum in the
aggregate amount of $19.9 million at September 30, 1998.
In March 1998, the Company completed its Senior Notes Offering. The Company
received net proceeds of approximately $192.8 million from the Senior Notes
Offering. The proceeds were used to repay outstanding borrowings under the
Senior Credit Facility, to repay in full and retire a $12.5 million bridge
loan from ABRY II and accrued interest thereon and a $20 million subordinated
term loan and accrued interest thereon and to pay a distribution preference to
holders of Class B Common Stock. The Senior Discount Notes were issued under
the Indenture and will mature on March 15, 2008. Until March 15, 2003, the
Company's interest expense on the Senior Discount Notes will consist solely of
the accretion of original issue discount. Thereafter, the Senior Discount
Notes will require annual cash interest payments of $32.5 million.
In September 1998, in order to finance the MobileMedia Acquisition, the
Company sold two newly issued series of Preferred Stock, the Senior Preferred
Stock with a liquidation preference of $30.0 million and the Junior Preferred
Stock with a liquidation preference of $32.5 million (the "Original Junior
Preferred Stock"). Included in the sale of the Senior Preferred Stock were
warrants to purchase approximately .75% of the Company's outstanding common
stock. The warrants will be cancelled upon the redemption of the Senior
Preferred Stock. ABRY/Pinnacle, Inc., an affiliate of ABRY II, purchased the
Original Junior Preferred Stock. In addition to the proceeds from the above
sales, the MobileMedia Acquisition was funded with the ABRY Bridge Loan and
borrowings under the Senior Credit Facility. In December 1998, the Company
issued $26.2 million of additional Junior Preferred Stock (the "Additional
Junior Preferred Stock") to ABRY/Pinnacle, Inc. The Original Junior Preferred
Stock and the Additional Junior Preferred Stock are collectively referred to
as the "Junior Preferred Stock". The Junior Preferred Stock currently has a
liquidation preference of $59.1 million. The proceeds from the sale of the
Additional Junior Preferred Stock were used to partially repay the Senior
Credit Facility. The Existing Preferred Stock is entitled to receive
dividends, payable quarterly, at a current rate of 14% per annum. The Existing
Preferred Stock is redeemable, at the option of the Company, in whole (but not
in part), at any time at a redemption price equal to the aggregate liquidation
preference thereof, plus all accumulated but unpaid dividends to the date of
redemption.
The Company intends to use the net proceeds of the Offerings, assuming an
initial public offering price of $15.00 per Share of Common Stock, as follows:
(i) approximately $30.3 million to redeem the outstanding shares of the Senior
Preferred Stock; (ii) approximately $59.1 million to redeem the outstanding
shares of the Junior Preferred Stock; (iii) $15.1 million, including accrued
interest, to repay in full and retire the ABRY Bridge Loan; (iv) approximately
$43.7 million to be distributed to certain stockholders in connection with the
Recapitalization to occur upon the closing of the Common Stock Offering; and
(v) approximately $135.9 million to repay outstanding borrowings under the
Senior Credit Facility.
Total capital expenditures, including tower acquisitions and fixed assets,
for the nine months ended September 30, 1998 were $350.3 million, compared to
$64.0 million in the comparable 1997
43
<PAGE>
period. Capital expenditures, including acquisitions, were $12.7 million,
$42.8 million and $89.4 million for the periods ended December 31, 1995, 1996
and 1997, respectively, and related primarily to acquisitions.
The Company anticipates that it will spend approximately $23.3 million on
capital expenditures in the last quarter of 1998, including $22.1 million for
the acquisition, construction and upgrading of additional towers. The Company
estimates capital expenditures in each of 1999 and 2000 to be approximately
$150.0 million.
The Company believes that cash flow from operations and existing cash
balances will be sufficient to meet working capital requirements for existing
properties. To the extent that the Company pursues additional acquisitions,
construction activity and other capital expenditures, however, the Company
will be required to obtain additional financing. There can be no assurance
that such financing will be commercially available through an increased
commitment under the Senior Credit Facility or otherwise 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 may not be able to
achieve its current business strategy.
INFLATION
Because of the relatively low levels of inflation experienced in 1995, 1996,
1997 and as of September 30, 1998, inflation did not have a significant effect
on the Company's results in such years.
YEAR 2000
The Company utilizes management information systems and software technology
that may be affected by Year 2000 issues throughout its businesses. During
fiscal 1996, the Company began to implement plans to ensure those systems
continue to meet its internal and external requirements. During fiscal 1998,
the Company completed the modifications and testing of its information systems
and is Year 2000 compliant. The Company has developed questionnaires and
contacted key suppliers and customers regarding their Year 2000 compliance to
determine any impact on its operation. In general, the suppliers and customers
have developed or are in the process of developing plans to address Year 2000
issues. The Company will continue to monitor and evaluate the progress of its
suppliers and customers on this critical matter.
The Year 2000 is not expected to have a material impact on the Company's
current information systems as a result of the steps already completed to make
the Company's systems Year 2000 compliant. 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 prior to
the Year 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information," was issued, establishing standards for public
enterprises to disclose certain information about operating segments and
related disclosures about products and services, geographic areas and
significant customers. The Company will adopt this pronouncement in 1998 in
accordance with the implementation requirements. Management believes that the
adoption of SFAS No. 131 will not have a material impact on the Company's
financial statements.
44
<PAGE>
BUSINESS
COMPANY OVERVIEW
The Company is the leading provider of wireless communication tower space in
the Southeastern United States. Since its formation in May 1995, the Company
has focused exclusively on creating a portfolio of dense clusters of
geographically contiguous towers and renting tower space to wireless
communications providers and users. The Company believes that the rental of
tower space is the sector of the tower industry in which it can earn the
highest cash flow margins and risk adjusted return on invested capital. This
strategy also presents significant opportunities for continued revenue and
cash flow growth through the addition of new tenants on its existing towers
and towers that may be acquired in the future.
Since commencing operations in May 1995 and through September 30, 1998, the
Company has completed 195 acquisitions through which it has acquired 766
towers and has constructed an additional 64 towers in such high growth markets
as Atlanta, Birmingham, New Orleans, Orlando and Tampa. Subsequent to
September 30, 1998 and prior to December 18, 1998, the Company acquired an
additional 35 towers. As of December 18, 1998, the Company had agreements or
letters of intent to acquire 41 towers. As a result of its extensive existing
tower base, the Company believes it is well-positioned to continue to
capitalize on the growth opportunities available in the rapidly consolidating
and highly fragmented tower rental industry. For the year ended December 31,
1997 on a pro forma basis, the Company had tower rental revenue and EBITDA of
$40.6 million and $27.5 million, respectively. For the nine months ended
September 30, 1998, on a pro forma basis, the Company had tower rental revenue
and EBITDA of $34.1 million and $20.0 million, respectively. See "Unaudited
Pro Forma Financial Data."
The Company has a diversified base of over 800 customers consisting of all
forms of wireless communications providers, operators of private networks and
government agencies that include Southern Communications, Nextel, Sprint PCS,
PageNet, Motorola, BellSouth Mobility, MobileMedia, Teletouch, Skytel,
Pagemart, Federal Bureau of Investigation and Bureau of Alcohol, Tobacco &
Firearms. The Company's leases generally range in duration from three to five
years and many provide for scheduled minimum rent increases of the greater of
a specified percentage (which typically ranges from 3 to 5%) or the change for
the relevant period in the CPI.
The Company is experiencing strong demand for tower rental space fueled by
the deployment of new wireless technologies and strong underlying growth in
wireless services. The Company 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 a meaningful indicator of the Company's
ability to generate incremental revenue on such towers. Taking into
consideration new leases written as of September 30, 1998, the Company
experienced "same tower" revenue growth in excess of 20.0% on an annualized
basis for the nine months ended September 30, 1998 on its base of towers owned
as of December 31, 1997. The Company's Annualized Run Rate Revenue as of
September 30, 1998 was $43.4 million.
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 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 may be placed. Wireless communications providers design their
network and select their communications sites in order
45
<PAGE>
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 is expected to continue to increase 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 1998.
[BAR CHART SHOWING GROWTH IN THE UNITED STATES' WIRELESS COMMUNICATIONS
INDUSTRY BY SUBSCRIBERS.]
US Wireless Subscribers
Total Subscribers
June 1985 - June 1998
---------------------
1985 203,600
1986 500,000
1987 883,778
1988 1,608,697
1989 2,691,793
1990 4,368,686
1991 6,380,063
1992 8,892,636
1993 13,067,318
1994 19,283,306
1995 28,154,414
1996 38,196,466
1997 48,705,563
1998 60,831,431
46
<PAGE>
. 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.
. 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 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.
47
<PAGE>
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.
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. As of September 30, 1998, the
Company's tower inventory was comprised of 625 guyed, 172 self-supporting
lattices and 33 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
48
<PAGE>
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.
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 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
(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.
THE PINNACLE APPROACH TO THE TOWER RENTAL INDUSTRY
As a result of the recent developments in the wireless communications
industry and the highly fragmented nature of the tower rental industry, the
Company's founders recognized a significant opportunity to consolidate
strategically located wireless communications towers and enhance rental
revenue on those towers. In particular, the Company's founders developed a
strategy of acquiring clusters of towers that would provide strong positions
in selected, high growth wireless communications markets in the Southeastern
United States.
BUSINESS AND GROWTH STRATEGY
The Company's objective is to create substantial value from both its
position as the leading provider of wireless communications rental tower space
in the Southeastern United States and its expansion into additional wireless
communication markets. In order to achieve this objective, the Company has
designed and implemented a three-tiered growth strategy that focuses on:
(i) increasing revenue yield per tower through aggressively marketing
available rental space; (ii) continuing acquisitions of towers in key markets;
and (iii) implementing a selective tower construction program
49
<PAGE>
designed to complement its acquisition 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 aggressively markets rental space on its towers to capitalize on
the operating leverage of its business. The Company's customers are generally
responsible for the installation of their own equipment and the incremental
utility costs associated with that equipment. In addition, adding customers to
an existing tower does not result in increased monitoring, maintenance or
insurance costs. Accordingly, when customers are added to an existing tower,
additional revenue can be achieved at low incremental costs, thereby yielding
increased cash flow margins. The key elements of the Company's marketing and
development strategy include the following:
. OFFER STRATEGICALLY LOCATED CLUSTERS OF TOWERS. By owning and assembling
clusters of towers in high growth regions, the Company believes it is able
to offer its customers the ability to rapidly and efficiently fulfill the
network expansion plans across a particular market or region, which the
Company believes provides it with a significant competitive advantage.
. TARGET A DIVERSIFIED CUSTOMER BASE. The number of antennae a tower can
accommodate varies depending on the type of tower (self-supporting
monopole, guyed, self-supporting lattice), the height of the tower and the
nature of the services provided by such antennae. The substantial majority
of the Company's towers are self-supporting lattice and guyed towers that
can support a large number of antennae and therefore enable the Company to
market its tower space to a diverse group of wireless communications
providers.
. LEVERAGE CUSTOMER RELATIONSHIPS. The Company believes it has established a
reputation among its customers as a highly professional and reliable tower
space provider. This has been achieved through ongoing investment in the
development of relationships at multiple levels of customer organizations.
The Company believes that important factors in generating interest in its
towers are the customer's awareness 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 towers.
. TRACK FCC FILINGS. All FCC licensees must file applications for site
locations. As part of a disciplined approach to acquisitions and new tower
construction activities, the Company tracks these filings, which provide
market intelligence as to existing wireless communications providers'
build-out plans and new market entrants.
II. ACQUISITION STRATEGY
Ownership of rental towers in many parts of the United States remains highly
fragmented, although the consolidation of tower ownership has begun to
accelerate as larger independent owners acquire small local owners in certain
regions. The Company believes that its acquisition strategy has allowed it to
achieve the highest density of towers across nine states located in the
Southeastern United States, which the Company believes provides it with a
significant competitive advantage.
The Company believes that growth through acquisition is an attractive
strategy because it allows the Company to: (i) choose the location of its
towers in key urban and other desired locations; (ii) acquire towers with
existing tenants and the capacity to add multiple, additional tenants; (iii)
not seek build-to-suit mandates from customers, which may result in towers
being built in unprofitable locations; and (iv) lower its risk as cash flow
from existing tenants is predetermined and immediate.
The Company's acquisition strategy continue to focus on: (i) rapidly
acquiring towers in key markets as a means to quickly gain critical mass,
thereby discouraging other tower consolidators from entering its markets; (ii)
completing follow-on acquisitions to enhance its coverage in selected wireless
50
<PAGE>
communications markets; and (iii) penetrating new markets as a platform for
future growth. In executing its acquisition strategy, the Company generally
targets strategically located individual towers or small groups of towers. The
Company's focus on individual towers or small groups of towers, however, does
not preclude potential acquisitions of a large number of towers in a single
transaction. The Company's completion of the Southern Towers Acquisition (201
towers) in March 1998 and the MobileMedia Acquisition in September 1998 (166
towers) are two of the largest acquisition transactions in the industry to
date. Since commencing operations in 1995 and through September 30, 1998, the
Company has completed the acquisition of 766 towers in 195 separate
transactions. Subsequent to September 30, 1998 and prior to December 18, 1998,
the Company acquired an additional 35 towers. As of December 18, 1998, the
Company had agreements or letters of intent to acquire 41 towers.
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 102 total employees, 25% are dedicated to
completing acquisitions. The Company utilizes 10 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 key elements of the Company's acquisition strategy are set forth below:
. TARGET HIGH GROWTH WIRELESS COMMUNICATIONS MARKETS. The Company targets
population centers and key transportation corridors in wireless
communications markets where there is evidence of high potential growth.
The Southeastern United States is attractive because of its relatively high
population and economic growth rates with 4 of the top 10 fastest growing
cities in the United States located in this region, according to the U.S.
Census Bureau. In addition, according to the U.S. Census Bureau, the
population growth rate in Florida for the three years ending July 1, 1997,
was 5.0%, nearly double that of the overall rate of 2.8% for the United
States. Within the Southeastern United States, the Company has established
strong market positions in densely populated areas such as Atlanta,
Birmingham, New Orleans, Orlando and Tampa. The MobileMedia Acquisition
provided the Company with strong market positions in Knoxville, Mobile and
Nashville, as well as towers in Southern California and New England that
provide the Company a base for penetrating these attractive wireless
markets. The Company has also established strong market positions along key
transportation corridors in the Southeastern United States.
. FOCUS ON COMPATIBILITY WITH EXISTING TOWER NETWORK. The Company considers
many factors when evaluating a potential acquisition. In particular, 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
and competitive advantage. The Company also considers whether the towers in
a particular acquisition meet demand for enhanced coverage that 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. The MobileMedia
51
<PAGE>
Acquisition and the Southern Towers Acquisition expanded the Company's
presence to contiguous markets in the Southeastern United States.
. EMPLOY A DISCIPLINED VALUATION PROCESS. The Company seeks to acquire towers
that have existing cash flow and identified potential for significant
future cash flow growth from additional tenants. For each potential
acquisition, the Company reviews the current population coverage of each
tower to be acquired, the nature and quality of the existing and potential
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.
Consistent with the Company's acquisition criteria and strategy of
accumulating clusters of towers in regions that are highly attractive to
wireless communications providers, the Company has recently completed the
following major acquisitions:
SOUTHERN TOWERS ACQUISITION. In March 1998, the Company acquired 201 towers
from Southern Communications for approximately $83.5 million plus fees and
expenses. Southern Communications is a subsidiary of Southern Company, one of
the largest utility holding companies in the United States and an ESMR
provider. Substantially all of the towers, which are located in Georgia,
Alabama, Mississippi and Florida, were constructed within the past four years.
The Southern Towers Acquisition represented an attractive opportunity to
significantly accelerate the achievement of the Company's goal of becoming the
leading provider of rental tower space in the Southeastern United States.
In connection with the Southern Towers Acquisition, the Company entered into
leases with Southern Communications and its affiliates to provide tower space
for their ESMR network. The leases provide for an initial ten-year term with
five optional renewal periods of five-years each exercisable at the customer's
option on the same terms as the original leases (the "Southern Communications
Leases"). In addition, the Company has entered into an option agreement with
Southern Communications whereby Southern Communications may require the
Company to use commercially reasonable efforts to supply, acquire or construct
an additional 80 towers for rental by Southern Communications or its
affiliates. The Company has initiated construction on approximately half of
the tower opportunities presented by Southern Communications to date. The
Company evaluates these opportunities with respect to the towers' potential
strategic fit with the Company's existing tower portfolio and ability to
capture additional third party tenants.
Prior to the acquisition, these towers, which had only a limited number of
third party tenants, were principally for the use of Southern Communications
and its affiliates. The towers were generally constructed with capacity
significantly exceeding Southern Communications' specific capacity
requirements. Accordingly, the Company believes that there is substantial
potential for additional revenue from these towers. Since the closing of the
Southern Towers Acquisition, the Company has already experienced significant
interest from potential customers in the towers and has negotiated new leases
totaling approximately $632,000 in annualized lease revenue. As of December
31, 1997, on a pro forma basis, the towers had combined annual revenue
totaling $4.8 million and Tower Level Cash Flow of $3.7 million, implying a
tower level cash flow margin of 77.9%.
MOBILEMEDIA ACQUISITION: In September 1998, the Company acquired 166 towers
from MobileMedia and its affiliates for approximately $170.0 million.
Subsequent to its announced merger with Arch Communications, Inc., MobileMedia
will be the second largest paging company in the United States.
52
<PAGE>
The MobileMedia Acquisition represented an attractive opportunity to acquire
towers that (i) further strengthened the Company's tower portfolio in certain
existing markets, (ii) provided entry into geographically contiguous markets
and (iii) expanded the Company's operations into new markets in Southern
California and New England.
In connection with this acquisition, the Company entered into a lease
arrangement to provide rental tower space to MobileMedia Communications, an
affiliate of MobileMedia (the "Master Lease"). The Master Lease provides for
an initial 15 year noncancellable term with one five-year renewal period,
exercisable at the option of the lessee. Under the Master Lease, MobileMedia
Communications secured tower space for its currently existing 683 transmitters
on the acquired towers at a monthly rental rate of $1,300 per transmitter or
$888,000 per month. The monthly rental rate reflects (i) current pricing
available to other customers of the Company for similar equipment
configurations, (ii) the request of MobileMedia that the rental rate be fixed
and not subject to escalation during the initial lease term, (iii) the ability
of MobileMedia Communications to transfer its existing transmitters on the 166
towers to the Company's other towers and (iv) the reservation of space to
accommodate the full complement of equipment necessary for the deployment of
MobileMedia Communications' two-way paging services.
In connection with the Master Lease, the Company has also given MobileMedia
Communications the right to a defined pricing discount for additional tower
space on the Company's tower portfolio, which, MobileMedia Communications may
lease in the future as it continues to expand its paging network. The Company
believes this favorable pricing arrangement may benefit the Company in two
ways. First, the Company is positioned to benefit from additional revenues for
new sites required by MobileMedia Communications as its network expands.
Second, as MobileMedia Communications continues to rationalize its network, it
will need to eliminate redundancy of transmitter systems at certain towers and
will therefore need to relocate these transmitters on new towers, many of
which may be provided by the Company. The Company believes that this discount
arrangement is an incentive for MobileMedia Communications to utilize the
Company as a preferred provider of rental tower space for new tower locations
it may require in the future.
The acquired towers had previously only been marketed on a limited basis,
despite the fact that they are predominantly either self-supporting or guyed
towers capable of supporting multiple tenants. The Company believes these
towers are attractively located and therefore highly marketable to a diverse
group of additional wireless communications providers. Further, the location
of these towers enhances and strengthens the Company's existing portfolio of
towers in the Southeastern United States and, with respect to the towers in
Southern California and New England, provides the basis for penetrating these
new markets. Since the closing of the MobileMedia Acquisition, the Company has
already experienced significant interest from potential customers in the
towers and has negotiated new leases totaling $243,000 in annualized lease
revenue. Additionally, when acquired, the towers had existing third party
tenants that generated annual revenue of approximately $2.2 million. As of
December 31, 1997, on a pro forma basis, the combined annual revenue totaling
$13.2 million resulted in Tower Level Cash Flow of $11.8 million, implying a
tower cash flow margin of 89.9%.
III. NEW TOWER CONSTRUCTION STRATEGY
An additional element of the Company's growth strategy is to selectively
construct new towers in and around major markets in which it already has a
presence in order to enhance coverage in existing markets. In addition, the
Company intends to pursue new build opportunities in order to expand capacity
or otherwise improve already existing sites. In both cases, the Company
adheres to its own requirements of return on invested capital. The Company
does not engage in speculative construction projects or large scale build-to-
suit projects. During 1997 and the nine months ended September 30, 1998, the
Company constructed 22 and 34 towers, respectively. As a result of
opportunities generated through its marketing efforts, the Company estimates
that it will identify 80 to 120 new tower build
53
<PAGE>
opportunities over the next 12 months. As of September 30, 1998 four new
towers were under construction by the Company and there was in excess of 11
additional tower projects in various stages of development. 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 carefully evaluates
such plans to meet customer requirements, which may result in 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. Tower 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 generate returns that exceed the Company's minimum required
return on invested capital.
. 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 the necessary steps to obtain
zoning approvals and building permits. The Company acquires tower
structures from a variety of vendors and oversees the construction of the
tower by hired sub-contractors.
COMPANY STRENGTHS
The Company believes its business is characterized by the following
strengths:
. EXCLUSIVE FOCUS ON TOWER RENTAL BUSINESS. The Company exclusively focuses
on the rental of wireless communications tower space as opposed to other
aspects of the tower industry such as site acquisition services, tower
construction services and ancillary services. Furthermore, the Company does
not engage in large scale build-to-suit programs, preferring instead to
focus on its core acquisition strategy and complimentary selective
construction strategy designed to enhance coverage in targeted markets. The
Company believes that by focusing on this sector of the tower industry, it
can earn the highest risk adjusted return on invested capital.
. DISCIPLINED AND EFFICIENT ACQUIRER OF TOWER ASSETS. At September 30, 1998
the Company had a network of approximately 755 towers (excluding 35 towers
required subsequent to September 30, 1998 and 41 towers to be acquired
pursuant to probable acquisitions), geographically clustered in the
Southeastern United States as well as 75 towers located in Southern
California and New England. The Company's proven acquisition process
identifies towers that typically have an established foundation of existing
cash flow and are geographically complementary to its existing portfolio.
The Company has demonstrated the ability to identify and successfully
negotiate the purchase of what it believes to be value enhancing tower
acquisitions.
. ABILITY TO SUCCESSFULLY INCREASE TOWER RENTAL REVENUE. The Company's
aggressive marketing efforts to all major wireless communication providers
has resulted in the signing of a significant number of new tenants over the
last three years. Additional tenants increase the operating leverage of the
Company's portfolio and generally increase the Company's overall cash flow
margins. In order to measure the revenue growth performance of acquired
towers, the Company tracks the cumulative increase in monthly revenue from
towers acquired during different periods. The Company has generated a
cumulative increase in total monthly revenues for the 29 towers acquired in
1995 of 133.0% through September 1998. In addition, the 119 towers acquired
54
<PAGE>
in 1996 and the 134 towers acquired in 1997 have generated cumulative
increases in total monthly revenues of 68.0% and 14.0%, respectively
through September 1998.
In addition to the above strengths, the Company believes that its
business will be characterized by the following:
. HIGH CASH FLOW MARGINS WITH SIGNIFICANT OPERATING LEVERAGE. 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, the Company can generate
increasing operating margins when new customers are added, resulting in
high incremental free cash flow. For the nine months ended September 30,
1998, the Company's Tower Level Cash Flow Margin was 81.2%.
. CONSOLIDATION OPPORTUNITIES IN A HIGHLY FRAGMENTED INDUSTRY. The tower
rental industry remains highly fragmented, with few independent operators
owning a large number of towers. The pace of consolidation has begun to
accelerate, however, as the larger independent operators continue to
acquire small local or regional operators and purchase communications sites
and related assets from wireless communications carriers. The Company
further believes that significant opportunities for growth exist in this
current industry environment and that it is well-positioned to continue to
be a significant consolidator of towers. Since commencing operations in May
1995, through September 30, 1998, the Company has successfully completed
195 acquisitions through which it has acquired 766 towers.
. ATTRACTIVE GROWTH 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 provide basic infrastructure components for all major wireless
communications services, including cellular, PCS, paging, two-way radio,
broadcast television, microwave, wireless data transmission and SMR
customers. As a result, the Company believes that it can achieve a level of
growth in its tower rental revenue that will in general reflect the growth
of its customer base over the next several years.
. 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, many of the
Company's leases provide built-in annual rate increases of the greater of a
specified percentage (which typically ranges from 3 to 5%) the change for
the relevant period in the CPI. Furthermore, because a significant
proportion of tower rental revenue is received from customers that are
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 addition, the
Company has a broad representation of wireless communications providers and
underlying technologies reflected in its customer base of over 800
customers, which the Company believes enhance the stability and
predictability of its cash flow.
. BARRIERS TO ENTRY. Towers are subject to a variety of federal and local
regulations that make the construction of towers difficult and increase the
time and expense associated with their construction, especially in highly
populated or high transmission areas. As a result, the Company believes
that in areas where it has established a critical mass of rental tower
inventory, 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 tower rental industry typically experiences low
customer churn as a result of the high relocation costs incurred by
customers. When customers enter into long-term
55
<PAGE>
contracts for tower space, those customers generally make significant
capital and network engineering commitments to the related site. The time
and costs associated with network reconfiguration and obtaining FCC and
municipal or local approval may also discourage customer relocation. The
Company believes that the high levels of commitment made by its customers
benefit the Company in the form of recurring and highly predictable revenue
stream. The Company experienced customer churn of approximately 1.0% per
annum for the twelve month period ended September 30, 1998.
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. As the Company seeks to expand its
size, it will continue to evaluate the need to supplement its current
workforce.
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 rapidly integrate new acquisitions and tower
construction activity and initiate sales and marketing efforts immediately
upon closing or completion.
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
56
<PAGE>
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.
CUSTOMERS AND CUSTOMER LEASES
As of September 30, 1998, the Company had over 4,000 separate tower space
leases. The Company has a diversified base of over 800 customers. MobileMedia
Communications and certain of its affiliates and Southern Communications and
certain of its affiliates would have accounted for 12.9% and 26.3% of the
Company's revenues, respectively, for the nine months ended September 30, 1998
on a pro forma basis. See "Risk Factors--Customer Concentration."
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
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 September 30, 1998:
<TABLE>
<CAPTION>
PERCENTAGE OF
CUSTOMER TYPE REVENUE
------------- -------------
<S> <C>
Paging......................................................... 43%
SMR............................................................ 19
2-Way Services................................................. 14
PCS............................................................ 12
Cellular....................................................... 4
Broadcasting................................................... 4
Government..................................................... 3
Data........................................................... 1
---
Total........................................................ 100%
===
</TABLE>
In connection with the Southern Towers Acquisition, the Company and Southern
Communications entered into leases providing that Southern Communications or
one of its affiliates would be a customer on each of the 201 towers acquired.
Under the Southern Communications Leases, Southern Communications and its
affiliates 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. 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 also entered into a 10 year option agreement with Southern
Communications whereby Southern Communications may require the Company to use
commercially reasonable efforts to supply, acquire or construct an additional
80 sites within Alabama, Florida, Georgia or Mississippi at locations
designated by Southern Communications, for rental of sites thereon 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.
In connection with the MobileMedia Acquisition, the Company entered into the
Master Lease with affiliates of MobileMedia leasing the "site spaces" at the
towers that were previously utilized by MobileMedia and its affiliates for the
installation and operation of transmitter systems. The Master Lease has a 15
year term with one five-year renewal term exercisable at the option of the
lessee. Rent under the Master Lease during the initial 15 year term is $1,300
per month per site space. During the renewal term, rent will be determined
based on then existing market rental rates.
57
<PAGE>
PROPERTIES
The Company both owns and leases the real property upon which its towers are
located. As of September 30, 1998, the Company owned 281 towers on parcels of
real estate that are leased and 520 towers on parcels of real estate that are
owned. Additionally, the Company currently manages 29 tower sites.
The following is a summary of the Company's sites by state, as of September
30, 1998:
<TABLE>
<CAPTION>
NUMBER NUMBER TOTAL
OF TOWER OF TOWER NUMBER OF
STATE SITES OWNED SITES LEASED TOWER SITES*
----- ----------- ------------ ------------
<S> <C> <C> <C>
Florida................................ 90 69 176
Georgia................................ 65 77 142
Alabama................................ 81 25 106
Louisiana.............................. 58 15 73
Mississippi............................ 31 24 66
Tennessee.............................. 39 11 50
North Carolina......................... 38 11 49
California............................. 29 12 41
Texas.................................. 19 10 29
South Carolina......................... 19 8 27
Virginia............................... 17 2 19
Maryland............................... 13 0 13
New Hampshire.......................... 3 6 9
New York............................... 2 4 7
Rhode Island........................... 1 4 5
Arkansas............................... 3 2 5
Ohio................................... 2 0 2
Connecticut............................ 2 0 2
New Mexico............................. 2 0 2
Massachusetts.......................... 2 0 2
Maine.................................. 1 0 1
Wisconsin.............................. 1 0 1
Michigan............................... 1 0 1
New Jersey............................. 0 1 1
Delaware............................... 1 0 1
--- --- ---
Total................................ 520 281 830
=== === ===
</TABLE>
- --------
* Includes 29 tower sites managed by the Company.
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 September
30, 1998, the Company had 39 towers in the Orlando, Florida market, 38 towers
in the Atlanta, Georgia market, 46 towers in the Birmingham, Alabama market,
37 towers in the Tampa/Sarasota, Florida market and 28 towers in the New
Orleans, Louisiana market.
In rural areas, a tower site typically consists of a three to five acre
tract that supports the tower, equipment shelter and guy wires that stabilize
the tower. Less than 2,500 square feet are needed for a self-supporting tower
that is typically used in metropolitan areas. Leases generally have 10 to 25
year terms, with options for the Company to renew the leases for an average of
approximately 10 years. Pursuant to the Senior Credit Facility, the senior
lenders have liens on, among other things, tenant leases, equipment, inventory
and interests in all real property of the Company on which towers are located
or which constitute a tower.
A significant portion of the ground leases assumed in connection with the
MobileMedia Acquisition are subject to renewal within the next five years. In
the event that the Company is not satisfied with
58
<PAGE>
the renewal terms with respect to such leases, the Company has the right to
put back these properties to MobileMedia and MobileMedia will still be
obligated to pay its rent on these properties. The Company may incur
significant additional operating expenses in connection with the renewal of
such leases. There can be no assurances regarding the extent of such increases
or whether such increases could have an adverse effect on the Company's
results of operations.
The Company leases its corporate headquarters in Sarasota, Florida. The
aggregate square 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. See "Risk Factors--
Competition."
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 maintain
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.
59
<PAGE>
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.
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 current cost of
complying with those laws is not material to the Company's financial condition
or results of operations.
EMPLOYEES
As of September 30, 1998, the Company had approximately 102 full-time
employees, of which 75 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 others. 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 Internal Revenue Service (the "Service") 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. See "Certain Federal Income Tax Considerations" for a detailed
discussion of the REIT qualification requirements.
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.
60
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
Set forth below is certain information concerning the Company's directors,
executive officers and key employees. All of the directors have served as
directors of the Company since the Company's inception except for Steven Day
who has served since February 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert Wolsey............... 48 Director, President and Chief Executive Officer
James Dell'Apa.............. 41 Director, Executive Vice President and Chief
Operating Officer
Steven Day.................. 45 Director, Vice President, Secretary and Chief
Financial Officer
David Zahn.................. 33 Vice President of Operations
Ben Gaboury................. 47 Vice President of Sales and Marketing
Martin Alvarez.............. 44 Chief Information Officer
Andrew Banks................ 44 Director
Peni Garber................. 35 Director
Peggy Koenig................ 42 Director
Royce Yudkoff............... 43 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 raised over $74 million in its
initial public offering. At the time of Mr. Wolsey's departure from PCI in
April 1994, PCI 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.
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,
61
<PAGE>
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 that have filed initial public offerings.
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.
DAVID ZAHN is primarily responsible for the ongoing maintenance of the
Company's existing tower inventory, new site construction, capacity
augmentation and new customer equipment integration. He joined Pinnacle in
September 1996. From 1987 to 1996, Mr. Zahn worked for 360(degrees)
Communications (formerly Sprint Cellular and Centel Cellular) where he held a
variety of positions including 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.
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.
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 (or the equivalent) of DirecTel. 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 and secretary of 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 (or the equivalent) of Nexstar Broadcasting Group LLC, Network Music
Holdings LLC, Quorum Broadcast Holdings Inc. and Audio Communications Network,
LLC. 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 (or the
equivalent) of Connoisseur Communications Partners, L.P., Avalon Cable
Holdings LLC and Network Music Holdings LLC. She
62
<PAGE>
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 (or the equivalent) of Quorum Broadcast Holdings Inc.,
Nexstar Broadcasting Group, LLC, Audio Communications Network, LLC and
Metrocall. He graduated as a Baker Scholar from the Harvard Business School
and is an honors graduate of Dartmouth College.
COMPOSITION OF THE BOARD OF DIRECTORS
Pursuant to the terms of the Company's Certificate of Incorporation and
Bylaws, the Board of Directors has the power to set the number of directors
(not less than one nor more than 10) by resolution adopted by the directors of
the Company. Each director is elected to serve until the next annual meeting
of the stockholders, except in the case of removal or vacancy, and until his
successor is duly elected and qualified or until his death or retirement or
until he resigns or is removed. Currently, the number of directors is set at
seven. The Company intends to maintain at all times at least two independent
directors on its Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee. The Company has established an Audit Committee composed of
Ms. Garber and Ms. Koenig. The Audit Committee makes recommendations
concerning the engagement of independent public accountants, reviews with the
independent public accountants the plans and results of the audit engagement,
approves professional services provided by the accountants, reviews the
independence of the accountants, considers the range of audit and non-audit
fees and reviews the adequacy of the Company's internal accounting controls.
The Audit Committee is also responsible for the review of transactions between
the Company and any affiliate or entity in which a Company affiliate has a
material interest.
Compensation Committee. The Company has established a Compensation
Committee, consisting of Mr. Yudkoff and Ms. Koenig. The Compensation
Committee establishes the compensation of the Company's executive officers.
The Compensation Committee also administers the Company's Stock Incentive Plan
and determines the amount, exercise price and vesting schedules of stock
options awarded thereunder.
Executive Committee. The Company has established an Executive Committee
consisting of Mr. Wolsey, Ms. Koenig and Mr. Yudkoff. The Executive Committee
has the authority to act in place of the Board of Directors on all matters
which would otherwise come before the Board, except for such matters which are
required by law or by the Company's Certificate of Incorporation or Bylaws to
be acted upon exclusively by the Board.
Other Committees. The Board of Directors may establish other committees as
deemed necessary or appropriate from time to time.
COMPENSATION OF DIRECTORS
All directors receive reimbursement of reasonable out-of-pocket expenses
incurred in connection with meetings of the Board of Directors. Directors who
are employees of the Company do not receive any fee in addition to their
regular salary for serving on the Board of Directors. Non-employee directors
currently do not receive any fee, but will be eligible to participate in the
Company's Stock Incentive Plan.
63
<PAGE>
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) YEAR SALARY ($) BONUS ($) SATION ($) AWARDS ($) OPTIONS (#) PAYOUTS ($) SATION ($)
- ------------------------------ ---- ---------- --------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert Wolsey........... 1997 156,000 70,000 6,500(b) -- -- -- --
President, Chief 1996 129,698 30,000 -- -- -- -- --
Executive
Officer 1995 50,000 -- -- 11,000 -- -- --
James Dell'Apa.......... 1997 156,248 -- -- -- -- -- --
Executive Vice 1996 128,125 30,000 -- -- -- -- --
President and Chief 1995 50,000 -- -- 10,000 -- -- --
Operating Officer
Steven Day.............. 1997 131,250 -- -- 10,000 -- -- --
Vice President, 1996 -- -- -- -- -- -- --
Secretary and 1995 -- -- -- -- -- -- --
Chief Financial Officer
David Zahn.............. 1997 126,260 -- -- -- -- -- --
Vice President of 1996 36,102 -- -- 1,200 -- -- --
Operations 1995 -- -- -- -- -- -- --
Ben Gaboury............. 1997 126,094 -- -- -- -- -- --
Vice President of Sales 1996 31,789 -- -- 1,200 -- -- --
and Marketing 1995 -- -- -- -- -- -- --
</TABLE>
- -------
(a) See also, "Employment Agreements".
(b) Amount of reimbursement for payment of income taxes.
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 those provided 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.
STOCK OPTIONS
There were no stock options granted or exercised during the last fiscal
year. The Company currently intends to grant no more than one-half of the
options available under its Stock Incentive Plan to its
64
<PAGE>
employees during the next twelve months. A significant portion of those
options are expected to be granted on or about the date of the consummation of
the Offerings. The Company currently anticipates that less than one-half of
such options granted during such twelve months will be granted to Named
Executive Officers and that substantially all such options will have an
exercise price no less than the fair market value of the Common Stock on the
date of grant.
STOCK INCENTIVE PLAN
GENERAL
The Pinnacle Holdings Inc. Stock Incentive Plan became effective July 1,
1998. The Stock Incentive Plan provides for awards consisting of stock option
and restricted stock grants ("Awards") to employees, non-employee directors,
and other persons who perform services for the Company.
ADMINISTRATION
The Stock Incentive Plan is administered by a committee consisting of at
least two directors of the Company who are "non-employee directors" within the
meaning of Rule 16b-3 promulgated under Section 16(b) of the Exchange Act and
who are "outside directors" within the meaning of Section 162(m) of the Code
and the regulations promulgated under Section 162(m) of the Code (the
"Committee"). The Committee is authorized to select the individuals to whom
Awards will be granted, determine the type, size and terms and conditions of
Awards, and construe and interpret the Stock Incentive Plan. The Company's
Board of Directors may appoint a different committee for the purpose of
approving Awards to persons who are not subject to the requirements of Section
16(b) of the Exchange Act and Section 162(m) of the Code.
SHARES
The maximum number of shares of Common Stock that may be made subject to
Awards granted under the Stock Incentive Plan is approximately 2,000,000. In
the event of any change in capitalization of the Company, however, the
Committee shall adjust the maximum number and class of shares with respect to
which Awards may be granted, the number and class of shares which are subject
to outstanding Awards and the purchase price therefor. In addition, if any
Award expires or terminates without having been exercised, the shares of
Common Stock subject to the Award again become available for grant under the
Stock Incentive Plan.
ELIGIBILITY
The Committee may grant Awards to any employee, non-employee director,
consultant, advisor or independent contractor of the Company.
STOCK OPTIONS
The Committee is authorized to grant to eligible persons options to purchase
a specified number of shares of Common Stock at a stated price per share
("Options"). During any calendar year, the Committee shall not grant to any
eligible person Options to purchase more than 1,000,000 shares of Common
Stock. An Option may be intended to qualify as an "incentive stock option"
("ISO") pursuant to the Code, or may be intended to be a nonqualified option
("NSO"). The term of an ISO cannot exceed 10 years, and the exercise price of
any ISO must be equal to or greater than the fair market value of the shares
of Common Stock on the date of the grant. Any ISO granted to a holder of 10%
or more of the combined voting power of the capital stock of the Company must
have an exercise price equal to or greater than 110% of the fair market value
of the Common Stock on the date of grant and may not have a term exceeding
five years from the grant date. The exercise price and the term of an NSO
shall be determined by the Committee on the date that the NSO is granted.
65
<PAGE>
Options shall become exercisable in whole or in part by the Optionee on the
date or dates specified by the Committee. The Committee may provide that an
Option becomes exercisable in installments over a period of years or upon the
attainment of stated goals. The Committee, in its sole discretion, may
accelerate the date or dates on which an Option becomes exercisable.
Each Option shall expire on such date or dates as the Committee shall
determine at the time the Option is granted. Upon termination of an Optionee's
employment with the Company (including by reason of the Optionee's death),
each unexercised Option (whether or not then exercisable) shall terminate and
be forfeited, except that any such Options which are then exercisable shall
remain exercisable for such period after termination of the Optionee's
employment as the Committee may have determined at the time the Option was
granted. If an Optionee's employment with the Company is terminated for cause
(as defined in the Stock Incentive Plan), all of such person's Options shall
immediately terminate.
Payment for shares of Common Stock purchased upon exercise of an Option must
be made in full at the time of purchase. Payment may be made in cash or in any
other manner as may be authorized by the Committee. Each Option shall be
evidenced by a written agreement containing such terms and conditions
consistent with the Incentive Plan as shall be established by the Committee.
RESTRICTED STOCK
The Committee may grant to an eligible person an award of Common Stock
subject to future service and such other restrictions and conditions as the
Committee may determine ("Restricted Stock"). The Committee will determine the
terms of such Restricted Stock, including the price, if any, to be paid by the
recipient for the restricted stock, the restrictions placed on the shares and
the time or times when the restrictions will lapse, at the time of the
granting thereof.
66
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of September 30, 1998, after giving
effect to the Recapitalization, 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 capital stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER THE
THE OFFERINGS OFFERINGS(B)
NAME AND ADDRESS OF BENEFICIAL ----------------------- -----------------------
OWNER(S)(A) NUMBER PERCENT NUMBER PERCENT
------------------------------ ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
ABRY II (c).................... 8,196,983 82.0% 8,196,983 41.0%
Robert Wolsey (d).............. 613,082 6.1 613,082 3.1
James M. Dell'Apa (e).......... 408,632 4.1 408,632 2.0
Steven Day (f)................. 368,182 3.7 368,182 1.8
David Zahn..................... 35,717 * 35,717 *
Ben Gaboury.................... 35,717 * 35,717 *
Andrew Banks (g)............... 550 * 550 *
Peni Garber.................... 550 * 550 *
Peggy Koenig (h)............... 1,100 * 1,100 *
Royce Yudkoff (i).............. 8,198,084 82.0 8,198,084 41.0
------------ ------- ------------ -------
All directors and executive
officers as a group
(10 persons).................. 9,697,273 97.0% 9,697,273 48.5%
</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) Assumes no exercise of the Underwriters' over-allotment options to
purchase up to an aggregate of 1,500,000 shares of Common Stock from the
Company.
(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) Includes 5,774 shares of Common Stock held by Pantera, Inc. and 288,682
shares of Common Stock held by Pantera Partnership Ltd.
(e) Excludes 36,618 shares of Common Stock held by relatives of Mr. Dell'Apa
of which he disclaims beneficial ownership.
(f) Includes 67,863 shares of Common Stock held by Mr. Day's spouse, 7,143
shares of Common Stock held by South Creek, Inc. and 214,304 shares of
Common Stock held by South Creek Partnership Ltd.
(g) Mr. Banks beneficially owns 550 shares of Common Stock held by Audemi
Corporation.
(h) Includes 550 shares of Common Stock held by Ms. Koenig's spouse.
(i) 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. Also includes
550 shares of Common Stock held by Mr. Yudkoff's spouse.
67
<PAGE>
CERTAIN RELATIONSHIPS AND TRANSACTIONS
SUBSCRIPTION AND STOCKHOLDERS AGREEMENT
The principal stockholders of the Company (ABRY II, and Messrs. Wolsey,
Dell'Apa and Day) are parties to 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
Company. The following issuances are exempt from this preemptive right: (a) to
any employee of the Company; (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 shares of 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 Company. This
preemptive right will terminate upon the closing of the Offerings. The
Stockholders Agreement also provides that ABRY II will make a capital
contribution of up to an aggregate of $50 million. Such capital contribution
commitment will terminate upon the closing of the Offerings.
Parties to the Stockholders Agreement have certain rights and obligations in
connection with (i) a sale by ABRY II of shares in the Company, (ii) a sale of
the Company, and (iii) a reorganization or recapitalization of the Company in
anticipation of a sale of the Company or a public offering. In the case of a
sale by ABRY II of shares in the Company, the other stockholders party to the
Stockholders Agreement will have the right to participate pro rata in such a
sale, but such right to participate will terminate upon the closing of the
Offerings. In the case of a sale of the Company 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 Company. Pursuant to
the Agreement, all shares of Class D Common stock issued and outstanding will
automatically vest and convert into Class C Common stock upon the consummation
of the Offerings (and thereafter will convert into Common Stock). The
Stockholders Agreement also provides for certain put and call rights among the
Company 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.
The parties to the Stockholders Agreement have also entered into an
agreement to effect the Recapitalization.
CAPITAL CONTRIBUTION AGREEMENT
The Company and ABRY II entered into a capital contribution agreement with
NationsBank of Texas, N.A. (the "Capital Contribution Agreement"), pursuant to
which ABRY II agreed to make capital contributions to the Company, up to an
aggregate capital contribution of $50.0 million, in an amount equal to (i)
100.0% of the Company'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
September 30, 1998, ABRY II had contributed $37.2 million, not including $15.0
million of the ABRY Bridge Loan and had guaranteed an additional $3.9 million
of other debt of the aggregate $50.0 million associated with capital
contribution commitment.
JUNIOR PREFERRED STOCK
In September 1998, ABRY/Pinnacle, Inc., an affiliate of ABRY II, purchased
32.5 shares of Original Junior Preferred Stock with a liquidation preference
of $32.5 million. The proceeds of the sale were used to partially finance the
MobileMedia Acquisition. In December 1998, ABRY/Pinnacle Inc. purchased an
additional 26.2 shares of Additional Junior Preferred Stock with a liquidation
preference of $26.2 million. The proceeds of the sale were used to partially
pay down the Senior Credit Facility.
68
<PAGE>
MANAGEMENT AND CONSULTING SERVICES AGREEMENT
The Company and ABRY entered into a Management Services and Consulting
Agreement as of April 17, 1995, pursuant to which the Company pays up to
$75,000 per year plus reimbursable expenses in exchange for certain consulting
services. The Company paid approximately $12,500 for such services and
expenses from the period of inception through December 31, 1995 and
approximately $55,162 and $78,166 for such services and expenses for the years
ended December 31, 1996 and 1997, respectively. The Company paid approximately
$70,636 for such services through September 30, 1998. The Management Services
and Consulting Agreement is terminable at any time by either party with prior
written notice.
REGISTRATION RIGHTS AGREEMENT
The parties to the Stockholders Agreement have entered into a registration
rights agreement (the "Registration Rights Agreement") pursuant to which ABRY
II and its assigns may require the Company, subject to certain conditions and
limitations, to register with the Securities and Exchange Commission (the
"Commission") in accordance with the Securities Act of 1933, as amended (the
"Securities Act") all or part of the shares of Common Stock currently owned by
ABRY II at the request of the holders of a majority of such shares of Common
Stock. If the Company proposes to file on its own behalf or on behalf of any
holders of its equity securities a registration statement under the Securities
Act, then the Company is required, subject to certain conditions and
limitations, to give notice thereof to the parties to the Registration Rights
Agreement and to offer to include such parties shares of Common Stock in such
registration. The Company may not cause any registration statement to be
declared effective by the Commission within 180 days after the effective date
of any other registration statement registering equity securities of the
Company. The Company is generally required to bear the expenses of all such
registrations, except underwriting discounts and commissions. See "Shares
Eligible for Future Sale."
PINNACLE TOWERS II INC.
In November 1997, certain Company stockholders formed Pinnacle Towers II
Inc. ("PTI II"). PTI II is under common control with, and therefore is an
affiliate of the Company, because ABRY II and certain executives of the
Company 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.
In November 1997, the Company sold to PTI II, for approximately $2.2
million, certain of its towers and projects-in-progress. Effective April 30,
1998, the Company repurchased all of those assets from PTI II. Currently, PTI
II has minimal assets and is an inactive company.
MANAGEMENT INDEBTEDNESS
During the 1998 fiscal year, the Company had a loan receivable from Mr.
Dell'Apa, an executive officer, in the amount of $94,000. The loan to Mr.
Dell'Apa was 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 bore
interest payable quarterly at a rate equal to the Company's bank rate less 600
basis points. This loan was repaid in August 1998.
69
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
SENIOR CREDIT FACILITY
The Company has entered into the Senior Credit Facility with NationsBank,
N.A., Goldman, Sachs Credit Partners L.P. and certain other lenders that
provides a revolving line of credit for borrowings of up to $250.0 million, of
which $200.0 million is currently committed. The Company may make borrowings
and repayments until December 31, 2005. Beginning March 31, 2000, the
availability under the revolving line of credit starts reducing by specified
amounts on a quarterly basis until December 31, 2005 when the availability
will be reduced to zero. Loans under the Senior Credit Facility bear interest
at a rate per annum, at the borrower's request, equal to the agent bank's
prime rate plus a margin of up to 2.0% or the 90-day LIBOR plus a margin of up
to 3.0%. Outstanding borrowings under the Senior Credit Facility amounted to
$169.8 million at September 30, 1998. Advances under the Senior Credit
Facility have been used primarily to fund acquisitions and construction of
towers. As of September 30, 1998, after giving effect to the Transactions,
there would have been approximately $138.9 million available under the Senior
Credit Facility, after giving effect to approximately $17.0 million of
outstanding letters of credit, which reduce availability under 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 the subsidiaries and the Company has guaranteed the
obligations of Pinnacle Towers, Inc. under the Senior Credit Facility. 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
to prepay subordinated debt. In addition, the Company may not permit the
Leverage Ratio (as defined therein) to exceed certain amounts.
ABRY BRIDGE LOAN
As of September 30, 1998, ABRY II had advanced to the Company a total of
$15.0 million to partially finance the MobileMedia Acquisition and certain
other acquisitions. The ABRY Bridge Loan will be repaid in full with a portion
of the proceeds from the Offerings. ABRY II may continue to make such
advances. Amounts outstanding under the ABRY Bridge Loan bear 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.
10% SENIOR DISCOUNT NOTES
The Senior Discount Notes were initially issued in aggregate principal
amount of $325 million and are senior unsecured obligations of the Company.
The Senior Discount Notes will mature on March 15, 2008. Prior to March 15,
2003, the Company's interest expense on the Senior Discount Notes will be
comprised solely of the accretion of original issue discount. Thereafter, the
Senior Discount Notes will accrue cash interest at a rate of 10.0% per annum,
payable semi-annually in arrears on March 15 and September 15 of each year,
commencing September 15, 2003.
The Senior Discount Notes are redeemable at the option of the Company, in
whole or in part, at any time on or after March 15, 2003 at a redemption price
equal to 105.0% of the principal amount thereof during the twelve-month period
beginning March 15, 2003, 103.333% of the principal amount thereof during the
twelve-month period beginning March 15, 2004, 101.667% of the principal amount
thereof during the twelve-month period beginning March 15, 2005 and 100.0% of
the principal amount thereof on or after March 15, 2006, together with accrued
and unpaid interest to the redemption date. In addition, the Company at its
option, may redeem at least $5.0 million and in the aggregate up to 35% of the
original principal amount of the Senior Discount Notes at any time on or
before March 15, 2001, at a redemption price equal to 110.0% of the Accreted
Value (as defined in the Indenture) thereof to but excluding the redemption
date plus accrued and unpaid Liquidated Damages (as defined
70
<PAGE>
in the Indenture) to the redemption date with the net proceeds of one or more
Public Equity Offerings (as defined in the Indenture); provided, however, that
at least 65% of the original principal amount remains outstanding and that
such redemption occurs within 60 days following the closing of any such Public
Equity Offering.
In the event of a Change of Control (as defined in the Indenture) of the
Company, the Company will be required to make an offer to purchase all
outstanding Senior Discount Notes at a price equal to 101% of the principal
amount thereof plus accrued and unpaid interest and Liquidated Damages to the
date of purchase. If such offer to purchase is to be consummated prior to
March 15, 2003, the purchase price will be equal to 101% of the Accreted Value
thereof on the date of purchase plus accrued and unpaid Liquidated Damages
thereon to the date of purchase.
The Indenture contains covenants for the benefit of the holders of the
Senior Discount Notes that, among other things, and subject to certain
exceptions, restrict the ability of the Company and its Restricted
Subsidiaries (as defined in the Indenture) to: (i) incur additional
indebtedness; (ii) guarantee payment of debt; (iii) pay dividends and make
distributions; (iv) restrict dividend or other payments of Restricted
Subsidiaries; (v) create liens; (vi) issue stock of subsidiaries; (vii) enter
into transactions with affiliates; (viii) merge or consolidate the Company;
and (ix) transfer and sell assets.
71
<PAGE>
DESCRIPTION OF NEW PREFERRED STOCK
The summary contained herein of certain provisions of the New Preferred
Stock to be issued by the Company does not purport to be complete and is
subject to and is qualified in its entirety by reference to, all of the
provisions of the Certificate of Designations (the "Certificate of
Designations"), a copy of which has been filed with the Commission as an
exhibit to the Registration Statement of which this Prospectus forms a part.
See "Definitions" below for the definitions of certain capitalized terms used
herein. Other capital terms used herein and not otherwise defined under
"Certain Definitions" below are defined in the Certificate of Designations.
GENERAL
At the consummation of the Preferred Stock Offering, the Company will be
authorized to issue 5,000,000 shares of preferred stock as designated by the
Company's Board of Directors, of which 150,000 shares initially will be
authorized, issued and outstanding pursuant to this Preferred Stock Offering
and up to shares will be designated and reserved for issuance to pay
dividends on the New Preferred Stock if the Company elects to pay dividends on
the New Preferred Stock in additional shares of New Preferred Stock on or
prior to , 2004 in accordance with the terms thereof. All of such shares
will be designated as New Preferred Stock and will have a liquidation
preference of $1,000 per share. Subject to certain conditions, the shares of
New Preferred Stock will be exchangeable for the Exchange Notes at the option
of the Company on any dividend payment date on or after the Issue Date. The
New Preferred Stock, when issued and paid for by the Underwriters in
accordance with the terms of the Underwriting Agreement, will be fully paid
and non-assessable and the holders thereof will not have any subscription or
preemptive rights in connection therewith.
RANKING
The New Preferred Stock will, with respect to dividend rights and rights of
liquidation, winding-up and dissolution, rank (i) senior to each other class
of capital stock outstanding or established hereafter by the Company the terms
of which do not expressly provide that it ranks senior to, or on a parity
with, the New Preferred Stock as to dividend rights and rights on liquidation,
winding-up and dissolution of the Company (collectively referred to as "Junior
Shares"); (ii) on a parity with each other class of preferred stock
established hereafter by the Company the terms of which expressly provide that
such class or series will rank on a parity with the New Preferred Stock as to
dividend rights and rights on liquidation, winding-up and dissolution
(collectively referred to as "Parity Shares"); and (iii) junior to each class
of preferred stock established after the date hereof by the Company the terms
of which expressly provide that such class or series will rank senior to the
New Preferred Stock as to dividend rights and rights upon liquidation,
winding-up and dissolution of the Company (collectively referred to as the
"Senior Shares").
The Company may not authorize any new class of Senior Shares without the
approval of the holders of at least a majority of the New Preferred Stock then
outstanding, voting or consenting as a separate class.
DIVIDENDS
Holders of the outstanding New Preferred Stock will be entitled to receive,
when, as and if declared by the Board of Directors of the Company, out of
funds legally available therefor, dividends on the New Preferred Stock at a
rate per annum equal to % of the liquidation preference amount per share of
New Preferred Stock, payable quarterly. In the event that dividends on the New
Preferred Stock are in arrears and unpaid for six or more quarterly dividend
periods (whether or not consecutive), holders of New Preferred Stock will be
entitled to certain voting rights. See "--Voting Rights" below. All dividends
will be cumulative, whether or not earned or declared, on a daily basis from
the Issue Date and will be
72
<PAGE>
payable quarterly in arrears on , , and of each year (each a
"Dividend Payment Date"), commencing on , 1999, to holders of record on
the , , or immediately preceding the relevant Dividend Payment
Date. Dividends may be paid at the Company's option on any Dividend Payment
Date occurring on or before , 2004 either in cash or by issuing additional
fully paid and nonassessable New Preferred Stock with an aggregate liquidation
preference equal to the amount of such dividends. After , 2004 dividends
on New Preferred Stock are payable only in cash. Dividends payable on the New
Preferred Stock for any period shorter than a quarterly dividend period will
be computed on the basis of a 360-day year of twelve 30-day months and the
actual number of days elapsed. The Senior Credit Facility and the Indenture
relating to the Senior Discount Notes limit the Company's ability to pay cash
dividends on its capital stock, including the New Preferred Stock. See
"Description of Certain Indebtedness." In particular, the Senior Credit
Facility, which matures December 31, 2005, prohibits the payment of cash
dividends on the New Preferred Stock. The Company currently expects that prior
to being required to pay cash dividends on the New Preferred Stock it would
seek an amendment to the Senior Credit Facility to permit such cash payments.
No full dividends may be declared or paid or funds set apart for the payment
of dividends on any Parity Shares (except for dividends on Parity Shares
payable in additional Parity Shares or Junior Shares) for any period unless
full cumulative dividends shall have been or contemporaneously are declared
and paid (or are deemed declared and paid) in full or declared and, if payable
in cash, a sum in cash sufficient for such payment set apart for such payment
on the New Preferred Stock. If full dividends are not so paid, the New
Preferred Stock will share dividends pro rata with the Parity Shares. No
dividends may be paid or set apart for such payment on Junior Shares (except
dividends on Junior Shares payable in additional Junior Shares) if full
cumulative dividends have not been paid in full (or deemed paid) on the New
Preferred Stock. Dividends on account of arrears for any past Dividend Period
and dividends in connection with any optional redemption may be declared and
paid at any time, without reference to any regular Dividend Payment Date, to
holders of record of New Preferred Stock on such date, not more than forty-
five (45) days prior to the payment thereof, as may be fixed by the Board of
Directors of the Company. So long as any New Preferred Stock is outstanding,
the Company shall not make any payment on account of, or set apart for payment
money for a sinking or other similar fund for, the purchase, redemption or
other retirement of, any Parity Shares or Junior Shares (except as permitted
by the Certificate of Designations), or any warrants, rights, calls or options
to purchase any Parity Shares or Junior Shares, and shall not permit any
corporation or other entity directly or indirectly controlled by the Company
to purchase or redeem any Parity Shares or Junior Shares or any such warrants,
rights, calls or options, unless full cumulative dividends determined in
accordance herewith on the New Preferred Stock have been paid (or are deemed
paid) in full.
MANDATORY REDEMPTION
The New Preferred Stock will be subject to mandatory redemption (subject to
the legal availability of funds therefor) in whole on , 2009, at a price
equal to 100% of the liquidation preference thereof, plus, without
duplication, all accumulated and unpaid dividends to the date of redemption.
The Senior Credit Facility and the Indenture relating to the Senior Discount
Notes would restrict the ability of the Company to redeem the New Preferred
Stock and future agreements of the Company may restrict or prohibit the
Company from redeeming the New Preferred Stock.
OPTIONAL REDEMPTION
The New Preferred Stock may be redeemed, in whole or in part, at the option
of the Company (subject to contractual and other restrictions with respect
thereto and the legal availability of funds therefor) at any time on or after
, 2004 at the redemption prices set forth below (expressed as percentages
of the liquidation preference thereof), plus, without duplication, an amount
in cash
73
<PAGE>
equal to all accumulated and unpaid dividends to the redemption date
(including an amount in cash equal to a prorated dividend for the period from
the Dividend Payment Date immediately prior to the
7redemption date), if redeemed during the 12-month period beginning of
each of the years set forth below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2004...........................................................
2005...........................................................
2006...........................................................
2007 and thereafter............................................ 100.0%
</TABLE>
The New Preferred Stock will be subject to redemption on or prior to ,
2004 only in the event that on or before , 2002 the Company receives net
proceeds from the sale of its Common Stock in one or more Public Equity
Offerings or Strategic Equity Investments, in which case the Company may, at
its option, use all or a portion of any such net proceeds to redeem New
Preferred Stock in an amount of at least 5,000 shares and up to an aggregate
amount equal to 35% of the then outstanding shares of New Preferred Stock
(whether issued in exchange for New Preferred Stock or in lieu of cash
interest payments) at a redemption price equal to % of the liquidation
preference thereof, plus, without duplication, an amount in cash equal to all
accumulated and unpaid dividends to the redemption date (including an amount
in cash equal to a prorated dividend for the period from the Dividend Payment
Date immediately prior to the redemption date), provided, however, that after
any such redemption, the liquidation preference of New Preferred Stock
remaining outstanding must equal at least (i) 65% of the aggregate liquidation
preference of New Preferred Stock originally issued in the Preferred Stock
Offering or (ii), in the event of a partial exchange, shares with an aggregate
liquidation preference of $75.0 million. Any such redemption must occur on a
redemption date within 60 days of any such sale. In the event of redemption of
only a portion of the then outstanding New Preferred Stock, the Company will
effect such redemption on a pro rata basis.
In the event of partial redemptions of New Preferred Stock, the shares to be
redeemed will be determined pro rata, except that the Company may redeem all
shares held by any holders of fewer than one share (or shares held by holders
who would hold less than one share as a result of such redemption), as may be
determined by the Company. No optional redemption may be authorized or made
unless prior thereto all accumulated and unpaid dividends shall have been paid
(in the case of dividends payable after , 2004, in cash) or a sum set apart
for such payment on the New Preferred Stock.
PROCEDURE FOR REDEMPTION
On and after the redemption date, unless the Company defaults in the payment
of the applicable redemption price, dividends will cease to accumulate on
shares of New Preferred Stock called for redemption and all rights of holders
of such shares will terminate except for the right to receive the redemption
price, without interest; provided, however, that if a notice of redemption
shall have been given as provided in the succeeding sentence and the funds
necessary for redemption (including an amount in respect of all dividends that
will accrue to the redemption date) shall have been segregated and irrevocably
set apart by the Company, in trust for the equal and ratable benefit of the
holders of the shares called for redemption, then dividends shall cease to
accumulate on the redemption date on the shares to be redeemed then, at the
close of business of the day on which such funds are segregated and set apart,
the holders of the shares to be redeemed shall cease to be stockholders of the
Company and shall be entitled only to receive the redemption price for such
shares, without interest. The Company will send a written notice of redemption
by first class mail to each holder of record of New Preferred Stock, not fewer
than 30 days nor more than 60 days prior to the date fixed for such redemption
at its registered address. New Preferred Stock issued and reacquired will,
upon
74
<PAGE>
compliance with the applicable requirements of Delaware law, have the status
of authorized but unissued preferred stock of the Company undesignated as to
series and may, with any and all other authorized but unissued preferred stock
of the Company, be designated or redesignated and issued or reissued, as the
case may be, as part of any series of preferred stock of the Company, except
that any issuance or reissuance of New Preferred Stock must be in compliance
with the Certificate of Designations.
EXCHANGE
The Company may, at its option, subject to certain conditions, on any
scheduled Dividend Payment Date occurring on or after the Issue Date, exchange
either 50% (but not less than 75,000 shares) or 100% of the aggregate shares
of New Preferred Stock then outstanding for the Exchange Notes; provided that
(i) on the date of such exchange there are no accumulated and unpaid dividends
on the shares of New Preferred Stock (including the dividend payable on such
date) or other contractual impediment to such exchange; (ii) immediately after
giving effect to such exchange, no Default or Event of Default (each as
defined in the Exchange Indenture) would exist under the Exchange Indenture
and no default or event of default would exist under the Indenture; and (iii)
the conditions set forth in the next succeeding paragraph are satisfied. The
exchange of the shares of New Preferred Stock into Exchange Notes would be
restricted by covenants contained in the Senior Credit Facility and the
Indenture relating to the Senior Discount Notes with respect to, among other
things, the incurrence of indebtedness.
The Company's right to exchange shares of New Preferred Stock for Exchange
Notes shall also be conditioned on there not being outstanding, on the date of
such exchange, (i) any Debt, other than the Exchange Notes, that is expressly
made subordinated in right of payment to any Senior Debt unless such Debt, by
its terms and by the terms of any agreement or instrument pursuant to which
such Debt is outstanding, is expressly made pari passu with, or subordinate in
right of payment to, the Exchange Notes pursuant to provisions substantially
similar to those contained in the Exchange Indenture; provided that the
foregoing limitations shall not apply to distinctions between categories of
Senior Debt that exist by reason of any Liens or Guarantees arising or created
in respect of some but not all Senior Debt; (ii) any direct or indirect
guarantee by any Restricted Subsidiary with respect to any Debt of the Company
that by its terms would be pari passu or junior in right of payment to the
Exchange Notes; or (iii) any Lien on or with respect to any property or assets
of any Restricted Subsidiary to secure any Debt of the Company that is
expressly by its terms subordinate or junior in right of payment (other than
by reason of maturity) to any other Debt of the Company.
Upon any exchange pursuant to the preceding paragraph, holders of
outstanding shares of New Preferred Stock will be entitled to receive, subject
to the second succeeding sentence, $1.00 principal amount of Exchange Notes
for each $1.00 of the aggregate liquidation preference of shares of New
Preferred Stock held by them. The Exchange Notes will be issued in registered
form, without coupons. Exchange Notes issued in exchange for shares of New
Preferred Stock will be issued in principal amounts of $1,000 and integral
multiples thereof so that each holder of shares of New Preferred Stock will
receive certificates representing the entire amount of Exchange Notes to which
such holder's shares of New Preferred Stock entitle such holder; provided that
the Company may pay cash in lieu of issuing an Exchange Note in a principal
amount less than $1,000. The Company will send a written notice of exchange by
mail to each holder of record of shares of New Preferred Stock not fewer than
30 days nor more than 60 days before the date fixed for such exchange. On and
after the date of exchange, dividends will cease to accrue on the outstanding
shares of New Preferred Stock and all rights of the holders of shares of New
Preferred Stock (except the right to receive the Exchange Notes, an amount in
cash, to the extent applicable, equal to the accumulated and unpaid dividends
to the exchange date and, if the Company so elects, cash in lieu of any
Exchange Note that is in a principal amount less than $1,000) will terminate.
The person entitled to receive the Exchange Notes issuable
75
<PAGE>
upon such exchange will be treated for all purposes as the registered holder
of such Exchange Notes. See "Description of Exchange Notes."
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
the Company, holders of New Preferred Stock will be entitled to be paid, out
of the assets of the Company available for distribution to the stockholders,
the liquidation preference of $1,000 per share of New Preferred Stock,
plus, without duplication, an amount in cash equal to all accumulated and
unpaid dividends thereon to the date fixed for liquidation, dissolution or
winding-up (including an amount equal to a prorated dividend for the period
from the last Dividend Payment Date to the date fixed for liquidation,
dissolution or winding-up), before any distribution is made on any Junior
Shares, including, without limitation, the Common Stock of the Company. If,
upon any voluntary or involuntary liquidation, dissolution or winding-up of
the Company, the amounts payable with respect to the New Preferred Stock and
all other Parity Shares are not paid in full, the holders of the New Preferred
Stock and the Parity Shares will share equally and ratably in any distribution
of assets of the Company in proportion to the full liquidation preference,
including, without duplication, all accrued and unpaid dividends to which each
is entitled. After payment of the full amount of the liquidation preference
and accumulated and unpaid dividends to which they are entitled, the holders
of New Preferred Stock will not be entitled to any further participation in
any distribution of assets of the Company. However, neither the sale,
conveyance, exchange or transfer (for cash, shares of stock, securities or
other consideration) of all or substantially all of the property or assets of
the Company nor the consolidation or merger of the Company with one or more
entities shall be deemed to be a liquidation, dissolution or winding-up of the
affairs of the Company.
The Certificate of Designations for the New Preferred Stock does not contain
any provision requiring funds to be set aside to protect the liquidation
preference of the New Preferred Stock, although such liquidation preference
will be substantially in excess of the par value of such shares of New
Preferred Stock. In addition, the Company is not aware of any provision of
Delaware law or any controlling decision of the courts of the State of
Delaware (the state of incorporation of the Company) that requires a
restriction upon the surplus of the Company solely because the liquidation
preference of the New Preferred Stock will exceed its par value. Consequently,
there will be no restriction upon the surplus of the Company solely because
the liquidation preference of the New Preferred Stock will exceed the par
value and there will be no remedies available to holders of the New Preferred
Stock before or after the payment of any dividend, other than in connection
with the liquidation of the Company, solely by reason of the fact that such
dividend would reduce the surplus of the Company to an amount less than the
difference between the liquidation preference of the New Preferred Stock and
its par value.
VOTING RIGHTS
The holders of New Preferred Stock, except as otherwise required under
applicable law or as set forth below, shall not be entitled or permitted to
vote on any matter required or permitted to be voted upon by the stockholders
of the Company.
The Certificate of Designations provides that if (i) dividends on the New
Preferred Stock are in arrears and unpaid (and, if after , 2004, such
dividends are not paid in cash) for six or more quarterly dividend periods
(whether or not consecutive); (ii) the Company fails to redeem the New
Preferred Stock on , 2009 or fails otherwise to discharge any redemption
obligation with respect to the New Preferred Stock; (iii) the Company fails to
make an Offer to Purchase if the provisions set forth under "--Change of
Control" below require such Offer of Purchase to be made, or fails to purchase
New Preferred Stock from holders who elect to have such shares purchased
pursuant to such an Offer to Purchase; (iv) a breach or violation of any of
the provisions described under the
76
<PAGE>
caption "--Certain Covenants" occurs and the breach or violation continues for
a period of 30 days or more after the Company receives notice thereof
specifying the default from the holders of at least 25% of the shares of New
Preferred Stock then outstanding; or (v) the Company fails to pay at the final
stated maturity (giving effect to any extensions thereof) the principal amount
of any Debt of the Company or any Subsidiary of the Company, or the final
stated maturity of any such Debt is accelerated, if the aggregate principal
amount of such Debt, together with the aggregate principal
amount of any other such Debt in default for failure to pay principal at the
final stated maturity (giving effect to any extensions thereof) or which has
been accelerated, aggregates $20 million or more at any time, in each case,
after a 10-day period during which such default shall not have been cured or
such acceleration rescinded, then the number of directors constituting the
Board of Directors of the Company will be adjusted to permit the holders of a
majority of the then outstanding shares of New Preferred Stock, voting
together with any outstanding Parity Shares separately as a single class, to
elect the lesser of two directors and that number of directors constituting
25% of the members of such Board of Directors. Such voting rights will
continue until such time as, in the case of a dividend default, all
accumulated dividends in arrears on the New Preferred Stock are paid in full
(and, in the case of dividends payable after , 2004, paid in cash) and, in
all other cases, the failure, breach or default giving rise to such Voting
Rights Triggering Event is remedied or waived by the holders of at least a
majority of the New Preferred Stock then outstanding, at which time the term
of any directors elected pursuant to the provisions of this paragraph shall
terminate. Each such event described in clauses (i) through (v) above is
referred to herein as a "Voting Rights Triggering Event." The voting rights
provided herein shall be the holders' exclusive remedy at law or in equity.
In addition to the provisions described above under "Ranking," the
Certificate of Designations will also provide that the Company will not,
without the approval of the holders of a majority of the New Preferred Stock
then outstanding amend, alter or repeal any of the provisions of the Company's
Certificate of Incorporation (including the Certificate of Designations) or
the bylaws of the Company so as to affect adversely the powers, preferences or
rights of the holders of the New Preferred Stock or reduce the time for any
notice to which the holders of the New Preferred Stock may be entitled.
Subject to the provisions described above under "Ranking", the Certificate of
Designations provides that an amendment of the Company's Certificate of
Incorporation to authorize or create, or to increase the authorized amount, of
Junior Shares, Parity Shares or Senior Shares shall not be deemed to affect
adversely the powers, references or rights of the holders of the New Preferred
Stock.
Notwithstanding the foregoing, modifications and amendments of the terms of
Certificate of Designations described below under "--Change of Control" and
"--Certain Covenants" may be made by the Company with the consent of the
holders of a majority of the New Preferred Stock; provided, however, that
following the mailing of any Offer to Purchase and until the Expiration Date
of that Offer to Purchase no such modification or amendment may, without the
consent of the holder of each outstanding Share of New Preferred Stock
affected thereby, modify any Offer to Purchase for the New Preferred Stock
required under the "Change of Control" covenant contained in the Certificate
of Designations in a manner materially adverse to the holders of outstanding
New Preferred Stock. In addition, the holders of a majority of the outstanding
New Preferred Stock, on behalf of all holders of New Preferred Stock, may
waive compliance by the Company with the covenants described below under "--
Certain Covenants" and may waive any past default of the provisions of the
Certificate of Designations described below under "--Change of Control" and
"--Certain Covenants", except a default arising from failure to purchase any
New Preferred Stock tendered pursuant to an Offer to Purchase.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of shares of New
Preferred Stock will have the right to require the Company to repurchase all
or any part (equal to $1,000 or an integral
77
<PAGE>
multiple thereof) of such holder's shares of New Preferred Stock pursuant to
the Offer to Purchase described below at an offer price in cash equal to 101%
of the aggregate liquidation preference thereof plus accrued and unpaid
dividends thereon to date of purchase. Within thirty days following any Change
of Control, the Company will mail an Offer to Purchase to each holder
describing the transaction or transactions that constitute the Change of
Control and offering to purchase shares of
New Preferred Stock 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 Company will comply with the
requirements of Rule 14e-1 under the Securities Exchange Act of 1934, as
amended (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 shares of New Preferred Stock pursuant to
the Offer to Purchase.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Certificate of Designations are applicable.
Except as described above with respect to a Change of Control, the Certificate
of Designations does not contain provisions that permit the Holders of the New
Preferred Stock to require that the Company repurchase or redeem the shares of
New Preferred Stock in the event of a takeover, recapitalization or similar
transaction.
The Company will not be 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
Certificate of Designations applicable to the Offer to Purchase made by the
Company and purchases all of the shares of New Preferred Stock validly
tendered and not withdrawn under such Offer to Purchase.
A "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 Company 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 Company of any plan or proposal for the liquidation or
dissolution of the Company (whether or not otherwise in compliance with the
provisions of the Certificate of Designations); (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 Company 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 Company 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 Company 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 shares of New
Preferred Stock to require the Company to repurchase such shares of New
Preferred Stock as a result of a sale, lease, transfer, conveyance or other
disposition of less than all of the assets of the Company 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 Company 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.
78
<PAGE>
"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 which Voting Stock is directly or indirectly
owned by any Person described in clause (i) above.
ASSET DISPOSITIONS
The Certificate of Designations will provide that the Company will not, and
will not permit any Restricted Subsidiary to, consummate an Asset Disposition
unless (i) the Company 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 Company 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 Company's or such Restricted Subsidiary's most
recent balance sheet) of the Company or any such Restricted Subsidiary that
are assumed by the transferee of any such assets pursuant to a customary
novation agreement that releases the Company or such Restricted Subsidiary
from further liability, (b) any securities, notes or other obligations
received by the Company or any such Restricted Subsidiary from such transferee
that are converted by the Company 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 Company's or such
Restricted Subsidiary's most recent balance sheet) of a Restricted Subsidiary
all of the Capital Stock of which is disposed of in such Asset Disposition,
which liabilities have ceased to be liabilities of the Company 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 Company 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 Company or a business reasonably
ancillary thereto, to permanently repay Debt under (A) the Senior Credit
Facility or (B) the Senior Discount Notes or (C) the Exchange Notes or any
renewal, extension, refinancing or refunding thereof to the extent that any
such instrument would require or, at the Company'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 Company 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
Company or such Restricted Subsidiary to make an Offer to Purchase that amount
of shares of New Preferred Stock equal to the amount of Excess Proceeds at a
price equal to 100% of the liquidation preference of the New Preferred Stock
to be purchased, plus accrued and unpaid interest thereon, if any, to the date
of purchase and, to the extent required by the terms thereof, any other Parity
Shares at a price equal to 100% of the liquidation preference of such Parity
Shares, on a pro rata basis with the New Preferred Stock; provided, however,
that if at any time any non-cash consideration received by the Company 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 Company may use such Excess Proceeds to any use
which is not otherwise prohibited by the Indenture and the Exchange Indenture.
79
<PAGE>
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
Company and its Restricted Subsidiaries aggregates at least $10.0 million, at
which time the Company or such Restricted Subsidiary shall apply all Excess
Proceeds that have been so deferred to make an Offer to Purchase as provided
above.
The Company 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.
CERTAIN COVENANTS
The Certificate of Designations contains, among others, the following
covenants:
LIMITATION ON CONSOLIDATED DEBT
The Company may not, and may not permit any Restricted Subsidiary of the
Company to Incur any Debt unless the ratio of (a) the aggregate consolidated
principal amount of Debt of the Company 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 Company to any Wholly Owned Restricted Subsidiary of
the Company for which fair value has been received or Debt owed by a
Restricted Subsidiary of the Company to the Company or a Wholly Owned
Restricted Subsidiary of the Company; provided, however, that (a) any such
Debt owing by the Company 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 Company of any Debt so permitted to a Person
other than the Company or another Wholly Owned Restricted Subsidiary of the
Company 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 Company 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 Senior Discount 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 New Preferred Stock after giving effect to the application of the
proceeds thereof, in each case in an aggregate principal amount not to
exceed the principal amount of the Debt so refinanced plus the amount of
80
<PAGE>
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 Company as necessary to accomplish
such refinancing by means of a tender offer or privately negotiated
repurchase, plus the expenses of the Company or the Restricted Subsidiary,
as the case may be,
Incurred in connection with such refinancing; provided, however, that the
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 "Change of Control" and "Asset
Dispositions";
(v) Acquisition Debt;
(vi) ABRY Subordinated Debt;
(vii) Subordinated Debt of the Company owed to any of its stockholders
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
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 made to stockholders of the Company 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;
(viii) Debt of the Company in an amount not to exceed, at any one time
outstanding, the sum of (i) 2.0 times the aggregate net cash proceeds plus
(ii) 1.0 times the fair market value of non-cash proceeds (evidenced by a
resolution of the Board of Directors set forth in an Officers' Certificate
delivered to the Transfer Agent), in each case, from the issuance and sale,
other than to a Subsidiary, of Equity Interests (other than Redeemable
Stock) of the Company since after the date of original issue of the New
Preferred Stock (less the amount of such proceeds used to make Restricted
Payments as provided in clause (i) of the second paragraph of the covenant
described below under the caption "--Limitation on Restricted Payments");
provided that such Debt does not mature prior to the Stated Maturity of the
New Preferred Stock and the Weighted Average Life to Maturity of such Debt
is longer than that of the New Preferred Stock; and
(ix) Debt not otherwise permitted to be Incurred pursuant to clauses
(i) through (viii) above, which, together with any other outstanding Debt
Incurred pursuant to this clause (ix), has an aggregate principal amount
not in excess of $25 million at any time outstanding.
For purposes of determining compliance with this covenant, in the event that
an item of Debt meets the criteria of more than one of the categories
described in clauses (i) through (ix) above or is entitled to be Incurred
pursuant to the first paragraph of this covenant, the Company shall, in its
sole discretion, classify (or later reclassify in whole or in part) such item
of Debt in any manner that complies with this covenant. Accrual of interest,
accretion or amortization of original issue discount and the payment of
interest in the form of additional Debt will not be deemed to be an Incurrence
of Debt for purposes of this covenant.
81
<PAGE>
LIMITATION ON RESTRICTED PAYMENTS
The Company (i) may not, and may not permit any Restricted Subsidiary of the
Company 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 Company or any Restricted Subsidiary)
in respect of its Capital Stock or to the holders thereof, excluding (a) any
dividends or distributions by the Company 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), (b) in the
case of a Restricted Subsidiary, dividends or distributions payable to the
Company or a Wholly Owned Restricted Subsidiary or pro rata dividends or
distributions, or (c) dividends in accordance with the terms of the New
Preferred Stock (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 Company (other than shares of New Preferred Stock) or any Related
Person of the Company or (b) any options, warrants or other rights to acquire
shares of Capital Stock of the Company or any Related Person of the Company or
any securities convertible or exchangeable into shares of Capital Stock of the
Company or any Related Person of the Company, excluding any purchase from the
Company by a Wholly Owned Restricted Subsidiary of any Capital Stock of the
Company or options, warrants or other rights to acquire shares of Capital
Stock of the Company or any securities convertible or exchangeable into shares
of Capital Stock of the Company, (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 Company 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 Company (other than ABRY Subordinated Debt) which is pari
passu with or subordinate in right of payment to the New Preferred Stock (each
of clauses (i) through (iv) being a "Restricted Payment") if:
(1)a Voting Rights Triggering Event, or an event that with the passing of
time or the giving of notice, or both, would constitute a Voting Rights
Triggering Event, 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 Company could not Incur at least $1.00 of additional
Debt pursuant to the terms of the covenant 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 New Preferred
Stock exceeds the sum of: (a) cumulative Consolidated Cash Flow since the
date of original issuance of the New Preferred Stock 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 Company since the date of original issuance of the New
Preferred Stock 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) $25
million.
Notwithstanding the foregoing, so long as no Voting Rights Triggering Event,
or event that with the passing of time or the giving of notice, or both, would
constitute a Voting Rights Triggering Event, shall have occurred and is
continuing or would result therefrom:
(i)the Company may make Restricted Payments in an aggregate amount up to
the amount of (A) the net proceeds received by the Company after the date
of original issuance of the New
82
<PAGE>
Preferred Stock, 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 Company or a Subsidiary of the Company) of Capital Stock (other
than Redeemable Stock) of the Company, options, warrants or other rights to
acquire Capital Stock (other than Redeemable Stock) of the Company and Debt
of the Company that has been converted into or exchanged for Capital Stock
(other than Redeemable Stock and other than by or from a Subsidiary) of the
Company after the date of original issuance of the New Preferred Stock;
plus (B) the aggregate amount received in cash after the date of original
issuance of the New Preferred Stock from the sale of the stock of an
Unrestricted Subsidiary or the sale of all or substantially all of the
assets of an Unrestricted Subsidiary to the extent that a liquidating
dividend is paid to the Company or any Restricted Subsidiary from the
proceeds of such sale; plus (C) 50% of any dividends received by the
Company or a Restricted Subsidiary after the date of original issuance of
the New Preferred Stock from an Unrestricted Subsidiary of the Company, to
the extent that such dividends were not otherwise included in Consolidated
Net Income of the Company for such period.
(ii)the Company and any Restricted Subsidiary of the Company 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 Company or such
Restricted Subsidiary could have paid such dividend in accordance with the
foregoing provisions;
(iii)(a) the Company may use cash distributions received from Pinnacle
Towers to make distributions to stockholders of the Company, each such
distribution in an aggregate amount per taxable year equal to (1) the
amount of gross income actually includible by the stockholders of the
Company on their tax returns with respect to such taxable year solely as a
result of the operations of the Company 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 stockholders of the
Company; 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 Company may make one or more distributions to its
shareholders consisting of Subordinated Debt of the Company, each such
distribution constituting Subordinated Debt not to exceed in the aggregate
an amount necessary to enable the Company 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 stockholders of the Company in accordance with the terms
of clause (a) of this clause (iii), provided that, in connection with any
such distribution, the Company 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 Company may repurchase Capital Stock of the Company owned by any
deceased shareholder of the Company (a) to the extent that the Company or
any Restricted Subsidiary was the beneficiary of a key-man life insurance
policy on such stockholder and (b) in an amount not to exceed the net
proceeds received by the Company or such Restricted Subsidiary from such
key-man life insurance;
(v)the Company may repurchase Capital Stock of the Company owned by
either any deceased stockholder of the Company or former employee of the
Company, provided that the aggregate amount of such repurchases in any
twelve-month period may not exceed $1 million; and
(vi)the Company may refinance any Debt otherwise permitted by clause (iv)
of the second paragraph under "Limitation on Consolidated Debt" above.
83
<PAGE>
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.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
The Company 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 Company or any
other Restricted Subsidiary or pay any Debt or other obligation owed to the
Company or any other Restricted Subsidiary; (ii) to make loans or advances to
the Company or any other Restricted Subsidiary; or (iii) to transfer any of
its property or assets to the Company or any other Restricted Subsidiary.
Notwithstanding the foregoing, the Company 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 New Preferred Stock (including the Senior Discount Notes and the
Senior Credit Facility and the agreements executed in connection
therewith);
(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 New Preferred Stock 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.
84
<PAGE>
LIMITATION ON OWNERSHIP OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES
The Company 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 Company 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 Company
and any Restricted Subsidiary and that complies with the provisions described
under "--Asset Dispositions" to the extent such provisions apply.
TRANSACTIONS WITH AFFILIATES AND RELATED PERSONS
The Company 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 Company (other
than the Company 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 Company 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 Company or
such Restricted Subsidiary. For any transaction (or series of related
transactions) that involves less than or equal to $10.0 million, the Chief
Executive Officer or Chief Operating Officer of the Company shall determine
that the transaction satisfies the above criteria and shall evidence such a
determination by an Officer's Certificate filed with the Transfer Agent. 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 Transfer Agent.
PROVISION OF FINANCIAL INFORMATION
The Certificate of Designations will provide that the Company will provide
to the holders of the New Preferred Stock (a) within 15 days of each filing
with the Commission (i) transmit by mail to all holders of New Preferred
Stock, as their names and addresses appear in the Security Register, without
cost to such holders of New Preferred Stock, and (ii) file with the Transfer
Agent, copies of the annual reports, quarterly reports and other documents
which the Company files with the Commission pursuant to such Section 13(a) or
15(d) or any successor provision thereto.
UNRESTRICTED SUBSIDIARIES
The Company may designate any Subsidiary of the Company 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 Company 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 Company 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
85
<PAGE>
Stock of, or owns or holds any Lien on any property of, any other Subsidiary
of the Company which is not a Subsidiary of the Subsidiary to be so designated
or otherwise an Unrestricted Subsidiary, provided that either (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 Company could Incur
at least $1.00 of additional Debt pursuant to the first paragraph under "--
Limitation on Consolidated Debt" and provided, further, that the Company 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.
MERGER, CONSOLIDATION AND SALE OF ASSETS.
The Certificate of Designations will provide that, without the affirmative
vote of the holders of a majority of the issued and outstanding shares of New
Preferred Stock, voting or consenting as a separate class, the Company will
not, in a single transaction or a series of related transactions, consolidate
with or merge with or into, or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of its assets to, another Person
or adopt a plan of liquidation unless (i) either (1) the Company is the
surviving or continuing Person or (2) the Person (if other than the Company)
formed by such consolidation or into which the Company is merged or the Person
that acquires by conveyance, transfer or lease the properties and assets of
the Company substantially as an entirety or in the case of a plan of
liquidation, the Person to which assets of the Company have been transferred,
shall be a corporation, limited liability company, partnership or trust
organized and existing under the laws of the United States or any State
thereof or the District of Columbia; (ii) the shares of New Preferred Stock
shall be converted into or exchanged for and shall become shares of Capital
Stock of such successor, transferee or resulting Person, having in respect of
such successor, transferee or resulting Person the same powers, preferences
and relative participating, optional or other special rights and the
qualifications, limitations or restrictions thereon, that the shares of New
Preferred Stock had immediately prior to such transaction; (iii) immediately
after giving pro forma effect to such transactions, no Voting Rights
Triggering Event shall have occurred or be continuing; and (iv) the Company
has delivered to the Transfer Agent for the shares of New Preferred Stock
prior to the consummation of the proposed transaction an Officers' Certificate
and an Opinion of Counsel, each stating that such consolidation, merger or
transfer complies with the Certificate of Designations and that all conditions
precedent in the Certificate of Designations relating to such transaction have
been satisfied. For purposes of the foregoing, the transfer (by lease,
assignment, sale or otherwise, in a single transaction or series of related
transactions) of all or substantially all of the properties and assets of one
or more Subsidiaries, the Capital Stock of which constitutes all or
substantially all of the properties or assets of the Company, will be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company.
TRANSFER AGENT AND REGISTRAR
will be the transfer agent and registrar for the New Preferred Stock (the
"Transfer Agent").
86
<PAGE>
DESCRIPTION OF THE EXCHANGE NOTES
The Exchange Notes are to be issued under an Indenture (the "Exchange
Indenture"), between the Company and , as trustee (the "Trustee"),
which will be executed on or prior to the date of original issuance of the
Exchange Notes. The statements under this caption relating to the Exchange
Notes and the Exchange Indenture are summaries and do not purport to be
complete, and are subject to, and are qualified in their entirety by reference
to, all the provisions of the Exchange Indenture, including the definitions of
certain terms therein. See "Certain Definitions" below for the definitions of
certain capitalized terms used herein. Unless otherwise indicated, references
under this caption to sections, "(S)" or articles are references to the
Exchange Indenture. Where reference is made to particular provisions of the
Exchange Indenture or to defined terms not otherwise defined herein, such
provisions or defined terms are incorporated herein by reference. The Exchange
Indenture is filed as an exhibit to the Registration Statement of which this
Prospectus forms a part. For purposes of the description of the Exchange
Notes, the term "Company" refers to Pinnacle Holdings Inc. and does not
include its subsidiaries except for purposes of financial data determined on a
consolidated basis.
GENERAL
The Exchange Notes will be unsecured obligations of the Company and will
mature on , 2009. The Exchange Notes will bear interest at the rate of %
per annum from the date of issue, payable semi-annually on and of
each year to the Person in whose name the Exchange Note (or any predecessor
Exchange Note) is registered at the close of business on the preceding or
as the case may be. Interest may be paid at the Company's option on any
interest payment date occurring on or before , 2004 either in cash or by
issuing additional Exchange Notes with an aggregate principal amount equal to
the amount of such interest payments. After , 2004 interest on Exchange
Notes is payable only in cash. Interest on the Exchange Notes will be computed
on the basis of a 360-day year of twelve 30-day months. ((S)(S) 301, 307 and
310)
Principal of and premium, if any, and interest on the Exchange Notes will be
payable, and the Exchange Notes may be presented for registration of transfer
and exchange, at the office or agency of the Company maintained for that
purpose in the Borough of Manhattan, The City of New York provided that at the
option of the Company, payment of interest on the Exchange Notes may be made
by check mailed to the address of the Person entitled thereto as it appears in
the Exchange Note Register. Until otherwise designated by the Company, such
office or agency will be the corporate trust office of the Trustee, as Paying
Agent and Registrar. ((S)(S) 301, 305 and 1002)
The Exchange Notes will be issued in fully registered form, without coupons,
in denominations of $1,000 and any integral multiple thereof. ((S) 302). No
service charge will be made for any registration of transfer or exchange of
Exchange Notes, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
SUBORDINATION
The payment of the principal of and premium, if any, and interest on the
Exchange Notes, and any other obligations of the Company in respect of the
Exchange Notes (including any obligation to repurchase Exchange Notes) will,
to the extent set forth in the Exchange Indenture, be subordinated in right of
payment to the prior payment in full of all Senior Debt. Upon any payment or
distribution of assets to creditors upon any liquidation, dissolution,
winding-up, reorganization, assignment for the benefit of creditors,
marshalling of assets or any bankruptcy, insolvency or similar proceedings of
the Company, the holders of all Senior Debt will first be entitled to receive
payment in full in cash of all Obligations due or to become due thereon before
the holders of the Exchange Notes will be entitled to receive any payment in
respect of the principal of or premium, if any, or interest on the Exchange
87
<PAGE>
Notes. No payments on account of principal, premium, if any, or interest
(including interest after the commencement of any such proceeding at the rate
specified in the applicable Senior Debt, whether or not allowed or allowable
in such proceeding), or any other obligations (including any obligation to
repurchase), in respect of the Exchange Notes may be made if there shall have
occurred and be
continuing a Senior Payment Default. Upon the occurrence of a Senior
Nonmonetary Default and receipt of written notice by the Company and the
Trustee of the occurrence of such Senior Nonmonetary Default from a holder of
the Designated Senior Debt (or a trustee, agent or other representative for
such a holder) which is the subject of such Senior Nonmonetary Default, no
payments on account of principal, premium, if any, or interest or any other
obligations (including any obligation to repurchase), in respect of the
Exchange Notes may be made for a period (the "Payment Blockage Period")
commencing on the date of the receipt of such notice and ending the earlier of
(i) the date on which such Senior Nonmonetary Default shall have been cured or
waived or ceased to exist or all Designated Senior Debt the subject of such
Senior Nonmonetary Default has been discharged and (ii) the 179th day after
the date of the receipt of such notice; provided, however, that no more than
one Payment Blockage Period may be commenced during any 360-day period and
there shall be a period of at least 181 days during any such 360-day period
when no Payment Blockage Period is in effect; provided, further, that no
Senior Nonmonetary Default which existed or was continuing on the date of the
commencement of a Payment Blockage Period may be made the basis of the
commencement of a subsequent Payment Blockage Period whether or not within a
period of 360 consecutive days, unless such Senior Nonmonetary Default shall
have been cured for a period of not less than 90 consecutive days. "Senior
Payment Default" is defined in the Exchange Indenture as any default in the
payment of any principal of or premium, if any, or interest on Senior Debt
when due, whether at the stated maturity of any such payment or by declaration
of acceleration, call for redemption or otherwise. "Senior Nonmonetary
Default" is defined in the Exchange Indenture as a default with respect to any
Designated Senior Debt, other than a Senior Payment Default, which shall give
the holders of such Designated Senior Debt (or a trustee or agent on behalf of
the holders thereof) the right to declare such Designated Senior Debt due and
payable prior to the date on which it would otherwise become due and payable.
"Bank Credit Agreement" means the Senior Credit Facility or any renewal,
extension, refinancing or refunding thereof, whether by the Company or any
Restricted Subsidiary, and any related notes, security documentation,
guarantees, letters of credit, collateral documents, instruments and
agreements executed in connection therewith, including any appendices,
exhibits or schedules to any of the foregoing, and in each case as such
agreements may be amended, modified, supplemented or restated from time to
time, or refunded, refinanced, restructured, replaced, renewed, repaid or
extended from time to time (whether provided under the original credit
agreement or credit agreements or otherwise) on one or more occasions.
"Designated Senior Debt" means (i) Debt under the Bank Credit Agreement,
(ii) Debt under the Senior Discount Notes and (iii) any Senior Debt of the
Company (a) which at the time of determination exceeds $25 million in
aggregate principal amount outstanding or available under a committed
facility, (b) which is specifically designated in the instrument evidencing
such Senior Debt as "Designated Senior Debt" by the Company and (c) as to
which the Trustee has received an Officers' Certificate of the Company
specifying such Senior Debt as "Designated Senior Debt."
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages, guarantees and other liabilities
payable under the documentation governing any Debt, in each case whether now
or hereafter existing, renewed or restructured, whether or not from time to
time decreased or extinguished and later increased, created or incurred,
whether or not arising on or after the commencement of a proceeding under
Title 11, U.S. Code or any similar federal or state law for the relief of
debtors (including post-petition interest) and whether or not allowable as a
claim in any such proceeding.
88
<PAGE>
"Senior Debt" means all Obligations on, or other amount of, (i) Debt for
money borrowed under the Bank Credit Agreement, (ii) Debt for money borrowed
of the Company, whether Incurred on or prior to the date of the Exchange
Indenture or thereafter Incurred, other than the Exchange Notes, (iii) Debt
evidenced by bonds, debentures, notes or other similar instruments, including
Debt Incurred in
connection with the acquisition of property, assets or business, (iv) matured
and unmatured reimbursement or other obligations of the Company with respect
to letters of credit, bankers' acceptances or similar facilities issued for
the account of the Company, (v) obligations of the Company under interest rate
swaps, caps, collars and similar arrangements, (vi) Capital Lease Obligations
of the Company, (vii) guarantees by the Company of (x) Debt for money borrowed
and (y) Debt of a Restricted Subsidiary consisting of performance and other
similar bonds and reimbursement obligations Incurred in the ordinary course of
business securing the performance of contractual, franchise or license
obligations of such Restricted Subsidiary, or in respect of a letter of credit
obtained to secure such performance; and (viii) amendments, renewals,
extensions, modifications, refinancings and refundings of any such Debt;
provided, however, the following shall not constitute Senior Debt: (A) any
Debt owed to a Person when such Person is a Subsidiary of the Company, (B) any
Debt which by the terms of the instrument creating or evidencing the same
provides that it is on parity with or subordinated in right of payment to the
Exchange Notes, (C) any Debt Incurred in violation of the Indenture or (D) any
Debt which is subordinated in right of payment in any respect to any other
Debt of the Company.
MANDATORY REDEMPTION
The Company is not required to purchase or make mandatory redemption
payments or sinking fund payments with respect to the Exchange Notes.
OPTIONAL REDEMPTION
Except as described below, the Exchange Notes will not be redeemable at the
Company's option prior to , 2004.
The Exchange Notes will be subject to redemption, at the option of the
Company, in whole or in part, at any time on or after , 2004 and prior to
maturity, upon not less than 30 nor more than 60 days' notice mailed to each
holder of Exchange Notes to be redeemed at such holder's address appearing in
the Exchange 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
of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2004...........................................................
2005...........................................................
2006...........................................................
2007 and thereafter............................................
</TABLE>
The Exchange Notes will be subject to redemption on or prior to , 2002
only in the event that on or before , 2002 the Company receives net proceeds
from the sale of its Common Stock in one or more Public Equity Offerings or
Strategic Equity Investments, in which case the Company may, at its option,
use all or a portion of any such net proceeds to redeem Exchange Notes in a
principal amount of at least $5.0 million and up to 35% of the aggregate
principal amount of the Exchange Notes then outstanding (whether issued in
exchange for New Preferred Stock or in lieu of
89
<PAGE>
cash interest payments), at a redemption price of % of the aggregate
principal amount of the Exchange Notes to be redeemed plus without
duplication, accrued and unpaid interest to the date of redemption, provided,
however, that after any such redemption Exchange Notes in an amount equal to
at least $75.0 million aggregate principal amount of the Exchange Notes
remains outstanding (excluding any Exchange Notes held by the Company 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 Exchange Notes to be redeemed at such
holder's address appearing in the Exchange Note Register, in face amounts of
$1,000 or an integral multiple of $1,000.
If less than all the Exchange Notes are to be redeemed, selection of
Exchange Notes for redemption will be made by the Trustee, in compliance with
the requirements of the principal national securities exchange, if any, on
which the Exchange Notes are listed, or, if the Exchange 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 Exchange 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 Exchange Note is to be redeemed in part only, the
notice of redemption that relates to such Exchange Note shall state the
portion of the principal amount thereof to be redeemed. A new Exchange 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 Exchange Note.
Exchange Notes called for redemption become due on the date fixed for
redemption. On and after the redemption date, interest ceases to accrue on
Exchange Notes or portions of them called for redemption and, unless the
Company defaults in the payment of the redemption price, Exchange Notes or
portions of them called for redemption will no longer be deemed outstanding.
((S)(S) 203, 1101, 1104, 1105 and 1107).
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Exchange Notes
will have the right to require the Company to repurchase all or any part
(equal to $1,000 or an integral multiple thereof) of such holder's Exchange
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 thereon to date of purchase. Within thirty days following any
Change of Control, the Company will mail an Offer to Purchase to each holder
describing the transaction or transactions that constitute the Change of
Control and offering to purchase Exchange 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 Company
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 Exchange Notes
pursuant to the Offer to Purchase.
The Senior Credit Facility and the Indenture relating to the Senior Discount
Notes restrict the Company's ability to prepay debt, including the Exchange
Notes and the Senior Credit Facility also provides that certain change of
control events with respect to the Company would constitute a default
thereunder. Any future credit agreements or other agreements to which the
Company becomes a party may contain similar restrictions and provisions. In
the event a Change of Control occurs at a time when the Company is prohibited
from purchasing the Exchange Notes, the Company could seek the consent of its
lenders to the purchase of Exchange Notes or could attempt to refinance the
borrowings that contain such prohibition. If the Company does not obtain such
a consent or repay such borrowings, the Company will remain prohibited from
purchasing Exchange Notes. In such case, the Company's failure to purchase
tendered Exchange Notes would constitute an Event of Default under the
Exchange Indenture, which would, in turn, constitute a default under the
Senior Credit Facility and the Indenture relating to the Senior Discount Notes
or may constitute a default under such other future agreements.
90
<PAGE>
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Exchange Indenture are applicable. Except
as described above with respect to a Change of Control, the Exchange Indenture
does not contain provisions that permit the Holders of the Exchange Notes to
require that the Company repurchase or redeem the Exchange Notes in the event
of a takeover, recapitalization or similar transaction.
The Company will not be 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
Exchange Indenture applicable to the Offer to Purchase made by the
Company and purchases all Exchange Notes validly tendered and not withdrawn
under such Offer to Purchase.
A "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 Company 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 Company of any plan or proposal for the liquidation or
dissolution of the Company (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 Company 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 Company 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 Company 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 Exchange Notes to
require the Company to repurchase such Exchange Notes as a result of a sale,
lease, transfer, conveyance or other disposition of less than all of the
assets of the Company 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 Company 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 which Voting Stock is directly or indirectly
owned by any Person described in clause (i) above.
ASSET DISPOSITIONS
The Exchange Indenture will provide that the Company will not, and will not
permit any Restricted Subsidiary to, consummate an Asset Disposition unless
(i) the Company 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
91
<PAGE>
case of a Tower Asset Exchange, at least 75% of the consideration received by
the Company 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 Company's or such Restricted Subsidiary's
most recent balance sheet) of the Company or any such Restricted Subsidiary
that are assumed by the transferee of any such assets pursuant to a customary
novation agreement that releases the Company or such Restricted Subsidiary
from further liability, (b) any securities, notes or other obligations
received by the Company or any such Restricted Subsidiary from such transferee
that are converted by the Company 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
Company's or such Restricted Subsidiary's most recent balance sheet) of a
Restricted Subsidiary all of the Capital Stock of which is disposed of in such
Asset Disposition, which liabilities have ceased to be liabilities of the
Company 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 Company 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 Company or a business reasonably
ancillary thereto, to permanently repay Debt under (A) the Senior Credit
Facility or (B) the Senior Discount Notes or any renewal, extension,
refinancing or refunding thereof to the extent that any such instrument would
require or, at the Company'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 Company 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 Company or such Restricted
Subsidiary to make an Offer to Purchase that amount of Exchange Notes equal to
the amount of Excess Proceeds at a price equal to 100% of the principal amount
of the Exchange Notes to be purchased, plus accrued and unpaid interest
thereon, if any, to the date of purchase and, to the extent required by the
terms thereof, any other Debt of the Company that is pari passu with the
Exchange 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 Exchange Notes,
provided, however, that if at any time any non-cash consideration received by
the Company 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 Company may use such
Excess Proceeds to any use which is not otherwise prohibited by the Exchange
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 Company and its Restricted Subsidiaries aggregates at least $10.0 million,
at which time the Company or such Restricted Subsidiary shall apply all Excess
Proceeds that have been so deferred to make an Offer to Purchase as provided
above.
92
<PAGE>
The Company 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 Exchange Notes pursuant to such Offer to Purchase.
CERTAIN COVENANTS
The Exchange Indenture contains, among others, the following covenants,
which will only have effect beginning on the date, if any, of issuance of the
Exchange Notes:
LIMITATION ON CONSOLIDATED DEBT
The Company may not, and may not permit any Restricted Subsidiary of the
Company to Incur any Debt unless the ratio of (a) the aggregate consolidated
principal amount of Debt of the Company
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 Company to any Wholly Owned Restricted Subsidiary of
the Company for which fair value has been received or Debt owed by a
Restricted Subsidiary of the Company to the Company or a Wholly Owned
Restricted Subsidiary of the Company; provided, however, that (a) any such
Debt owing by the Company 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 Company of any Debt so permitted to a Person
other than the Company or another Wholly Owned Restricted Subsidiary of the
Company 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 Company 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 Exchange 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
Exchange Notes after giving effect to the application of the proceeds
thereof (as described in a schedule to the Exchange 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
Company as necessary to accomplish such refinancing by means of a tender
offer or privately negotiated repurchase, plus the expenses of the Company
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 Exchange Notes or Debt which is pari passu
with or subordinate in right of payment to the
93
<PAGE>
Exchange Notes shall only be permitted if (x) in the case of any
refinancing of the Exchange Notes or Debt which is pari passu to the
Exchange Notes, the refinancing Debt is Incurred by the Company and made
pari passu to the Exchange Notes or subordinated to the Exchange Notes, and
(y) in the case of any refinancing of Debt which is subordinated to the
Exchange Notes, the refinancing Debt is Incurred by the Company and is
subordinated to the Exchange Notes; (B) the 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 "Change of
Control" and "Asset Dispositions"; (C) in the case of any refinancing of
Debt incurred by the Company, the refinancing Debt may be Incurred only by
the Company, 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 Company; 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 Company;
(v)Acquisition Debt;
(vi)ABRY Subordinated Debt;
(vii)Subordinated Debt of the Company owed to any of its stockholders 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
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 made to stockholders of the Company 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;
(viii)Debt of the Company in an amount not to exceed, at any one time
outstanding, the sum of (i) 2.0 times the aggregate net cash proceeds plus
(ii) 1.0 times the fair market value of non-cash proceeds (evidenced by a
resolution of the Board of Directors set forth in an Officers' Certificate
delivered to the Trustee), in each case, from the issuance and sale, other
than to a Subsidiary, of Equity Interests (other than Redeemable Stock) of
the Company since the data of original issue of the New Preferred Stock
(less the amount of such proceeds used to make Restricted Payments as
provided in clause (i) of the second paragraph of the covenant described
below under the caption "--Limitation on Restricted Payments"): provided
that such Debt does not mature prior to the Stated Maturity of the New
Preferred Stock and the Weighted Average Life to Maturity of such Debt is
longer than that of the New Preferred Stock; and
(ix)Debt not otherwise permitted to be Incurred pursuant to clauses (i)
through (viii) above, which, together with any other outstanding Debt
Incurred pursuant to this clause (ix), has an aggregate principal amount
not in excess of $25 million at any time outstanding.
94
<PAGE>
For purposes of determining compliance with this covenant, in the event that
an item of Debt meets the criteria of more than one of the categories
described in clauses (i) through (ix) above or is entitled to be Incurred
pursuant to the first paragraph of this covenant, the Company shall, in its
sole discretion, classify (or later reclassify in whole or in part) such item
of Debt in any manner that complies with this covenant. Accrual of interest in
the form of additional Debt will not be deemed to be an Incurrence of Debt for
purposes of this covenant.
LIMITATION ON SUBORDINATED DEBT OF RESTRICTED SUBSIDIARIES
The Company 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 Company or any other
Restricted Subsidiary.
LIMITATION ON GUARANTEES OF COMPANY DEBT BY RESTRICTED SUBSIDIARIES
The Company 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 Company unless: (i) (A) such Restricted Subsidiary
simultaneously executes and delivers a supplemental indenture providing for a
Guarantee of payment of the Exchange Notes by such Restricted Subsidiary; and
(B) with respect to any Guarantee of Debt of the Company that is subordinate
in right of payment to the Exchange Notes, such Guarantee shall be
subordinated to such Restricted Subsidiary's Guarantee with respect to the
Exchange Notes at least to the same extent as such Debt is subordinated to the
Exchange 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
Company or any other Restricted Subsidiary as a result of any payment by such
Restricted Subsidiary under its Guarantee until the Exchange Notes have been
paid in full. ((S) 1010)
LIMITATION ON RESTRICTED PAYMENTS
The Company (i) may not, and may not permit any Restricted Subsidiary of the
Company 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 Company or any Restricted Subsidiary)
in respect of its Capital Stock or to the holders thereof, excluding (a) any
dividends or distributions by the Company 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
Company 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 Company or any Related Person of the Company or (b) any options,
warrants or other rights to acquire shares of Capital Stock of the Company or
any Related Person of the Company or any securities convertible or
exchangeable into shares of Capital Stock of the Company or any Related Person
of the Company, excluding any purchase from the Company by a Wholly Owned
Restricted Subsidiary of any Capital Stock of the Company or options, warrants
or other rights to acquire shares of Capital Stock of the Company or any
securities convertible or exchangeable into shares of Capital Stock of the
Company, (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 Company 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
95
<PAGE>
acquire or retire for value prior to any scheduled maturity, repayment or
sinking fund payment Debt of the Company (other than ABRY Subordinated Debt)
which is pari passu with or subordinate in right of payment to the Exchange
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 Company 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 New Preferred
Stock exceeds the sum of: (a) cumulative
Consolidated Cash Flow since the date of original issuance of the New
Preferred Stock 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 Company since the
date of original issuance of the New Preferred Stock 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) $25 million.
Prior to the making of any Restricted Payment, the Company 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:
(i)the Company may make Restricted Payments in an aggregate amount up to
the amount of (A) the net proceeds received by the Company after the date
of original issuance of the New Preferred Stock, 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 Company or a Subsidiary of the Company) of
Capital Stock (other than Redeemable Stock) of the Company, options,
warrants or other rights to acquire Capital Stock (other than Redeemable
Stock) of the Company and Debt of the Company that has been converted into
or exchanged for Capital Stock (other than Redeemable Stock) and other than
by or from a Subsidiary) of the Company after the date of original issuance
of the New Preferred Stock; plus (B) the aggregate amount received in cash
after the date of original issuance of the New Preferred Stock from the
sale of the stock of an Unrestricted Subsidiary or the sale of all or
substantially all of the assets of an Unrestricted Subsidiary to the extent
that a liquidating dividend is paid to the Company or any Restricted
Subsidiary from the proceeds of such sale; plus (c) 50% of any dividends
received by the Company or a Restricted Subsidiary after the date of
original issuance of the New Preferred Stock from an Unrestricted
Subsidiary of the Company, to the extent that such dividends were not
otherwise included in Consolidated Net Income of the Company for such
period.
(ii)the Company and any Restricted Subsidiary of the Company 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 Company or such
Restricted Subsidiary could have paid such dividend in accordance with the
foregoing provisions;
96
<PAGE>
(iii)(a) the Company may use cash distributions received from Pinnacle
Towers to make distributions to stockholders of the Company, each such
distribution in an aggregate amount per taxable year equal to (1) the
amount of gross income actually includible by the stockholders of the
Company on their tax returns with respect to such taxable year solely as a
result of the operations of the Company 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 stockholders of the
Company; 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 Company may make one or more distributions to its
stockholders consisting of Subordinated Debt of the Company, each such
distribution constituting Subordinated Debt not to exceed in the aggregate
an amount necessary to enable the Company 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 stockholders of the Company in accordance with the terms
of clause (a) of this clause (iii),
provided that, in connection with any such distribution, the Company 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 Company may repurchase Capital Stock of the Company owned by any
deceased stockholder of the Company (a) to the extent that the Company or
any Restricted Subsidiary was the beneficiary of a key-man life insurance
policy on such stockholder and (b) in an amount not to exceed the net
proceeds received by the Company or such Restricted Subsidiary from such
key-man life insurance;
(v)the Company may repurchase Capital Stock of the Company owned by
either any deceased stockholder of the Company or former employee of the
Company, provided that the aggregate amount of such repurchases in any
twelve-month period may not exceed $1 million; and
(vi)the Company 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)
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
The Company 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 Company or any
other Restricted Subsidiary or pay any Debt or other obligation owed to the
Company or any other Restricted Subsidiary; (ii) to make loans or advances to
the Company or any other Restricted Subsidiary; or (iii) to transfer any of
its property or assets to the Company or any other Restricted Subsidiary.
Notwithstanding the foregoing, the Company 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 Exchange Notes (including the Senior Credit Facility and the Senior
Discount Notes and the agreements executed in connection therewith) as
described in a schedule to the Exchange Indenture;
97
<PAGE>
(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 Exchange 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 Exchange 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)
LIMITATION ON SENIOR SUBORDINATED DEBT
The Company may not Incur any Debt which by its terms is both (i)
subordinated in right of payment to any Senior Debt and (ii) senior in right
of payment to the Exchange Notes. ((S) 1013)
LIMITATION ON ISSUANCE OF GUARANTEES OF SUBORDINATED DEBT
The Company may not permit any Restricted Subsidiary, directly or
indirectly, to assume, guarantee or in any other manner become liable with
respect to any Debt of the Company that by its terms is pari passu or junior
in right of payment to the Exchange Notes. ((S) 1014)
LIMITATION ON LIENS SECURING COMPANY SUBORDINATED DEBT
The Company 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 of the Company that is
expressly by its terms subordinate or junior in right of payment (other than
by reason of maturity) to any other Debt of the Company without making, or
causing such Restricted Subsidiary to make, effective provision for securing
the Exchange 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 Company which is subordinate in right of payment (other than by
reason of maturity) to the Exchange Notes, prior to such Debt as to such
property for so long as such Debt will be so secured. ((S) 1015)
98
<PAGE>
LIMITATION ON OWNERSHIP OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES
The Company 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 Company 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 Company
and any Restricted Subsidiary and that complies with the provisions described
under "Asset Dispositions" above to the extent such provisions apply.
((S) 1014)
99
<PAGE>
TRANSACTIONS WITH AFFILIATES AND RELATED PERSONS
The Company 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 Company (other
than the Company 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 Company 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 Company or
such Restricted Subsidiary. For any transaction (or series of related
transactions) that involves less than or equal to $10.0 million, the Chief
Executive Officer or Chief Operating Officer of the Company 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 $10.0 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
The Exchange Indenture will provide that the Company will (a) within 15 days
of each filing with the Commission (i) transmit by mail to all holders of
Exchange Notes, as their names and addresses appear in the Exchange Note
Register, without cost to such holders of Exchange Notes, and (ii) file with
the Trustee, copies of the annual reports, quarterly reports and other
documents which the Company files with the Commission pursuant to such Section
13(a) or 15(d) or any successor provision thereto.
UNRESTRICTED SUBSIDIARIES
The Company may designate any Subsidiary of the Company 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 Company 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 Company 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
Company which is not a Subsidiary of the Subsidiary to be so designated or
otherwise an Unrestricted Subsidiary, provided that either (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 Company could Incur at least
$1.00 of additional Debt pursuant to the first paragraph under "--Limitation
on Debt" and provided, further, that the Company 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) 1011)
100
<PAGE>
MERGERS, CONSOLIDATIONS AND CERTAIN SALES OF ASSETS
The Company 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 Company 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
Company does not survive or in which the Company sells, leases or otherwise
disposes of all or substantially all of its assets, the successor entity to
the Company 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 Company's obligations under the
Exchange Indenture; (2) immediately before and after giving effect to such
transaction and treating any Debt which becomes an obligation of the Company
or a Restricted Subsidiary as a result of such transaction as having been
Incurred by the Company 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, and the Company has filed an Officers' Certificate
with the Trustee to that effect; (3) except in the case of any such
consolidation or merger of the Company 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 Company (or other successor entity to the
Company) is equal to or greater than that of the Company immediately prior to
the transaction; (4) except in the case of any such consolidation or merger of
the Company 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 Company or a Restricted Subsidiary as a result of such
transaction as having been Incurred by the Company or such Restricted
Subsidiary at the time of the transaction, the Company (including any
successor entity to the Company) could Incur at least $1.00 of additional Debt
pursuant to the provisions of the Exchange 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 Company would become subject to a Lien
prohibited by the provisions of the Exchange Indenture described under
"Limitation on Liens above, the Company or the successor entity to the Company
shall have secured the Exchange Notes as required by said covenant; and (6)
certain other conditions are met. ((S) 801)
EVENTS OF DEFAULT
The following will be Events of Default under the Exchange Indenture:
(a)failure to pay principal of (or premium, if any, on) any Exchange Note
when due;
(b)failure to pay any interest on any Exchange Note when due, continued
for 30 days;
(c)default in the payment of principal and interest on Exchange 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 by the Company or any of its Subsidiaries for 30 days after
notice to comply with the provisions described under "Merger, Consolidation
and Certain Sales of Assets";
(e)failure to perform any other covenant or agreement of the Company
under the Exchange Indenture or the Exchange Notes continued for 60 days
after written notice to the Trustee or Holders of at least 25% in aggregate
principal amount of Outstanding Exchange Notes;
(f)default under the terms of any instrument evidencing or securing Debt
for money borrowed by the Company or any Restricted Subsidiary having an
outstanding principal amount of $20.0 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;
101
<PAGE>
(g)the rendering of a final judgment or judgments (not subject to appeal)
against the Company or any Subsidiary in an amount in excess of $5.0
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 Company or any Subsidiary. ((S) 501)
Subject to the provisions of the Exchange 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 Exchange 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 Exchange 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 Exchange Notes
may accelerate the maturity of all Exchange 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 Exchange 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 Exchange
Indenture. If an Event of Default specified in Clause (h) above occurs, the
Outstanding Exchange 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".
No Holder of any Exchange 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 Exchange 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 Exchange 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
Exchange Note for enforcement of payment of the principal of and premium, if
any, or interest on such Exchange Note on or after the respective due dates
expressed in such Exchange Note. ((S) 508)
The Company will be required to furnish to the Trustee quarterly a statement
as to the performance by the Company of certain of its obligations under the
Indenture and as to any default in such performance. ((S) 1018)
SATISFACTION AND DISCHARGE OF THE EXCHANGE INDENTURE
The Exchange Indenture will cease to be of further effect as to all
outstanding Exchange Notes (except as to (i) rights of registration of
transfer and exchange and the Company's right of optional redemption, (ii)
substitution of apparently mutilated, defaced, destroyed, lost or stolen
Exchange Notes, (iii) rights of Holders to receive payment of principal and
interest on the Exchange Notes, (iv) rights, obligations and immunities of the
Trustee under the Exchange Indenture and (v) rights of the Holders of the
Exchange Notes as beneficiaries of the Exchange Indenture with respect to any
property deposited with the Trustee payable to all or any of them), if (x) the
Company will have paid or caused to be paid the principal of and interest on
the Exchange Notes as and when the same will have become due and payable or
(y) all outstanding Exchange Notes (except lost, stolen or destroyed
102
<PAGE>
Exchange Notes which have been replaced or paid) have been delivered to the
Trustee for cancellation. (Article Four)
DEFEASANCE
The Exchange Indenture will provide that, at the option of the Company, (a)
if applicable, the Company will be discharged from any and all obligations in
respect of the Outstanding Exchange Notes or (b) if applicable, the Company
may omit to comply with certain restrictive covenants, that such omission
shall not be deemed to be an Event of Default under the Exchange Indenture and
the Exchange 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 Exchange Notes. With respect to clause (B), the obligations
under the Exchange 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 Company 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 Exchange 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 Company has delivered to the Trustee an Opinion of Counsel
to the effect that the Holders of the Exchange 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 Company or any Restricted Subsidiary is a party or by which the
Company 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 Company 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 Company Act of 1940; and
(v)certain other customary conditions precedent are satisfied.
MODIFICATION AND WAIVER
Modifications and amendments of the Exchange Indenture may be made by the
Company and the Trustee with the consent of the Holders of a majority in
aggregate principal amount of the Outstanding Exchange Notes; provided,
however, that no such modification or amendment may, without the consent of
the Holder of each Outstanding Exchange Note affected thereby, (a) change the
Stated Maturity of the principal of, or any installment of interest on, any
Exchange Note, (b) reduce the principal amount of, (or the premium) or
interest on, any Exchange Note, (c) change the place or currency of payment of
principal of (or premium), or interest on, any Exchange Note, (d) impair the
right to institute suit for the enforcement of any payment on or with respect
to any Exchange Note, (e) reduce the above-stated percentage of Outstanding
Exchange Notes necessary to modify or amend the Exchange Indenture, (f) reduce
the percentage of aggregate principal amount of Outstanding Exchange Notes
necessary for waiver of compliance with certain provisions of the Exchange
Indenture
103
<PAGE>
or for waiver of certain defaults, (g) modify any provisions of the Exchange
Indenture relating to the modification and amendment of the Exchange 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 Exchange Notes required under the "Asset Dispositions" and
the "Change of Control" covenants contained in the Exchange Indenture in a
manner materially adverse to the Holders thereof. ((S) 902)
Notwithstanding the foregoing, without the consent of any Holder, the
Company and the Trustee may amend or supplement the Exchange Indenture or the
Exchange Notes to cure any ambiguity, defect or inconsistency provided that
such action does not adversely affect the interests of the Holders of the
Exchange Notes in any material respect, to provide for the assumption of the
Company's obligations to Holders of Exchange Notes in the case of a merger or
consolidation, to secure the Exchange Notes, to add to the covenants of the
Company for the benefits of the Holders or to comply with requirements of the
Commission in order to effect or maintain the qualification of the Exchange
Indenture under the Trust Indenture Act.
The Holders of a majority in aggregate principal amount of the Outstanding
Exchange Notes, on behalf of all Holders of Exchange Notes, may waive
compliance by the Company with certain restrictive provisions of the Exchange
Indenture. ((S) 1019) Subject to certain rights of the Trustee, as provided in
the Exchange Indenture, the Holders of a majority in aggregate principal
amount of the Outstanding Exchange Notes, on behalf of all Holders of Exchange
Notes, may waive any past default under the Exchange Indenture, except a
default in the payment of principal, premium or interest or a default arising
from failure to purchase any Exchange Note tendered pursuant to an Offer to
Purchase. ((S) 513)
GOVERNING LAW
The Exchange Indenture and the Exchange Notes will be governed by the laws
of the State of New York.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Exchange Notes or the Exchange Indenture or for any claim based on, in respect
of, or by reason of, such obligations or their creation. Each holder of
Exchange Notes by accepting an Exchange Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance
of the Exchange Notes. Such waiver may not be effective to waive liabilities
under the federal securities laws and it is the view of the Commission that
such waiver is against public policy.
THE TRUSTEE
The Exchange 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 Exchange Indenture. During the existence of an
Event of Default, the Trustee will exercise such rights and powers vested in
it under the Exchange 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 Exchange 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 Company, 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 Company or any Affiliate, provided, however, that if it acquires any
conflicting interest (as defined in the Exchange Indenture or in the Trust
Exchange Indenture Act), it must eliminate such conflict or resign. ((S) 608)
104
<PAGE>
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Certificate of Designations and the Exchange Indenture. Reference is made to
the Exchange Indenture for the full definition of all such terms, as well as
any other terms used herein for which no definition is provided.
"ABRY Subordinated Debt" means Debt of the Company in principal amount not
to exceed $15 million in the 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 Senior
Discount 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 Senior Discount 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 Senior Discount Notes, upon notice by 25% or more in principal amount
of the Senior Discount Notes to the Trustee, the Trustee shall have the right
to give notice to the Company 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.
"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 Company 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 Company 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 Company 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 Company 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 Company or a Restricted Subsidiary with
respect to any Tower Assets that was in effect on the first day of such
105
<PAGE>
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 Company 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 Company 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 $1.0 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,
106
<PAGE>
(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 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 Company 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 Company 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 Company 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 Company 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 Company 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 Company and its Restricted
Subsidiaries, whether or not declared or paid; (vi) interest on Debt
guaranteed by the Company 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 Company 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 Company or a Restricted
Subsidiary of the Company 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 Company except to the extent
of the amount of dividends or other distributions actually paid to the Company
or a Restricted Subsidiary of the Company by such Person during such period,
(c) gains or losses on Asset Dispositions by the Company 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
107
<PAGE>
to the Company, adjustments following the date of the Indenture to the
accounting books and records of the Company 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 Company 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 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.
"Equity Interests" means capital stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"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 Senior Discount 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.
108
<PAGE>
"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 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
109
<PAGE>
such reserve within twelve months following the consummation of such Asset
Disposition will be treated for all purposes of the Indenture and the Exchange
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 Company
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 Exchange Notes or New Preferred Stock, as the case may be,
specified in such Offer at the purchase price specified in such Offer (as
determined pursuant to the Indenture or the Certificate of Designations, as
the case may be). 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
Exchange Notes or New Preferred Stock within five Business Days after the
Offer Expiration Date. The Company 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 Company's obligation to make an Offer to
Purchase, and the Offer shall be mailed by the Company or, at the Company's
request, by the Trustee in the name and at the expense of the Company. The
Offer shall contain information concerning the business of the Company and its
Restricted Subsidiaries which the Company 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 Exchange Indenture
(which requirements may be satisfied by delivery of such documents together
with the Offer), (ii) a description of material developments in the Company'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
Company to make the Offer to Purchase), (iii) if applicable, appropriate pro
forma financial information concerning the Offer to Purchase and the events
requiring the Company 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 Exchange Notes or New Preferred Stock, as the case may be, pursuant to
the Offer to Purchase. The Offer shall also state all of its material terms.
"Permitted Business" means any business conducted by the Company and its
subsidiaries on the date of original issue of the New Preferred Stock and any
other business related, ancillary or complementary to any such business.
"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 (i) 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
110
<PAGE>
pursuant to the provisions of clause (iii) of the provisions of the Indenture
described under the caption "Asset Dispositions".
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or agency or political subdivision thereof (including any
subdivision or ongoing business of any such entity or substantially all of the
assets of any such entity, subdivision or business).
"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 Company 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
redeemable at the option of the holder thereof, in whole or in part, at any
time prior to the final Stated Maturity of the Exchange 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
Company 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 Exchange 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 Exchange Notes
contained in the covenant described under "Asset Dispositions" and such
provisions applicable to such Capital Stock
111
<PAGE>
specifically provide that the Company and its Restricted Subsidiaries will not
repurchase or redeem any such stock pursuant to such provisions prior to the
repurchase of such Exchange 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 Company, whether
existing on or after the date of the Certificate of Designations, unless such
Subsidiary is an Unrestricted Subsidiary.
"Site Management Contract" means any agreement pursuant to which the Company
or any of its Restricted Subsidiaries has the right to substantially control
Tower Assets and the revenues derived from the rental or use thereof.
"Strategic Equity Investment" means a cash contribution to the common equity
capital of the Company or a purchase from the Company of common Equity
Interests (other than Redeemable Stock), in either case by or from a Strategic
Investor and for aggregate cash consideration of at least $25 million.
"Strategic Equity Investor" means a Person engaged in a Permitted Business
whose Total Equity Market Capitalization exceeds $1.0 billion.
"Subordinated Debt" means Debt of the Company 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 Senior Discount 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 Senior Discount 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 Senior Discount Notes, upon notice by 25% or more in
principal amount of the Senior Discount Notes to the Trustee, the Trustee
shall have the right to give notice to the Company 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 Company (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 Senior Discount Notes or (y) permit redemption or other
retirement (including pursuant to an offer to purchase made by the Company) of
such other Debt at the option of the holder thereof prior to the final Stated
Maturity of the Senior Discount 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 Company) which is conditioned upon a change of
control of the Company 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 Company's
repurchase of the Senior Discount Notes required to be repurchased by the
Company 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 Company
or a Restricted Subsidiary to repurchase or redeem such Subordinated Debt upon
the occurrence of an Asset Disposition occurring prior to the
112
<PAGE>
final maturity of the Senior Discount 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 Senior
Discount Notes contained in the covenant described under "Asset Dispositions"
and such provisions applicable to such Debt specifically provide that the
Company and its Restricted Subsidiaries will not repurchase or redeem any such
Debt pursuant to such provisions prior to the repurchase of such Senior
Discount Notes as are 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.
"Total Equity Market Capitalization" of any Person means, as of the any day
of determination, the sum of: (1) the product of (A) the aggregate number of
outstanding primary shares of common stock of such Person on such day (which
shall not include any options or warrants on, or securities convertible or
exchangeable into, shares of common stock of such person) multiplied by (B)
the average closing price of such common stock listed on a national securities
exchange or the Nasdaq National Market System over the 20 consecutive business
days immediately preceding such day; plus (2) the liquidation value of any
outstanding shares of preferred stock of such Person on such day.
"Tower Asset Exchange" means any transaction in which the Company 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
Company 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.
"Weighted Average Life to Maturity" means, when applied to any Debt or
series or class of preferred stock at any date, the number of years obtained
by dividing;
(1) the sum of the products obtained by multiplying (a) the amount of
each then remaining installment, sinking fund, serial maturity or other
required payments of principal or liquidation preference, including payment
at final maturity, in respect thereof, by (b) the number of years
(calculated to the nearest one-twelfth) that will elapse between such date
and the making of such payment; by
(2) the then outstanding principal amount of such Debt or the aggregate
liquidation preference of the then outstanding preferred stock, as the case
may be.
"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.
113
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain United States federal income tax
considerations relating to the purchase, ownership and disposition of the New
Preferred Stock, including an exchange of the New Preferred Stock for Exchange
Notes, but does not purport to be a complete analysis of all the potential tax
considerations relating thereto. The discussion is based upon the Internal
Revenue Code of 1986, as amended (the "Code"), Treasury Regulations, IRS
rulings and pronouncements and judicial decisions now in effect, all of which
are subject to change at any time by legislative, judicial or administrative
action. Any such changes may be applied retroactively in a manner that could
adversely affect holders of the New Preferred Stock and the Exchange Notes
(collectively, the "securities").
The discussion assumes that the holders of the securities will hold them as
"capital assets" within the meaning of section 1221 of the Code. Although the
matter is not entirely free from doubt, the Company intends to treat the New
Preferred Stock as equity (except where the Code now has explicit rules to the
contrary for the New Preferred Stock) and the Exchange Notes as indebtedness
for federal income tax purposes, and the balance of the discussion is based on
the assumption that such treatment will be respected. The discussion is not
binding on the IRS or the courts. The Company has not sought and will not seek
any rulings from the IRS with respect to the positions of the Company
discussed herein, and there can be no assurance that the IRS will not take a
different position concerning the tax consequences of the purchase, ownership
or disposition of the securities or that any such position would not be
sustained.
The tax treatment of a holder of the securities may vary depending on his
particular situation or status. Certain holders (including S corporations,
insurance companies, tax-exempt organizations, financial institutions, broker-
dealers and taxpayers subject to alternative minimum tax) may be subject to
special rules not discussed below. The following discussion is limited to
certain aspects of the United States federal income tax consequences relevant
to a holder that is a citizen or resident of the United States or any state
thereof, or a corporation or other entity created or organized under the laws
of the United States or any political subdivision thereof; or an estate or
trust the income of which is subject to United States federal income tax
regardless of source or that is otherwise subject to United States federal
income tax on a net income basis in respect of the securities. The following
discussion does not consider all aspects of United States federal income tax
that may be relevant to the purchase, ownership, and disposition of the
securities by such holder in light of his personal circumstances, including a
person who may hold the securities as a position in a hedging transaction,
"straddle," "conversion transactions" or when a constructive sale of an
"appreciated financial position" may occur for tax purposes. In addition, the
description does not consider the effect of any applicable foreign, state,
local or other tax laws or estate or gift tax considerations.
TAXATION OF THE COMPANY
The Company currently has in effect an election to be taxed as a REIT under
Sections 856 through 860 of the Code. The Company believes that it has since
its inception been organized and operated in such a manner as to qualify for
taxation as a REIT under the Code and its proposed method of operation will
enable it to continue to meet the requirements for continued qualification and
taxation as a REIT under the Code. The Company's continued qualification as a
REIT will depend upon the Company's qualification as a REIT in prior years.
The Company intends to continue to operate in a manner so as to qualify as a
REIT, but no assurance can be given that the Company will qualify or remain
qualified as a REIT. In the opinion of Holland & Knight LLP, the Company has
been organized and operated in conformity with the requirements for
qualification as a REIT under the Code and the continued operation of the
Company in a manner consistent with the statements made in the Management
Representation Certificate and the requirements for REIT qualification as
described in this Prospectus will enable it to continue to meet the
requirements for qualification and taxation as a REIT. It must be emphasized
that such opinion of counsel as to REIT qualification is based on certain
114
<PAGE>
customary assumptions and factual representations regarding, among other
things, the ownership of stock of the Company, the nature of the Company's
assets, the conduct of its business, the sources of its revenues, the amounts
distributed by it to shareholders and other matters germane to the
requirements for qualification as a REIT. In addition, Holland & Knight LLP
will not review the Company's compliance with these requirements on an ongoing
basis, and there can be no assurance that the Company, the sources of its
income, the composition of its assets, the level of its dividends or the
diversity of its share ownership for any given year will satisfy the
requirements for qualification and taxation as a REIT. Prospective investors
also should be aware that an opinion of counsel is not binding on the Service
or any court, but merely represents counsel's best judgment with respect to
the probable outcome on the merits based on counsel's review and analysis of
existing law, regulations and interpretations, which include no controlling
precedent. In certain instances, due to the lack of relevant precedent,
counsel's opinion is based on administrative policies and practices of the
Service as indicated in existing private letter rulings (which rulings are not
binding on the Service) or authority considered by counsel to be analogous.
There can be no assurance that a position contrary to the opinion of counsel
will not be taken by the Service, or that any court considering the issues
would not hold contrary to such opinion.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex, and only limited judicial or administrative
interpretations are available. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its shareholders. The discussion is qualified in its
entirety by the applicable Code provisions, Treasury Regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all of
which are subject to change prospectively or retroactively.
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income tax on its net income that is distributed
currently to its shareholders. That treatment substantially eliminates the
"double taxation" (i.e., taxation at both the corporate and shareholder
levels) that generally results from investment in a corporation. However, the
Company will be subject to federal income tax in the following circumstances.
First, the Company will be taxed at regular corporate rates on any
undistributed REIT taxable income, including undistributed net capital gains.
Second, under certain circumstances, the Company may be subject to the
"alternative minimum tax" on undistributed items of tax preference, if any.
Third, if the Company has (i) net income from the sale or other disposition of
"foreclosure property" that is held primarily for sale to customers in the
ordinary course of business or (ii) other nonqualifying income from
foreclosure property, it will be subject to tax at the highest corporate rate
on such income. Fourth, if the Company has net income from prohibited
transactions (which are, in general, certain sales or other dispositions of
property (other than foreclosure property) held primarily for sale to
customers in the ordinary course of business), such income will be subject to
a 100% tax. Fifth, if the Company should fail to satisfy the 75% gross income
test or the 95% gross income test (as discussed below), and nonetheless has
maintained its qualification as a REIT because certain other requirements have
been met, it will be subject to tax in an amount equal to (a) the gross income
attributable to the greater of the amount by which it fails the 75% or 95%
gross income test, multiplied by (b) a fraction intended to reflect its
profitability. Sixth, if the Company should fail to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain net income for such year, and (iii)
any undistributed taxable income from prior periods, it would be subject to a
4% excise tax on the excess of such required distribution over the amounts
actually distributed. If the Company elects to retain and pay income tax on
its net long-term capital gain in a taxable year, any retained amounts would
be treated as having been distributed for purposes of the 4% excise tax. See
"--Requirements for REIT Qualification--Distribution Requirements." Seventh,
if the Company acquires any asset from a C corporation (i.e., a corporation
generally subject to full corporate-level tax) in a transaction in which the
basis of the asset in the Company's hands is determined by reference to the
basis of the asset (or any other asset) in the hands of the C corporation and
the Company recognizes gain on the disposition
115
<PAGE>
of such asset during the 10-year period beginning on the date on which such
asset was acquired by it, then to the extent of such asset's "built-in-gain"
(i.e., the excess of the fair market value of such asset at the time of
acquisition by the Company over the adjusted basis in such asset at such
time), such gain will be subject to tax at the highest regular corporate rate
applicable (as to be provided in Treasury Regulations that have not yet been
promulgated). The results described above with respect to the recognition of
"built-in-gain" assume that the Company has made an election pursuant to IRS
Notice 88-19 as to such acquisitions and will do so as to any future such
acquisition.
REQUIREMENTS FOR REIT QUALIFICATION
The Code defines a REIT as a corporation, trust, or association (i) that is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation,
but for sections 856 through 860 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the
Code; (v) the beneficial ownership of which is held by 100 or more persons;
(vi) not more than 50% in value of the outstanding shares of which is owned,
directly or indirectly, by five or fewer individuals (as defined in the Code
to include certain entities) during the last half of each taxable year (the
"5/50 Rule"); (vii) that makes an election to be a REIT (or has made such
election for a previous taxable year) and satisfies all relevant filing and
other administrative requirements established by the Service that must be met
in order to elect and maintain REIT status; (viii) that uses a calendar year
for federal income tax purposes and complies with the recordkeeping
requirements of the Code and Treasury Regulations promulgated thereunder; and
(ix) that meets certain other tests, described below, regarding the nature of
its income and assets. The Code provides that conditions (i) to (iv),
inclusive, must be met during the entire taxable year and that condition (v)
must be met during at least 335 days of a taxable year of 12 months, or during
a proportionate part of a taxable year of less than 12 months. For purposes of
determining stock ownership under the 5/50 Rule, a supplemental unemployment
compensation benefits plan, a private foundation, or a portion of a trust
permanently set aside or used exclusively for charitable purposes generally is
considered an individual. A trust that is a qualified trust under Code section
401(a), however, generally is not considered an individual and beneficiaries
of such trust are treated as holding shares of a REIT in proportion to their
actuarial interests in such trust for purposes of the 5/50 Rule.
The Company's certificate of incorporation contains restrictions regarding
transfer of its shares that are intended to assist the Company in continuing
to satisfy the share ownership requirements described in clauses (v) and (vi)
above. Such transfer restrictions are described in "Description of Capital
Stock--Certain Provisions of the Company's Certificate of Incorporation and
Bylaws."
In connection with a concurrent offering of common stock of the Company and
the Company's executive officers and directors, who will own in the aggregate
approximately % of the stock of the Company outstanding after the completion
of the Offerings have entered into agreements (the "Lock-Up Agreements") not
to, without prior written consent of the Underwriters, sell, offer, contract
to sell, pledge, grant any option to purchase, or otherwise transfer or
dispose of any such shares for a period of 180 days after the date of this
Prospectus. See "Underwriting." In addition, since the time the Company was
organized, an agreement among the Company and its major stockholders has
imposed certain restrictions on the transfers of shares of the stock of the
Company under certain circumstances (the "Stockholders Agreement"). See
"Certain Relationships and Transactions--Subscription and Stockholders
Agreement." Futhermore, in connection with the issuance of certain classes of
its stock, the Company has imposed certain restrictions on the transferability
of such shares (the "Restrictive Legends"). As described above, one of the
REIT qualification requirements is that the shares of a REIT be transferable.
The opinion of Holland & Knight LLP is based in part on the conclusion that
none of the Lock-Up Agreements, the Stockholders Agreement or the Restrictive
Legends will render the shares of stock restricted thereby to be deemed other
than transferable for
116
<PAGE>
purposes of such REIT qualification requirement. Investors should be aware
that there is no relevant authority involving transfer restrictions similar to
those contained in any of the Lock-Up Agreements, the Stockholders Agreement
or the Restrictive Legends or that discuss whether such restrictions may
violate such transferability requirement. Therefore, the opinion of Holland &
Knight LLP with respect to the transferability requirement is based upon the
plain language of the REIT provisions of the Code and authorities addressing
transferability in situations that are considered to be analogous, certain of
which authorities have been rendered obsolete for unrelated reasons by more
recent administrative pronouncements. Opinions of counsel are not binding upon
the Service or the courts, and there can be no assurance that the Service will
not assert successfully a contrary position. If any of the Lock-Up Agreements,
the Stockholders Agreement or the Restrictive Legends is deemed to be a
transfer restriction contrary to the transferability requirement for REIT
qualification, the Company may not currently qualify as a REIT or may, in
connection with the completion of the Offering, lose its REIT status and
possibly incur other adverse tax consequences. See "Risk Factors--REIT
Status."
The Company currently has wholly-owned corporate subsidiaries (the
"Corporate Subsidiaries"). The Company may have additional corporate
subsidiaries in the future. Code section 856(i) provides that a corporation
that is a "qualified REIT subsidiary" will not be treated as a separate
corporation, and all assets, liabilities, and items of income, deduction, and
credit of a "qualified REIT subsidiary" will be treated as assets,
liabilities, and items of income, deduction, and credit of the REIT. For
taxable years beginning after December 31, 1997, a "qualified REIT subsidiary"
is a corporation all of the capital stock of which is owned by the REIT.
However, for taxable years beginning before January 1, 1998, a "qualified REIT
subsidiary" was a corporation, all of the capital stock of which was owned by
the REIT at all times during the period such corporation was in existence.
Legislative history provided, however, that an existing corporation acquired
by a REIT would be deemed to satisfy this requirement if a Section 338
election was made by the corporation. Thus, in applying the requirements
described herein, any "qualified REIT subsidiaries" of the Company will be
ignored, and all assets, liabilities, and items of income, deduction, and
credit of such subsidiaries will be treated as assets, liabilities, and items
of income, deduction, and credit of the Company. The Company believes its
current Corporate Subsidiaries are "qualified REIT subsidiaries" and will
continue to be "qualified REIT subsidiaries", such that no Corporate
Subsidiary will be subject to federal corporate income taxation (although it
may be subject to state and local taxation).
In addition, in order to become qualified and remain qualified as a REIT, as
of the close of each taxable year, a REIT must not have any accumulated
"earnings and profits" attributable to a non-REIT year, including for this
purpose any such accumulated "earnings and profits" carried over or deemed
carried over to it from a C corporation. The Company believes that neither it
has, nor any acquisition by it of a C corporation has resulted in the Company
having, any such accumulated "earnings and profits." However, an adjustment of
the Company's earnings and profits for a prior year, resulting from an audit
adjustment of the Service or otherwise, could cause the Company to fail to
satisfy such requirement effective for the year of such adjustment and
subsequent years.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate
share of the assets of the partnership and will be deemed to be entitled to
the gross income of the partnership attributable to such share. In addition,
the assets and gross income of the partnership will retain the same character
in the hands of the REIT for purposes of section 856 of the Code, including
satisfying the gross income and asset tests described below.
INCOME TESTS
In order for the Company to qualify and to maintain its qualification as a
REIT, two requirements relating to gross income must be satisfied annually.
First, at least 75% of its gross income (excluding gross income from
prohibited transactions) for each taxable year must consist of defined types
of
117
<PAGE>
income derived directly or indirectly from investments relating to real
property or mortgages on real property (including "rents from real property"
and, in certain circumstances, interest) or from certain types of temporary
investments. Second, at least 95% of its gross income (excluding gross income
from prohibited transactions) for each taxable year must be derived from such
real property or temporary investments, and from dividends, other types of
interest, and gain from the sale or disposition of stock or securities, or
from any combination of the foregoing. The specific application of these tests
to the Company is discussed below.
The rent received by the Company from its tenants ("Rent") will qualify as
"rents from real property" in satisfying the gross income requirements for a
REIT described above only if several conditions are met. First, the amount of
Rent must not be based, in whole or in part, on the income or profits of any
person. However, an amount received or accrued generally will not be excluded
from the term "rents from real property" solely by reason of being based on a
fixed percentage or percentages of receipts or sales. Second, the Code
provides that rents received from a tenant of the Company will not qualify as
"rents from real property" in satisfying the gross income tests if the Company
or a direct or indirect owner of 10% or more of the Company directly or
constructively owns 10% or more of the ownership interests in such tenant (a
"Related Party Tenant"). Third, if rent attributable to personal property,
leased in connection with a lease of real property, is greater than 15% of the
total rent received under the lease, then the portion of rent attributable to
such personal property will not qualify as "rents from real property."
Finally, for the Rent to qualify as "rents from real property," the Company
generally must not operate or manage its properties or furnish or render
services to the tenants of such properties, other than through an "independent
contractor" who is adequately compensated and from whom the Company derives no
revenue. The "independent contractor" requirement, however, does not apply to
the extent the services provided by the Company are "usually or customarily
rendered" in connection with the rental of space for occupancy only and are
not otherwise considered "rendered to the occupant." In addition, beginning
with its 1998 taxable year, the Company may render a de minimis amount of
"noncustomary" services to the tenants of a property other than through an
independent contractor as long as the amount the Company receives with respect
to such services does not exceed 1% of its total receipts from the property.
For that purpose, the amount attributable to such services will be at least
equal to 150% of the Company's direct cost of providing the services.
The Company does not charge Rent for any portion of any property that is
based, in whole or in part, on the sales, receipts, income or profits of any
person. In addition, the Company has not received and does not anticipate
receiving any Rent from a Related Party Tenant. Also, the Rent attributable to
personal property leased in connection with any lease (a "Lease") of real
property by the Company does not exceed 15% of the total Rent received under
the Lease. Finally, subject to the 1% de minimis exception, the Company
provides no noncustomary services to its tenants, other than through an
independent contractor.
If any portion of the Rent does not qualify as "rents from real property"
because the Rent attributable to personal property leased in connection with
any Lease of real property exceeds 15% of the total Rent received under the
Lease for a taxable year, the portion of the Rent that is attributable to
personal property will not be qualifying income for purposes of either the 75%
or 95% gross income test. Thus, if the Rent attributable to personal
property,plus any other income received by the Company during a taxable year
that is not qualifying income for purposes of the 95% gross income test,
exceeds 5% of its gross income during such year, it likely would lose its REIT
status. If, however, any portion of the Rent received under a Lease does not
qualify as "rents from real property" because either (i) the Rent is
considered based on the income or profits of any person or (ii) the tenant is
a Related Party Tenant, none of the Rent received by the Company under such
Lease would qualify as "rents from real property." In that case, if the Rent
received by the Company under such Lease, plus any other income received by it
during the taxable year that is not qualifying income for purposes of the 95%
gross income test, exceeds 5% of its gross income for such year, it likely
would lose its REIT status.
118
<PAGE>
Finally, subject to the 1% de minimis exception, if any portion of the Rent
does not qualify as "rents from real property" because the Company furnishes
noncustomary services with respect to a property other than through a
qualifying independent contractor, none of the Rent received by it with
respect to the such property would qualify as "rents from real property." In
that case, if the Rent received by the Company with respect to such property,
plus any other income received by it during the taxable year that is not
qualifying income for purposes of the 95% gross income test, exceeds 5% of its
gross income for such year, it would lose its REIT status.
In addition to the Rent, certain of the Company's tenants may be required to
pay additional charges, such as late fees. To the extent that such charges
represent either (i) reimbursements of amounts a tenant is obligated to pay to
third parties or (ii) penalties for nonpayment or late payment of such
amounts, such charges should qualify as "rents from real property." To the
extent that additional charges represent interest that is accrued on the late
payment of the Rent or such additional charges, such should be treated as
interest that qualifies for the 95% gross income test, but not the 75% gross
income test.
From time to time, the Company has entered into hedging transactions with
respect to one or more of its assets or liabilities, and the Company may
continue to enter into such hedging transactions. Such transactions include or
may include interest rate swap contracts, interest rate cap or floor
contracts, futures or forward contracts, and options. To the extent that the
Company has entered or enters into an interest rate swap or cap contract,
option, futures contract, forward rate agreement, or similar financial
instrument to reduce the interest rate risk with respect to any indebtedness
incurred or to be incurred to acquire or carry real estate assets, any
periodic income or gain from the disposition of such contract will be
qualifying income for purposes of the 95% gross income test, but not the 75%
gross income test. To the extent that the Company hedges with other types of
financial instruments or in other situations, it is not entirely clear how the
income from those transactions will be treated for purposes of the income
tests that apply to REITs under the Code. The Company has structured, and the
Company intends to structure in the future, any hedging transactions in a
manner that will not jeopardize its status as a REIT.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it nevertheless may qualify as a REIT for such
year if it is entitled to relief under certain provisions of the Code. Those
relief provisions generally will be available if the Company's failure to meet
such tests is due to reasonable cause and not due to willful neglect, the
Company attaches a schedule of the sources of its income to its return, and
any incorrect information on the schedule was not due to fraud with intent to
evade tax. It is not possible, however, to state whether in all circumstances
the Company would be entitled to the benefit of those relief provisions. As
discussed above in "Certain Federal Income Tax Considerations--Taxation of the
Company," even if those relief provisions apply, the Company will be subject
to a tax in an amount equal to (a) the gross income attributable to the
greater of the amount by which the 75% and 95% gross income tests are failed,
multiplied by (b) a fraction intended to reflect profitability.
ASSET TESTS
The Company, at the close of each quarter of each taxable year, also must
satisfy two tests relating to the nature of its assets. First, at least 75% of
the value of its total assets must be represented by cash or cash items
(including certain receivables), government securities, "real estate assets,"
or, in cases where it raises new capital through stock or long-term (at least
five-year) debt offerings, temporary investments in stock or debt instruments
during the one-year period following its receipt of such capital. The term
"real estate assets" includes interests in real property, interests in
mortgages on real property to the extent the principal balance of a mortgage
does not exceed the value of the associated real property, and shares of other
REITs. For purposes of the 75% asset test, the term "interest in real
property" includes an interest in land and improvements thereon, such as
119
<PAGE>
buildings or other inherently permanent structures (including items that are
structural components of such buildings or structures), a leasehold of real
property, and an option to acquire real property (or a leasehold of real
property). The Service 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 constitute inherently permanent structures
and are therefore real estate assets. Second, of the investments not included
in the 75% asset class, the value of any one issuer's securities owned by the
Company may not exceed 5% of the value of its total assets and the Company may
not own more than 10% of any one issuer's outstanding voting securities
(except for the interest of the Company in any qualified REIT subsidiary).
If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied the asset tests at the close of the preceding calendar
quarter and (ii) the discrepancy between the value of its assets and the asset
test requirements was not wholly or partly caused by an acquisition of non-
qualifying assets and arose from changes in the market values of its assets.
If the condition described in clause (ii) of the preceding sentence were not
satisfied, the Company still could avoid disqualification by eliminating any
discrepancy within 30 days after the close of the calendar quarter in which it
arose.
DISTRIBUTION REQUIREMENTS
The Company, in order to qualify as a REIT, is required to distribute with
respect to each taxable year dividends (other than capital gain dividends or
retained capital gains) to its shareholders in an aggregate amount at least
equal to (i) the sum of (A) 95% of its "REIT taxable income" (computed without
regard to the dividends paid deduction and its net capital gain) and (B) 95%
of the net income (after tax), if any, from foreclosure property, minus (ii)
the sum of certain items of noncash income. Such distributions must be paid in
the taxable year to which they relate, or in the following taxable year if
declared before the Company timely files its federal income tax return for
such year and if paid on or before the first regular dividend payment date
after such declaration. To the extent that the Company does not distribute all
of its net capital gain or distributes at least 95%, but less than 100%, of
its "REIT taxable income," as adjusted, it will be subject to tax thereon at
capital gains and regular ordinary corporate tax rates, as the case may be.
Furthermore, if the Company should fail to distribute during each calendar
year at least the sum of (i) 85% of its REIT ordinary income for such year,
(ii) 95% of its REIT capital gain income for such year, and (iii) any
undistributed taxable income from prior periods, it would be subject to a 4%
nondeductible excise tax on the excess of such required distribution over the
amounts actually distributed. To the extent that the Company elects to retain
and pay income tax on its long-term capital gain in a taxable year, as
described in "--Taxation of Taxable U.S. Shareholders," such retained amount
will be treated as having been distributed for purposes of the 4% excise tax.
To the extent that the Company is required to include items in "REIT taxable
income" in advance of the receipt of cash payments associated with such income
or is required to expend cash for the repayment of debt or in any other manner
for which no current deduction is available in computing the Company's "REIT
taxable income," the Company may find it necessary to arrange for short-term
(or possibly long-term) borrowings, raise funds through the issuance of
additional shares of Common or Preferred Stock, or pay dividends in the form
of taxable share dividends in order to meet the 95% distribution requirement
necessary to maintain its REIT qualification.
Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirements for a year by paying "deficiency dividends"
to its shareholders in a later year, which may be included in its deduction
for dividends paid for the earlier year. Although the Company may be able to
avoid being taxed on amounts distributed as deficiency dividends, it will be
required to pay to the Service interest based upon the amount of any deduction
taken for deficiency dividends.
120
<PAGE>
RECORDKEEPING REQUIREMENTS
Pursuant to applicable Treasury Regulations, in order to qualify as a REIT,
the Company must maintain certain records. In addition, to avoid a monetary
penalty, the Company must request on an annual basis certain information from
its shareholders designed to disclose the actual ownership of its outstanding
shares.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, it will be subject to tax (including
any applicable alternative minimum tax) on its taxable income at regular
corporate rates. Distributions to shareholders in any year in which the
Company fails to qualify will not be deductible nor will they be required to
be made. In such event, to the extent of current and accumulated earnings and
profits, all distributions to shareholders will be taxable as ordinary income
and, subject to certain limitations of the Code, corporate distributees may be
eligible for the dividends received deduction. Unless entitled to relief under
specific statutory provisions, the Company also will be disqualified from
taxation as a REIT for the four taxable years following the year during which
it ceased to qualify as a REIT. It is not possible to predict whether in all
circumstances the Company would be entitled to such statutory relief.
NEW PREFERRED STOCK
The following discussion summarizes the material federal income tax
considerations generally applicable to holders acquiring the New Preferred
Stock offered hereby on original issue, but does not purport to be a complete
analysis of all potential tax consequences.
DISTRIBUTIONS ON NEW PREFERRED STOCK
As long as the Company qualifies as a REIT, distributions on the New
Preferred Stock, whether paid in cash or in additional shares of New Preferred
Stock ("Dividend Shares") and which are not in excess of the Company's current
or accumulated earnings and profits (and not designated as capital gain
dividends) will be taken into account by the holder as ordinary income and
will not be eligible for the dividends received deduction generally available
to corporations. For purposes of determining whether distributions are out of
current or accumulated earnings and profits, earnings and profits are first
allocated to preferred stock and then allocated to common stock. The amount of
the Company's current and accumulated earnings and profits at any particular
time depends on the future financial performance of the Company. The Company
believes that it does not presently have current or accumulated earnings and
profits and does not expect to have any such earnings and profits for the
immediately forseeable future. Distributions that are designated as capital
gain dividends will be taxed as long-term capital gains (to the extent they do
not exceed the Company's actual net capital gain for the taxable year) without
regard to the period for which the shareholder has held his shares. However,
corporate shareholders may be required to treat up to 20% of certain capital
gain dividends as ordinary income.
Distributions in excess of current and accumulated earnings and profits will
not be taxable to a shareholder to the extent that the distributions do not
exceed the adjusted basis of the shareholder's shares, but rather will reduce
the adjusted basis of such shares. To the extent that such distributions in
excess of current and accumulated earnings and profits exceed the adjusted
basis of a shareholder's shares, such distributions will be included in income
as long-term capital gain (or short-term capital gain if such shares have been
held for one year or less), assuming that such shares are capital assets in
the hands of the shareholder. In addition, any distribution declared by the
Company in October, November, or December of any year and payable to a
shareholder of record on a specified date in any such month shall be treated
as both paid by the Company and received by the shareholder
121
<PAGE>
on December 31 of such year, provided that the distribution is actually paid
by the Company during January of the following calendar year. The Company may
be required to withhold a portion of capital gain distributions to
shareholders who fail to certify their nonforeign status to the Company.
Shareholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. Instead, such losses would
be carried over by the Company for potential offset against its future income
(subject to certain limitations). Taxable distributions from the Company and
gain from the disposition of New Preferred Stock will not be treated as
passive activity income and, therefore, shareholders generally will not be
able to apply any "passive activity losses" (such as losses from certain types
of limited partnerships in which a shareholder is a limited partner) against
such income. In addition, taxable distributions from the Company generally
will be treated as investment income for purposes of the investment interest
limitations. Capital gains from the disposition of New Preferred Stock or
distributions treated as such (or any portion of either), however, will be
treated as investment income only if the shareholder so elects, in which case
such capital gains will be taxed at ordinary income rates. The Company will
notify shareholders after the close of the Company's taxable year as to the
portions of the distributions attributable to that year that constitute
ordinary income, return of capital, and capital gain.
With respect to distributions designated by the Company as capital gain
dividends and any retained capital gains that the Company is deemed to
distribute in taxable years beginning on and after January 1, 1998, the
Company may designate (subject to certain limits) whether such a dividend or
distribution is taxable to its noncorporate shareholders at a 20% or 25% rate.
The 20% rate is the maximum rate applicable to noncorporate shareholders with
respect to sales and exchanges of assets held for more than one year, while
the 25% rate is the maximum rate applicable to sales and exchanges of "Section
1250 Property" (i.e., depreciable real property) to the extent such gain would
have been treated as ordinary income if the property were "Section 1245
Property". The maximum marginal individual income tax rate on ordinary income
is 39.6%. Thus, the tax rate differential between capital gain and ordinary
income for individuals may be significant. In addition, the characterization
of income as capital or ordinary may affect the deductibility of capital
losses. Capital losses not offset by capital gains may be deducted against an
individual's ordinary income only up to a maximum annual amount of $3,000, and
capital losses not currently deductible due to such limitation may be carried
forward indefinitely. All net capital gain of a corporate taxpayer is subject
to tax at ordinary corporate rates. A corporate taxpayer can deduct capital
losses only to the extent of capital gains, with unused losses being carried
back three years and forward five years.
Tax-exempt entities, including qualified employee pension and profit sharing
trusts and individual retirement accounts ("Exempt Organizations"), generally
are exempt from federal income taxation. However, they are subject to taxation
on their unrelated business taxable income ("UBTI"). While many investments in
real estate generate UBTI, the Service has issued a published ruling that
dividend distributions from a REIT to an exempt employee pension trust do not
constitute UBTI, provided that the shares of the REIT are not otherwise used
in an unrelated trade or business of the exempt employee pension trust. Based
on that ruling, amounts distributed by the Company to Exempt Organizations
generally will not constitute UBTI, provided that (i) the Exempt Organization
has not financed its acquisition of shares of Common Stock with acquisition
indebtedness within the meaning of the Code and (ii) the shares of Common
Stock are not otherwise used by the Exempt Organization in an unrelated trade
or business. Furthermore, social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts, and qualified group
legal services plans that are exempt from taxation under paragraphs (7), (9),
(17), and (20), respectively, of Code section 501(c) are subject to different
UBTI rules, which generally will require them to characterize distributions
from the Company as UBTI. In addition, in certain circumstances, a pension
trust that owns more than 10% of the Common Stock of the Company may be
required to treat a percentage of the dividends received with respect to its
Company shares as UBTI (the "UBTI Percentage"). The UBTI Percentage is the
122
<PAGE>
gross income derived by the Company from an unrelated trade or business
(determined as if the Company were a pension trust) divided by the gross
income of the Company for the year in which the dividends are paid. The UBTI
rule applies to a pension trust holding more than 10% of the stock of the
Company only if (i) the UBTI Percentage is at least 5%, (ii) the Company
qualifies as a REIT by reason of the modification of the 5/50 Rule that allows
the beneficiaries of the pension trust to be treated as holding shares of the
Company in proportion to their actuarial interests in the pension trust, and
(iii) either (A) one pension trust owns more than 25% of the value of the
Company's shares or (B) a group of pension trusts individually holding more
than 10% of the value of the Company's shares collectively owns more than 50%
of the value of the Company's shares.
NEW PREFERRED STOCK DISCOUNT
The New Preferred Stock is subject to mandatory redemption (the "Mandatory
Redemption"). In addition, on or after , 2004 and subject to certain
restrictions, the Preferred Stock is redeemable at any time at the option of
the Company at specified redemption prices (the "Optional Redemption"). See
"Description of New Preferred Stock--The New Preferred Stock--Optional
Redemption" and "--Mandatory Redemption." Pursuant to Section 305(c) of the
Code, holders of New Preferred Stock may be required to treat a portion of the
difference between the New Preferred Stock's issue price and its redemption
price as constructive distributions of property includible in income on a
periodic basis. For purposes of determining whether such constructive
distribution treatment applies, the Mandatory Redemption and the Optional
Redemption are tested separately. Constructive distribution treatment is
required if either (or both) of these tests is satisfied.
Section 305(c) of the Code provides that the entire amount of a redemption
premium with respect to preferred stock that is subject to mandatory
redemption is treated as being distributed to the holders of such preferred
stock on an economic accrual basis. New Preferred Stock generally is
considered to have redemption premium for this purpose if the price at which
it must be redeemed (the "Redemption Price") exceeds its issue price (its fair
market value on the date of its issuance) by more than a de minimis amount.
For this purpose, such excess (the "Preferred Stock Discount") will be treated
as zero if it is less than 1/4 of 1% of the Redemption Price multiplied by the
number of complete years from the date of issuance of the stock until the
stock must be redeemed. Preferred Stock Discount is taxable as a constructive
distribution to the holder (treated as a dividend to the extent of the
Company's current and accumulated earnings and profits and otherwise subject
to the treatment described above for distributions) over the term of the
preferred stock using a constant interest rate method similar to that
described below for accruing original issue discount ("OID"). See "--Original
Issue Discount" below.
Under Treasury Regulations (the "Regulations"), Preferred Stock Discount
will arise due to the Optional Redemption feature only if, based on all of the
facts and circumstances as of the date the New Preferred Stock is issued,
redemption pursuant to the Optional Redemption is more likely than not to
occur. Even if redemption were more likely than not to occur, however,
constructive distribution treatment would not result if the redemption premium
were solely in the nature of a penalty for premature redemption. For this
purpose, a penalty for premature redemption is a premium paid as a result of
changes in economic or market conditions over which neither the issuer nor the
holder has legal or practical control, such as changes in prevailing dividend
rates. The Regulations provide a safe harbor pursuant to which constructive
distribution treatment will not result from an issuer call right if (i) the
issuer and the holder are unrelated, (ii) there are no arrangements that
effectively require the issuer to redeem the stock and (iii) exercise of the
option to redeem would not reduce the yield of the stock. The Company does not
believe that the Optional Redemption would be treated as more likely than not
to be exercised under these rules. If the Optional Redemption were treated as
more likely than not to be exercised, Preferred Stock Discount could arise on
Dividend Shares.
123
<PAGE>
Dividend Shares received by holders of the New Preferred Stock may bear
Preferred Stock Discount depending upon the issue price of such shares (i.e.,
the fair market value of the Dividend Shares on the date of their issuance).
If shares of Preferred Stock (including Dividend Shares) bear Preferred Stock
Discount, such shares generally will have different tax characteristics from
other shares of Preferred Stock and might trade separately, which might
adversely affect the liquidity of such shares.
SALE, REDEMPTION AND EXCHANGE OF NEW PREFERRED STOCK
A redemption of shares of New Preferred Stock for cash or in exchange for
Exchange Notes would be a taxable event.
A redemption of shares of New Preferred Stock for cash will generally be
treated as a sale or exchange if the holder does not own, actually or
constructively within the meaning of section 318 of the Code, any stock of the
Company other than the redeemed New Preferred Stock. If a holder does own,
actually or constructively, other stock of the Company, a redemption of New
Preferred Stock may be treated as a dividend to the extent of the Company's
current and accumulated earnings and profits (as determined for federal income
tax purposes and an "extraordinary dividend" if the redemption is non-pro
rata). Such dividend treatment would not be applied if the redemption is "not
essentially equivalent to a dividend" with respect to the holder under section
302(b)(1) of the Code. A distribution to a holder will be "not essentially
equivalent to a dividend" if it results in a "meaningful reduction" in the
holder's stock interest in the Company. For this purpose, a redemption of New
Preferred Stock that results in a reduction in the proportionate interest in
the Company (taking into account any actual ownership of New Preferred Stock
or common stock of the Company and any such stock constructively owned) of a
holder whose relative stock interest in the Company is minimal and who
exercises no control over corporate affairs should be regarded as a meaningful
reduction in the holder's stock interest in the Company.
If the redemption of the New Preferred Stock for cash is not treated as a
distribution taxable as a dividend, the redemption would result in capital
gain or loss equal to the difference between the amount of cash received and
the holder's adjusted tax basis in the New Preferred Stock redeemed, except to
the extent that the redemption price includes dividends which have been
declared by the Board of Directors prior to the redemption. Similarly, upon
the sale of the New Preferred Stock (other than in a redemption or in exchange
for the Exchange Debentures), the difference between the sum of the amount of
cash and the fair market value of other property received and the holder's
adjusted basis in the New Preferred Stock would result in capital gain or
loss. This gain or loss would be long-term capital gain or loss if the
holder's holding period for the New Preferred Stock exceeds twelve months.
Under current law, capital gains recognized by corporations are taxed at a
maximum rate of 35% and the maximum rate on net long-term capital gains in the
case of individuals and estates and trusts is 20%.
A redemption of New Preferred Stock in exchange for Exchange Notes will be
subject to the same general rules as a redemption for cash, except that the
holder would have capital gain or loss equal to the difference between the
issue price of the Exchange Notes received (as determined for purposes of
computing the original issue discount on such Exchange Notes) and the holder's
adjusted basis in the New Preferred Stock. The holder's basis in the Exchange
Notes would equal the issue price of the Exchange Notes. See the discussion
below under "Original Issue Discount."
If a redemption of New Preferred Stock is treated as a distribution that is
taxable as a dividend, the amount of the distribution will be measured by the
amount of cash or the issue price of the Exchange Notes, as the case may be,
received by the holder. The holder's adjusted tax basis in the redeemed New
Preferred Stock will be transferred to any remaining stock holdings in the
Company. If the holder does not retain any actual stock ownership in the
Company (only having a stock interest constructively), the holder may lose
such basis entirely.
124
<PAGE>
Depending upon a holder's particular circumstances, the tax consequences of
holding Exchange Notes may be less advantageous than the tax consequences of
holding New Preferred Stock because, for example, payments of interest on the
Exchange Debentures would be taxable as ordinary income to the holder when
paid even if the Company had no earnings and profits so that any dividends
paid would not be taxable as ordinary income.
ORIGINAL ISSUE DISCOUNT
In the event that the New Preferred Stock is exchanged for Exchange
Debentures and the "stated redemption price at maturity" of the Exchange Notes
exceeds their "issue price" by more than a de minimis amount, the Exchange
Notes will be treated as having original issue discount ("OID") equal to the
entire amount of such excess.
If the Exchange Notes are traded on an established securities market within
the sixty-day period ending thirty days after the exchange date, the issue
price of the Exchange Notes will be their fair market value as of their issue
date. Subject to certain limitations described in the Treasury Regulations,
the Exchange Notes will be deemed to be traded on an established securities
market if, among other things, price quotations will be readily available from
dealers, brokers, or traders. If the New Preferred Stock, but not the Exchange
Notes issued and exchanged therefor, is traded on an established securities
market within the sixty-day period ending thirty days after the exchange, then
the issue price of each Exchange Note should be the fair market value of the
New Preferred Stock exchanged therefor at the time of the exchange. The New
Preferred Stock generally will be deemed to be traded on an established
securities market if it appears on a system of general circulation that
provides a reasonable basis to determine fair market value based either on
recent price quotations or recent sales transactions. In the event that
neither the New Preferred Stock nor the Exchange Notes are traded on an
established securities market within the applicable period, the issue price of
the Exchange Notes will be their stated principal amount--namely, their face
value--unless either (i) the Exchange Notes do not bear "adequate stated
interest" within the meaning of section 1274 of the Code, which is unlikely,
or (ii) the Exchange Notes are issued in a so-called "potentially abusive
situation" as defined in the Treasury Regulations under section 1274 of the
Code (including a situation involving a recent sales transaction), in which
case the issue price of such Exchange Notes generally will be the fair market
value of the New Preferred Stock surrendered in exchange therefor.
The "stated redemption price at maturity" of the Exchange Notes should equal
the total of all payments under the Exchange Notes, other than payments of
"qualified stated interest." "Qualified stated interest" generally is stated
interest that is unconditionally payable in cash or other property (other than
Exchange Notes) at least annually at a single fixed rate. Exchange Notes that
are issued when the Company has the option to pay interest for certain periods
in additional Exchange Notes should be treated as having been issued without
any qualified stated interest. Accordingly, the sum of all interest payable
pursuant to the stated interest rate on such Exchange Notes over the entire
term should be included (along with stated principal) in the stated redemption
price at maturity of such Exchange Notes. On the other hand, if the Exchange
Notes are issued after the period for paying interest in additional Exchange
Notes has passed, then stated interest would appear to qualify as qualified
stated interest and none of such stated interest would be included in the
stated redemption price at maturity of the Exchange Notes.
TAXATION OF STATED INTEREST AND ORIGINAL ISSUE DISCOUNT ON EXCHANGE NOTES
Each holder of an Exchange Note with OID will be required to include in
gross income an amount equal to the sum of the "daily portions" of the OID for
all days during the taxable year in which such holder holds an Exchange Note.
The daily portions of OID required to be included in a holder's gross income
in a taxable year will be determined under a constant yield method by
allocating to each day during the taxable year in which the holder holds the
Exchange Note a pro rata portion of the OID
125
<PAGE>
attributable to each accrual period will be the product of the "adjusted issue
price" of the Exchange Note at the beginning of such accrual period multiplied
by the "yield to maturity" of the Exchange Note (properly adjusted for the
length of the accrual period). The adjusted issue price of an Exchange Note at
the beginning of an accrual period is the original issue price of the Exchange
Note plus the aggregate amount of OID that accrued in all prior accrual
periods, and less any cash payments--other than qualified stated interest
payments (which only would apply if the Exchange Notes were issued after ,
2004) on the Exchange Notes. The "yield to maturity" is the discount rate
that, when used in computing the present value of all principal and interest
payments to be made under the Exchange Note, produces an amount equal to the
issue price of the Exchange Note. An "accrual period" may be of any length and
may vary in length over the term of the debt instrument, provided that each
accrual period is no longer than one year and each scheduled payment of
principal or interest occurs either on the final day or the first day of an
accrual period.
An additional Exchange Note (a "Secondary Note") issued in payment of
interest with respect to an initially issued Exchange Note (an "Initial Note")
will not be considered as a payment made on the Initial Debenture and will be
aggregated with the Initial Note for purposes of computing and accruing OID on
the Initial Note. As between the Initial Note and the Secondary Note, the
adjusted issue price of the Initial Note would be allocated between the
Initial Note and the Secondary Note in proportion to their respective
principal amounts. That is, upon the issuance of a Secondary Note with respect
to an Initial Note, the Initial Note and the Secondary Note derived from the
Initial Note are treated as initially having the same adjusted issue price and
inherent amount of OID per dollar of principal amount. The Initial Note and
the Secondary Note derived therefrom would be treated as having the same yield
to maturity. Similar treatment would be applied when additional Exchange Notes
are issued on Secondary Notes.
In the event that the Exchange Notes are not issued with OID, because they
are issued after , 2004, and the redemption price of the Exchange Notes
does not exceed their issue price by more than a de minimis amount, stated
interest would be included in income by a holder in accordance with such
holder's usual method of accounting. In all other cases, all stated interest
will be treated as payments on the Exchange Notes under the rules discussed
above.
BOND PREMIUM ON EXCHANGE NOTES
If New Preferred Stock is exchanged for Exchange Notes that are not treated
as having OID, and the issue price of such Exchange Notes exceeds the amount
payable at the maturity date (or earlier call date, if appropriate), such
excess will be recoverable by the holder of the Exchange Notes as amortizable
bond premium over the term of the Exchange Notes (taking into account earlier
call dates, as appropriate), under a yield-to-maturity formula, if an election
by the holder under section 171 of the Code is made or is already in effect.
An election under section 171 of the Code is available only if the Exchange
Notes are held as capital assets. The amortizable bond premium generally will
be treated as an offset to qualified stated interest allocable to an accrual
period on the Exchange Notes rather than as a separate deduction item. If the
amortizable bond premium allocable to an accrual period exceeds the qualified
stated interest, special rules apply that may limit when the deduction for the
excess may be taken. This election is revocable only with the consent of the
IRS and applies to all obligations owned or acquired by the holder on or after
the first day of the taxable year to which the election applies. To the extent
the excess is deducted as amortizable bond premium, the holder's adjusted tax
basis in the Exchange Notes will be reduced.
ACQUISITION PREMIUM ON EXCHANGE NOTES
A holder of an Exchange Note issued with OID who purchases such Exchange
Note for an amount that is greater than its then adjusted issue price but
equal to or less than the sum of all amounts payable on the Exchange Note
after the purchase date (other than payments, if any, of qualified stated
126
<PAGE>
interest) will be considered to have purchased such Exchange Note at an
"acquisition premium." Under the acquisition premium rules, the amount of OID
which such holder must include in income with respect to such Exchange Note
for any taxable year will be reduced by the portion of such acquisition
premium properly allocable to such year.
MARKET DISCOUNT ON EXCHANGE NOTES
Purchasers of New Preferred Stock should be aware that the disposition of
Exchange Notes may be affected by the market discount provisions of the Code.
The market discount rules generally provide, if a holder of a debt instrument
purchases it at a "market discount" and thereafter realizes gain upon a
disposition or a retirement of the debt instrument, the lesser of such gain or
the portion of the market discount that has accrued on a straight-line basis
(or on a constant interest rate basis, if such alternative rate of accrual has
been elected by the holder under section 1276(b) of the Code) while the debt
instrument was held by such holder will be taxed as ordinary income at the
time of such disposition. "Market discount" with respect to the Exchange Notes
will be the amount, if any, by which the "revised issue price" of an Exchange
Note (or its stated redemption price at maturity if the Exchange Note has no
OID) exceeds the holder's basis in the Exchange Note immediately after such
holder's acquisition, subject to a de minimis exception. The "revised issue
price" of an Exchange Note is its issue price increased by the portion of OID
previously includible in the gross income of prior holders for periods prior
to the acquisition of the Exchange Note by the holder (without regard to any
acquisition premium exclusion) and reduced by prior payments other than
payments of qualified stated interest.
A holder who acquires an Exchange Note at a market discount also may be
required to defer a portion of any interest expense that otherwise may be
deductible on any indebtedness incurred or maintained to purchase or carry
such Exchange Note until the holder disposes of the Exchange Note in a taxable
transaction. Moreover, to the extent of any accrued market discount on such
Exchange Notes, any partial principal payment with respect to Exchange Notes
will be includible as ordinary income upon receipt, as will the Exchange
Note's fair market value on certain otherwise non-taxable transfers (such as
gifts).
A holder of Exchange Notes acquired at a market discount may elect for
federal income tax purposes to include market discount in gross income as the
discount accrues, either on a straight-line basis or on a constant interest
rate basis. This current inclusion election, once made, applies to all market
discount obligations acquired on or after the first day of the first taxable
year to which the election applies, and may not be revoked without the consent
of the IRS. If a holder of Exchange Notes makes such an election, the
foregoing rules with respect to the recognition of ordinary income on sales
and other dispositions of such debt instruments, and with respect to the
deferral of interest deductions on indebtedness incurred or maintained to
purchase or carry such debt instruments, would not apply.
The Company will furnish annually to the IRS and to record holders of the
Exchange Notes information relating to the OID, if any, accruing during the
calendar year. Such information will be based on the amount of OID that would
have accrued to a holder who acquired the Exchange Note on original issue.
Accordingly, other holders will be required to determine for themselves
whether they are eligible to report a reduced amount of OID for federal income
tax purposes.
REDEMPTION OR SALE OF NEW EXCHANGE NOTES
Generally, any redemption or sale of Exchange Notes will result in taxable
gain or loss equal to the difference between the sum of the amount of cash and
the fair market value of other property received (except to the extent that
cash received is attributable to accrued, but previously untaxed, qualified
stated interest, which portion of the consideration would be taxed as ordinary
income) and the holder's adjusted tax basis in the Exchange Notes. The
adjusted tax basis of a holder who receives
127
<PAGE>
an Exchange Note in exchange for Preferred Stock will generally be equal to
the issue price of the Exchange Note increased by any OID with respect to the
Exchange Note included in the holder's income prior to sale or redemption of
the Exchange Note, and reduced by any amortizable bond premium applied against
the holder's income prior to sale or redemption of the Exchange Note and by
payments with respect to the Exchange Note other than payments of qualified
stated interest. Except to the extent that an intention to call the Exchange
Notes prior to their maturity existed at the time of their original issue as
an agreement or understanding between the Company and the original holders of
a substantial amount of the Exchange Notes (which is unlikely), and subject to
the above discussion of market discount, such gain or loss would be long-term
capital gain or loss if the holder's holding period for the Exchange Notes
exceeded twelve months.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY AND TO CORPORATE
HOLDERS
Pursuant to section 163 of the Code and in the event that the Exchange Notes
are "applicable high yield discount obligations" ("AHYDOs"), a portion of the
OID (if any) accruing on the Exchange Notes may be treated as a dividend (not
eligible for the dividends-received deduction in the case of corporate holders
if the Company remains a REIT), and the Company would not be entitled to
deduct the "disqualified portion" of the OID accruing on the Exchange Notes
and would be allowed to deduct the remainder of the OID only when paid in
cash.
The Exchange Notes will constitute AHYDOs if they (i) have a term of more
than five years, (ii) have a yield to maturity equal to or greater than the
sum of the applicable federal rate at the time of issuance of the Exchange
Notes (the "AFR") plus five percentage points, and (iii) have "significant"
OID. A debt instrument is treated as having "significant" OID if the aggregate
amount that would be includible in gross income with respect to such debt
instrument for periods before the close of any accrual period ending after the
date five years after the date of issue exceeds the sum of (i) the aggregate
amount of interest to be paid under the debt instrument before the close of
such accrual period and (ii) the product of the initial issue price of such
debt instrument and its yield to maturity. Because the amount of OID, if any,
attributable to the Exchange Notes will be determined at the time such
Exchange Notes are issued and the AFR at that point in time is not
predictable, it is impossible currently to determine whether Exchange Notes
will be treated as AHYDOs.
In addition, if the Exchange Notes are AHYDOs, and if the yield to maturity
of the Exchange Notes exceeds the sum of the AFR plus six percentage points,
then the lesser of the total OID or a portion of the OID on the Exchange Notes
equal to the product of the total return on the Exchange Notes times the
fraction of which the numerator is the excess of the yield to maturity over
the sum of the AFR plus six percentage points and the denominator is the yield
to maturity, will not be deductible by the Company and will be treated for
some purposes as a dividend to the holders of the Exchange Notes (to the
extent that such amounts would have been treated as a dividend to the holders
of the Exchange Notes if they had been distributions with respect to the
Company's stock). Amounts treated as a dividend will be nondeductible by the
Company, will not be eligible for the dividends received deduction by a
corporate holder under Section 243 of the Code if the Company remains
qualified as a REIT, and will be treated as OID and not as a dividend for
withholding tax purposes.
BACKUP WITHHOLDING
A holder of a security may be subject to backup withholding at the rate of
31 percent with respect to dividends on the New Preferred Stock, interest on
the Exchange Notes or sales proceeds thereof, unless such holder (a) is a
corporation or falls within certain other exempt categories and, when
required, demonstrates the exemption or (b) provides a correct taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. A holder of a security who does not provide its correct
128
<PAGE>
taxpayer identification number upon request may be subject to penalties
imposed by the IRS. Any amount paid as backup withholding would be creditable
against the holder's federal income tax liability.
POSSIBLE LEGISLATIVE OR OTHER ACTIONS AFFECTING TAX CONSEQUENCES
Prospective holders of the securities should recognize that the present
federal income tax treatment of the Company and an investment in the Company
may be modified by legislative, judicial or administrative action at any time,
and that any such action may affect the Company and investments and
commitments previously made. The rules dealing with federal income taxation
are constantly under review by persons involved in the legislative process and
by the Service and Treasury Department, resulting in revisions of regulations
and revised interpretations of established concepts as well as statutory
changes. Revisions in federal tax laws and the interpretations thereof could
adversely affect the tax consequences to the Company or of an investment in
the Company.
OTHER TAX CONSEQUENCES
The Company, the Corporate Subsidiaries, or the holders of securities of the
Company may be subject to state or local taxation in various state or local
jurisdictions, including those in which it or they own property, transact
business, or reside. The state and local tax treatment of the Company, and its
shareholders may not conform to the federal income tax consequences discussed
above. CONSEQUENTLY, PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE EFFECT OF STATE AND LOCAL TAX LAWS ON AN INVESTMENT IN
THE COMPANY.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSIDERATIONS DOES
NOT CONSIDER THE FACTS AND CIRCUMSTANCES OF ANY PARTICULAR PROSPECTIVE
PURCHASER'S SITUATION OR STATUS. ACCORDINGLY, EACH PROSPECTIVE PURCHASER OF
PREFERRED STOCK SHOULD CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE TAX
CONSEQUENCES TO IT, INCLUDING THOSE UNDER STATE, LOCAL, FOREIGN AND OTHER TAX
LAWS.
129
<PAGE>
VALIDITY OF COMMON STOCK AND NEW PREFERRED STOCK
The validity of the shares of Common Stock and New Preferred Stock offered
hereby will be passed upon for the Company by its counsel, Holland & Knight
LLP, Tampa, Florida, and passed upon for the Underwriters by Sullivan &
Cromwell, New York, New York.
EXPERTS
The financial statements 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
PricewaterhouseCoopers 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.
The financial statements of MobileMedia Communications, Inc. and
Subsidiaries Tower Operations at December 31, 1997 and 1996, and for the years
then ended, appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
130
<PAGE>
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files, or will file when appropriate,
reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information may be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices at Seven World Trade Center, 13th Floor, New
York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material may also be obtained from the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W. Washington, D.C. 20549 at prescribed rates. In addition, the
Commission maintains a Web site at http://www.sec.gov containing reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission, including the Company.
The Company has filed with the Commission a registration statement on Form
S-11 (the "Registration Statement") under the Securities Act with respect to
the Common Stock offered hereby. For the purposes hereof, the term
"Registration Statement" means the original registration statement and any and
all amendments thereto. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Common Stock, reference is hereby made to such Registration Statement,
including the exhibits and schedules filed as part thereof. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete and in each instance reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. The Registration Statement, including the exhibits filed as a
part thereof, may be inspected and copied at the public reference facilities
maintained by the Commission as set forth above.
131
<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, 1996, 1997 and September
30, 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 nine months ended September 30, 1997 and 1998 (unau-
dited)................................................................... 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 nine months ended September 30, 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 nine months ended September 30, 1997 and 1998 (unau-
dited)................................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES TOWER OPERATIONS
Report of Independent Auditors............................................ F-19
Balance Sheets as of June 30, 1998 (unaudited) and December 31, 1997 and
1996 .................................................................... F-20
Statements of Income for the six months ended June 30, 1998 and 1997 (un-
audited) and for each of the two years ended December 31, 1997
and 1996 ................................................................ F-21
Statements of Changes in Net Tower Operation Assets as of December 31,
1996 and 1997 and June 30, 1998 (unaudited).............................. F-22
Statements of Cash Flows for the six months ended June 30, 1998 and 1997
(unaudited) and for each of the two years ended December 31, 1997 and
1996 .................................................................... F-23
Notes to Financial Statements............................................. F-24
SOUTHERN COMMUNICATIONS SERVICES, INC. TOWER OPERATIONS
Report of Independent Public Accountants.................................. F-27
Balance Sheets as of December 31, 1997 and 1996........................... F-28
Statements of Operations for the years ended December 31, 1997 and 1996... F-29
Statements of Changes in Accumulated Deficit for the years ended
December 31, 1997 and 1996............................................... F-30
Statements of Cash Flows for the years ended December 31, 1997 and 1996... F-31
Notes to Financial Statements............................................. F-32
SHORE COMMUNICATIONS
Report of Independent Certified Public Accountants........................ F-35
Combined Balance Sheet as of December 3, 1997............................. F-36
Combined Statement of Operations and Retained Earnings for the period from
January 1, 1997 through December 3, 1997................................. F-37
Combined Statement of Cash Flows for the period from January 1, 1997
through December 3, 1997................................................. F-38
Notes to Combined Financial Statements.................................... F-39
TIDEWATER COMMUNICATIONS
Report of Independent Certified Public Accountants........................ F-44
Combined Balance Sheet as of July 31, 1997................................ F-45
Combined Statement of Operations and Retained Earnings for the period from
January 1, 1997 through July 31, 1997.................................... F-46
Combined Statement of Cash Flows for the period from January 1, 1997
through July 31, 1997.................................................... F-47
Notes to Combined Financial Statements.................................... F-48
MAJESTIC COMMUNICATIONS
Report of Independent Certified Public Accountants........................ F-53
Combined Balance Sheet as of June 27, 1997................................ F-54
Combined Statement of Operations and Retained Earnings for the period from
January 1, 1997 through June 27, 1997.................................... F-55
Combined Statement of Cash Flows for the period from January 1, 1997
through June 27, 1997.................................................... F-56
Notes to Combined Financial Statements.................................... F-57
</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/ PricewaterhouseCoopers LLP
Price Waterhouse LLP
Tampa, Florida
March 4, 1998
F-2
<PAGE>
PINNACLE HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER
DECEMBER 31, DECEMBER 31, 30,
1996 1997 1998
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $ 47,419 $ 1,693,923 $ --
Accounts receivable, less allowance
for doubtful accounts
of $45,000, $70,000, and $356,905,
respectively....................... 483,883 1,577,575 2,145,696
Prepaid expenses and other current
assets............................. 291,148 1,037,447 1,032,619
----------- ------------ ------------
Total current assets............... 822,450 4,308,945 3,178,315
Restricted cash....................... 34,072 59,822 60,976
Tower assets, net of accumulated
depreciation of $2,229,274,
$8,278,524, and $15,223,593,
respectively......................... 48,327,035 127,946,070 459,593,332
Fixed assets, net..................... 757,595 1,495,121 2,311,318
Land.................................. 4,112,000 6,850,951 13,861,872
Deferred debt issue costs, net of
accumulated amortization of $222,755,
$514,898 and $827,619, respectively.. 1,159,080 1,871,242 11,848,530
Other assets.......................... 353,405 645,752 1,223,925
----------- ------------ ------------
$55,565,637 $143,177,903 $492,078,268
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................... $ 807,092 $ 2,242,397 $ 2,889,655
Accrued expenses.................... 723,444 3,095,049 7,374,058
Deferred revenue.................... 132,423 639,460 1,038,862
Current portion of long-term debt... 636,214 11,122,077 15,663,791
----------- ------------ ------------
Total current liabilities.......... 2,299,173 17,098,983 26,966,366
Long-term debt........................ 29,785,966 109,459,790 399,642,563
Other liabilities..................... 60,759 105,012 112,089
----------- ------------ ------------
32,145,898 126,663,785 426,721,018
----------- ------------ ------------
Commitments and contingencies (Note 7)
Redeemable stock:
Series A senior preferred stock,
mandatorily redeemable, dividends
payable-in-kind; $.001 par value;
145,000 shares authorized; 0, 0 and
30,322 shares issued and
outstanding at December 31, 1996
and 1997 and September 30, 1998,
respectively; includes accrued
dividends of $322,192 at September
30, 1998 (Note 12)................. -- -- 28,782,220
Class B common stock, 12,000 shares
issued and outstanding at December
31, 1996 and 1997 and September 30,
1998............................... 1,200,000 1,761,000 1,761,000
Class D common stock, $.001 par
value; 38,000, 39,000, and 40,000
shares issued and outstanding at
December 31, 1996 and 1997 and
September 30, 1998, respectively... 38 39 40
----------- ------------ ------------
1,200,038 1,761,039 30,543,260
----------- ------------ ------------
Stockholders' equity:
Series B junior preferred stock,
redeemable, 14% dividends, $.001
par value; 100 shares authorized;
0, 0 and 32.85 shares issued and
outstanding at December 31, 1996
and 1997 and September 30, 1998,
respectively (Note 12)............. -- -- 32,570,731
Common stock:
Class A common stock--202,500 shares
issued and outstanding at December
31, 1996 and 1997 and June 30,
1998............................... 203 203 203
Class E common stock--51,300,
67,089, and 174,766 shares issued
and outstanding at December 31,
1996, 1997 and September 30, 1998,
respectively....................... 51 67 175
Warrants (Note 12).................. -- -- 1,000,000
Additional paid-in capital.......... 24,881,219 25,875,752 35,547,160
Accumulated deficit................. (2,661,772) (11,122,943) (34,304,279)
----------- ------------ ------------
22,219,701 14,753,079 34,813,990
----------- ------------ ------------
$55,565,637 $143,177,903 $492,078,268
=========== ============ ============
</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) NINE MONTHS ENDED
THROUGH YEAR ENDED YEAR ENDED SEPTEMBER 30,
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 $ 7,981,381 $ 21,127,633
Tower operating
expenses, excluding
depreciation and
amortization........... 180,919 1,135,023 2,632,274 1,469,490 3,965,511
--------- ----------- ----------- ----------- ------------
Gross margin.......... 552,084 3,706,729 10,248,357 6,511,891 17,162,122
--------- ----------- ----------- ----------- ------------
Other expenses:
General and
administrative....... 306,180 923,168 1,385,382 881,656 2,861,133
Corporate
development.......... 369,496 1,439,749 3,772,140 2,400,587 5,212,815
Depreciation.......... 281,950 2,041,085 6,334,769 4,369,632 13,357,626
--------- ----------- ----------- ----------- ------------
957,626 4,404,002 11,492,291 7,651,875 21,431,574
--------- ----------- ----------- ----------- ------------
Loss from operations.... (405,542) (697,273) (1,243,934) (1,139,984) (4,269,452)
Interest expense........ 181,212 1,154,990 6,925,094 4,377,952 7,276,265
Amortization of original
issue discount and debt
issuance costs......... 58,664 164,091 292,143 185,569 11,635,619
--------- ----------- ----------- ----------- ------------
Net loss................ $(645,418) $(2,016,354) $(8,461,171) $(5,703,505) $(23,181,336)
========= =========== =========== =========== ============
Payable-in-kind
preferred dividends and
accretion.............. -- -- -- -- 683,304
Net loss attributable to
common shareholders.... $(645,418) $(2,016,354) $(8,461,171) $(5,703,505) $(23,864,640)
========= =========== =========== =========== ============
Basic loss per common
share.................. $ (6.31) $ (8.10) $ (27.28) $ (18.66) $ (59.85)
========= =========== =========== =========== ============
Weighted average number
of common shares
outstanding............ 102,250 248,950 310,122 305,666 398,708
========= =========== =========== =========== ============
</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>
SERIES B JUNIOR CLASS A CLASS E
PREFERRED STOCK COMMON STOCK COMMON STOCK ADDITIONAL STOCK
------------------ -------------- -------------- PAID-IN SUBSCRIPTIONS ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT WARRANTS CAPITAL RECEIVABLE DEFICIT
------ ----------- ------- ------ ------- ------ ---------- ----------- ------------- ------------
<S> <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.........
Class D.........
Stock
subscription..... $(180,015)
Net loss........ $ (645,418)
----- ----------- ------- ---- ------- ---- ---------- ----------- --------- ------------
Balance at
December 31,
1995............. -- -- 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.........
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............. -- -- 202,500 203 51,300 51 -- 24,881,219 -- (2,661,772)
Issuance of
common stock, net
of issuance
costs:
Class B.........
Class D.........
Class E......... 15,789 16 1,555,533
Retirement of
common stock:
Class B.........
Class D.........
Net loss......... (8,461,171)
Adjustment to
Class B common
stock............ (561,000)
----- ----------- ------- ---- ------- ---- ---------- ----------- --------- ------------
Balance at
December 31,
1997............. -- -- 202,500 203 67,089 67 -- 25,875,752 -- (11,122,943)
(UNAUDITED):
Issuance of
common stock,
net of issuance
costs:
Class D.........
Class E......... 107,677 108 10,767,600
Distribution to
Class B common
stockholders
(Note 6)........ (412,888)
Issuance of
preferred stock,
net of issuance
costs:
Series A senior
preferred
stock........... $1,000,000
Series B junior
preferred
stock........... 32.50 32,221,690
Dividends and
accretion on
preferred
stock........... 0.35 349,041 (683,304)
Net loss........ (23,181,336)
----- ----------- ------- ---- ------- ---- ---------- ----------- --------- ------------
Balance at
September 30,
1998............ 32.85 $32,570,731 202,500 $203 174,766 $175 $1,000,000 $35,547,160 -- $(34,304,279)
===== =========== ======= ==== ======= ==== ========== =========== ========= ============
<CAPTION>
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Issuance of
common stock, net
of issuance
costs:
Class A......... $ 7,051,481
Class B.........
Class D.........
Stock
subscription..... (180,015)
Net loss........ (645,418)
-------------
Balance at
December 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
December 31,
1997............. 14,753,079
(UNAUDITED):
Issuance of
common stock,
net of issuance
costs:
Class D.........
Class E......... 10,767,708
Distribution to
Class B common
stockholders
(Note 6)........ (412,888)
Issuance of
preferred stock,
net of issuance
costs:
Series A senior
preferred
stock........... $ 1,000,000
Series B junior
preferred
stock........... 32,221,690
Dividends and
accretion on
preferred
stock........... (334,263)
Net loss........ (23,181,336)
-------------
Balance at
September 30,
1998............ $34,813,990
=============
</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) NINE MONTHS ENDED
THROUGH YEAR ENDED YEAR ENDED SEPTEMBER 30,
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) $ (5,703,505) $(23,181,336)
----------- ----------- ----------- ------------ ------------
Adjustments to
reconcile net loss to
net cash provided by
operating activities:
Depreciation........... 281,950 2,041,085 6,334,769 4,369,632 13,357,626
Amortization of
original issue
discount and debt
issuance costs........ 58,664 164,091 292,143 185,569 11,635,619
Provision for doubtful
accounts.............. -- 45,000 25,000 25,000 286,905
(Increase) decrease
in:
Accounts receivable,
gross............... (74,818) (454,065) (1,118,692) (415,469) (855,026)
Notes receivable..... (387,455) 387,455 -- -- --
Prepaid expenses and
other current
assets.............. (13,544) (277,604) (746,299) 97,759 4,828
Deferred debt costs.. -- -- -- (450,000) (4,977,403)
Other assets......... (175,172) (237,408) (358,587) (150,485) (609,486)
Increase (decrease)
in:
Accounts payable..... 173,381 633,711 1,435,305 2,242,679 647,258
Accrued expenses..... 293,665 429,779 2,371,605 20,312 4,279,009
Deferred revenue..... 55,006 77,417 507,037 (104,947) 399,402
Other current
liabilities......... 490,000 (490,000) -- -- --
Other liabilities.... -- 49,491 44,253 101,930 7,077
----------- ----------- ----------- ------------ ------------
Total adjustments.... 701,677 2,368,952 8,786,534 5,921,980 24,175,809
----------- ----------- ----------- ------------ ------------
Net cash provided by
operating activities... 56,259 352,598 325,363 218,475 994,473
----------- ----------- ----------- ------------ ------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Payments made in
connection with
acquisitions:
Tower assets......... (10,553,958) (31,845,153) (70,852,422) (47,777,002) (310,720,053)
Land................. (774,153) (3,337,847) (2,738,951) (1,071,953) (7,010,921)
Capital expenditures:
Tower assets......... (1,121,150) (7,036,048) (14,815,863) (14,346,502) (31,312,021)
Fixed assets......... (287,711) (563,646) (1,023,513) (783,566) (1,244,500)
(Increase) decrease in
restricted cash....... (297,118) 138,157 (25,750) (25,750) (1,154)
----------- ----------- ----------- ------------ ------------
Net cash used in
investing activities... (13,034,090) (42,644,537) (89,456,499) (64,004,773) (350,288,649)
----------- ----------- ----------- ------------ ------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Borrowings under
long-term debt, net
...................... 4,937,200 24,866,994 89,918,073 85,814,601 479,713,785
Repayment of long-term
debt.................. -- (568,516) (695,982) (20,798,943) (204,138,000)
Proceeds from issuance
of redeemable stock,
net................... 1,200,030 8 -- -- 28,782,220
Proceeds from issuance
of PIK preferred
stock and warrants,
net................... -- -- -- -- 32,887,427
Proceeds from issuance
of common stock,
net................... 6,871,466 18,010,007 1,555,549 458,457 10,767,709
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 65,474,115 347,600,253
----------- ----------- ----------- ------------ ------------
Net increase (decrease)
in cash and
cash equivalents....... 30,865 16,554 1,646,504 1,687,817 (1,693,923)
Cash and cash
equivalents,
beginning of period.... -- 30,865 47,419 47,419 1,693,923
----------- ----------- ----------- ------------ ------------
Cash and cash
equivalents, end of
period................. $ 30,865 $ 47,419 $ 1,693,923 $ 1,735,236 $ --
=========== =========== =========== ============ ============
SUPPLEMENTAL DISCLOSURE
OF CASH FLOWS:
Cash paid for inter-
est................... $ 185,980 $ 1,037,452 $ 5,786,816 $ 4,124,306 $ 7,840,878
=========== =========== =========== ============ ============
Non-cash transactions:
Seller debt issued in
connection with
acquisitions.......... $ 1,715,520 $ -- $ -- $ 10,235,131 $ 2,347,107
Payable-in-kind
preferred dividends
and accretion......... $ -- $ -- $ -- $ -- $ 683,304
</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 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.
F-7
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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 (LOSS) PER SHARE
Basic net income (loss) per common share is based on the weighted average
number of shares of common stock outstanding during each period. The
computation of diluted earnings (loss) per share, assuming conversion of the
Class D common shares described in Note 9, has an antidilutive effect on
earnings per share.
F-8
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
RECLASSIFICATIONS
Certain amounts from prior years have been reclassified for consistency with
current presentation. These reclassifications were not material to the
consolidated 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 72 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.
The Company completed the acquisition of 201 towers from Southern
Communications Services, Inc. on March 4, 1998. On September 3, 1998, the
Company completed the acquisition of 166 towers from MobileMedia Corporation
and affiliates. (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 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,
--------------------------
1996 1997
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Tower rental revenue........................... $ 9,427,245 $ 15,547,242
Gross profit, excluding depreciation and
amortization.................................. 7,375,124 12,381,646
Net loss....................................... (11,117,283) (11,780,246)
Basic net loss per common share................ $ (44.66) $ (37.99)
</TABLE>
F-9
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
equipment................................. 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>
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
----------- ------------
<S> <C> <C>
Senior Credit Facility, monthly interest at variable
rates (7.75% and 8.25% at December 31, 1996 and
1997, respectively), secured, quarterly principal
installments beginning June 30, 2000, maturing
December 31, 2004.................................. $21,100,000 $ 72,000,000
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, 2021, secured by various letters of
credit............................................. 9,322,180 28,581,867
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
Less current portion of long-term debt.............. (636,214) (11,122,077)
----------- ------------
$29,785,966 $109,459,790
=========== ============
</TABLE>
F-10
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $56,883,692.
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.
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.
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.
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
F-11
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
at December 31, 1997 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-12
<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-13
<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
F-14
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
In connection with the Subordinated-Term Loan Agreement (see Note 6), the
Company issued warrants to the lenders for shares of the Company's Class F
Common Stock (see Note 12).
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.
F-15
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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).
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.
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.
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.
EVENTS SUBSEQUENT TO THE DATE OF INDEPENDENT ACCOUNTANT'S REPORT (UNAUDITED)
ACQUISITIONS
On September 3, 1998, the Company acquired from MobileMedia Corporation
("MobileMedia") and several of its affiliates 166 towers for an aggregate
purchase price of approximately $170 million. MobileMedia assigned its
existing tenant leases on the towers to the Company. The Company entered into
a lease (the "Lease") with MobileMedia Communications, Inc., an affiliate of
MobileMedia, providing such affiliate of MobileMedia the non-exclusive right
to install a certain amount of its equipment on the acquired towers for an
aggregate rent of $10.7 million per year. The Lease has an initial term of 15
years and one five-year renewal term exercisable at the option of the lessee.
Prior to this acquisition, space on the towers was primarily for the exclusive
use of MobileMedia and its
F-16
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
affiliates. The Company has integrated these towers into its rental tower
business and is leasing space on these towers to other third party wireless
communications providers. The towers are located in the Southeastern United
States, Southern California and New England.
The MobileMedia transaction was funded with proceeds from the sale of two
separate newly authorized series of preferred stock of the Company described
below, a loan from ABRY Broadcast Partners II, L.P., a controlling stockholder
of the Company, and borrowings under the Company's senior credit facility with
NationsBank, N.A. and certain other lenders.
Including to the Southern Communications and MobileMedia transactions
described above, for December 31, 1997 through December 18, 1998, the Company
purchased a total of 519 towers for an aggregate consideration of
approximately $330,836,121. Also subsequent to December 31, 1997 the Company
entered into several letters of intent with various third parties to purchase
41 towers, reflecting an aggregate commitment to pay approximately
$24,843,111.
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 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>
SEPTEMBER 30,
--------------------------
1997 1998
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Tower rental revenue........................... $ 31,553,628 $ 32,846,267
Gross profit, excluding depreciation and
amortization.................................. 26,857,397 27,430,522
Net loss....................................... (27,879,135) (32,240,666)
Net loss attributable to common shareholders... (34,732,945) (41,002,782)
Basic net loss per common share................ (113.63) (102.84)
</TABLE>
PREFERRED STOCK
On September 30, 1998, in connection with the MobileMedia Acquisition the
Company sold 30,000 shares of newly authorized Series A Senior Preferred Stock
(the "Senior Preferred Stock") for $30 million. These shares carry a
liquidation preference of $30 million in the aggregate, and were sold with an
attached warrant to purchase, for a nominal price, approximately 0.75% of the
Company's outstanding common stock. Dividends on the Senior Preferred Stock
accrue at a rate of 14% through March 31, 1999, 14.75% from April 1, 1999
through June 30, 1999, 15.5% from July 1, 1999 through September 30, 1999 and
16% thereafter. At the Company's option, such dividends can be paid by the
issuance of additional shares of such stock. The Senior Preferred Stock is
redeemable at the Company's option at no premium at any time upon 30 days
advance notice. The Senior Preferred Stock is mandatorily redeemable on
September 30, 2008. The warrants (valued using the Black-Scholes option
pricing model) are recorded at fair value and are exercisable at a nominal
price for a period of eight and one-half years commencing 18 months following
the issuance of the Senior Preferred Stock. If the Senior Preferred Stock is
redeemed prior to 18 months after its initial issuance, the warrants may not
be exercised and will be cancelled. The warrants expire on September 3, 2008.
ABRY/Pinnacle, Inc., an affiliate of ABRY Broadcast Partners II, L.P.,
purchased newly authorized Series B Junior Preferred Stock of the Company (the
"Junior Preferred Stock") with a liquidation preference of $32.5 million.
Dividends accrue at a rate of 14% and at the Company's option may be paid by
the issuance of additional shares of such stock. The Junior Preferred Stock is
redeemable at the Company's option at no premium at any time. The Junior
Preferred Stock is not mandatorily redeemable.
F-17
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Senior Preferred Stock and the Junior Preferred Stock have not been and
will not be registered under the Securities Act of 1933 and may not be offered
or sold in the United States absent registration or an applicable exemption
from the registration requirements.
In December 1998, the Company sold additional shares of the Series B Junior
Preferred Stock with a liquidation preference of $32.8 million, which resulted
in net proceeds of approximately $26.2 million.
CAPITAL CONTRIBUTION
As of September 30, 1998, approximately $8.9 million remained outstanding
under the Capital Contribution Agreement (see Note 9).
LONG-TERM DEBT
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 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, 2005. 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.
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 Company has the right 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 liquidated 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 borrowings 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.
In September 1998, the Company borrowed $15,000,000 from ABRY II, the
Company's principal stockholder (the "ABRY Bridge Loan"), to partially finance
the MobileMedia Acquisition. The ABRY Bridge Loan bears interest at a rate of
9.0%. Interest and principal under the ABRY Bridge Loan are payable within one
year from the date of borrowing.
F-18
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
MobileMedia Communications, Inc. and
Subsidiaries
We have audited the accompanying balance sheets of the tower operations (the
"Tower Operations") of MobileMedia Communications, Inc. and Subsidiaries (the
"Parent") as of December 31, 1997 and 1996 and the related statements of
income, changes in net tower operation assets, and cash flows for the years
then ended. These financial statements are the responsibility of the Parent'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
MobileMedia Communications, Inc. and Subsidiaries as of December 31, 1997 and
1996 and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
As discussed in Note 4, on July 7, 1998, MobileMedia Corporation and the
Parent entered into an agreement to sell certain assets of the Tower
Operations to Pinnacle Towers Inc. Tower Operations is not a separate legal
entity, subsidiary, division or segment of the Parent and, accordingly, it has
no independent financing sources. On January 30, 1997, MobileMedia, the Parent
and all seventeen of the Parent's subsidiaries (collectively with the Parent
and MobileMedia, the "Debtors"), filed for protection under Chapter 11 of
Title 11 of the United States Code. The Debtors are operating as debtors-in-
possession and are subject to the jurisdiction of the United State Bankruptcy
Court for the District of Delaware (the "Bankruptcy Court"). Accordingly, the
aforementioned sale transaction is subject to Bankruptcy Court approval.
Management believes it will receive the consent of its debt holders and the
Bankruptcy Court for the sale of the Tower Operations free and clear of all
liens. As a result of the uncertainties of the Debtor's bankruptcy and the
collateralization of the Tower Operations' assets, and the potential effect on
the Tower Operations' assets, there is substantial doubt that the Tower
Operations would continue as a going concern if the necessary consents are not
received or if for some other reason the sale transaction is not consummated.
The accompanying financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classifications
of assets or the amounts and classification of liabilities that may result
from the outcome of this uncertainty.
/s/ Ernst & Young LLP
MetroPark, New Jersey
July 13, 1998
F-19
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
TOWER OPERATIONS
(A CARVE-OUT ENTITY OF MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------------
1998 1997 1996
----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Accounts receivable (net of allowance
for doubtful accounts of $80,000,
$57,000 and $18,000 at June 30, 1998,
December 31, 1997 and 1996, respective-
ly).................................... $ 283,294 $ 196,307 $ 179,960
Prepaid site lease rentals.............. 46,248 49,710 46,934
----------- ----------- ----------
Total current assets................. 329,542 246,017 226,894
Property and equipment:
Land.................................... 2,401,987 2,401,987 2,401,987
Tower assets and other equipment........ 4,910,330 4,891,859 4,670,431
Less accumulated depreciation........... (1,544,396) (1,279,937) (758,456)
----------- ----------- ----------
Net property and equipment............... 5,767,921 6,013,909 6,313,962
----------- ----------- ----------
Total assets......................... $ 6,097,463 $ 6,259,926 $6,540,856
=========== =========== ==========
LIABILITIES AND NET TOWER OPERATION
ASSETS
Liabilities:
Accounts payable........................ $ 214,316 $ 520,318 $ 282,045
Unearned revenue........................ 172,829 165,241 29,411
----------- ----------- ----------
387,145 685,559 311,456
Commitments and contingencies
Net tower operation assets............... 5,710,318 5,574,367 6,229,400
----------- ----------- ----------
Total liabilities and net tower oper-
ation assets........................ $ 6,097,463 $ 6,259,926 $6,540,856
=========== =========== ==========
</TABLE>
See accompanying notes.
F-20
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
TOWER OPERATIONS
(A CARVE-OUT ENTITY OF MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------
YEAR ENDED DECEMBER 31,
JUNE 30, JUNE 30, -----------------------
1998 1997 1997 1996
----------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues........................ $1,262,201 $1,246,855 $ 2,500,185 $ 2,608,321
Expenses:
Operations..................... 513,105 525,572 1,113,663 1,001,018
General and administrative..... 283,413 292,413 609,179 540,015
Depreciation................... 264,459 257,576 521,481 489,271
---------- ---------- ----------- -----------
Total expenses.............. 1,060,977 1,075,561 2,244,323 2,030,304
---------- ---------- ----------- -----------
Net income...................... $ 201,224 $ 171,294 $ 255,862 $ 578,017
========== ========== =========== ===========
</TABLE>
See accompanying notes.
F-21
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
TOWER OPERATIONS
(A CARVE-OUT ENTITY OF MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES)
STATEMENTS OF CHANGES IN NET TOWER OPERATION ASSETS
<TABLE>
<S> <C>
Net tower operation assets as of December 31, 1995.................. $3,958,877
Net income......................................................... 578,017
Net activity with Parent........................................... 1,692,506
----------
Net tower operation assets as of December 31, 1996.................. 6,229,400
Net income......................................................... 255,862
Net activity with Parent........................................... (910,895)
----------
Net tower operation assets as of December 31, 1997.................. 5,574,367
Net income (unaudited)............................................. 201,224
Net activity with Parent (unaudited)............................... (65,273)
----------
Net tower operation assets as of June 30, 1998 (unaudited).......... $5,710,318
==========
</TABLE>
See accompanying notes.
F-22
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
TOWER OPERATIONS
(A CARVE-OUT ENTITY OF MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------
YEAR ENDED DECEMBER 31,
JUNE 30, JUNE 30, -------------------------
1998 1997 1997 1996
----------- ---------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income................. $ 201,224 $ 171,294 $ 255,862 $ 578,017
Adjustments to reconcile
net income to net cash
provided by operating ac-
tivities:
Depreciation............. 264,459 257,576 521,481 489,271
Change in operating as-
sets and liabilities:
Accounts receivable.... (86,987) (6,186) (16,347) (50,889)
Prepaid expenses....... 3,462 (2,777) (2,776) --
Accounts payable....... (306,002) 131,694 238,273 248,015
Unearned revenue....... 7,588 89,654 135,830 (27,082)
--------- --------- ----------- ------------
Net cash provided by oper-
ating activities.......... 83,744 641,255 1,132,323 1,237,332
INVESTING ACTIVITIES
Tower acquisitions and cap-
ital expenditures......... (18,471) (216,973) (221,428) (2,929,838)
--------- --------- ----------- ------------
Net cash used in investing
activities................ (18,471) (216,973) (221,428) (2,929,838)
FINANCING ACTIVITIES
Net activity with Parent... (65,273) (424,282) (910,895) 1,692,506
--------- --------- ----------- ------------
Net cash (used in) provided
by financing activities... (65,273) (424,282) (910,895) 1,692,506
--------- --------- ----------- ------------
Net increase in cash....... -- -- -- --
Cash at beginning of peri-
od........................ -- -- -- --
--------- --------- ----------- ------------
Cash at end of period...... $ -- $ -- $ -- $ --
========= ========= =========== ============
</TABLE>
See accompanying notes.
F-23
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
TOWER OPERATIONS
(A CARVE-OUT ENTITY OF MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES)
NOTES TO FINANCIAL STATEMENTS
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 "Tower Operations") of
MobileMedia Communications, Inc. and Subsidiaries (the "Parent"), which
includes the Parent's business of leasing space on the 163 tower sites that
are being acquired by Pinnacle Towers Inc. ("Pinnacle") (see Note 4) to
customers in the broadcast and wireless communication industries. The Parent
also utilizes the tower sites for its own transmitter systems.
Tower Operations is not a separate legal entity, subsidiary, division or
segment of the Parent and, accordingly, it has no independent financing
sources. All funding has been summarized in the accompanying financial
statements as "Net activity with 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
based upon revenues or total costs of certain infrastructure operations,
depending upon the nature of the cost.
On January 30, 1997, MobileMedia Corporation ("MobileMedia"), the Parent and
all seventeen of the Parent's subsidiaries (collectively with the Parent and
MobileMedia, the "Debtors"), filed for protection under Chapter 11 of Title 11
of the United States Code. The Debtors are operating as debtors-in-possession
and are subject to the jurisdiction of the United States Bankruptcy Court for
the District of Delaware (the "Bankruptcy Court").
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
CONCENTRATIONS OF CREDIT RISK
The owned tower site lease receivables potentially subject the business to
credit risk, as the Tower Operations generally does not require collateral or
other security to support customer receivables. The carrying amount of the
Tower Operations receivables approximates fair value.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives, which vary from 5 to
29 years.
IMPAIRMENT OF LONG-LIVED ASSETS
Management periodically reviews the values assigned to long-lived assets to
determine whether any impairments are other than temporary. Management
believes that no impairment exists with respect to the long-lived assets in
the accompanying balance sheets.
F-24
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
TOWER OPERATIONS
(A CARVE-OUT ENTITY OF MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Tower Operations 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
periodic basis over the non-cancelable lease term. The effect of escalation
clauses within such leases is not material. No revenue is recognized in the
accompanying financial statements related to the Parent's usage of space on
the Tower Operations towers.
ALLOCATION OF EXPENSES
Certain administrative expenses were allocated from the Parent based on the
ratio of revenue generated from the Tower Operations to the Parent's revenues
from services, rents and maintenance. Additionally, certain operational
expenses were allocated from the Parent based on the estimated percentage of
such costs which are deemed to be applicable to the Tower Operations.
Management believes that these are the most appropriate methodologies for
allocating such expenses.
INCOME TAXES
The Tower Operations is not in itself a taxable entity and no provision or
benefit for United States federal or state income taxes has been recorded.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial information as of June 30, 1998 and the six months
ended June 30, 1998 and 1997 contained herein is unaudited but, in the opinion
of management, includes all adjustments of a normal recurring nature which are
necessary for a fair presentation of the financial position, results of
operations, and cash flows for the periods presented. Results of operations
for the periods presented herein are not necessarily indicative of results of
operations for the entire year.
2. COMMITMENTS AND CONTINGENCIES
The Tower Operations' property and equipment are part of the collateral for
MobileMedia's secured debt. MobileMedia is seeking the consent of the secured
debt holders and the Bankruptcy Court for the sale of certain assets of the
Tower Operations to Pinnacle free and clear of the liens (see Note 4).
Management believes it will receive such consents from the secured debt
holders and the Bankruptcy Court.
The land on which certain towers are constructed is leased pursuant to
operating leases. Rental expenses under operating leases were approximately
$277,000, $298,000, $597,000 and $563,000 for the six months ended June 30,
1998 (unaudited) and 1997 (unaudited) and the years ended December 31, 1997
and 1996, respectively. The effect of escalation clauses within such leases is
not material. At December 31, 1997, the aggregate minimum rental commitments
under leases were as follows:
<TABLE>
<S> <C>
1998........................................................... $ 570,916
1999........................................................... 454,913
2000........................................................... 330,408
2001........................................................... 203,091
2002........................................................... 177,582
Thereafter..................................................... 639,760
----------
$2,376,670
==========
</TABLE>
F-25
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
TOWER OPERATIONS
(A CARVE-OUT ENTITY OF MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. COMMITMENTS AND CONTINGENCIES (CONTINUED)
One ground lease, which extends until October 2003, stipulates that the
tower on the land becomes the property of the city in which it is located upon
expiration of the lease.
One tower asset represents an exclusive lease agreement for use of the tower
by the Tower Operations. Additionally, the Company believes that it has title
to all Tower Operations land; however, for one such parcel, the Tower
Operations may only have an easement to use the property.
3. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Parent's
computer programs that have time-sensitive software may recognize a date using
"00" as the Year 1900 rather than the Year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
While the Parent is aware that certain of its software requires
modification, it is in the process of determining the full extent that it will
be required to modify or replace significant portions of its software so that
its computer systems function properly with respect to dates in the Year 2000
and thereafter. If such modifications and conversions are not made, or are not
completed timely, the Year 2000 issue could have a material impact on the
operations of the Parent and the Tower Operations.
4. SUBSEQUENT EVENT--SALE AND LEASEBACK OF TOWER ASSETS
On July 7, 1998, MobileMedia and the Parent entered into an agreement to
sell 163 towers and 49 parcels of land related to the Tower Operations to
Pinnacle Towers Inc. for $170,000,000. The transaction also includes the
assignment of leases and related lease payments for 89 land leases related to
towers included in the sale. It is anticipated that such transaction will
close on August 25, 1998, subject to the approval of the Bankruptcy Court.
In connection with the transaction, MobileMedia and the Parent will enter
into a lease agreement with Pinnacle in which the Parent will lease space on
towers for 683 transmitters for a period of fifteen years at a cost of $1,300
per month per transmitter.
F-26
<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-27
<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-28
<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-29
<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-30
<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-31
<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-32
<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
F-33
<PAGE>
SOUTHERN COMMUNICATIONS SERVICES, INC.
TOWER OPERATIONS
(A CARVE-OUT ENTITY OF SOUTHERN COMMUNICATIONS SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
as a nonrefundable deposit for the transaction. The transaction also includes
the assignment 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-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 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/PricewaterhouseCoopers LLP
Price Waterhouse LLP
Tampa, Florida
February 9, 1998
F-35
<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-36
<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-37
<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 income.......................................... $ 13,761
Adjustments to reconcile net income to net cash pro-
vided 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............. 479,366
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures:
Tower assets...................................... (571,259)
Fixed assets...................................... (3,023)
---------
Net cash used in investing activities................. (574,282)
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-38
<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-39
<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-40
<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-41
<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-42
<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-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 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/PricewaterhouseCoopers LLP
Price Waterhouse LLP
Tampa, Florida
February 9, 1998
F-44
<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-45
<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-46
<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-47
<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
F-48
<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)
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.
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-49
<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-50
<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-51
<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-52
<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/PricewaterhouseCoopers LLP
Price Waterhouse LLP
Tampa, Florida
February 9, 1998
F-53
<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-54
<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-55
<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 pro-
vided 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-56
<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-57
<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-58
<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-59
<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-60
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below, and each
of such Underwriters, has severally agreed to purchase from the Company, the
respective number of shares of New Preferred Stock set forth opposite its name
below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
NEW PREFERRED
UNDERWRITER STOCK
----------- -------------
<S> <C>
Goldman, Sachs & Co. .......................................
NationsBanc Montgomery Securities LLC.......................
Salomon Smith Barney Inc. ..................................
----
Total...................................................
====
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered
hereby, if any are taken.
The Underwriters propose to offer the shares of New Preferred Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at
such price less a concession of $ per share. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the shares of New Preferred Stock are
released for sale to the public, the offering price and other selling terms
may from time to time be varied by the representatives.
The New Preferred Stock is a new issue of securities with no established
trading market. The Company has been advised by the Underwriters that the
Underwriters intend to make a market in the New Preferred Stock but are not
obligated to do so and may discontinue market making at any time without
notice. No assurance can be given as to the liquidity of the trading market
for the New Preferred Stock.
In connection with the Offering, the Underwriters may purchase and sell the
New Preferred Stock in the open market. These transactions may include over-
allotment and stabilizing transactions and purchases to cover short positions
created by the Underwriters in connection with the Preferred Stock Offering.
Stabilizing transactions consist of certain bids or purchases for the purpose
of preventing or retarding a decline in the market price of the Preferred
Stock; and short positions created by the Underwriters involve the sale by the
Underwriters of a greater number of shares of Preferred Stock than they are
required to purchase from the Company in the Preferred Stock Offering. The
Underwriters also may impose a penalty bid, whereby selling concessions
allowed to other broker-dealers in respect of the securities sold in the
Offering may be reclaimed by the Underwriters if such shares of Preferred
Stock are repurchased by the Underwriters in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the Preferred Stock, which may be higher than the price that
might otherwise prevail in the open market, and these activities, if
commenced, may be discontinued at any time. These transactions may be affected
in the over-the-counter market or otherwise.
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
Goldman Sachs Credit Partners L.P. ("GSCP") and NationsBank, N.A.
("NationsBank") are lenders under the Senior Credit Facility. GSCP is an
affiliate of Goldman, Sachs & Co., and NationsBank is an affiliate of
NationsBanc Montgomery Securities LLC. A portion of the outstanding
indebtedness under the Senior Credit Facility will be repaid with a portion of
the net proceeds of the Offerings. See "Use of Proceeds".
U-1
<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 any 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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 14
Use of Proceeds.......................................................... 26
Dividend Policy.......................................................... 27
Capitalization........................................................... 28
Unaudited Pro Forma Financial Data.......................................
Selected Historical Consolidated Financial Data.......................... 37
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 39
Business................................................................. 45
Management............................................................... 61
Principal Stockholders................................................... 67
Certain Relationships and Transactions................................... 68
Description of Certain Indebtedness...................................... 70
Description of New Preferred Stock ...................................... 72
Description of Exchange Notes............................................ 87
Certain Definitions...................................................... 105
Certain Federal Income Tax Considerations ............................... 114
Validity of Common Stock and New Preferred Stock......................... 130
Experts.................................................................. 130
Additional Information................................................... 131
Index to Consolidated Financial Statements............................... F-1
Underwriting............................................................. U-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
150,000 SHARES
PINNACLE HOLDINGS INC.
% EXCHANGEABLE PREFERRED STOCK
(LIQUIDATION PREFERENCE
$1,000 PER SHARE)
-----------------
[LOGO OF PINNACLE HOLDINGS INC. APPEARS HERE]
-----------------
GOLDMAN, SACHS & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
SALOMON SMITH BARNEY
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the fees and expenses in connection with the
issuance and distribution of the securities being registered hereunder. All
such fees and expenses shall be borne by the Company.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............. $ 97,078
NASD filing fee.................................................. $ 30,500
Nasdaq listing fee............................................... $ 95,000
Printing and engraving expenses.................................. $ 100,000
Accounting fees and expenses..................................... $ 150,000
Legal fees and expenses.......................................... $ 250,000
Blue Sky fees and expenses....................................... $ 5,000
Transfer Agent's fees and expenses............................... $ 20,000
Directors' and Officers' insurance............................... $ 70,000
Miscellaneous.................................................... $ 182,422
----------
Total.......................................................... $1,000,000
==========
</TABLE>
- --------
* Estimated
ITEM 32. SALES TO SPECIAL PARTIES.
Not applicable.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES.
The securities issued or sold by the Company since May 1995, the date of
inception, which were not registered under the Securities Act are listed
below:
(i) Pursuant to the Stockholders Agreement, since December 31, 1995, the
Company has issued to ABRY II 200,000 shares of Class A Common Stock and
172,266 shares of Class E Common Stock. 35,000 shares of the Class A Common
Stock were issued in exchange for shares of Pinnacle Towers Inc. that were
held by ABRY II and the remaining shares were issued in exchange for
capital contributions made by ABRY II to the Company at a rate of 1 share
per each $100 contribution. Additionally, a total of 12,000 shares of Class
B Common Stock and a total of 31,000 shares of Class D Common Stock were
issued to the Company's founders in exchange for all of the capital stock
of Pinnacle Towers Inc. held by them. Furthermore, 2,500 shares of Class A
Common Stock were issued to the REIT investors for $100 per share.
(ii) From February 16, 1996 through June 25, 1997, the Company issued
19,000 shares of Class D Common Stock to certain employees of the Company
as compensation pursuant to their employee subscription agreements.
Pursuant to his subscription agreement, Mr. Day also purchased 500 shares
of Class B Common Stock for $100 per share.
(iii) On April 30, 1997, the Company sold 2,500 shares of Class E Common
Stock to James Dell'Apa for consideration of $100 per share.
(iv) On March 17, 1998, the Company issued $325,000,000 in principal
amount of its 10% Senior Discount Notes due 2008, pursuant to a Purchase
Agreement dated as of March 17, 1998, between the Company and the initial
purchasers thereof.
(v) On September 3, 1998, the Company sold 30,000 shares of the Senior
Preferred Stock and warrants to purchase up to 3,432 shares of Class F
Common Stock to New York Life Insurance Company for an aggregate purchase
price of $30.0 million.
II-1
<PAGE>
(vi) On September 3, 1998, the Company sold 32.5 shares of Junior
Preferred Stock to ABRY/Pinnacle, Inc., an affiliate of ABRY II, for an
aggregate purchase price of $32.5 million.
(vii) On December 16, 1998, the Company sold 26.2 shares of the Junior
Preferred Stock to ABRY/Pinnacle, Inc. for an aggregate purchase price of
$26.2 million.
The shares of capital stock issued in the above transactions were offered
and sold in reliance upon the exemption from registration under Section 4(2)
as transactions by an issuer not involving any public offering. The recipients
of securities in each such transaction represented their intentions to acquire
the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed
to the share certificates issued in such transaction. All recipients had
adequate access, through their relationship with the Company to information
about the Company.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pinnacle Holdings Inc., a Delaware corporation (the "Delaware Corporation").
The Delaware Corporation's Certificate of Incorporation and Bylaws contain
provisions limiting the personal liability of its directors for monetary
damages resulting from breaches of their duty of care to the extent permitted
by Section 102(b)(7) of the Delaware General Corporation Law. The Delaware
Corporation's Certificate of Incorporation and Bylaws also contain provisions
making indemnification of the Delaware Corporation's directors and officers
mandatory to the fullest extent permitted by the Delaware General Corporation
Law, including circumstances in which indemnification is otherwise
discretionary.
The Delaware General Corporation Law permits the indemnification by a
Delaware corporation of its directors, officers, employees and other agents
against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement in connection with specified actions, suits or proceedings,
whether civil, criminal, administrative or investigative (other than
derivative actions which are by or in the right of the corporation) if they
acted in good faith and in a manner they reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceedings, had no reasonable cause to believe their
conduct was illegal. A similar standard of care is applicable in the case of
derivative actions, except that indemnification only extends to expenses
(including attorneys' fees) incurred in connection with defense or settlement
of such an action and require court approval before there can be any
indemnification where the person seeking indemnification has been found liable
to the corporation. The Company intends to obtain directors' and officers'
liability insurance, consistent with the provisions of the Delaware General
Corporation Law, to protect directors and officers from liabilities under
various laws, including the Securities Act.
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not applicable.
ITEM 36. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.0 Underwriting Agreement+
3.1.1 Amended and Restated Certificate of Incorporation of the Company+
Certificate of Amendment of Amended and Restated Certificate of
3.1.2 Incorporation+
3.1.3 Bylaws of the Company**
4.1 Indenture dated as of March 20, 1998 among the Company and The
Bank of New York, as Trustee**
4.2 Exchange and Registration Rights Agreement dated as of March 20,
1998 by and among the Company and each of the Purchasers referred
to therein**
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
4.3 Specimen Stock Certificate*****
4.4 Registration Agreement+
4.5 Recapitalization Agreement+
4.6 Certificate of Designation Series A Senior Preferred Stock******
4.7 Certificate of Designation Series B Junior Preferred Stock******
4.8 Certificate of Designation % Exchangeable Preferred Stock+
4.9 Indenture dated as of January , 1999.+
5.1 Opinion of Holland & Knight LLP****
5.2 Opinion of Holland & Knight LLP regarding the legality of the New
Preferred Stock, including consent.+
8.1 Opinion of Holland & Knight LLP
10.1 Second Amended and Restated Credit Agreement dated February 26,
1998 by and among Pinnacle Towers, Inc., a wholly-owned subsidiary
of the Company ("PTI"), NationsBank of Texas, N.A. and Goldman,
Sachs Credit Partner L.P.**
10.2 First Amendment to Second Amended and Restated Credit Agreement
dated March 17, 1998**
10.3 Form of Purchase and Sale Agreement dated January 9, 1998 by and
among PTI and Southern Communications**
10.4 Form of Southern Communications Master Site Lease Agreement by and
among PTI and Southern Communications**
10.5 Form of Option to Direct Construction or Acquisition of Additional
Tower Facilities by and among PTI and Southern Communications**
10.6 Form of Exchange Agreement by and among PTI and Southern
Communications**
10.7 Form of Lease Agreement--Non-Restricted Premises**
10.8 Form of Lease Agreement--Restricted Premises**
10.9 Form of Master Antenna Site Lease by and among PTI and Teletouch
Communications, Inc.**
10.10 Contract of Sale by and among PTI and Teletouch Communications,
Inc. and First Amendment to Contract of Sale**
10.11 Executive Employment Agreement between the Company and Robert
Wolsey dated May 3, 1995**
10.12 Executive Employment Agreement between the Company and Steven Day
dated February 17, 1997**
10.13 Executive Employment Agreement between the Company and James
Dell'Apa dated May 3, 1995**
10.14 Subscription Agreement dated December 31, 1995 by and among ABRY
II and PTI**
10.15 Second Amended and Restated Subscription and Stockholders
Agreement dated May 16, 1996 by and among PTI, the Company and
certain stockholders**
10.16 Capital Contribution Agreement dated February 26, 1998**
10.17 Convertible Promissory Note due 1998 dated February 11, 1998 by
and among the Company and ABRY II**
10.18 Services Agreement by and among PTI and PTI II**
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.19 Amended Capital Contribution Agreement dated May 29, 1998***
10.20 Third Amended and Restated Credit Agreement dated May 29, 1998***
10.21 Purchase Agreement dated as of July 7, 1998 among MobileMedia, its
affiliates and the Company****
10.22 Proposed Form of Master Lease for Transmitter Systems Space
between the Company and MobileMedia Communications, Inc.****
10.23 Form of Management and Consulting Services Agreement dated as of
April , 1995 between Pinnacle Towers Inc. and ABRY*
10.24 Stock Incentive Plan*****
10.25 Second Amendment to Third Amended and Restated Credit Agreement
10.26 Amendment to Purchase Agreement dated September 2, 1998 between
PTI and MobileMedia and certain of its affiliates******
21.1 List of Subsidiaries**
23.1 Consent of Holland & Knight LLP (contained in Exhibit 5.1)****
23.2 Consent of PricewaterhouseCoopers LLP, independent certified
public accountants
23.3 Consent of Arthur Andersen LLP, independent certified public
accountants
23.4 Consent of Ernst & Young LLP, independent certified public
accountants
24.1 Powers of Attorney (included on signature pages of Registration
Statement)****
25.1 Statement of Eligibility of Trustee on Form T-1+
27.1 Financial Data Schedule
</TABLE>
- --------
+ To be filed by amendment.
* Previously filed on July 27, 1998 with Amendment No. 1 to the Company's
Registration Statement on Form S-11.
** Previously filed on April 1, 1998 with the Company's Registration
Statement on Form S-4 (SEC file no. 333-49147).
*** Previously filed on June 11, 1998 with Amendment No. 1 to the Company's
Registration Statement on Form S-4.
**** Previously filed on July 17, 1998 with the Company's Registration
Statement on Form S-11 (SEC file no. 333-59297).
***** Previously filed on August 11, 1998 with Amendment No. 2 to the
Company's Registration Statement on Form S-11.
****** Previously filed on September 18, 1998 with the Company's Report on
Form 8-K.
(b) Financial Statement Schedules
None
ITEM 37. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions described in Item 14, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities
II-4
<PAGE>
Act of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4), or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS
ALL OF THE REQUIREMENTS FOR FILING ON FORM S-11 AND HAS DULY CAUSED THIS
AMENDMENT NO. 4 TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY
THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY OF SARASOTA, STATE OF
FLORIDA, ON DECEMBER 30, 1998.
Pinnacle Holdings, Inc.
/s/ Steven Day
By: _________________________________
Steven Day, Chief Financial
Officer
POWER OF ATTORNEY
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<S> <C>
SIGNATURES TITLE
DATE
* Chief Executive December 30, 1998
- ------------------------------------- Officer, President,
ROBERT WOLSEY Chief Operating
Officer and
Director
/s/ Steven Day Vice President, December 30, 1998
- ------------------------------------- Chief Financial
STEVEN DAY Officer, Secretary
and Director
* Executive Vice December 30, 1998
- ------------------------------------- President and
JAMES DELL'APA Director
* Director December 30, 1998
- -------------------------------------
ANDREW BANKS
* Director December 30, 1998
- -------------------------------------
PENI GARBER
* Director December 30, 1998
- -------------------------------------
PEGGY KOENIG
* Director December 30, 1998
- -------------------------------------
ROYCE YUDKOFF
/s/ Steven Day
*By: _______________________________,
STEVEN DAY
ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.0 Underwriting Agreement+
3.1.1 Amended and Restated Certificate of Incorporation of the Company+
Certificate of Amendment of Amended and Restated Certificate of
3.1.2 Incorporation+
3.1.3 Bylaws of the Company**
Indenture dated as of March 20, 1998 among the Company and The
4.1 Bank of New York, as Trustee**
4.2 Exchange and Registration Rights Agreement dated as of March 20,
1998 by and among the Company and each of the Purchasers referred
to therein**
4.3 Specimen Stock Certificate*****
4.4 Registration Agreement+
4.5 Recapitalization Agreement+
4.6 Certificate of Designation Series A Senior Preferred Stock******
4.7 Certificate of Designation Series B Junior Preferred Stock******
4.8 Certificate of Designation % Exchangeable Preferred Stock+
4.9 Indenture dated as of January , 1999.+
5.1 Opinion of Holland & Knight LLP****
5.2 Opinion of Holland & Knight LLP regarding the legality of the New
Preferred Stock, including consent.+
8.1 Opinion of Holland & Knight LLP
10.1 Second Amended and Restated Credit Agreement dated February 26,
1998 by and among Pinnacle Towers, Inc., a wholly-owned subsidiary
of the Company ("PTI"), NationsBank of Texas, N.A. and Goldman,
Sachs Credit Partner L.P.**
10.2 First Amendment to Second Amended and Restated Credit Agreement
dated March 17, 1998**
10.3 Form of Purchase and Sale Agreement dated January 9, 1998 by and
among PTI and Southern Communications**
10.4 Form of Southern Communications Master Site Lease Agreement by and
among PTI and Southern Communications**
10.5 Form of Option to Direct Construction or Acquisition of Additional
Tower Facilities by and among PTI and Southern Communications**
10.6 Form of Exchange Agreement by and among PTI and Southern
Communications**
10.7 Form of Lease Agreement--Non-Restricted Premises**
10.8 Form of Lease Agreement--Restricted Premises**
10.9 Form of Master Antenna Site Lease by and among PTI and Teletouch
Communications, Inc.**
10.10 Contract of Sale by and among PTI and Teletouch Communications,
Inc. and First Amendment to Contract of Sale**
10.11 Executive Employment Agreement between the Company and Robert
Wolsey dated May 3, 1995**
10.12 Executive Employment Agreement between the Company and Steven Day
dated February 17, 1997**
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.13 Executive Employment Agreement between the Company and James
Dell'Apa dated May 3, 1995**
10.14 Subscription Agreement dated December 31, 1995 by and among ABRY
II and PTI**
10.15 Second Amended and Restated Subscription and Stockholders
Agreement dated May 16, 1996 by and among PTI, the Company and
certain stockholders**
10.16 Capital Contribution Agreement dated February 26, 1998**
10.17 Convertible Promissory Note due 1998 dated February 11, 1998 by
and among the Company and ABRY II**
10.18 Services Agreement by and among PTI and PTI II**
10.19 Amended Capital Contribution Agreement dated May 29, 1998***
10.20 Third Amended and Restated Credit Agreement dated May 29, 1998***
10.21 Purchase Agreement dated as of July 7, 1998 among MobileMedia, its
affiliates and the Company****
10.22 Proposed Form of Master Lease for Transmitter Systems Space
between the Company and MobileMedia Communications, Inc.****
10.23 Form of Management and Consulting Services Agreement dated as of
April , 1995 between Pinnacle Towers Inc. and ABRY*
10.24 Stock Incentive Plan*****
10.25 Second Amendment to Third Amended and Restated Credit Agreement
10.26 Amendment to Purchase Agreement dated September 2, 1998 between
PTI and MobileMedia and certain of its affiliates******
21.1 List of Subsidiaries**
23.1 Consent of Holland & Knight LLP (contained in Exhibit 5.1)****
23.2 Consent of PricewaterhouseCoopers LLP, independent certified
public accountants
23.3 Consent of Arthur Andersen LLP, independent certified public
accountants
23.4 Consent of Ernst & Young LLP, independent certified public
accountants
Powers of Attorney (included on signature pages of Registration
24.1 Statement)****
25.1 Statement of Eligibility of Trustee on Form T-1+
27.1 Financial Data Schedule
</TABLE>
- --------
+ To be filed by amendment.
* Previously filed on July 27, 1998 with Amendment No. 1 to the Company's
Registration Statement on Form S-11.
** Previously filed on April 1, 1998 with the Company's Registration
Statement on Form S-4 (SEC file no. 333-49147).
*** Previously filed on June 11, 1998 with Amendment No. 1 to the Company's
Registration Statement on Form S-4.
**** Previously filed on July 17, 1998 with the Company's Registration
Statement on Form S-11 (SEC file no. 333-59297).
***** Previously filed on August 11, 1998 with Amendment No. 2 to the
Company's Registration Statement on Form S-11.
****** Previously filed on September 18, 1998 with the Company's Report on
Form 8-K.
<PAGE>
EXHIBIT 8.1
December ___, 1998
Pinnacle Holdings, Inc.
1549 Ringling Boulevard, Third Floor
Sarasota, FL 34236
Re: Registration Statement on Form S-11
Registration No. _________________
Ladies and Gentlemen:
We have acted as counsel to Pinnacle Holdings, Inc., a Delaware corporation
(the "Company"), in connection with the Common Stock as more fully described in
the Company's Registration Statement on Form S-11 (the "Registration Statement,"
which includes the "Prospectus"), filed with the Securities and Exchange
Commission on or about the date hereof. In connection therewith, we have been
asked to provide an opinion regarding certain federal income tax matters related
to the Company. Capitalized terms used in this letter and not otherwise defined
herein have the meaning set forth in the Prospectus.
The opinions set forth in this letter are based on relevant provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations
thereunder (including proposed and temporary Regulations), and interpretations
of the foregoing as expressed in court decisions, the legislative history, and
existing administrative rulings, policies and practices of the Internal Revenue
Service (the "Service") including its practices and policies indicated in
private letter rulings (which rulings are not binding on the Service except, in
the case of each such ruling, with respect to the specific taxpayer that
receives such ruling), all as of the date hereof. These provisions and
interpretations are subject to change, which may or may not be retroactive in
effect, which changes could adversely affect the opinions rendered herein and
the tax consequences to the Company and the investors in the Common Stock.
In rendering this opinion, we have examined the following documents: (1)
the Registration Statement and the facts and descriptions set forth therein of
the Company and its investments, activities, operations and governance; (2) the
Company's Certificate of Incorporation, as amended, Bylaws and stock ownership
information;
<PAGE>
Pinnacle Holdings, Inc.
July __, 1998
Page 2
(3) the Certificate of Incorporation, Bylaws and stock ownership information of
each QRS Corporation (for a list of QRS Corporations see Exhibit A); and (4) the
quarterly REIT qualification testing schedules prepared by the Company with the
assistance of the Company's accountants, Pricewaterhouse Coopers LLP through and
including June 30, 1998. The opinions set forth in this letter also are
premised on certain additional information and representations through
consultation with officers of the Company and the Company's accountants,
Pricewaterhouse Coopers LLP, including those contained in the Company's
management representation certificate to us dated July ____, 1998 (the
"Management Representation Certificate") regarding certain facts and other
matters (including among other things, the Company's stock ownership, assets,
acquisitions, revenues, and distributions) as are germane to the determination
that the Company has been and will be owned and operated in such a manner that
the Company has and will continue to satisfy the requirements for qualification
as a REIT under the Code.
We have made such factual and legal inquiries, including the procedures
described above and examination of the documents set forth above, as we have
deemed necessary or appropriate for purposes of our opinion. For purposes of
rendering our opinion, however, we have not made an independent investigation or
audit of the facts set forth in the above-referenced documents, including the
Registration Statement and the Management Representation Certificate. We
consequently have relied upon the representations in the Management
Representation Certificate that the information presented therein and in such
documents or otherwise furnished to us is accurate, and we have assumed that the
information presented in such documents or otherwise furnished to us is accurate
and complete with respect to all material facts relevant to our opinion.
In our review, we have assumed, with your consent, that all of the
representations and statements set forth in the documents that we reviewed
(including, without limitation, the Management Representation Certificate) are
true and correct, and each of the obligations imposed by any such document on
the parties thereto, including obligations imposed under the Certificate of
Incorporation of the Company and each QRS Corporation, have been and will be
performed or satisfied in accordance with their terms. Moreover, we have
assumed that the Company and each QRS Corporation has been and will continue to
be operated in the manner described in the relevant certificate of incorporation
or other organizational documents and in the Prospectus. We assume for the
purposes of this opinion that the Company and each QRS is validly organized and
duly incorporated under the laws of the jurisdiction of its incorporation. We
also have assumed the genuineness of all signatures, the proper execution of all
documents, the authenticity of all documents submitted to us as
<PAGE>
Pinnacle Holdings, Inc.
July __, 1998
Page 3
originals, the conformity to originals of documents submitted to us as copies,
and the authenticity of the originals from which any copies were made.
Based upon, subject to, and limited by the assumptions and qualifications
set forth herein, in the discussion in the Prospectus under the caption "Certain
Federal Income Tax Consequences" (which is incorporated herein by reference),
and the discussion herein, we are of the opinion that:
(a) the Company was organized and has operated in conformity with the
requirements for qualification and taxation as a real estate investment trust
("REIT") pursuant to Sections 856 through 860 of the Code for its taxable years
ended December 31, 1995, December 31, 1996, and December 31, 1997, and the
continued operation of the Company in a manner consistent with the statements
made in the Management Representation Certificate and the requirements for REIT
qualification as described in the Prospectus will enable it to continue to meet
the requirements for qualification and taxation as a REIT; and
(b) the descriptions of the law and the legal conclusions contained in the
Prospectus under the caption "Certain Federal Income Tax Considerations" are
correct in all material respects and the discussion thereunder fairly summarizes
the federal income tax considerations that are likely to be material to a holder
of Common Stock.
We assume no obligation to advise you of any changes in our opinion
subsequent to the delivery of this opinion letter, and we do not undertake to
update the opinion letter. The Company's qualification and taxation as a REIT
depends upon the Company's ability to meet on a continuing basis, through actual
annual operating and other results, the various requirements under the Code and
described in the Prospectus with regard to, among other things, the sources of
its gross income, the composition of its assets, the level of its distribution
to stockholders, and the diversity of its stock ownership. Holland & Knight LLP
will not review the Company's compliance with these requirements on a continuing
basis. Accordingly, no assurance can be given that the actual results of the
operations of the Company and the QRS Corporations, the sources of their income,
the nature of their assets, the level of the Company's distributions to
stockholders and the diversity of its stock ownership for any given taxable year
will satisfy the requirements under the Code for qualification and taxation as a
REIT. In addition, as noted above, our opinions are based solely on the
documents that we have examined, the additional information that we have
obtained, and the representations that have been made to us, and cannot be
relied upon if any of the facts contained in such documents or in such
additional information is, or later becomes, inaccurate or if any of the
representations made to us is, or later becomes, inaccurate.
<PAGE>
Pinnacle Holdings, Inc.
July __, 1998
Page 4
An opinion of counsel merely represents counsel's best judgment with
respect to the probable outcome on the merits and is not binding on the Service
or the courts. In certain instances with respect to matters for which there is
no relevant authority, including the effect of certain transfer restrictions
under the Lock-Up Agreements, the Stockholders Agreement and the Restrictive
Legends on the ability of the Company to satisfy the requirement for REIT
qualification that its shares be transferable, our opinion is based on
authorities which we have considered to be analogous even though certain such
authorities have been rendered obsolete for unrelated reasons by subsequent
authorities. There can be no assurance that positions contrary to our opinions
will not be taken by the Service, or that a court considering the issues would
not hold contrary to our opinions.
This opinion letter has been prepared solely for your use in connection
with the filing of the Registration Statement on the date of this opinion letter
and should not be quoted in whole or in part or otherwise referred to, nor filed
with or furnished to any governmental agency or other person or entity, without
the prior written consent of this firm.
We hereby consent to the filing of our opinion, together with the
attachments thereto, as Exhibit 8.1 to the Registration Statement and to the use
of the name of our firm in the Registration Statement. In giving this consent,
however, we do not thereby admit that we are an "expert" within the meaning of
the Securities Act of 1933, as amended.
Very truly yours,
HOLLAND & KNIGHT LLP
<PAGE>
EXHIBIT A
QRS Corporations
of
Pinnacle Holdings, Inc.
Pinnacle Towers Inc.
Coverage Plus Antenna Systems, Inc.
Tower Systems, Inc.
<PAGE>
Exhibit 10.25
SECOND AMENDMENT
TO
THIRD AMENDED AND RESTATED CREDIT AGREEMENT
THIS SECOND AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT is
dated as of the day of ____________, 1998 (this "Second Amendment"), and entered
into among PINNACLE TOWERS INC., a Delaware corporation (the "Borrower"), the
Lenders signatory hereto, NATIONSBANK, N.A., a national banking association,
individually and as Administrative Lender (in such latter capacity, the
"Administrative Lender"), and GOLDMAN SACHS CREDIT PARTNERS L.P., as Syndication
Agent (the "Syndication Agent").
WITNESSETH:
----------
WHEREAS, the Borrower, the Administrative Lender, the Syndication Agent,
and Lenders entered into a Third Amended and Restated Credit Agreement, dated as
of May 29, 1998, as amended by that certain First Amendment to Third Amended and
Restated Credit Agreement, dated as of June 29, 1998 (as further amended,
restated, or otherwise modified from time to time, the "Credit Agreement");
WHEREAS, the Lenders, the Borrower, the Administrative Lender, and the
Syndication Agent have agreed to amend the Credit Agreement to make certain
changes to the terms therein upon the terms and conditions set forth below;
NOW, THEREFORE, for valuable consideration hereby acknowledged, the
Borrower, the Lenders, the Administrative Lender, and the Syndication Agent
agree as follows:
SECTION 1. Definitions. Unless specifically defined or redefined below,
-----------
capitalized terms used herein shall have the meanings ascribed thereto in the
Credit Agreement.
SECTION 2. Amendment to Definition of Applicable Margin. The definition
--------------------------------------------
of "Applicable Margin" in Article I of the Credit Agreement shall be deleted in
its entirety, and the following definition of "Applicable Margin" shall be
substituted in its stead:
"Applicable Margin" means, (a) with respect to LIBOR Advances, 3.000%
per annum, and (b) with respect to Base Advances, 2.000% per annum provided
that, if there exists no Default or Event of Default, then the Applicable
Margin will be the following per annum percentages applicable in the
following situations:
1
<PAGE>
Base Advance LIBOR Advance
Applicability Percentage Percentage
------------- ---------- ----------
(i) If the Leverage 2.000% 3.000%
Ratio is equal to or
greater than 4.50 to 1.00
(ii) If the Leverage 1.875% 2.875%
Ratio is equal to or
greater than 4.00 to 1.00
but is less than
4.50 to 1.00
(iii) If the Leverage 1.750% 2.750%
Ratio is equal to or
greater than 3.50 to 1.00
but is less than
4.00 to 1.00
(iv) If the Leverage 1.500% 2.500%
Ratio is equal to or
greater than 3.00 to 1.00
but is less than
3.50 to 1.00
(v) If the Leverage 1.250% 2.250%
Ratio is equal to or
greater than 2.50 to 1.00
but is less than
3.00 to 1.00
(vi) If the Leverage 1.000% 2.000%
Ratio is equal to or
greater than 2.00 to 1.00
but is less than
2.50 to 1.00
(vii) If the Leverage 0.750% 1.750%
Ratio is less than
2.00 to 1.00
The Applicable Margin payable by the Borrower shall be (a) reduced or
increased as applicable and as set forth in the table above, on a quarterly
basis according to the
2
<PAGE>
performance of the Parent, Borrower and Subsidiaries of Borrower as tested
by the Leverage Ratio, and (b) further increased as set forth in Section
6.15(c) hereof. Except as set forth in the last sentence hereof, any such
increase or reduction in the Applicable Margin provided for herein shall be
effective three Business Days after receipt by Administrative Lender of the
applicable financial statements and corresponding Compliance Certificate.
If financial statements and a Compliance Certificate of the Borrower
setting forth the Leverage Ratio are not received by the Administrative
Lender by the date required pursuant to Article VII hereof, the Applicable
Margin shall be determined as if the Leverage Ratio exceeds 4.50 to 1.00,
until such time as such financial statements and Compliance Certificate are
received. For the final quarter of any fiscal year of the Borrower, the
Borrower may provide the unaudited financial statements of the Borrower,
subject only to year-end adjustments, for the purpose of adjusting the
Applicable Margin.
SECTION 3. Addition of Definition of Leverage Ratio. The definition of
-----------------------------------------
"Leverage Ratio" shall be added in its entirety to Article I of the Credit
Agreement in alphabetical order, as follows:
"Leverage Ratio" means the ratio, at the end of the accounting period
with respect to which such determination is made, of (a) the remainder of
Senior Debt of the Borrower and its Subsidiaries (exclusive of Debt owed to
each other), minus the sum of Subordinated Debt outstanding which is (i)
permitted to be incurred under Sections 8.02(h) hereof and (ii) (without
duplication) owed to ABRY, to (b) Annualized EBITDA, provided that, the
calculation of the Leverage Ratio shall exclude revenues or charges
attributable to Properties of the Borrower and its Subsidiaries sold during
the calculation period as if such sale occurred on the first day of such
period and shall include revenues and charges attributable to Properties of
the Borrower and its Subsidiaries purchased during such period as if such
purchase occurred on the first day of such period.
SECTION 4. Deletion of Definition of Senior Leverage Ratio. The
-----------------------------------------------
definition of "Senior Leverage Ratio" in Article I of the Credit Agreement shall
be deleted in its entirety.
SECTION 5. Deletion of Definition of Total Leverage Ratio. The definition
----------------------------------------------
of "Total Leverage Ratio" in Article I of the Credit Agreement shall be deleted
in its entirety.
SECTION 6. Amendment to Section 2.05(a). Section 2.05(a) of the Credit
-----------------------------
Agreement shall be deleted in its entirety and the following Section 2.05(a)
shall be substituted in its stead:
(a) Excess Cash Flow. Within 130 days after the end of each fiscal
year of Borrower ending on or after March 31, 2000, the Borrower shall pay
to Administrative Lender for the Ratable account of Lenders an amount equal
to (i) 50% of Excess Cash Flow for the preceding fiscal year if the
Leverage Ratio calculated
3
<PAGE>
at the end of the same period is less than 4.00 to 1.00, or (b) 75% of
Excess Cash Flow for the preceding fiscal year if the Leverage Ratio
calculated at the end of the same period is greater than or equal to 4.00
to 1.00. All prepayments made pursuant to this Section 2.05(a) shall be
applied to reduce outstanding Advances (which amounts shall also reduce the
Available Commitment in accordance with the terms of Section 2.11(c)(iv)
hereof).
SECTION 7. Amendment to Section 2.10(b). Section 2.10(b) of the Credit
----------------------------
Agreement shall be deleted in its entirety and the following Section 2.10(b)
shall be substituted in its stead:
(b) Commitment Fee. Subject to Section 11.08 hereof, the Borrower
shall pay to Administrative Lender for the Ratable account of Lenders a
commitment fee on the average daily amount of the difference between (i)
the Available Commitment and (ii) the sum of all Advances outstanding and
the face amount of all outstanding Letters of Credit, at a per annum rate
equal to 0.500%, payable in each case in arrears on each Quarterly Date and
on the Maturity Date, commencing with the first Quarterly Date after the
Closing Date, and continuing until the Maturity Date.
SECTION 8. Amendment to Section 6.15(c). Section 6.15(c) of the Credit
----------------------------
Agreement shall be deleted in its entirety and the following Section 6.15(c)
shall be substituted in its stead:
(c) Breach of Section 6.15(a) and (b) above. In the event any
---------------------------------------
provision of Section 6.15(a) or (b) above is breached, subject to the last
sentence of this Section 6.15(c), the Applicable Margin shall increase by
.25% per annum, effective the date of such breach under Section 6.15(a) or
(b) above, and shall increase every 30 days thereafter (effective each 31st
date following the preceding increase) by .25% per annum (but in no event
shall the interest rate increase under this Section 6.15(c) by more than
.25% per annum per 30 day period) until the earlier of (i) compliance with
this Section 6.15, or (ii) such time as the per annum interest rate is
equal to the Highest Lawful Rate (where the interest rate will remain until
the Borrower is in compliance). If, on the date six months after the date
of any breach, such breach is still in effect, then (A) with respect to a
breach under Section 6.15(a) hereof, all Tenant Lease Revenues from any
Primary Non-Conforming Tenant Lease or Secondary Non-Conforming Tenant
Lease, as applicable, in excess of the applicable percent limitation, will
be excluded from revenues for the purpose of determining EBITDA in
connection with any determination of (I) the Leverage Ratio (with respect
to the determination of Section 8.01(b) hereof and the Applicable Margin)
and the debt service coverage
4
<PAGE>
ratio set forth in Section 8.01(d) hereof, and (B) with respect to a breach
under Section 6.15(b) hereof, all Tower Cash Flow from any Tower located on
a Non-Conforming Ground Lease in excess of the thirty percent limitation
will be excluded from revenues for the purpose of determining EBITDA in
connection with any determination of (I) the Leverage Ratio (with respect
to Section 8.01(b) hereof and the Applicable Margin), and the debt service
coverage ratio set forth in Section 8.01(d) hereof, and, in each case, such
exclusion from EBITDA for such purposes will continue until five Business
Days after the date the Borrower delivers to the Administrative Lender a
certificate of an Authorized Officer certifying that there exists no breach
under Section 6.15(a) and/or (b) above, in detail satisfactory to the
Administrative Lender. If there exists no Default or Event of Default upon
giving effect to any exclusion from EBITDA in accordance with the
provisions set forth above, the interest rate shall be calculated without
giving effect to any increase in the Applicable Margin set forth in this
Section 6.15(c).
SECTION 9. Amendment to Section 8.01(a). The grid set forth in Section
----------------------------
8.01(a) of the Credit Agreement detailing the Period and the Ratio shall be
------ -----
deleted in its entirety and the following shall be substituted in its stead:
(a) INTENTIONALLY DELETED.
SECTION 10. Amendment to Section 8.01(b). Section 8.01(b) of the Credit
----------------------------
Agreement shall be deleted in its entirety and the following Section 8.01(b)
shall be substituted in its stead:
(b) LEVERAGE RATIO. The Borrower shall not permit the Leverage Ratio to be
more than the following ratios at the end of any fiscal quarter during the time
during the following time periods:
Period Ratio
------ -----
From the Closing Date
through September 30, 1999 5.50 to 1.00
From October 1, 1999
through June 30, 2000 5.00 to 1.00
From July 1, 2000
through December 31, 2000 4.50 to 1.00
From January 1, 2001
through December 31, 2001 4.00 to 1.00
From January 1, 2002
through December 31, 2002 3.50 to 1.00
From January 1, 2003
and thereafter 3.00 to 1.00
5
<PAGE>
provided however, that in the event of a failure to meet the ratios
required by this Section 8.01(b), so long as no other Default or Event of
Default exists hereunder, ABRY may, through the Parent, not more than two
times during the term of this Agreement (in addition to those instances in
which ABRY may be required to make such a contribution pursuant to Section
2(b) of the Capital Contribution Agreement), prior to the delivery by the
Borrower of its Compliance Certificate in accordance with Section 7.03
hereof evidencing such breach, make either (i) an equity capital
contribution or (ii) a loan to the Borrower constituting Cure Sub Debt, or
any combination of equity and Cure Sub Debt, in each case to enable the
Borrower to reduce the outstanding principal amount of Advances hereunder
in an amount sufficient to cure the breach under this Section 8.01(b). In
the event that the ABRY makes such capital contribution or loan
constituting Cure Sub Debt, the Borrower must reduce the outstanding
Advances hereunder by such amount, and the Borrower may demonstrate its
compliance with the financial covenant in this Section 8.01(b) by
calculating such covenant (A) after such contribution or Cure Sub Debt loan
has been made, and (B) after the Obligation has been reduced by such
contribution or such Cure Sub Debt loan. Notwithstanding anything in this
Agreement to the contrary, the second time that ABRY makes any capital
contribution or Cure Sub Debt loan to cure any Event of Default as a result
of a violation of this Section 8.01(b) as permitted above, any such capital
contribution or Cure Sub Debt loan shall be applied in accordance with the
terms of Section 2.05(b) hereof, but shall permanently reduce the
outstanding Obligations by a reduction in the Available Commitment in
accordance with the terms of Section 2.11(c)(ii) hereof.
SECTION 11. Amendment to Section 8.08(b)(vi). Section 8.08(b)(vi) of
--------------------------------
the Credit Agreement shall be deleted in its entirety and the following Section
8.08(b)(vi) shall be substituted in its stead:
(vi) at such time as the Leverage Ratio is less than 2.50 to 1.00, the
Borrower may make a distribution to the Parent to enable the Parent to
repurchase capital stock of the Parent owned by any Shareholder that was an
officer of the Borrower that has resigned or has been terminated (and the
Parent is hereby permitted to do so) (A) in accordance with the terms of
that certain Second Amended and Restated Subscription and Stockholders
Agreement, among the Parent and the Shareholders, dated as of May 16, 1996
(the "Stockholders Agreement") and (B) in an amount not to exceed any
equity contribution made by ABRY to the Parent and by the Parent to the
Borrower for such purpose,
SECTION 12. Conditions Precedent. This Second Amendment shall not be
--------------------
effective until all proceedings of the Borrower taken in connection with this
Second Amendment and the transactions contemplated hereby shall be satisfactory
in form and substance to the Administrative Lender and Lenders, and the
Administrative Lender and Lenders shall have each received:
6
<PAGE>
(a) payment in full of amendment fees, payable to the
Administrative Lender on behalf of the Lenders in their Specified
Percentages;
(b) payment and/or reimbursement in full of all legal and other
expenses incurred by the Administrative Lender through the date hereof and
payable or reimbursable by the Borrower in accordance with the terms of the
Credit Agreement, including without limitation, the fees and expenses due
and payable by the Administrative Lender to Special Counsel and local
counsel;
(c) copies of resolutions authorizing the execution, delivery and
performance of this Second Amendment by the Borrower and the Parent, and
legal opinions by counsel in form and substance satisfactory to the
Administrative Lender regarding the due execution, delivery and performance
of this Second Amendment and the legality, validity and the enforceability
thereof; and
(d) such other documents, instruments, and certificates, in form
and substance satisfactory to the Administrative Lender, as the
Administrative Lender shall deem necessary or appropriate in connection
with this Second Amendment and the transactions contemplated hereby.
SECTION 13. Representations and Warranties. The Borrower represents and
------------------------------
warrants to the Lenders and the Administrative Lender that (a) this Second
Amendment constitutes its legal, valid, and binding obligations, enforceable in
accordance with the terms hereof (subject as to enforcement of remedies to any
applicable bankruptcy, reorganization, moratorium, or other laws or principles
of equity affecting the enforcement of creditors' rights generally), (b) there
exists no Event of Default or Default under the Credit Agreement both before and
after giving effect to this Second Amendment, (c) its representations and
warranties set forth in the Credit Agreement and other Loan Papers are true and
correct on the date hereof both before and after giving effect to this Second
Amendment, (d) it has complied with all agreements and conditions to be complied
with by it under the Credit Agreement and the other Loan Papers by the date
hereof, (e) the Credit Agreement, as amended hereby, and the other Loan Papers
remain in full force and effect, and (f) no notice to, or consent of, any Person
is required under the terms of any agreement of the Borrower in connection with
the execution of this Second Amendment.
SECTION 14. Further Assurances. The Borrower shall execute and deliver
------------------
such further agreements, documents, instruments, and certificates in form and
substance satisfactory to the Administrative Lender, as the Administrative
Lender or any Lender may deem necessary or appropriate in connection with this
Second Amendment.
SECTION 15. Counterparts. This Second Amendment and the other Loan Papers
------------
may be executed in any number of counterparts, all of which taken together shall
constitute one and the same instrument. In making proof of any such agreement,
it shall not be necessary to produce or account for any counterpart other than
one signed by the party against which enforcement is sought.
7
<PAGE>
SECTION 16. ENTIRE AGREEMENT. THIS AGREEMENT AND THE OTHER LOAN PAPERS
----------------
REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
SECTION 17. GOVERNING LAW. (A) THIS AGREEMENT AND ALL LOAN PAPERS SHALL
-------------
BE DEEMED CONTRACTS MADE UNDER THE LAWS OF TEXAS AND SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF TEXAS, EXCEPT TO THE
EXTENT (A) FEDERAL LAWS GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND
INTERPRETATION OF ALL OR ANY PART OF THIS AGREEMENT AND ALL LOAN PAPERS OR (B)
STATE LAW GOVERNS UCC COLLATERAL INTERESTS FOR PROPERTIES OF THE BORROWER AND
THE SUBSIDIARIES OUTSIDE THE STATE OF TEXAS. WITHOUT EXCLUDING ANY OTHER
JURISDICTION, THE BORROWER AND EACH SUBSIDIARY AGREES THAT THE COURTS OF TEXAS
WILL HAVE JURISDICTION OVER PROCEEDINGS IN CONNECTION HEREWITH.
(b) THE BORROWER AND EACH SUBSIDIARY HEREBY WAIVES PERSONAL
SERVICE OF ANY LEGAL PROCESS UPON IT. IN ADDITION, THE BORROWER AND EACH
SUBSIDIARY AGREES THAT SERVICE OF PROCESS MAY BE MADE UPON IT BY REGISTERED MAIL
(RETURN RECEIPT REQUESTED) DIRECTED TO THE BORROWER AT ITS ADDRESS DESIGNATED
FOR NOTICE UNDER THIS AGREEMENT AND SERVICE SO MADE SHALL BE DEEMED TO BE
COMPLETED UPON RECEIPT BY THE BORROWER. NOTHING IN THIS SECTION SHALL AFFECT THE
RIGHT OF THE ADMINISTRATIVE LENDER OR ANY LENDER TO SERVE LEGAL PROCESS IN ANY
OTHER MANNER PERMITTED BY LAW.
SECTION 18. WAIVER OF JURY TRIAL. TO THE MAXIMUM EXTENT PERMITTED BY LAW,
--------------------
THE BORROWER, EACH SUBSIDIARY AND EACH LENDER HEREBY WAIVES ANY RIGHT THAT IT
MAY HAVE TO A TRIAL BY JURY OF ANY DISPUTE (WHETHER A CLAIM IN TORT, CONTRACT,
EQUITY, OR OTHERWISE) ARISING UNDER OR RELATING TO THIS AGREEMENT, THE OTHER
LOAN PAPERS, OR ANY RELATED MATTERS, AND AGREES THAT ANY SUCH DISPUTE SHALL BE
TRIED BEFORE A JUDGE SITTING WITHOUT A JURY.
================================================================================
THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.
===============================================================================
8
<PAGE>
IN WITNESS WHEREOF, this Second Amendment to Third Amended and Restated
Credit Agreement is executed as of the date first set forth above.
THE BORROWER: PINNACLE TOWERS INC.
-------------------------------------
By:
----------------------------------
Its:
---------------------------------
ACCEPTED AND AGREED:
PINNACLE HOLDINGS INC.
By:
-------------------------------
Its:
------------------------------
ADMINISTRATIVE LENDER: NATIONSBANK,N.A.,as Administrative
Lender
-------------------------------------
By: Roselyn Drake
Its: Vice President
SYNDICATION AGENT: GOLDMAN SACHS CREDIT PARTNERS L.P., as
Syndication Agent
-------------------------------------
By:
----------------------------------
Its:
---------------------------------
LENDERS: NATIONSBANK, N.A., individually as a
Lender
-------------------------------------
By: Roselyn Drake
Its: Vice President
9
<PAGE>
GOLDMAN SACHS CREDIT PARTNERS L.P.
-------------------------------------
By:
----------------------------------
Its:
---------------------------------
BANKBOSTON, N.A.
-------------------------------------
By:
----------------------------------
Its:
---------------------------------
SOCIETE GENERALE, NEW YORK BRANCH
-------------------------------------
By:
----------------------------------
Its:
---------------------------------
BANK OF AMERICA
-------------------------------------
By:
----------------------------------
Its:
---------------------------------
10
<PAGE>
KEY CORPORATE CAPITAL INC.
-------------------------------------
By:
----------------------------------
Its:
---------------------------------
UNION BANK OF CALIFORNIA, N.A.
-------------------------------------
By:
----------------------------------
Its:
---------------------------------
CO-BANK, ACB
-------------------------------------
By:
----------------------------------
Its:
---------------------------------
GENERAL ELECTRIC CAPITAL CORP.
-------------------------------------
By:
----------------------------------
Its:
---------------------------------
11
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 4 to Registration Statement No. 333-59297 on Form S-11 of
Pinnacle Holdings Inc. of the following: (1) our report dated March 4, 1998
relating to the consolidated financial statements of Pinnacle Holdings Inc.,
(2) our report dated February 9, 1998 relating to the combined financial
statements of Shore Communications, (3) our report dated February 9, 1998
relating to the combined financial statements of Tidewater Communications and
(4) our report dated February 9, 1998 relating to the combined financial
statements of Majestic Communications, which appear in such Prospectus. We
also consent to the reference to us under the heading "Experts" and "Selected
Financial Data" in such Prospectus. However, it should be noted that
PricewaterhouseCoopers LLP has not prepared or certified such "Selected
Financial Data."
/s/ Pricewaterhousecoopers LLP
Tampa, Florida
December 30, 1998
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated February 20, 1998, on the Tower Operations of Southern
Communications Services, Inc. and to all references to our Firm included in or
made a part of this Registration Statement.
/s/ Arthur Andersen LLP
Atlanta, Georgia
December 28, 1998
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated July 13, 1998, with respect to the financial
statements of the Tower Operations of MobileMedia Communications, Inc. and
Subsidiaries included in Pre-Effective Amendment No. 34 to the Registration
Statement (Form S-11 No. 333-59297) and related Prospectuses of Pinnacle
Holdings Inc. for the registration of 11,500,000 shares of its common stock,
150,000 shares of its Exchangeable Preferred Stock and Exchange Notes due
2009.
/s/ Ernst & Young LLP
MetroPark, New Jersey
December 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 SEP-30-1998
<CASH> 1,693,923 0
<SECURITIES> 0 0
<RECEIVABLES> 1,647,575 2,502,601
<ALLOWANCES> 70,000 356,905
<INVENTORY> 0 0
<CURRENT-ASSETS> 4,308,945 3,178,315
<PP&E> 137,719,715 477,128,243
<DEPRECIATION> 8,278,524 15,223,593
<TOTAL-ASSETS> 143,177,903 492,078,268
<CURRENT-LIABILITIES> 17,098,983 26,966,366
<BONDS> 109,459,790 399,642,563
1,761,039 30,543,260
0 32,570,731
<COMMON> 270 378
<OTHER-SE> 14,752,809 2,242,881
<TOTAL-LIABILITY-AND-EQUITY> 143,177,903 492,078,268
<SALES> 12,880,631 21,127,633
<TOTAL-REVENUES> 12,880,631 21,127,633
<CGS> 2,632,274 3,965,511
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 11,784,434 33,067,193
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 6,925,094 7,276,265
<INCOME-PRETAX> 0 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (8,461,171) (23,181,336)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (8,461,171) (23,181,336)
<EPS-PRIMARY> (27.28) (59.85)
<EPS-DILUTED> (27.28) (59.85)
</TABLE>
