<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998 or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-24773
PINNACLE HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Delaware 65-0652634
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1549 Ringling Boulevard
3rd Floor
Sarasota, Florida 34236
(Address of principal executive offices) (zip-code)
Registrant's telephone number, including area code: (941) 364-8866
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
----------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) had been subject to such filing
requirements in the past 90 days.
YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
<PAGE>
PART I
ITEM 1. BUSINESS
Company Overview
Pinnacle Holdings Inc., a Delaware corporation, (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 December 31, 1998, the
Company has completed 210 acquisitions through which it has acquired 799 towers
and has constructed an additional 77 towers in such high growth markets as
Atlanta, Birmingham, New Orleans, Orlando and Tampa.
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").
Industry Background
Communications towers are primary infrastructure components for wireless
communications services such as cellular, paging, personal communications
services ("PCS"), Specialized Mobile Radio ("SMR"), wireless data transmission
and radio and television broadcasting. Wireless communications companies require
specialized wireless transmission networks in order to provide service to their
customers. Each of these networks is configured specifically to meet the
coverage requirements of the particular carrier and includes transmission
equipment such as antennae, transmitters and receivers placed at various
locations throughout the covered area. These locations, or communications sites,
are critical to the operation of wireless communications networks and consist of
towers, rooftops and other structures upon which such equipment may be placed.
Wireless communications providers design their network and select their
communications sites in order to optimize available frequencies relative to
their projected usage patterns, topography and service requirements.
The Wireless Communications Industry
The wireless communications industry is growing rapidly as: (i) consumers
become increasingly aware of the uses and benefits of wireless communications
services; (ii) the costs of wireless communications services decline; and (iii)
new wireless communications technologies continue to be developed. Changes in
U.S. federal regulatory policy have led to a significant increase in the number
of competitors in the wireless communications industry, most recently through
the auction of radio spectrum for PCS. This competition, combined with an
increasing reliance on wireless communications services by consumers and
businesses, has increased demand for higher quality networks characterized by
uninterrupted service and improved coverage. As new carriers build out their
networks and existing carriers upgrade and expand their networks to maintain
their competitiveness, the demand for communications sites is expected to
continue to increase dramatically.
1
<PAGE>
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.
. 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 Federal Communications Commission ("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 Enhanced
Specialized Mobile Radio ("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.
2
<PAGE>
. 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. 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-
3
<PAGE>
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 December 31, 1998, the Company's tower inventory was
comprised of 646 guyed, 192 self-supporting lattices and 38 monopoles.
Wireless communications equipment can also be placed on building rooftops.
Traditionally, rooftop sites have been common in urban downtown areas where tall
buildings are available and multiple communications sites are required because
of high wireless traffic density. Today, rooftop sites are used less for certain
types of customers as current technology requirements cause an increasing number
of providers to place antennae lower on buildings.
The value of a rental tower is principally determined by the desirability
of its location to customers and the amount of customer equipment installations
that it can support. Several customers may share one tower through "vertical
separation" with each type of customer on a different level. While many existing
towers were not originally built with the capacity to support multiple
customers, these towers can often be upgraded to support additional equipment.
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
4
<PAGE>
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 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
5
<PAGE>
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 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. 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 (as
defined herein) in March 1998 (201 towers) and the MobileMedia Acquisition (as
defined herein) in September 1998 (166 towers) are two of the largest
acquisition transactions in the industry to date. Since commencing operations
in 1995 and through December 31, 1998, the Company has completed the acquisition
of 799 towers in 210 separate transactions. Subsequent to December 31, 1998 and
prior to January 18, 1999, the Company acquired an additional tower. As of
January 18, 1999, the Company had agreements or letters of intent to acquire 135
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 108 total employees at December 31, 1998, 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.
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
6
<PAGE>
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 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 (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 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
7
<PAGE>
the Southern Towers Acquisition, the Company has already experienced significant
interest from potential customers in the towers and has negotiated new leases
totaling approximately $724,000 in annualized lease revenue.
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.
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 $305,000 in annualized lease revenue.
Additionally, when acquired, the towers had existing third party tenants that
generated annual revenue of approximately $2.2 million.
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
8
<PAGE>
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 1998, the Company constructed 22 and 47
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. As of December 31, 1998, 16
new towers were under construction by the Company and there were in excess of
100 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. 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 December 31, 1998,
the Company had a network of approximately 801 towers (excluding one tower
acquired subsequent to December 31, 1998 and 135 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
9
<PAGE>
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.
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 year ended December 31, 1998, the
Company's tower level cash flow margin was 80.7%.
. 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 and through December 31, 1998, the Company has successfully completed
210 acquisitions through which it has acquired 799 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
10
<PAGE>
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 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 December 31, 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
Federal Aviation Administration ("FAA") and FCC regulations and other local
requirements. Regulatory data is
11
<PAGE>
integrated into the Company's management information systems and is provided to
current and potential customers as part of equipment installation support
efforts.
Customer Sales and Support. The Company's customer sales support group is
dedicated to responding to the needs of current and potential customers. Support
is offered to customers in connection with assessing a selected tower's
capacity, determining the potential for radio frequency interference from new
equipment and providing required documentation as to ownership and other
property issues. This service function seeks to facilitate the customer's
decision to initiate installation on the Company's tower and, the Company
believes, has enhanced the Company's reputation as a full-service and responsive
provider of rental tower space.
Customers and Customer Leases
As of December 31, 1998, the Company had over 4,200 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 approximately 24% and 11% of
the Company's revenues, respectively, for the year ended December 31, 1998 on a
run rate basis.
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 December 31, 1998:
<TABLE>
<CAPTION>
Percentage
Customer Type of
- ------------------- Revenue
-----------
<S> <C>
Paging........................................................... 43
SMR.............................................................. 18
2-Way Services................................................... 14
PCS.............................................................. 11
Cellular......................................................... 5
Broadcasting..................................................... 4
Government....................................................... 4
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
12
<PAGE>
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.
Competition
The markets in which the Company operates are highly competitive. The
Company competes with wireless communications providers who own and operate
their own tower networks, site development companies which acquire space on
existing towers, rooftops and other sites, other independent tower companies and
traditional local independent tower operators. Wireless communications providers
who own and operate their own tower networks generally are larger and have
greater financial resources than the Company. The Company believes that tower
location and capacity, price, quality of service and density within a geographic
market historically have been and will continue to be the most significant
competitive factors affecting tower rental companies. The Company believes that
competition for tower acquisitions will increase and that additional competitors
will enter the tower rental market, some of which may have greater financial
resources than the Company.
Regulatory Matters
Federal Regulations. Both the FCC and FAA promulgate regulations relative
to towers used for wireless communications. Such regulations primarily relate to
the siting, lighting and marking of towers. Most proposed antenna structures
that are higher than 200 feet above ground level or that may interfere with the
flight path of a nearby airport must be studied by the FAA and registered with
the FCC. Upon notification to the FAA of a potential new tower or a proposed
change in the height or location of certain existing towers, the FAA assigns a
number to and conducts an aeronautical study. Upon the finding that a proposed
tower, new or modified, does not constitute a hazard to air navigation, the FAA
will require certain painting and lighting requirements to be met to maximize
the visibility of the tower. All towers subject to the FAA notification process
must be registered by the tower owner with the FCC. At FCC registration, the FCC
generally requires the painting and lighting requirements of the FAA to be met.
Tower owners may also bear the responsibility of notifying the FAA of any tower
lighting outage. The FCC enforces the tower painting and lighting requirements.
Failure to 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.
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
13
<PAGE>
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 December 31, 1998, the Company had approximately 108 full-time
employees, of which 78 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 Real Estate Investment Trust ("REIT") under Sections 856-860 of the Internal
Revenue Code (the "Code"). 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 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.
ITEM 2. PROPERTIES
The Company both owns and leases the real property upon which its towers
are located. As of December 31, 1998, the Company owned 542 towers on parcels of
real estate that are leased and 302 towers on parcels of real estate that are
owned. Additionally, the Company currently manages 32 tower sites.
14
<PAGE>
The following is a summary of the Company's sites by state, as of December
31, 1998:
<TABLE>
<CAPTION>
Number of Number of Total Number
Tower Tower of
State Sites Leased Sites Owned Tower Sites*
----- ------------ ----------- -------------
<S> <C> <C> <C>
Florida.................................... 92 71 181
Georgia.................................... 67 80 147
Alabama.................................... 81 31 113
Louisiana.................................. 60 15 75
Tennessee.................................. 32 25 68
Mississippi................................ 42 15 58
North Carolina............................. 39 12 51
California................................. 29 12 41
Texas...................................... 20 12 32
South Carolina............................. 18 9 27
Virginia................................... 17 2 19
Maryland................................... 13 0 13
New Hampshire.............................. 3 6 9
Washington................................. 8 0 8
New York................................... 2 4 7
Arkansas................................... 4 2 6
Rhode Island............................... 1 4 5
Maine...................................... 2 1 3
Ohio....................................... 2 0 2
Connecticut................................ 2 0 2
New Mexico................................. 2 0 2
Massachusetts.............................. 2 0 2
Wisconsin.................................. 1 0 1
Michigan................................... 1 0 1
New Jersey................................. 0 1 1
Delaware................................... 1 0 1
--- --- ---
Total............................ 542 302 876
=== === ===
</TABLE>
* Includes 32 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 December 31, 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 (as defined
herein), 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 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.
15
<PAGE>
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 $207,000 in 1998. 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.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
There is currently no market for the Common Stock. The Company's Common
Stock has been approved for quotation on the Nasdaq National Market under the
symbol "BIGT".
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. 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
project 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.
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 (as defined
herein), and the certificate of designations governing the Company's
Exchangeable Preferred Stock currently limit the ability of the Company to make
cash distributions, in each case except for such distributions necessary to
maintain its REIT status.
As of February 16th, 1999, there were approximately 120 stockholders of
record.
The securities issued or sold by the Company since May 1995, the date of
inception, which were not registered under the Securities Act of 1933, as
amended (the "Securities Act") are listed below:
16
<PAGE>
(i) Pursuant to the Stockholders Agreement (as defined herein),
since December 31, 1995, the Company has issued to ABRY Broadcast Partners
II, L.P. ("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
issues 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 20, 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 (the "Senior Discount
Notes"), pursuant to a Purchase Agreement dated as of March 17, 1998,
between the Company and the initial purchasers thereof. The initial
purchasers subsequently resold the Senior Discount Notes to (a) "qualified
institutional buyers" (in reliance on Rule 144A under the Securities Act)
and (b) non-U.S. persons outside the United States (in reliance on
Regulation S under the Securities Act). In connection with the issuance
and sale of the Senior Discount Notes, the Company and the initial
purchasers entered into a registration rights agreement pursuant to which
the Company agreed to use its best efforts to cause a registration
statement to become effective under the Securities Act with respect to the
exchange by the Company of new notes for the outstanding Senior Discount
Notes. The form and terms of the new notes are the same as the form and
terms of the Senior Discount Notes in all material respects. The Company
filed a registration statement on Form S-4 that became effective, as
amended, on March 17, 1998.
(v) On September 3, 1998, the Company sold 30,000 shares of the
Company's Series A senior preferred stock (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.
(vi) On September 3, 1998, the Company sold 32.5 shares of the
Company's Series B junior preferred stock (the "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 such transaction. All recipients had adequate access, through their
relationship with the Company to information about the Company.
17
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
ITEM 6. SELECTED 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 three
years ended December 31, 1996, 1997 and 1998 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
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)
through Years Ended December 31,
December 31, --------------------------------------
1995 1996 1997 1998
------------- ------------ ------------ ------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Tower rental revenue..... $ 733 $ 4,842 $12,881 $ 32,019
Tower operating expenses,
excluding depreciation
and amortization........ 181 1,135 2,633 6,166
------ ------- ------- --------
Gross profit, excluding
depreciation and
amortization............ 552 3,707 10,248 25,853
Other expenses:
General and
administrative (a)..... 306 916 1,367 4,175
Corporate
development (a)........ 369 1,421 3,723 6,382
State franchise, excise
and minimum taxes...... -- 26 67 686
Depreciation............ 282 2,041 6,335 22,513
------ ------- ------- --------
Loss from operations..... (405) (697) (1,244) (7,903)
Interest expense......... 181 1,155 6,925 12,300
Amortization of original
issue discount and debt
issuance costs ......... 59 164 292 16,427
------ ------- ------- --------
Loss before extraordinary
item.................... (645) (2,016) (8,461) (36,630)
Extraordinary loss from
extinguishment of debt.. -- -- -- 5,641
------ ------- ------- --------
Net loss................. (645) 2,016 (8,461) (42,271)
====== ======= ======= ========
Dividends and accretion
on Preferred Stock...... -- -- -- 3,094
------ ------- ------- --------
Loss attributable to
Common Stock............ $ (645) $(2,016) $(8,461) $(45,365)
====== ======= ======= ========
Basic loss per Common
Share:
Loss before
extraordinary item..... $(6.31) $ (8.10) $(27.28) $ (94.95)
Extraordinary item...... -- -- -- (13.48)
------ ------- ------- --------
Net loss................ $(6.31) $ (8.10) $(27.28) $(108.43)
====== ======= ======= ========
Weighted average number
of shares of Common
Stock................... 102 249 310 418
Other Operating Data:
Tower Level Cash Flow
(b)..................... $ 552 $ 3,707 $10,248 $ 25,853
Tower Level Cash Flow
Margin (c).............. 75.3% 76.6% 79.6% 80.7%
Adjusted EBITDA (b)...... $ 246 $ 2,791 $ 8,881 $ 21,678
Adjusted EBITDA Margin
(c)..................... 33.6% 57.6% 68.9% 67.7%
EBITDA (b)............... $ (123) $ 1,344 $ 5,091 $ 14,610
EBITDA Margin (c)........ -- 27.8% 39.5% 45.6%
Number of Towers:
Beginning of period..... 0 33 156 312
Towers acquired during
the period............. 29 119 134 517
Towers constructed
during the period...... 4 4 22 47
End of period........... 33 156 312 876
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
December 31,
------------------------------------
1995 1996 1997 1998
------- ------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............. 31 $ 47 $ 1,694 $ 13,801
Tower assets, net..................... 11,551 48,327 127,946 473,942
Total assets.......................... 14,573 55,566 143,178 516,148
Total debt............................ 6,124 30,422 120,582 433,218
Redeemable stock:
Series A senior preferred stock...... -- -- -- 29,882
Class B common stock................. 1,200 1,200 1,761 1,761
Class D common stock................. -- -- --
Series B junior preferred stock....... -- -- -- 59,929
Common stock.......................... -- -- -- --
Additional paid-in capital............ 7,051 24,881 25,876 33,137
Stock subscription receivable......... (180) -- -- --
Common stock warrants................. -- -- -- 1,000
Accumulated deficit................... (645) (2,661) (11,123) (53,394)
------- ------- -------- --------
Stockholders' equity.................. 6,226 22,220 14,753 40,672
</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,
corporate development expenses and state franchise, excise and minimum
taxes. "EBITDA" represents loss from operations before depreciation and
amortization not including the effect of accretion and accrued dividends
on Existing 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.
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
The following is a discussion of the financial condition and results of
operations of the Company for each of the three years ended December 31, 1996,
1997 and 1998. The discussion should be read in conjunction with the Financial
Statements of the Company and the notes thereto included in this Form 10-K. 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.
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:
Year Ended December 31,
1996 1997 1998 Total(1)
---- ---- ---- --------
Number of towers acquired..................... 119 134 517 799
Number of towers built........................ 4 22 47 77
---- ---- ---- ---
Number of towers acquired or built during the 123 156 564 876
period....................................... ==== ==== ==== ===
Number of acquisition transactions completed.. 49 72 82 210
- --------------
(1) Included in the number of towers acquired are 32 tower sites that the
Company manages.
As of December 31, 1998, the Company also had 16 towers under construction
and 100 additional tower projects in various stages of development. Subsequent
to December 31, 1998 and prior to January 18, 1999, the Company acquired an
additional tower. As of January 18, 1999, the Company had agreements or letters
of intent to acquire 135 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
20
<PAGE>
(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.
The Company has generated net losses since inception and at December 31,
1998, had an accumulated deficit totalling $53.4 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 December 31, 1998,
the Company's Annualized Run Rate Revenue was $44.7 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 Form 10-K.
Year Ended December 31,
------------------------------
1996 1997 1998
--------- -------- ---------
Statement of Operations Data:
Tower rental revenue....................... 100.0% 100.0% 100.0%
Tower operating expenses, excluding 23.4 20.4 19.3
depreciation and amortization.............
Gross profit............................... 76.6 79.6 80.7
Expenses:
General and administrative................. 18.9 10.6 13.0
Corporate development...................... 29.3 28.9 19.9
State franchise, excise and minimum taxes.. 0.5 0.5 2.1
Depreciation............................... 42.2 49.2 70.3
Loss from operations.......................... (14.3) (9.6) (24.6)
Interest expense.............................. 23.9 53.8 38.4
Amortization of original issue discount....... 3.4 2.3 51.3
Extraordinary item............................ - - 17.6
Net loss...................................... (41.6%) (65.7%) (114.3%)
1998 Compared to 1997
Tower rental revenue increased 148.6% to $32.0 million in 1998 from $12.9
million in 1997. This increase is attributable to the acquisition and
construction of 564 towers during the twelve month period ended December 31,
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
134.2% to $6.2 million in 1998 from $2.6 million in 1997. This increase is
consistent with the purchase and construction of towers as discussed above.
21
<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 13.0% of revenue in
1998 from 10.6% in 1997. This increase resulted from increases in staffing
related to the Company becoming a public registrant and related increases in
professional fees and travel costs, increased levels of advertising and
marketing expenditures in connection with attracting new tenants to the
Company's towers and increases in rent and related costs.
Corporate development expenses, which represent costs incurred in connection
with acquisitions and construction of new towers, increased 71.4% to $6.4
million in 1998 from $3.7 million in 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 to 19.9% in 1998 from 28.9% in
1997 because of the incremental increase in tower rental revenue from the
comparative period in 1997 and economies of scale resulting from such growth.
State franchise, excise and minimum taxes, which represent taxes assessed in
connection with the Company's operations in various state jurisdictions
increased to $0.7 million in 1998 from $0.1 million in 1997. Such taxes are
calculated using various methods such as a portion of the Company's property
within a given state, the Company's capital structure or based upon a minimum
tax in lieu of income taxes. The increase in 1998 is primarily attributable to
the Company's significant expansion of its geographic region primarily through
acquisitions.
Interest expense, net of amortization of original issue discount, increased
77.6% to $12.3 million in 1998 from $6.9 million in 1997. The increase in
interest expense was attributable to increased borrowing associated with the
Company's acquisitions during the period.
During 1998 the Company significantly amended its Senior Credit Facility to
provide up to $250 million of financing, $200 million of which is accessible by
the Company for borrowings. Additionally, certain financial covenants were
modified. As a result of this significant modification, a write-off of the
previously deferred debt issue costs of $5.6 million is reflected in the
financial statements as an extraordinary item.
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
131.9% 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 to 20.4% in 1997 from 23.4% in 1996, reflecting operating
efficiencies gained on existing towers as well as on new towers acquired or
constructed.
General and administrative expenses increased 49.2% to $1.4 million in 1997
from $0.9 million in 1996. General and administrative costs decreased as a
percentage of tower rental revenue to 10.6% in 1997 from 18.9% in 1996 because
of lower overhead costs as a percentage of tower rental revenue.
Corporate development expenses increased 162.0% to $3.7 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 28.9% in 1997 compared to 29.3% 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.
22
<PAGE>
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 $9.3 million (inclusive of a $15.0 million loan from ABRY II (the
"ABRY Bridge Loan")), $12.8 million and $1.5 million as of December 31, 1998,
1997 and 1996, respectively. Excluding the current portion of long-term debt,
current assets exceeded current liabilities by $6.4 million as of December 31,
1998. Excluding the current portion of long-term debt, current liabilities
exceeded current assets by $1.7 million and $0.8 million as of December 31, 1997
and 1996, respectively. The Company's ratio of total debt to stockholders'
equity was 10.7 to 1.0 at December 31, 1998, 8.2 to 1.0 at December 31, 1997 and
1.4 to 1.0 as of December 31, 1996.
The Company has entered into a senior credit facility with NationsBank, N.A.
and certain other lenders (the "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%. As of December 31,
1998, outstanding borrowings under the Senior Credit Facility were approximately
$182.5 million. Advances under the Senior Credit Facility have been used
primarily to fund acquisitions and construction of towers.
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
December 31, 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 IPO. Additionally, as of December 31, 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 $58.7 million of Junior
Preferred Stock. The ABRY Bridge Loan will be paid in full and retired with
proceeds from the IPO.
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 $19.8 million at December 31, 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 an
indenture (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. Included in the sale of
the Senior Preferred Stock were warrants to purchase approximately .75% of the
Company's outstanding common stock.
23
<PAGE>
The warrants will be cancelled upon the redemption of the Senior Preferred
Stock. ABRY/Pinnacle, Inc., an affiliate of ABRY II, purchased the 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 to ABRY/Pinnacle, Inc. The
proceeds from the sale of the Junior Preferred Stock were used to fund tower
acquisitions and pay operating costs. The Junior Preferred Stock currently has
a liquidation preference of $60.4 million. The Senior Preferred Stock and the
Junior Preferred Stock are entitled to receive dividends, payable quarterly, at
a current rate of 14% per annum. The Senior Preferred Stock and the Junior
Preferred Stock are 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.
Capital expenditures, including acquisitions, were $42.8 million, $89.4
million and $373.6 million for the periods ended December 31, 1996, 1997 and
1998, respectively, and related primarily to acquisitions.
The Company is currently seeking to fund certain of its liquidity needs with
proceeds from the initial public offering and sale of its Common Stock (the
"IPO"). The Company intends to use the net proceeds of the IPO, assuming an
initial public offering price of $15.00 per share, as follows: (i)
approximately $31.4 million to redeem the outstanding shares of the Senior
Preferred Stock; (ii) approximately $60.4 million to redeem the outstanding
shares of the Junior Preferred Stock; (iii) approximately $15.7 million,
including accrued interest, to repay in full and retire the ABRY Bridge Loan;
(iv) approximately $43.7 million of preferential amounts and yields to certain
stockholders; and (v) approximately $129.3 million to repay outstanding
borrowings under the Senior Credit Facility.
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 requiring funding in excess
of available IPO proceeds and funds available under its Senior Credit Facility,
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 be
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 1996, 1997
and 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks inherent in the Company's
financial instruments. These instruments arise from transactions entered into
in the normal course of business and, in some cases, relate to the Company's
acquisitions of related businesses. The Company is subject to interest rate
risk on its existing Senior Credit Facility and any future financing
requirements. The Company's fixed rate debt consists primarily of outstanding
balances on its Senior Discount Notes and notes payable to former tower owners
and its variable rate debt relates to borrowings under its Senior Credit
Facility. See "-Liquidity and Capital Resources".
The following table represents the future principal payment obligations and
weighted-average interest rates associated with the Company's existing long-term
debt instruments assuming the Company's actual level of long-term indebtedness
of $398,408,000 under the Senior Discount Notes and the Senior Credit Facility
as of December 31, 1998:
<TABLE>
<CAPTION>
Expected Maturity Date
<S> <C> <C> <C> <C> <C> <C>
1999 2000 2001 2002 2003 Thereafter
------- ----------- ----------- ----------- ----------- ------------
Liabilities
Long-term Debt
Fixed Rate
(10.00%) -- -- -- -- -- $325,000,000
Variable Rate
(Weighted Average Interest
Rate of 8.58%)............. -- $18,245,000 $27,367,500 $36,490,000 $36,490,000 $ 63,857,500
</TABLE>
The Company's primary market risk exposure relates to (i) the interest rate
risk on long-term and short-term borrowings, (ii) its ability to refinance its
Senior Discount Notes at maturity at market rates, (iii) the impact of interest
rate movements on its ability to meet interest expense requirements and exceed
financial covenants and (iv) the impact of interest rate movements on the
Company's ability to obtain adequate financing to fund future acquisitions. The
Company manages interest rate risk on its outstanding long-term and short-term
debt through its use of fixed and variable rate debt. While the Company can not
predict or manage its ability to refinance existing debt or the impact interest
rate movements will have on its existing debt, management continues to evaluate
its financial position on an ongoing basis.
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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,
1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, 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.
PricewaterhouseCoopers LLP
Tampa, Florida
January 11, 1999
25
<PAGE>
PINNACLE HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents....................... $ 1,693,923 $ 13,801,190
Accounts receivable, less allowance for doubtful
accounts
of $70,000 and $125,000, respectively.......... 1,577,575 1,679,390
Prepaid expenses and other current assets....... 1,037,447 1,432,428
------------ ------------
Total current assets........................... 4,308,945 16,913,008
Restricted cash................................... 59,822 --
Tower assets, net of accumulated depreciation of
$8,278,524 and $28,964,462, respectively......... 127,946,070 473,942,309
Fixed assets, net................................. 1,495,121 2,476,666
Land.............................................. 6,850,951 14,613,365
Deferred debt issue costs, net of accumulated
amortization of $514,898 and $6,765,601,
respectively..................................... 1,871,242 6,686,683
Other assets...................................... 645,752 1,516,070
------------ ------------
$143,177,903 $516,148,101
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable................................ $ 2,242,397 $ 3,280,809
Accrued expenses................................ 3,095,049 5,761,016
Deferred revenue................................ 639,460 1,448,432
Current portion of long-term debt............... 11,122,077 15,692,912
------------ ------------
Total current liabilities...................... 17,098,983 26,183,169
Long-term debt.................................... 109,459,790 417,524,802
Other liabilities................................. 105,012 125,152
------------ ------------
126,663,785 443,833,123
------------ ------------
Commitments and contingencies (Note 7)
Redeemable stock (Note 8):
Series A senior preferred stock, mandatorily
redeemable, dividends payable-in-kind; $.001
par value; 145,000 shares authorized; 0 and
31,383 shares issued and outstanding at
December 31, 1997 and 1998, respectively;
includes accrued dividends and accretion of
$1,434,341 at December 31, 1998 ............... -- 29,882,298
Class B common stock, 12,000 shares issued and
outstanding at December 31, 1997 and 1998,
respectively................................... 1,761,000 1,761,000
Class D common stock, $.001 par value; 39,000,
and 40,000 shares issued and outstanding at
December 31, 1997 and 1998, respectively....... 39 40
------------ ------------
1,761,039 31,643,338
------------ ------------
Stockholders' equity (Note 8):
Series B junior preferred stock, redeemable, 14%
dividends, $.001 par value; 100 shares
authorized; 0 and 60 shares issued and
outstanding at December 31, 1997 and 1998,
respectively includes accrued dividends of
$1,659,821 .................................... -- 59,928,980
Common stock:
Class A common stock, 202,500 shares issued and
outstanding at December 31, 1997 and 1998,
respectively.............................. 203 203
Class E common stock, 67,089, and 174,766
shares issued and outstanding at December
31, 1997 and 1998, respectively........... 67 175
Warrants ...................................... -- 1,000,000
Additional paid-in capital..................... 25,875,752 33,136,302
Accumulated deficit............................ (11,122,943) (53,394,020)
------------ ------------
14,753,079 40,671,640
------------ ------------
$143,177,903 $516,148,101
============ ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these financial statements.
26
<PAGE>
PINNACLE HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Tower rental revenue................ $ 4,841,752 $12,880,631 $ 32,018,651
Tower operating expenses, excluding
depreciation and amortization...... 1,135,023 2,632,274 6,165,897
----------- ----------- ------------
Gross margin, excluding
depreciation and amortization ... 3,706,729 10,248,357 25,852,754
----------- ----------- ------------
Other expenses:
General and administrative........ 916,237 1,367,400 4,175,477
Corporate development............. 1,420,879 3,723,180 6,381,516
State franchise, excise and
minimum taxes.................... 25,801 66,942 686,040
Depreciation...................... 2,041,085 6,334,769 22,512,819
----------- ----------- ------------
4,404,002 11,492,291 33,755,852
----------- ----------- ------------
Loss from operations................ (697,273) (1,243,934) (7,903,098)
Interest expense.................... 1,154,990 6,925,094 12,300,182
Amortization of original issue
discount and debt issuance costs... 164,091 292,143 16,426,224
----------- ----------- ------------
Loss before extraordinary item...... (2,016,354) (8,461,171) (36,629,504)
Extraordinary loss from
extinguishment of debt............. -- -- 5,641,573
----------- ----------- ------------
Net loss............................ $(2,016,354) $(8,461,171) $(42,271,077)
=========== =========== ============
Payable-in-kind preferred dividends
and accretion...................... -- -- 3,094,162
Net loss attributable to common
shareholders....................... $(2,016,354) $(8,461,171) $(45,365,239)
=========== =========== ============
Basic loss per common share:
Loss before extraordinary item..... $ (8.10) $ (27.28) $ (94.95)
Extraordinary item................. -- -- (13.48)
----------- ----------- ------------
Net loss........................... $ (8.10) $ (27.28) $ (108.43)
=========== =========== ============
Weighted average number of common
shares outstanding................. 248,950 310,122 418,363
=========== =========== ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these financial statements.
27
<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>
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 E......... 15,789 16 1,555,533
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)
Issuance of
common stock,
net of issuance
costs:
Class E......... 107,677 108 10,767,600
Distribution to
Class B common
stockholders ... (412,888)
Issuance of
preferred stock,
net of issuance
costs:
Series A senior
preferred
stock........... 1,000,000
Series B junior
preferred
stock........... 58.74 58,269,159 (1,434,341)
Dividends and
accretion on
preferred
stock........... 1.66 1,659,821 (1,659,821)
Net loss........ (42,271,077)
----- ----------- ------- ---- ------- ---- ---------- ----------- --------- ------------
Balance at
December 31,
1998............. 60.40 $59,928,980 202,500 $203 174,766 $175 $1,000,000 $33,136,302 -- $(53,394,020)
===== =========== ======= ==== ======= ==== ========== =========== ========= ============
<CAPTION>
Stockholders'
equity
-------------
<S> <C>
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 E......... 1,555,549
Net loss......... (8,461,171)
Adjustment to
Class B common
stock............ (561,000)
-------------
Balance at
December 31,
1997............. 14,753,079
Issuance of
common stock,
net of issuance
costs:
Class E......... 10,767,708
Distribution to
Class B common
stockholders ... (412,888)
Issuance of
preferred stock,
net of issuance
costs:
Series A senior
preferred
stock........... 1,000,000
Series B junior
preferred
stock........... 56,834,818
Dividends and
accretion on
preferred
stock........... --
Net loss........ (42,271,077)
-------------
Balance at
December 31,
1998............. $40,671,640
=============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these financial statements.
28
<PAGE>
PINNACLE HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1996 1997 1998
------------ ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................. $(2,016,354) $(8,461,171) $ (42,271,077)
----------- ----------- -------------
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation......................... 2,041,085 6,334,769 22,512,819
Amortization of original issue
discount and debt issuance costs.... 164,091 292,143 16.426,224
Extraordinary loss from
extinguishment of debt.............. -- -- 5,641,573
Provision for doubtful accounts...... 45,000 25,000 55,000
(Increase) decrease in:
Accounts receivable, gross......... (454,065) (1,118,692) (156,815)
Prepaid expenses and other current
assets............................ (277,604) (746,299) (394,981)
Notes receivable................... 387,455 -- --
Other assets....................... (237,408) (358,587) (902,630)
Increase (decrease) in:
Accounts payable................... 633,711 1,435,305 1,038,412
Accrued expenses................... 429,779 2,371,605 2,665,967
Deferred revenue................... 77,417 507,037 808,972
Other current liabilities.......... (490,000) -- --
Other liabilities.................. 49,491 44,253 20,140
----------- ----------- -------------
Total adjustments.................. 2,368,952 8,786,534 47,714,681
----------- ----------- -------------
Net cash provided by operating
activities........................... 352,598 325,363 5,443,604
----------- ----------- -------------
Cash flows from investing activities:
Payments made in connection with
acquisitions:
Tower assets....................... (31,845,153) (70,852,422) (320,834,472)
Land............................... (3,337,847) (2,738,951) (7,762,414)
Capital expenditures:
Tower assets....................... (7,036,048) (14,815,863) (43,535,621)
Fixed assets....................... (563,646) (1,023,513) (1,553,493)
(Increase) decrease in restricted
cash................................ 138,157 (25,750) 59,822
----------- ----------- -------------
Net cash used in investing
activities........................... (42,644,537) (89,456,499) (373,626,178)
----------- ----------- -------------
Cash flows from financing activities:
Borrowings under
long-term debt, net ................ 24,866,994 89,918,073 487,247,329
Repayment of long-term debt.......... (568,516) (695,982) (205,029,425)
Proceeds from issuance of redeemable
stock, net.......................... 8 -- --
Proceeds from issuance of PIK
preferred stock and warrants, net... -- -- 87,717,116
Proceeds from issuance of common
stock, net.......................... 18,010,007 1,555,549 10,767,709
Payment of accretion in Class B
common stock........................ -- -- (412,888)
----------- ----------- -------------
Net cash provided by financing
activities........................... 42,308,493 90,777,640 380,289,841
----------- ----------- -------------
Net increase (decrease) in cash and
cash equivalents..................... 16,554 1,646,504 12,107,267
Cash and cash equivalents,
beginning of period.................. 30,865 47,419 1,693,923
----------- ----------- -------------
Cash and cash equivalents, end of
period............................... $ 47,419 $ 1,693,923 $ 13,801,190
=========== =========== =============
Supplemental disclosure of cash flows:
Cash paid for interest............... $ 1,037,452 $ 5,786,816 $ 12,271,070
=========== =========== =============
Non-cash transactions:
Seller debt issued in connection
with acquisitions................... $ 7,493,255 $19,251,850 $ 2,414,965
Payable-in-kind preferred dividends
and accretion....................... $ -- $ -- $ 3,094,162
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these financial statements.
29
<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. Sales to two customers accounted for 14.4% and
13.3% of revenues in 1998.
Restricted Cash
Restricted cash reflects cash held in escrow restricted for the acquisition
of tower sites.
Tower Assets
Tower assets consists of towers, licenses, permits and tower 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, 30
years for buildings and from 5 to 10 years for equipment and other
improvements to tower sites. Also included in tower assets are towers under
construction of $3,452,045 and $9,231,475 as of December 31, 1997 and 1998,
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
30
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 includes $747,000 of costs incurred in connection with a
pending initial public offering by the Company at December 31, 1998, which
will be deducted from the net proceeds of the offering in determining the
amount of additional paid in capital to be recorded upon completion of the
public offering or recorded as expense should the Company not be able to
complete the initial public offering, and tenant lease receivables recorded in
connection with the revenue recognition on non-cancellable tenant leases in
accordance with Financial Accounting Standards Board Opinion No. 13,
"Accounting for Leases."
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 and 1998
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,
1997 and 1998, which includes cash and accounts receivable, approximates fair
value due to the short maturity of those instruments. The Company considers
the variable rate financial instruments including interest rate swaps to be
representative of current market interest rates and, accordingly, the recorded
amounts approximate fair market value. The Company's Senior 10% discount notes
are publicly traded and were trading based on an 11.1% yield at December 31,
1998, indicating a fair value of the Notes of approximately $188.5 million.
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.
31
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1997 and 1998 and, therefore, was not required to pay
a cash dividend in order to retain its REIT status.
Loss Per Share
Basic net loss per common share is based on the weighted average number of
shares of common stock outstanding during each period. The computation of
diluted loss per share, assuming conversion of the Class D common shares and
the exercise of warrants issued in connection with the Series A Senior
Preferred Stock and the Subordinated-Term Loan Agreement, has an antidilutive
effect on loss per share.
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
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 the seller. 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.
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
Communications will continue to represent a significant but declining
percentage of the Company's
32
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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 affiliates. 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 as 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.
In addition to the Southern Communications and MobileMedia transactions
described above, the Company completed 80 acquisitions of 526 towers and
related assets, all of which were individually insignificant to the Company,
from various sellers during the year ended December 31, 1998 for an aggregate
purchase price of $331,204,262, consisting of $328,789,297 in cash and
$2,414,965 of notes payable to the former tower owners.
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, 1997. This
unaudited pro-forma information is 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,
--------------------------
1997 1998
------------ ------------
(unaudited) (unaudited)
<S> <C> <C>
Tower rental revenue........................... $ 38,427,583 $ 43,416,231
Gross profit, excluding depreciation and
amortization.................................. 31,970,369 35,889,471
Net loss....................................... (40,363,789) (48,938,067)
Basic net loss per common share................ $ (160.89) $ (153.89)
</TABLE>
33
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Fixed Assets
Fixed assets consist of the following:
<TABLE>
<CAPTION>
December 31,
Estimated useful ----------------------
lives in years 1997 1998
---------------- ---------- ----------
<S> <C> <C> <C>
Vehicles.......................... 5 $ 489,778 $ 657,062
Furniture, fixtures and other
office equipment................. 5 504,759 315,345
Data processing equipment......... 5 880,333 2,439,895
---------- ----------
1,874,870 3,412,302
Accumulated depreciation.......... (379,749) (935,636)
---------- ----------
Fixed assets, net................. $1,495,121 $2,476,666
========== ==========
</TABLE>
5. Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1998
---------- ----------
<S> <C> <C>
Construction and acquisition costs.................... $1,071,719 $2,429,893
Interest.............................................. 1,337,662 1,334,552
Professional fees..................................... 150,000 543,705
Taxes other than income............................... 148,115 736,698
Payroll and other..................................... 387,553 716,168
---------- ----------
$3,095,049 $5,761,016
========== ==========
</TABLE>
6. Long-term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1998
------------ ------------
<S> <C> <C>
Senior Credit Facility, interest at variable rates
(8.25% at December 31, 1997 and 8.55% to 8.63% at
December 31, 1998, respectively), secured,
quarterly principal installments beginning June
30, 2000, maturing December 31, 2005............. $ 72,000,000 $182,450,000
Senior 10% discount notes, net of unamortized
original issue discount of $0 and $109,041,993,
respectively, unsecured cash interest payable
semi-annually in arrears beginning September 16,
2003, balloon principal payment of $325,000,000
due at maturity on March 15, 2008................ -- 215,958,009
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 or guaranty by related party
(Note 9)......................................... 28,581,867 19,809,705
ABRY bridge loan, interest at 9% per annum,
principal and interest due in April 1999 and
September 1999 (Note 9).......................... -- 15,000,000
Subordinated term note, interest at variable rates
(11.88% at December 31, 1997), unsecured,
principal and interest maturing September 22,
2000............................................. 20,000,000 --
------------ ------------
120,581,867 433,217,714
Less: current potion of long-term debt............ (11,122,077) (15,692,912)
------------ ------------
Long-term debt.................................... $109,459,790 $417,524,802
============ ============
</TABLE>
34
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The remaining principal payments at December 31, 1998 were due as follows:
1999-$15,692,912; 2000-$22,914,363; 2001-$28,464,878; 2002-$38,499,435; 2003-
$37,014,388; 2004-$74,673,731 and thereafter $325,000,000.
Senior Credit Facility
During 1995, the Company entered into a credit agreement of senior debt
financing through a reducing revolving line of credit and revolver/term loan
(as amended, the "Senior Credit Facility"). 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. 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
accrued 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.
In December 1998 the Company significantly amended its Senior Credit
Facility to provide $200 million of financing. Advances under the Senior
Credit Facility accrue interest at the Company's option of either LIBOR plus a
margin of up to 3.00%, 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 2.00%. Additionally, certain financial covenants were
modified. As a result of this significant modification, a write-off of the
deferred debt costs of $5.6 million relating to original debt issue costs is
reflected in the accompanying financial statements as an extraordinary item.
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 senior debt to annualized EBITDA to exceed certain
amounts, as defined in the agreement.
For the years ended December 31, 1996, 1997, and 1998 the Company incurred
commitment fees of approximately $52,000, $192,000, and $210,000,
respectively.
Senior Discount Notes
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 periods ending March 15, 2003, 2004, 2005, and 2006 and
thereafter, respectively. In addition, the Company at any time prior to March
15, 2001 may redeem up to 35% of the Senior Discount Notes upon a
35
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 an amount 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.
Amortization of original issue discount for the year ended December 31, 1998
was $16,167,507.
ABRY Bridge Loan
In February 1998, the Company entered into an agreement with its principal
stockholder (the "ABRY 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. The Company satisfied
the loan balance in March 1998 in conjunction with the issuance of Senior
Discount Notes, including interest due of $114,041.
During April 1998, the Company borrowed $2.5 million under the ABRY Bridge
Loan to partially fund acquisitions. In September 1998, the Company borrowed
$12,500,000 under the ABRY Bridge Loan to partially finance the MobileMedia
Acquisition. An aggregate amount of $15,000,000 is outstanding under the ABRY
Bridge Loan at December 31, 1998. At December 31, 1998, accrued interest of
$526,438 is included in accrued expenses.
Subordinated Term Loan
On September 22, 1997, the Company entered into a term loan agreement for
$20,000,000, which was 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. Additionally, the
Company issued warrants for the Company's Class F Common Stock in connection
with this loan. This loan was repaid in full in March 1998 with proceeds
obtained from the issuance of the Senior Discount Notes. The warrants were
cancelled upon repayment of this loan.
Interest Rate Swap
The Company enters into interest rate swap agreements to manage the interest
rate risk associated with certain of its variable rate debt. The swap
agreements effectively converts the credit agreement floating rate debt from
LIBOR plus a margin, as defined in the agreement, to a fixed rate debt plus
the applicable margin under the credit agreement on an amount equal to the
notional value of the interest rate swap. The Company is exposed to credit
losses in the event of non-performance by counterparties on these agreements,
which the Company does not believe is significant. The following table
summarizes the interest rate swap agreements:
<TABLE>
<CAPTION>
Notional Amount
--------------------------------------------
Fixed
pay rate December 31, 1997 December 31, 1998
-------- ----------------- -----------------
Expiration date
<S> <C> <C> <C>
May 1, 1998..................... 6.22% $20,000,000 $ --
December 24, 1998............... 5.90% 30,000,000 --
June 24, 1999................... 5.14% -- 30,000,000
September 30, 2000.............. 5.75% 20,000,000 20,000,000
May 1, 2001..................... 5.85% 50,000,000
</TABLE>
36
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Approximately $28,000, $51,000 and $216,696 of interest expense was incurred
in 1996, 1997 and 1998, 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 site 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, 1998 are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
<S> <C>
1999.......................................................... $ 3,190,114
2000.......................................................... 2,752,952
2001.......................................................... 2,266,092
2002.......................................................... 2,063,840
2003.......................................................... 1,713,007
2004 and thereafter........................................... 15,072,586
-----------
Total minimum lease payments................................ 27,058,591
===========
</TABLE>
Total rent expense under noncancellable operating leases was approximately
$468,083, $1,468,323, and $3,623,798 for the years ended December 31, 1996,
1997 and 1998, 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.
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, 1998:
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
1999........................................................... $ 39,155,536
2000........................................................... 35,541,604
2001........................................................... 32,474,747
2002........................................................... 28,766,328
2003........................................................... 21,756,859
2004 and thereafter............................................ 129,193,435
------------
$286,888,509
============
</TABLE>
37
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Principally all of the leases provide for renewal at varying escalations.
Leases provided for fixed-rate escalations have been reflected above.
8. 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.
As of December 31, 1998, and after giving affect to guaranty of certain
notes payable to former tower owners of $3.9 million, approximately $8.9
million remained outstanding under the Capital Contribution Agreement.
Mandatorily Redeemable Preferred Stock, Preferred Stock and Warrants
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"). These shares carry a liquidation preference of
$30 million in the aggregate, and were sold with an attached warrant to
purchase 10,000 shares of Class F Common Stock at $.01 per share. 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 liquidation
preference, 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
not mandatorily redeemable. In December 1998, the Company sold additional
shares of the Series B Junior Preferred Stock to ABRY/Pinnacle, Inc. with a
liquidation preference of $26.2 million. The Junior Preferred Stock is
redeemable at the Company's option, at liquidation preference, at any time.
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.
Redeemable Common 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.
38
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
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.
39
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. The
distribution amount related to the Yield was fixed at June 30, 1997 at
approximately $4.8 million. 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"), which approximated $38.9 million at
December 31, 1998.
In 1998 the Company paid $412,888 in distributions to the holders of Class B
Common Stock in settlement of a distribution preference on such stock in
connection with the issuance of the senior 10% discount notes (Note 6).
Holders of Class A common stock are entitled to receive their respective
Preference Amounts before any distributions are to be made to any other class
of stock. Similarly, holders of Class E Common stock are entitled to receive
their respective Preference Amount before any distributions are to be made to
the holders of Class B, C, D or F common stock. Once distributions have been
made to Class A and E, holders of Class B common stock will receive their
Preference Amounts. Remaining distributions will be made to all classes of
common stock on the basis of the number of Units (as defined by the Company's
Certificate of Incorporation) assigned to the respective shares.
Additional stock information is as follows:
<TABLE>
<CAPTION>
December 31
-------------------
1997 1998
-------- ----------
<S> <C> <C>
Preferred Stock:
Par value per share....................................... $ 0.001 $ 0.001
Shares authorized......................................... 100,000 1,000,000
Designated as Series A Senior preferred stock............ -- 145,000
Designated as Series B Junior preferred stock............ -- 100
Shares issued and outstanding:
Series A Senior.......................................... -- 31,383
Series B Junior.......................................... -- 60
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............................ 39,000 40,000
Class E common stock:
Par value per share....................................... $ 0.001 $ 0.001
Shares authorized........................................ 300,000 302,500
Shares issued and outstanding............................ 67,089 174,766
Class F common stock:
Par value per share....................................... $ 0.001 $ 0.001
Shares authorized........................................ 10,000 1,000,000
Shares issued and outstanding............................ -- --
</TABLE>
40
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Incentive Plan
The Pinnacle Holdings Inc. Stock Incentive Plan (the "Plan") became
effective July 1, 1998. The 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. The Plan is
administered by a committee consisting of at least two non-employee directors
of the Company (the "Committee").
The maximum number of shares of Common Stock that may be made subject to
Awards granted under the Stock Incentive Plan is approximately 3,000,000. 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 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. No shares have been granted at December 31, 1998.
The Committee is authorized to grant to eligible persons incentive stock
options ("ISO") or nonqualified stock options ("NSO"). 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. 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.
Options shall become exercisable in whole or in part on the date or dates
specified by the Committee. 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.
The Committee may also 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.
9. Related Party Transactions
Certain board members and/or stockholders provide management services to the
Company. The Company pays up to $75,000, plus certain reimbursable costs
incurred on behalf of the Company, each year for such
41
<PAGE>
management services. The Company paid approximately $55,162, $78,166, and
$834,192 for such services and related reimbursable expenses for the years
ended December 31, 1996, 1997, and 1998, respectively. At December 31, 1997
and 1998, $29,950 and $232,500, respectively, was due to these related
parties for management services and related reimbursable costs. A balance due
from current or former officers of $200,000 and $16,097 is included in other
assets at December 31, 1997 and 1998, respectively. During 1997, the majority
stockholder of the Company guaranteed a note payable to a tower seller of $3.9
million associated with a tower acquisition. Also see Note 6 for related party
debt and Note 8 for certain related party equity transactions.
10. 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. The Company has not made any contributions to the plan.
11. Subsequent Events
Acquisitions
Subsequent to December 31, 1998 the Company is party to several letters of
intent with various third parties to purchase 135 towers, reflecting an
aggregate commitment to pay approximately $60.2 million.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
42
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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
43
<PAGE>
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, 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 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
44
<PAGE>
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 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 (as
defined herein) 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.
45
<PAGE>
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.
Compliance with Section 16(a) of the Exchange Act
Not applicable.
46
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
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 (the "Named Executive
Officers").
<TABLE>
<CAPTION>
Summary Compensation Table
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................... 1998 230,731 - - - - - -
President, Chief Executive 1997 156,000 70,000 6,500(b) - - - -
Officer 1996 129,698 30,000 - - - - -
James Dell'Apa.................. 1998 200,000 50,000 - - - - -
Executive Vice 1997 156,248 - - - - - -
President and Chief 1996 128,125 30,000 - - - - -
Operating Officer
Steven Day...................... 1998 153,808 15,000 - - - - -
Vice President, 1997 131,250 - - 10,000 - - -
Secretary and 1996 - - - - - - -
Chief Financial Officer
David Zahn...................... 1998 129,453 15,000 - - - - -
Vice President of 1997 126,260 - - - - - -
Operations 1996 36,102 - - 1,200 - - -
Ben Gaboury..................... 1998 129,453 15,000 - - - - -
Vice President of Sales 1997 126,094 - - - - - -
and Marketing 1996 31,789 - - 1,200 - - -
</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.
47
<PAGE>
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 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 IPO. 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 (the "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 Securities Exchange
Act of 1934, as amended (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 3,000,000. 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
48
<PAGE>
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.
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 Stock 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.
49
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of December 31, 1998, information as to
the Company's stock beneficially owned by (i) each director of the Company; (ii)
each Named Executive Officer; (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>
Class A Class B Class D Class E
Common Common Common Common
Name and Address of Beneficial ------------------------------------------------------------------------
Owner(s)(a) Shares(b) % Shares(b) % Shares(b) % Shares(b) %
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ABRY II (b) 200,000 98.8 - - - - 172,266 98.6
Robert Wolsey (c) - - 10,000 83.3 11,000 27.5 - -
James M. Dell'Apa (d) - - 1,500 12.5 8,975 22.4 2,500 1.4
Steven Day (e) - - 500 4.2 10,000 25.0 - -
David Zahn - - - - 1,000 2.5 - -
Ben Gaboury - - - - 1,000 2.5 - -
Andrew Banks (f) 25 * - - - - - -
Peni Garber 25 * - - - - - -
Peggy Koenig (g) 50 * - - - - - -
Royce Yudkoff (h) 200,050 98.8 - - - - 172,266 98.6
All directors and executive officers 200,150 98.8 12,000 100 31,975 79.9 174,766 100
as a group (10 persons)
<CAPTION>
Percentage
of Economic Percentage
Ownership of Voting
of all Power of
Name and Address of Beneficial Common all Common
Owner(s)(a) Stock Stock
- ------------------------------------------------------------------------
<S> <C> <C>
ABRY II (b) 86.7 86.7
Robert Wolsey (c) 4.9 4.9
James M. Dell'Apa (d) 3.0 3.0
Steven Day (e) 2.4 2.4
David Zahn * *
Ben Gaboury * *
Andrew Banks (f) * *
Peni Garber * *
Peggy Koenig (g) * *
Royce Yudkoff (h) 86.7 86.7
All directors and executive officers 97.6 97.6
as a group (10 persons)
</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) ABRY Holdings, Inc., the general partner of ABRY Capital, which is the
general partner of ABRY II, is wholly-owned by Mr. Yudkoff.
(c) Includes 100 shares of Class B common stock and 100 shares of Class D
common stock held by Pantera, Inc. and 5,000 shares of Class B common stock
and 5,000 shares of Class D common stock held by Pantera Partnership Ltd.
(d) Excludes 1,025 shares of Class D common stock held by relatives of Mr.
Dell'Apa of which he disclaims beneficial ownership.
(e) Includes 500 shares of Class B common stock and 1,900 shares of Class D
common stock held by Mr. Day's spouse, 200 shares of Class D common stock
held by South Creek, Inc. and 6,000 shares of Class D common stock held by
South Creek Partnership Ltd.
(f) Mr. Banks beneficially owns 25 shares of Class A common stock held by
Audemi Corporation.
(g) Includes 25 shares of Class A common stock held by Ms. Koenig's spouse.
(h) 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 25
shares of Class A common stock held by Mr. Yudkoff's spouse.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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
50
<PAGE>
the form of securities of the Company. This preemptive right will terminate upon
the closing of the IPO. 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 IPO.
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 IPO.
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 IPO (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 December 31,
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 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 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.
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, $78,166
and $834,192 for such services and expenses for the years ended December 31,
1996, 1997 and 1998, respectively. The Management Services and Consulting
Agreement is terminable at any time by either party with prior written notice.
51
<PAGE>
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 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.
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.
52
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS OF FORM 8-K
(a) List of Financial Statements, Financial Statement Schedules and Exhibits.
(1) and (2) - Response to this portion of Item 14 is submitted as a
separate section of this report.
(3) - Response to this portion of Item 14 is submitted as a separate
section of this report.
(b) Reports on Form 8-K.
The Company did not file a Form 8-K during the fourth quarter of 1998.
(c) Exhibits - Response to this portion of Item 14 is submitted as a separate
section of this report.
(d) Financial Statement Schedules - Response to this portion of Item 14 is
submitted as a separate section of this report.
53
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized, on February 16th, 1999.
Pinnacle Holdings Inc.
(Registrant)
By: /s/ Steven Day
------------------------------------------------
Steven Day, Chief Financial Officer
and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the Registrant and in the capacities indicated on February 16th,
1999.
Signature Title
--------- -----
/s/ Robert Wolsey
---------------------
Robert Wolsey President, Chief Executive Officer
and Director
/s/ Steven Day
---------------------
Steven Day Chief Financial Officer, Vice President and
Secretary
/s/ James Dell'Apa
---------------------
James Dell'Apa Executive Vice President, Chief Operating
Officer and Director
/s/ Andrew Banks
---------------------
Andrew Banks Director
/s/ Peni Garber
---------------------
Peni Garber Director
/s/ Peggy Koenig
---------------------
Peggy Koenig Director
/s/ Royce Yudkoff
---------------------
Royce Yudkoff Director
54
<PAGE>
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following financial statements and report of independent accountants
are included in Item 8:
Page
----
Report of Independent Accountants................................25
Consolidated Balance Sheet at December 31, 1998 and
December 31, 1997.............................................26
Consolidated Statement of Revenues and Expenses for the
Years Ended December 31, 1998, December 31, 1997 and
December 31, 1996..............................................27
Consolidated Statement of Stockholder's Equity for the
Years Ended December 31, 1998, December 31, 1997, and
December 31, 1996..............................................28
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1998, December 31, 1997 and
December 31, 1996..............................................29
Notes to Consolidated Financial Statements.......................30
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
55
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -------------------------------------------------------------------
3.1.1 Amended and Restated Certificate of Incoporation of the Company **
3.1.2 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**
4.3 Specimen Stock Certificate*****
4.4 Certificate of Designation Series A Senior Preferred Stock******
4.5 Certificate of Designation Series B Junior Preferred Stock******
10.1 Second Amended and Restated Credit Agreement dated February 26,
1998 by and among Pinnacle Towers, Inc., a wholly-owed 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 Third Amended and Restated Credit Agreement Dated May 29, 1998***
10.4 First Amendment to Third Amended and Restated Credit
Agreement********
10.5 Second Amendment to Third Amended and Restated Credit
Agreement*******
10.6 Form of Purchase and Sale Agreement dated January 9, 1998 by and
among PTI and Southern Communications**
10.7 Form of Southern Communications Master Site Lease Agreement by and
among PTI and Southern Communications**
10.8 Form of Option to Direct Construction or Acquisition of Additional
Tower Facilities by and among PTI and Southern Communications**
10.9 Form of Exchange Agreement by and among PTI and Southern
Communications*
10.10 Form of Lease Agreement-Non-Restricted Premises**
10.11 Form of Lease Agreement-Restricted Premises**
10.12 Form of Master Antenna Site Lease by and among PTI and Tylotic
Communications, Inc.**
10.13 Contract of Sale by and among PTI and Teletouch Communications,
Inc. and First Amendment to Control of Sale**
10.14 Executive Employment Agreement between the Company and Robert
Wolsey dated May 3, 1995**
10.15 Executive Employment Agreement between the Company and Steven Day
dated February 17, 1997**
10.16 Executive Employment Agreement between the Company and James
Dell'Apa dated May 3, 1995**
10.17 Subscription Agreement dated December 31, 1995 by and among ABRY
II and PTI**
10.18 Second Amended and Restated Subscription and Stockholders
Agreement dated May 16, 1996 by and among PTI, the Company and
certain stockholders**
<PAGE>
Exhibit No. Description
- ----------- -----------
10.19 Capital Contribution Agreement dated February 26, 1998**
10.20 Convertible Promissory Note due 1998 dated February 11, 1998 by
and among the Company and ABRY II**
10.21 Services Agreement by and among PTI and PTI II**
10.22 Amended Capital Contribution Agreement dated May 29, 1998***
10.23 Purchase Agreement dated as of July 7, 1998 among MobileMedia, its
affiliates and the Company****
10.24 Proposed Form of Master Lease for Transmitter Systems Space
between the Company and MobileMedia Communications, Inc.****
10.25 Amendment to Purchase Agreement dated September 2, 1998 between
PTI and MobileMedia and certain of its affiliates******
10.26 Form of Management and Consulting Services Agreement dated as of
April __, 1995 between Pinnacle Towers Inc. and ABRY*
10.27 Stock Incentive Plan*****
21.1 List of Subsidiaries**
27.1 Financial Data Schedule
- -------------------
* 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.
******* Previously filed on January 5, 1999 with Amendment No. 4 to the
Company's Registration Statement on Form S-11.
******** Previously filed on January 21, 1999 with Amendment No. 5 to the
Company's Registration Statement.
TPA3-609499.5
<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 13,801,190
<SECURITIES> 0 0
<RECEIVABLES> 1,647,575 1,804,390
<ALLOWANCES> 70,000 125,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 4,308,945 16,913,008
<PP&E> 144,570,666 519,996,802
<DEPRECIATION> 8,278,524 28,964,462
<TOTAL-ASSETS> 143,177,903 516,148,101
<CURRENT-LIABILITIES> 17,098,983 26,183,169
<BONDS> 109,459,790 417,524,802
0 29,882,298
0 59,928,980
<COMMON> 1,761,309 1,761,418
<OTHER-SE> 14,752,809 (19,257,718)
<TOTAL-LIABILITY-AND-EQUITY> 143,177,903 516,148,101
<SALES> 12,880,631 32,018,651
<TOTAL-REVENUES> 12,880,631 32,018,651
<CGS> 2,632,274 6,165,897
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 11,784,434 50,182,076
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 6,925,094 12,300,182
<INCOME-PRETAX> (8,461,171) (36,629,504)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (8,461,171) (36,629,504)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 5,641,573
<CHANGES> 0 0
<NET-INCOME> (8,461,171) 42,271,077
<EPS-PRIMARY> (27.28) (108.43)
<EPS-DILUTED> (27.28) (108.43)
</TABLE>