SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(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, 1999
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.
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(Exact name of registrant as specified in its charter)
DELAWARE 65-0652634
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1549 RINGLING BOULEVARD, 3RD FLOOR, SARASOTA, FLORIDA 34236
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(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: Common Stock, par
value $.001
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]
The aggregate market value of the voting common stock held by
non-affiliates as of February 24, 2000 was approximately $2.0 billion. There
were 48,294,471 shares of the registrant's common stock, par value $.001 per
share, outstanding on February 24, 2000.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the registrant's definitive proxy statement for its 2000
Annual Meeting of Stockholders, scheduled to be held on May 2, 2000, which proxy
statement will be filed no later than 120 days after the close of the
registrant's fiscal year ended December 31, 1999, are hereby incorporated by
reference in Part III of this Annual Report on Form 10-K.
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PART I
ITEM 1. BUSINESS
AS USED IN THIS ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDING
DECEMBER 31, 1999, UNLESS THE CONTEXT OTHERWISE REQUIRES, "WE," "US," "OUR,"
"COMPANY," OR "PINNACLE" REFERS TO PINNACLE HOLDINGS INC. AND ITS SUBSIDIARIES.
OVERVIEW
We are a leading independent provider of wireless communications site
space in the United States. We focus primarily on renting space on
communications sites to providers of wireless communications services such as
PCS, cellular, paging, SMR/ESMR, wireless data transmission and radio and
television broadcasting. We believe that focusing on the communications site
rental business allows us to achieve the highest cash flow margins with the
lowest level of risk on our invested capital in the communications site
business. Our growth strategy is focused on growing cash flow by increasing
tenancy on our existing sites and acquiring tall towers and other site
structures located in areas of high wireless rental site demand that can
accommodate multiple tenants. As a result of our extensive base of
communications sites and our acquisition strategy, we believe we are well
positioned to continue benefiting from the growth opportunities in the rapidly
consolidating tower industry and from the strong demand for communications site
rental space fueled by the growing demand for wireless services.
Since our formation in May 1995, we have focused on creating a
portfolio of communications site clusters in high growth markets such as
Atlanta, Birmingham, Boston, Chicago, Houston, Los Angeles, New Orleans, New
York, Orlando and Tampa. As of December 31, 1999, we have completed 346
acquisitions, acquiring 3,099 communications sites, including 1,657 owned sites,
584 "managed" sites and 858 "leased" sites, and we have constructed 100 towers.
As of December 31, 1999, we also have agreements or letters of intent to acquire
698 additional communications sites. Managed sites are tower or rooftop
communications sites owned by others where we have the exclusive right to market
antenna space. Leased sites are tower or rooftop communications sites owned by
others where we have a non-exclusive right to market antenna space.
We currently have over 3,790 customers renting space on one or more of
our communications sites. Our tenants include all forms of wireless
communications providers, operators of private wireless networks and government
agencies, including Arch Communications, BellSouth Mobility, the Federal Bureau
of Investigation, the Bureau of Alcohol, Tobacco & Firearms, Motorola, Nextel,
Pagemart, PageNet, Skytel, Southern Communications, Sprint PCS and Teletouch.
Our customers are generally responsible for the installation of their own
equipment and the incremental utilities costs associated with that equipment. In
addition, adding customers on a communications site does not increase our
monitoring, maintenance or insurance costs. Therefore, when new customers or
additional equipment are added to a communications site, we are able to increase
revenue with limited incremental costs, thereby increasing cash flow margins.
Furthermore, we experience minimal churn as our communications site locations
serve an essential function in our customers' wireless networks and cannot
easily be replaced.
We believe that "same site" revenue growth is a meaningful indicator of
the organic growth of our business. Same site revenue growth is measured by
comparing the annualized revenues of our communications sites at the end of a
period to the annualized revenues for the same sites at the end of a prior
period without considering revenues from the communications sites we acquired
during the period. Taking into consideration leases for new tenants, we
experienced same site revenue growth of approximately 19.0% for the year ended
December 31, 1999 on our base of communications sites as of December 31, 1998.
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INDUSTRY BACKGROUND
Communications sites are primary infrastructure components for wireless
communications services such as PCS, cellular, paging, SMR/ESMR, 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 to meet the
requirements of a particular carrier to cover a geographic area and include
transmission equipment such as antenna, 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 on which the
equipment may be placed. Wireless communications providers design their networks
and select their communications sites in order to optimize their transmission
frequencies, taking into account the projected geographic area the site will
cover, the topography of the area and the requirements of the technology being
deployed.
THE WIRELESS COMMUNICATIONS INDUSTRY
The wireless communications industry is growing rapidly as:
o consumers become increasingly aware of the uses and benefits of
wireless communications services;
o the costs of wireless communications services decline; and
o new wireless communications technologies are developed.
Changes in federal regulatory laws have led to a significant increase
in the number of competitors in the wireless communications industry. This
competition, combined with an increasing reliance on wireless communications
services by consumers and businesses, has increased demand for higher quality
networks with wide reaching and reliable service. As new service 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 increase dramatically.
The wireless communications industry is comprised of the following
segments:
o CELLULAR. Currently each market in the United States has two licensed
cellular service operators. Cellular networks consist of numerous
geographic "cells" located every few miles that rebroadcast the
cellular frequency. Each cell includes a communications site
consisting of transmission equipment typically located on a wireless
communications tower. A cellular system may use analog or digital
transmissions. According to industry publications, as of December 31,
1998, there were 59.2 million cellular telephone subscribers in the
United States, estimated to have grown to 66.9 million subscribers at
the end of 1999.
o PCS. PCS is an emerging wireless communications technology competing
with cellular that offers a digital signal that is clearer and offers
greater privacy than analog cellular systems. PCS companies are
expected to be substantial users of tower space primarily because:
--up to seven PCS licenses have been issued by the Federal
Communications Commission ("FCC") in each market (versus two
licenses for cellular); and
--PCS technology requires more communications sites to cover the same
geographic area as cellular technology.
According to industry publications, there were approximately 7.2 million PCS
subscribers in the United States as of December 31, 1998 estimated to have grown
to 14.6 million subscribers at the end of 1999.
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PERSONAL COMMUNICATIONS INDUSTRY ASSOCIATION MEMBERS ("PCIA") ESTIMATE THAT AS
OF DECEMBER 31, 1998 THERE WERE APPROXIMATELY 84,000 ANTENNA SITES (CELLULAR AND
PCS) IN THE UNITED STATES. PCIA estimates that this number will increase by
approximately 66,000 additional antenna sites by 2005. While some of these sites
may use existing communications sites, it is expected that a large number of new
sites will be required for the deployment of PCS networks. PrimeCo, Aerial and
Sprint PCS are currently building out PCS systems in the Southeast, and are
placing their equipment on many of our rental communications sites, rather than
constructing their own towers.
o PAGING. Paging has also enjoyed significant growth over the last 10
years. This growth was spurred by declining prices, wider geographic
reach and increasing demand by consumers. While network construction
by the paging industry appears to be reaching a level of maturity,
even at the current subscriber levels it is expected that additional
transmission frequencies and, in-turn, additional transmitter
equipment will be required both to service existing paging customers
and deploy new paging technologies. Paging companies have
historically relied heavily on rental towers and are expected to
continue to do so.
o SMR/ESMR. SMR companies provide two-way radio communications
primarily for commercial purposes. Two-way private business radio is
used primarily for businesses engaged in dispatching personnel or
equipment to work sites with users including 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 local
communications sites for transmission purposes. As a result of
advances in digital technology, some wireless communications
providers have begun to design or modify networks that utilize SMR
frequencies by deploying advanced digital technologies called ESMR.
ESMR increases the capacity of radio networks allowing more efficient
use of allocated frequencies. These efficiencies and improvements
allow ESMR to provide wireless telephone service that can compete
with cellular and PCS. As more commercial users are attracted to
enhanced SMR services, the demand for communications site space to
support this broader use should also increase. Nextel and Southern
Communications are currently the leading ESMR providers in the United
States.
o GOVERNMENT AGENCIES. Federal, state and local government agencies are
major users of wireless communications services and typically operate
on their own dedicated frequencies. These government agencies often
find it easier to lease rather than own communications site 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
communications site space include the Federal Bureau of
Investigation, U.S. Coast Guard, U.S. Secret Service and various
municipal agencies.
o BROADCAST AND WIRELESS CABLE. Broadcasters transmit AM/FM radio
signals and VHF and UHF television signals in order to obtain the
broadest and 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 communications site
location is chosen, broadcasters rarely change sites because of
complex regulatory requirements, high switching costs and business
disruption. Although the U.S. broadcasting industry is generally
mature in its demand for transmission communications site capacity, a
significant increase in demand for communications site space may
occur when digital transmissions are used to deliver high definition
television or digital multi-casting, i.e., multiple "normal"
definition television channels. Additionally, wireless cable
television is being developed and positioned as a potential
alternative to traditional cable television. Wireless cable operates
by receiving programming from a satellite which is then retransmitted
from an antenna on a communications site to an antenna on a
subscriber's residence. Several wireless cable companies are now in
the process of constructing their systems in our regions.
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o EMERGING TECHNOLOGIES AND AVAILABILITY OF FCC SPECTRUM. Several new
entrants in the wireless communications industry are emerging as new
technology becomes available and as additional radio spectrum is
authorized for use by the FCC. While currently in its earliest
stages, wireless internet access may result in substantial increases
in utilization of available spectrum. We believe this is likely to
result in demand for additional site rental space. Wireless local
loop systems provide non-mobile telecommunications services to users
by transmitting voice and data over radio waves from the public
switched network to the customer location. This technology allows
competition for non-mobile telephone revenue (primarily commercial
customers in office building environments) via the utilization of
fixed wireless technology, which is typically installed on building
rooftops. Wireless data transmission is also widely viewed as being
in its infancy as several companies endeavor to build national
wireless data transmission networks including, Nationwide Wireless
Network (an affiliate of MTEL), RAM Mobile Data (10% owned by
BellSouth), and Racotek's SMR based data networks. Automatic Vehicle
Monitoring/Location and Monitoring Services such as "Lo Jack" also
require a minimum of three towers to provide their services in a
particular coverage area. In addition to their current uses, we
believe that monitoring/tracking service providers will use this
technology to provide fleet tracking, rail and container
transportation monitoring, security and access control, etc.
These recent developments in the wireless communications industry
indicate continuing opportunities for growth in the communications site 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
communications sites.
THE COMMUNICATIONS SITE RENTAL INDUSTRY
A typical tower site consists of a fenced area containing a tower and an
equipment shelter that houses a variety of transmitting, receiving and switching
equipment. There are three types of towers:
o Guyed towers (which can reach heights of up to 2,000 feet) gain their
support from a series of cables attached at different levels on the
tower to anchor foundations in the ground;
o Lattice towers (which can reach heights of up to 1,000 feet) are
self-supporting structures usually tapered from the bottom up, with
either three or four legs; and
o Monopoles (which typically range in height from 50 to 200 feet) are
self-supporting tubular structures, which typically accommodate fewer
tenants. Monopoles are often used as single purpose towers or in
locations where there are space constraints or a need to address
aesthetic concerns.
In addition to towers, wireless communications equipment can also be
placed on building rooftops. Rooftop sites are common in urban downtown areas
where tall buildings are available and multiple communications sites are
required because of the high volume of wireless traffic. At December 31, 1999,
our tower portfolio consisted of 1,833 guyed, 658 self supporting lattices, 106
monopoles and 602 rooftop sites.
The value of a rental communications site is principally determined by
the desirability of its location to customers and the amount of equipment that
can be located at a particular site. Multiple customers can share one tower
through "vertical separation" with each type of customer (i.e., cellular, PCS or
paging) located at a different height on the tower, while multiple customers can
share a single rooftop communications site through "horizontal separation" of
each type of customer. Additionally, although many existing towers and rooftops
were not originally built with the capacity to support multiple customers, these
communications sites can often be augmented or reinforced 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. There have been a number of
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changes in the communications industry, however, that have resulted in
communications sites becoming available for multiple uses and for acquisition by
independent communications site operators:
o As new technologies emerged, much of the transmission equipment
located on many communications sites became obsolete. For example,
fiber optic cables have largely replaced transmission traffic
traditionally carried by wireless microwave networks.
o Paging and SMR providers traditionally owned their own networks and
transmission towers. As these industries have consolidated over the
past 10 years, the service providers consolidated their equipment,
resulting in unutilized or underutilized towers.
o Wireless communications providers today are generally more focused on
developing their subscriber base and less focused on building and
owning proprietary tower networks.
During the mid-to-late 1980s, a number of independent communications
site owners began to emerge, marking the beginning of the site rental industry.
These independent tower owners focused on owning and managing towers and
rooftops with multiple customers. We believe the majority of these operators
were individuals with a small number of local rental towers offering very
limited coverage areas. Since 1995, however, several larger independent
communications site owners have emerged as demand for wireless communications
services has continued to grow and as additional high frequency licenses were
awarded for new wireless communications services. Both trends led to a need for
networks with an extensive tower infrastructure. Rental communications sites in
many parts of the United States are still largely owned by many different
companies and individuals, even though the consolidation of communications site
ownership has begun to accelerate as larger independent owners acquire small
local owners. As the demand for communications sites has been increasing, there
has been a growing trend by municipalities to slow the proliferation of towers.
These trends have contributed to an increasing need for strategically located
towers that can accommodate multiple wireless communications providers.
OUR BUSINESS AND GROWTH STRATEGY
Our objective is to create value by rapidly growing cash flow. We
believe we can do this by aggressively marketing existing communications sites,
as well as new site inventory we obtain primarily through acquisition, and also
by selectively constructing new towers. In order to achieve this objective, we
have designed and implemented a three-tiered growth strategy that includes:
o increasing our revenue per tower by aggressively marketing available
space;
o continuing to acquire towers in key markets; and
o implementing a selective tower construction program designed to
complement our acquisition strategy.
OUR MARKETING AND DEVELOPMENT STRATEGY
We aggressively market rental space on our communications sites to
leverage our fixed costs over a broad base of customers. Our customers are
generally responsible for the installation of their own equipment and the
utility costs associated with operating their equipment. In addition, adding
customers to an existing communications site does not increase our monitoring,
maintenance or insurance costs. Accordingly, when customers are added to an
existing site, there is little expense and the additional revenue increases our
cash flow margins. The key elements of our marketing and development strategy
include the following:
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o WE OFFER STRATEGICALLY LOCATED CLUSTERS OF COMMUNICATIONS SITES. By
owning and assembling clusters of towers in high growth regions, we
believe that we are able to offer our customers the ability to
rapidly and efficiently fulfill their network expansion plans across
a particular market or region, which we believe provides us with a
significant competitive advantage. We also believe that the
management and leasing contracts we acquired in the Motorola Antenna
Site Acquisition will enhance our competitive position by allowing us
to make more communications sites, in more locations, available to
our customers.
o WE TARGET A DIVERSIFIED CUSTOMER BASE. The number of antennas a tower
can accommodate varies depending on the type of tower (guyed,
self-supporting lattice or self-supporting monopole), the height of
the tower and the nature of the services provided by such antennas.
The substantial majority of our towers are tall self-supporting
lattice and guyed towers that can support a large number of antennas
and therefore enable us to market our tower space to a diverse group
of wireless communications providers. In addition, rooftop sites
allow us to further diversify our customer base by providing us with
an inventory of high altitude sites suitable for newer LMDS and HDTV
technologies.
o WE TAKE ADVANTAGE OF OUR STRONG CUSTOMER RELATIONSHIPS. We believe
that we have established a reputation among our customers as a highly
professional and reliable tower space provider. This reputation has
been achieved through ongoing investment in the development of
relationships at multiple levels of our customers' organizations. We
believe that important factors in generating interest in our towers
are the customer's awareness of the quality of a particular site, the
ease of doing business with one lessor, the location of our other
towers and our ability to acquire and construct new towers. We also
use our strong customer relationships to understand our customers'
future construction plans to guide our acquisition and new
construction programs.
o WE USE EXPANSION INFORMATION OBTAINED FROM OUR CUSTOMERS. We use
information obtained from our customers concerning their future
expansion plans to guide our acquisition and new construction
programs.
o WE PRE-MARKET SITE RENTAL SPACE BY TRACKING FCC FILINGS. All FCC
licensees must file applications for site locations. As part of a
disciplined approach to acquisitions and new tower construction
activities, we track these filings, which enable us to pre-market
communications site rental space to existing and new wireless
communications providers.
OUR ACQUISITION STRATEGY
We are focused on acquiring cluster of communications sites in high
growth markets. We target tall towers that have existing tenants with capacity
for more. We believe that growth through acquisition is an attractive strategy
because it allows us to:
o choose the location of our communications sites in key urban and
other desired locations;
o acquire communications sites with existing tenants and the capacity
to add multiple, additional tenants;
o not seek "build-to-suit" mandates from customers, which may result in
towers being built in unprofitable locations; and
o lower our risk as cash flow from communications sites with existing
tenants is predetermined and immediate.
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Our acquisition strategy continues to focus on:
o rapidly acquiring communications sites in key markets as a means to
quickly gain critical mass which allows us to offer the most
desirable site rental inventory to a customer.
o completing follow-on acquisitions to enhance our coverage in selected
wireless communications markets; and
o entering new markets as a platform for future growth.
In executing our acquisition strategy, we generally target
strategically located individual communications sites or small groups of
communications sites. Our focus on individual communications sites or small
groups of communications sites, however, does not preclude potential
acquisitions of a large number of sites in a single transaction, as is the case
with the Southern Towers Acquisition, the MobileMedia Acquisition, and the
Motorola Antenna Site Acquisition.
The key elements of our acquisition strategy are set forth below:
o WE TARGET HIGH GROWTH WIRELESS COMMUNICATIONS MARKETS. We target
population centers and key transportation corridors in high growth
wireless communications markets. We have established a portfolio of
communications site clusters in high growth markets such as Atlanta,
Birmingham, Boston, Chicago, Houston, Los Angeles, New Orleans, New
York, Orlando and Tampa.
o WE TARGET TALL COMMUNICATIONS SITE STRUCTURES. We seek to acquire
tall communications site structures that can accommodate a
diversified customer base that uses different types of wireless
technologies with different height requirements.
o WE FOCUS ON THE COMPATIBILITY WITH OUR EXISTING COMMUNICATIONS SITE
NETWORK. We consider many factors when evaluating a potential
acquisition. In particular, we consider whether an acquisition will
enhance or create a cluster of communications sites in a given area,
thereby providing us with a stronger market position and competitive
advantage. We also consider whether the communications sites in a
particular acquisition meet previously identified customer demand for
enhanced coverage. In some instances, we may acquire, as part of a
group of communications sites being purchased, an individual
communications site that falls outside of normal acquisition
parameters. Such acquisitions occur only when we have determined that
the overall transaction is attractive.
o WE EMPLOY A DISCIPLINED VALUATION PROCESS. We seek to acquire
communications sites that have existing cash flow and identified
potential for significant future cash flow growth from additional
tenants. Prior to acquiring a communications site we consider each of
the following factors:
-- current population coverage of each communications site to be
acquired;
-- nature and quality of the existing and potential customer base;
-- coverage of current and future transportation corridors; and
-- location and desirability of competing communications sites.
o WE COMMIT SIGNIFICANT PERSONNEL TO IDENTIFYING, NEGOTIATING AND
CLOSING COMMUNICATIONS SITE ACQUISITIONS. We conduct extensive due
diligence prior to consummating an acquisition, leveraging what we
believe to be our competitive advantage in terms of our experience
in, and knowledge of, the communications site rental industry. We
utilize the services of 16 independent communications site buyers who
spend substantially all of their time in the field identifying,
evaluating and generating acquisition opportunities using a
standardized process that we have developed to ensure that
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acquisitions are evaluated, documented and rapidly processed. In
order to execute and ensure the integrity and quality of this
process, we use outside independent professionals to verify certain
accounting, legal and engineering data. We believe that this approach
has proven effective in permitting us to more accurately predict the
performance of acquired assets and reduce the risks associated with
our 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 we will be able to successfully implement our
acquisition strategy. See "--Forward Looking Statements and
Associated Considerations--We depend on acquisitions and the
integration of those acquisitions into our business."
We also make an assessment of potential cash flow growth and estimate
whether additional capital expenditures will be required to add capacity to
accommodate future growth. As a result of this strategy, we believe we have
among the highest cash flow margins with the lowest level of risk on invested
capital in the communications site business.
While we have completed an average of 6.2 acquisitions a month since
our formation in May 1995, consistent with our acquisition criteria and
strategy, we have completed the following major acquisitions since March 1998:
SOUTHERN TOWERS ACQUISITION. In March 1998, we 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
five years.
In connection with the Southern Towers Acquisition, we entered into
leases with Southern Communications and its affiliates to provide communications
site space for their ESMR network. The leases provide for an initial 10-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. In addition, we have
entered into an option agreement with Southern Communications where Southern
Communications could require us to use commercially reasonable efforts to
supply, acquire or construct an additional 80 towers for rental to Southern
Communications or its affiliates. We have initiated construction on
approximately half of the tower opportunities presented by Southern
Communications to date.
Prior to the Southern Towers Acquisition, these towers were principally
for the use of Southern Communications and its affiliates and had only a limited
number of third party tenants. The towers were generally constructed with
capacity that significantly exceeded Southern Communications' specific capacity
requirements. Accordingly, we believe that there is substantial potential for
additional revenue from these towers.
MOBILEMEDIA ACQUISITION. In September 1998, we acquired 166 towers from
MobileMedia and its affiliates for approximately $170 million (the "MobileMedia
Acquisition"). MobileMedia recently merged with Arch Communications, Inc.,
making it part of the second largest paging company in the United States.
In connection with this acquisition, we entered into a lease
arrangement to provide rental tower space to MobileMedia Communications, an
affiliate of MobileMedia. This lease provides for an initial 15 year
noncancellable term with one five-year renewal period, exercisable at the
customer's option. Under this lease, MobileMedia Communications secured
communications site 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. In connection with the lease, we have also given MobileMedia
Communications the right to a defined pricing discount for additional
communications site space on our tower portfolio that MobileMedia Communications
may lease in the future as it continues to expand its paging network. We believe
that the discount arrangement is an incentive for MobileMedia Communications to
use us as a preferred provider of rental communications site space for new
communications site locations they may require in the future.
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MOTOROLA ANTENNA SITE ACQUISITION. On August 31, 1999, we completed the
acquisition of approximately 1,858 communications sites, including 499 owned
sites, 526 managed sites, and 833 leased sites from Motorola, Inc. ("Motorola")
for $255 million in cash and stock, plus fees and expenses. The Motorola
communications sites that we acquired are largely clustered in urban areas
throughout the United States and Canada with over 50% of the owned sites
overlapping with our existing communications site portfolio. We believe that the
Motorola Antenna Site Acquisition greatly enhances our ability to offer our
customers attractive tower clusters in high growth markets and transportation
corridors. In addition, the Motorola managed sites that we acquired enable us to
provide our customers with urban rooftop sites such as the World Trade Center in
New York, Sears Tower in Chicago and the Allied Bank Building in Houston. We
believe these sites will allow us to further diversify our customer base by
providing us with an inventory of high altitude sites in urban areas.
In order to minimize the risk that the ownership of or income from
certain of the rooftop communications sites acquired from Motorola (the
"Transferred Assets") might negatively affect the Company's qualification as a
Real Estate Investment Trust ("REIT"), effective September 29, 1999 the
Transferred Assets were transferred to Pinnacle Towers III, Inc. ("PT III") for
$49,000,000. A subsidiary of the Company owns approximately 9% of PT III's
common stock. Certain officers of the Company own the remaining outstanding
common stock of PT III. In September 1999, a subsidiary of the Company purchased
$49,000,000 of convertible preferred stock issued by PT III. PT III used the
proceeds from the sale of such preferred stock to acquire the Transferred
Assets. In connection with such transfer, a subsidiary of the Company and PT III
entered into a services agreement whereby such subsidiary agreed to service the
assets of PT III and take certain related actions. Subsequent to September 30,
1999, PT III exchanged a portion of the convertible preferred stock it issued
for a $39,200,000 convertible promissory note issued by it to a subsidiary of
the Company and amended certain terms of the remaining convertible preferred
stock. In addition, the aforementioned services agreement was replaced with a
cost and expense sharing and reimbursement agreement. PT III has guaranteed our
credit facility and has pledged all of its assets to secure such guarantee.
The $39,200,000 convertible promissory note issued by PT III to a
subsidiary of the Company accrues interest at the rate of 13%, with interest
payable quarterly and all principal and accrued interest due and payable within
30 days upon demand. The $9,800,000 of outstanding PT III convertible preferred
stock accrues dividends at 18% per annum, payable quarterly. The terms of PT
III's certificate of incorporation limit PT III's ability to borrow money,
pledge its assets, issue additional securities, make distributions to its
shareholders, purchase and sell assets, enter into transactions with affiliates
and take certain actions without seeking approval from its common shareholders,
and its ability to issue or redeem certain securities, make certain
distributions, enter into certain transactions with its affiliates or to sell,
lease or dispose of a majority of its assets without the approval of the holders
of the convertible preferred stock is limited. Should all of the PT III
convertible preferred stock and the convertible promissory note be fully
converted to common stock of PT III, a subsidiary of the Company would own in
excess of 99.9% of the outstanding common stock of PT III. As a result of
Pinnacle Holdings Inc.'s ability to direct the policies and management that
guide the ongoing activities of PT III, the financial position and results of
operations and cash flows of PT III are consolidated in the financial statements
of Pinnacle Holdings Inc.
OUR NEW TOWER CONSTRUCTION STRATEGY
An additional element of our growth strategy is to selectively
construct new towers in and around major markets where we already have a
presence to enhance our existing communications site clusters. Additionally, we
also intend to build new towers to expand the capacity of, or otherwise improve,
existing sites. In both cases, we adhere to our own requirements of return on
invested capital. Tower construction is only initiated after at least one anchor
tenant is identified and after we have determined, based on market research,
that the capital outlay for the construction project would exceed our minimum
required return on invested capital. We do not engage in speculative
construction projects or pursue large "build-to-suit" mandates. During 1997,
1998 and 1999, we constructed 22, 47 and 23 towers, respectively. As a result of
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opportunities generated through our marketing efforts, we estimate that we will
identify 80 to 100 new tower build opportunities this year.
OUR STRENGTHS
We believe the following to be the strengths of our business:
o WE FOCUS ON THE COMMUNICATIONS SITE RENTAL BUSINESS. We focus on the
rental of wireless communications site space as opposed to other
lower margin segments of the tower industry such as site acquisition
services or tower construction services. Furthermore, we do not
engage in large scale "build-to-suit" programs, preferring instead to
focus on our core acquisition strategy and complimentary selective
construction strategy designed to enhance coverage in targeted
markets.
o WE TARGET AND ACQUIRE CLUSTERS OF COMMUNICATIONS SITES. We believe
that the location, size and capacity of our portfolio create
significant competitive advantages by enabling us to provide our
diverse wireless customers with clusters of sites in a given area.
o WE ARE A DISCIPLINED AND EFFICIENT ACQUIRER OF COMMUNICATIONS SITE
ASSETS. At December 31, 1999 we had a network of approximately 3,099
acquired communications sites. Through our acquisition process we
identify communications sites that typically have existing cash flow
and enhance our existing portfolio. We have demonstrated the ability
to identify and successfully negotiate the purchase of what we
believe to be value enhancing acquisitions.
o WE HAVE THE ABILITY TO SUCCESSFULLY INCREASE COMMUNICATIONS SITE
RENTAL REVENUE. Because of our aggressive marketing efforts to all
major wireless communications providers we have signed a significant
number of new tenants over the last four years. Additional tenants
increase the operating leverage of our communications site portfolio
and generally increase our overall cash flow margins
In addition to the above strengths, we believe that our business will
be characterized by the following:
o CONSOLIDATION OPPORTUNITIES IN A HIGHLY FRAGMENTED INDUSTRY. The
communications site rental industry remains highly fragmented. Based
on an industry analyst's report, we estimate that there are over
20,000 communications sites in the U.S. that are not owned by the
largest independent operators and carriers. This creates a
significant opportunity for well capitalized companies, such as
Pinnacle, to acquire small, independent operators. Since commencing
operations in May 1995, through December 31, 1999, we have
successfully completed 346 acquisitions through which we have
acquired 3,099 communications sites.
o ATTRACTIVE GROWTH PROSPECTS. Our rental communications sites 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. As a
result, we believe that we can achieve a level of growth in our
communications site rental revenue that will in general reflect the
growth of our customer base over the next several years.
o STABLE AND PREDICTABLE CASH FLOW. We believe that our business is
characterized by predictable and stable monthly, prepaid recurring
revenue. Additionally, because a significant proportion of our site
rental revenue is received from large companies such as Nextel, Arch
Communications and the Southern Company and because the
communications sites and services we provide are mission critical to
our customers' operations (service can be terminated by us if rent is
not paid), we generally experience low levels of bad debt expense.
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o BARRIERS TO ENTRY. Communications sites 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 areas. As a result, we
believe that in areas where we have established a critical mass of
rental communications site inventory, construction of alternative
communications sites will be less attractive to others due to the
likelihood of lower returns on those towers. Other independent
communications site companies with large build-to-suit contracts, as
well as wireless communications providers seeking to construct their
own proprietary, limited use towers face continued opposition by
municipalities, which are reducing the opportunities for such new
communications sites to be built and supporting the trend toward
co-location on existing rental communications sites.
OUR OPERATIONS
Through our centralized management structure, we are designed to be
an efficient consolidator and operator of rental communications sites. This is
reflected in the methods and processes that we employ in managing our day-to-day
operations, including the rapid integration of acquisition, tower construction
and sales and marketing data into our proprietary management information
systems. This approach ensures that communications site management is
coordinated across our functional areas and that the information is accurate,
timely and easily available. We have invested heavily in our information systems
and believe that our investments in these areas will accommodate significant
additional growth. As we seek to expand our communications site portfolio, we
will continue to evaluate the need to supplement our current workforce.
The key components of our operations include:
o effective integration of communications site assets into our
existing portfolio;
o ongoing monitoring of our portfolio of communications site assets;
and
o customer sales and support.
INTEGRATION. The pace and level of activity that characterize our
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, over the past four years we
committed substantial resources to the development of our proprietary management
information systems to accommodate our overall acquisition, construction and
marketing strategies. As a result, we have developed the capability to rapidly
integrate new acquisitions and tower construction activity and initiate sales
and marketing efforts upon closing or completion.
ONGOING MONITORING. Our operations personnel perform routine, ongoing
site monitoring to ensure the maintenance of accurate data with regard to our
communications site inventory. Inventory management includes radio frequency
audits and regulatory compliance. We seek to maintain accurate information with
regard to customers' equipment that is installed on our communications sites. We
believe that this area is overlooked by many rental communications site owners,
resulting in erroneous information about the availability of communications site
space and payments owed by some existing customers. To minimize errors, we
conduct radio frequency audits and match 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, we use 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 we operate are essential to us
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as well as to our customers. Operations personnel ensure that all sites are in
compliance with all Federal Aviation Administration (the "FAA") and FCC
regulations and other local requirements. Regulatory data is integrated into our
management information systems and is provided to current and potential
customers as part of equipment installation support efforts.
CUSTOMER SALES AND SUPPORT. Our 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 our communications sites and, we believe,
has enhanced our reputation as a full-service and responsive provider of rental
communications site space.
OUR CUSTOMERS AND CUSTOMER LEASES
As of December 31, 1999, we had over 15,260 separate communications
site leases. We have a diversified base of over 3,790 customers. As of December
31, 1999, Arch Communications, Nextel and Motorola represented 10.8%, 9.4% and
4.7%, respectively, of our revenue, on a run rate basis. See "--Forward Looking
Statements and Associated Considerations--The loss of any significant customer
would adversely affect our business" and "--Forward Looking Statements and
Associated Considerations--There are certain risks associated with the Motorola
Antenna Site Acquisition."
We have a diverse mix of customers representing the various
technologies and segments of the wireless communications industry. As a result,
we believe that we are not dependent on any one segment of the wireless
communications industry for future revenue growth. Our diverse mix of customers
will continue following the consummation of the Motorola Antenna Site
Acquisition, although we anticipate the percentage of revenue we derive from
paging customers will decrease while the percentage of revenue we derive from
SMR customers and private business customers will increase. The following is a
summary of our approximate percentage of annualized run rate revenue by customer
type (without giving effect to any pending acquisitions) as of December 31,
1999:
PERCENTAGE
CUSTOMER TYPE OF REVENUE
----------
Land Mobile .................................................... 31.6%
Paging ......................................................... 31.1%
SMR ............................................................ 15.4%
PCS ............................................................ 9.4%
Cellular ....................................................... 6.2%
Data ........................................................... 3.3%
Broadcasting ................................................... 2.5%
Other .......................................................... 0.8%
-----
Total....................................................... 100%
=====
In connection with the Southern Towers Acquisition, we entered into
leases with Southern Communications providing that Southern Communications or
one of its affiliates would be a customer on each of the 201 towers acquired.
Under these leases, Southern Communications and its affiliates pay annual
initial aggregate rents of $5.5 million. The leases have initial terms of 10
years with five optional renewal periods of five years, each of which is
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. We also
entered into a 10 year option agreement with Southern Communications whereby
Southern Communications may require us to use commercially reasonable efforts to
supply, acquire or construct an additional 80 sites within Alabama, Florida,
Georgia or
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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 for
the 201 towers described above.
In connection with the MobileMedia Acquisition, we entered into a lease
with affiliates of MobileMedia leasing the "site spaces" at the towers that were
previously utilized by MobileMedia and its affiliates for the installation and
operation of transmitter systems. The lease has a 15-year term with one
five-year renewal term exercisable at the option of the customer. Rent under the
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.
Upon consummation of the Motorola Antenna Site Acquisition, we assumed
a substantial number of tenant leases for the owned communications sites we
acquired from Motorola. Most of these leases are cancelable by either party on
short-term notice. See "--Forward Looking Statements and Associated
Considerations--There are certain risks associated with the Motorola Antenna
Site Acquisition."
OUR COMPETITION
The markets in which we operate are highly competitive. We compete with
wireless communications providers who own and operate their own communications
site networks, site development companies that acquire space on existing towers,
rooftops and other sites, other independent communications site companies and
traditional local independent communications site operators. Wireless
communications providers who own and operate their own communications site
networks generally are larger and have greater financial resources than we have.
We believe that communications site 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. We believe that competition for tower acquisitions will increase and
that additional competitors will enter the communications site rental market,
some of which may have greater financial and other resources than we have. See
"--Forward Looking Statements and Associated Considerations--We compete with
companies that have greater financial resources."
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 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 and other
communications sites are separately regulated by the FCC and independently
licensed based upon the particular frequently used. See "--Forward Looking
Statements and Associated Considerations--Our business requires compliance and
approval with regulatory authorities."
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
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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. However, the Telecom
Act provides a mechanism for judicial relief from zoning decisions that fail to
comply with certain provisions of the Telecom Act. For example, the Telecom Act
prohibits any state or local government action that would (i) discriminate
between different wireless communications providers or (ii) ban altogether the
construction, modification or placement of radio communication towers. The
Telecom Act requires the federal government to establish procedures to make
available on a fair, reasonable and nondiscriminatory basis property
rights-of-way and easements under federal control for the placement of new
telecommunications services. This may require that federal agencies and
departments work directly with licensees to make federal property available for
tower facilities.
All towers must comply with the National Environmental Policy Act of
1969 as well as other federal environmental statutes. The FCC's environmental
rules place responsibility on each applicant to investigate any potential
environmental effect of tower placement and operations and to disclose any
significant effects on the environment in an environmental assessment prior to
constructing a tower. In the event the FCC determines the proposed tower would
have significant environmental impact based on the standards the FCC has
developed, the FCC would be required to prepare an environmental impact
statement. This process could significantly delay the licensing of a particular
tower site. See "--Forward Looking Statements and Associated Considerations--We
are subject to environmental laws that impose liability without regard to fault
and environmental regulations that could adversely affect our operations."
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 REGULATIONS. In addition to the FCC's environmental
regulations, we are 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 our financial condition or results of
operations.
OUR EMPLOYEES
As of December 31, 1999, we had approximately 166 full-time employees,
of which 109 work in our Sarasota, Florida headquarters office. None of our
employees are unionized, and we consider our relationship with our employees to
be good.
REIT STATUS
We have elected to be treated as a REIT. A REIT is generally not
subject to federal corporate income taxes on that portion of its ordinary income
or capital gain for a taxable year that is distributed to stockholders within
such year. To qualify and remain qualified as a REIT, we are 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 that must be satisfied with respect to each taxable year in order
to qualify and remain qualified as such, a REIT generally must:
o distribute to stockholders 95% (90% beginning January 1, 2001) of its
taxable income computed without regard to net capital gains and
deductions for distributions to stockholders and 95% (90% beginning
January 1, 2001) of certain foreclosure income;
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o maintain at least 75% of the value of its total assets in real estate
assets (generally real property and interests therein), cash, cash
items and government securities;
o derive at least 75% of its gross income from investments in real
property or mortgages on real property; and
o derive at least 95% of its gross income from real property
investments described above 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 that are
structural components of such buildings or structures. The Service has ruled in
a revenue ruling that transmitting and receiving communications towers built
upon pilings or foundations similar to our towers as well as ancillary
buildings, heating and air conditioning systems and fencing constitute
inherently permanent structures and are therefore real estate assets. However,
depending on our assessment of the strategic importance of acquisitions which
may become available to us in our existing line of business or in complementary
non-real estate based communication site or services activities, we may acquire,
operate and derive income from assets businesses or entities that will cause us
to no longer qualify as a REIT. In this regard we transferred certain of the
assets we acquired from Motorola to PT III, in which we own substantially all of
the equity interest in the form of nonvoting, convertible preferred stock, as
well as approximately 9% of the voting common stock in order to minimize the
risk that the ownership of or income from such assets might negatively affect
our qualification as a REIT. The transferred assets consisted of substantially
all of the rooftop sites acquired from Motorola as well as equipment related
thereto. Due to the lack of relevant authority to confirm that the rooftop sites
and related equipment and the income therefrom will constitute qualifying assets
and income for REIT purposes, we transferred such assets to PT III in order to
reduce the risk that our direct ownership of such assets, and our direct receipt
of income produced by such assets, might adversely impact our qualification as a
REIT. As opportunities arise to acquire additional potentially non-REIT
qualifying assets, such assets may be acquired by PT III from us or directly
from the seller. To facilitate any such acquisitions, we may make additional
investments in or loans to PT III. Subsequent to December 31, 1999, we purchased
approximately $2.4 million of additional PT III convertible preferred stock and
loaned PT III an additional $9.5 million in exchange for a convertible
promissory note. PT III used such funds to acquire all of the stock of two
corporations that own and manage communication sites, certain of which may not
be REIT qualifying assets or generate income from assets that are non-REIT
qualifying.
In addition to REIT qualification requirements applicable to the nature
of assets owned or income received, certain other REIT qualification
requirements limit the nature and amount of stock or securities of another
corporation owned by a REIT unless such other corporation is itself qualified as
a REIT. PT III intends to request a private letter ruling from the Service that
the ownership of, and receipt of income from, the rooftop sites and related
equipment will be considered qualifying assets and income for REIT purposes, and
intends to elect to be taxed as a REIT, although such election may not be made
with respect to the short period year of 1999. On January 14, 2000, PT III
acquired all of the stock of a C-corporation having accumulated earnings and
profits and which owns and receives income from certain assets that are non-REIT
qualifying. Although PT III plans to distribute all such earnings and profits to
its shareholders before the last day of its taxable year which began January 1,
2000, and projects that the amount of such non-REIT assets and income will be
sufficiently small so as to permit PT III to satisfy the asset and income tests
for REIT qualification, there can be no assurance that, by virtue of such
January 14, 2000 acquisition or future acquisitions by PT III of stock or
assets, PT III will satisfy the requirements for qualification as a REIT, even
if the Service rules favorably with respect to PT III's ownership of, and
receipt of income from, the rooftop sites and related equipment acquired from
Motorola. With respect to years for which PT III is itself qualified and has
elected to be taxed as a REIT, our ownership of stock and securities therein
will not be subject to the aforementioned limitations applicable to the
ownership of, and receipt of income from,
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securities in a corporation which is not a REIT. If PT III receives a favorable
ruling from the Service with respect to the ownership of, and income received
from, rooftop sites and related equipment, and will otherwise satisfy the
requirements for a qualification as a REIT, then we currently expect to acquire
it in a merger or other similar transaction. However, if PT III does not receive
a favorable ruling from the Service concerning the foregoing matters or is not
itself qualified as a REIT for some other reason, it may remain as a separate
entity indefinitely, and the aforementioned limitations, as well as limitations
the subject of recent legislative enactments will apply to our ownership of
stock and other securities of PT III. If those limitations are exceeded, such
could result in a loss of our qualification as a REIT. While we have structured
our stock ownership in PT III in a manner which we believe satisfies the
currently applicable percentage limitations aforementioned, due to the lack of
relevant authority addressing certain matters involving the interpretation or
application of such percentage limitations, there is a risk that future judicial
or administrative interpretations addressing such matters with respect to the
REIT provisions of the Internal Revenue Code of 1986 (the "Code") could
adversely impact our ability to satisfy those percentage limitations, with
possible retroactive effect. Furthermore, due to legislative changes enacted on
December 17, 1999, for our taxable year beginning January 1, 2001, unless PT III
will then be separately qualified as a REIT, it will be necessary for an
election to be made that such corporation be a "taxable REIT subsidiary" or for
us to otherwise restructure or dispose of our investment in PT III in order to
maintain our REIT qualification.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED CONSIDERATIONS
This Annual Report on Form 10-K and the documents incorporated herein
by reference contain forward-looking statements that have been made pursuant to
the provisions of the Private Securities Litigation Reform Act of 1995. Words
such as "anticipates," "expects," "intends," "plans," believes," "seeks,"
"estimates," variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees of
future performance and are subject to certain risks, uncertainties and
assumptions that are difficult to predict; therefore, actual results may differ
materially from those expressed or forecasted in any such forward-looking
statements. In addition, we may from time to time make oral forward-looking
statements. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise. Such statements appear in a number of places in this
report and include statements regarding the intent, belief or current
expectations of Pinnacle, its directors or its officers with respect to, among
other things: (1) trends affecting our financial condition or results of
operation; (2) the industry in which the Company operates; (3) our business and
growth strategies; and (iv) other matters. Readers are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those indicated in the forward-looking statements as a result of various
factors. Readers are cautioned not to place undue reliance on these
forward-looking statements. Factors to consider in evaluating any
forward-looking statements and the other information contained in this Annual
Report on Form 10-K include the following:
WE HAVE A HISTORY OF OPERATING LOSSES. WE HAVE GENERATED LOSSES FROM
OPERATIONS, AND WE MAY CONTINUE TO DO SO.
We have incurred losses from continuing operations in each of the
fiscal years since our inception. As a result, for the years ended December 31,
1997, 1998 and 1999, our earnings were insufficient to cover combined fixed
charges by approximately $8.5 million, $39.7 million and $63.8 million,
respectively. We expect to continue to experience net losses in the future,
principally due to interest charges on outstanding indebtedness and substantial
charges relating to depreciation of our existing and future assets. These net
losses may be greater than the net losses we have experienced in the past.
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OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL
CONDITION; WE MAY INCUR SUBSTANTIALLY MORE DEBT.
We have a high level of indebtedness. As of December 31, 1999, we had
$719 million of indebtedness outstanding.
Our high level of indebtedness could have important consequences to
you. For example, it could:
o make it more difficult for us to satisfy our obligations with respect
to our indebtedness;
o increase our vulnerability to general adverse economic and industry
conditions;
o limit our ability to obtain additional financing;
o require the dedication of a substantial portion of our cash flow from
operations to the payment of principal of, and interest on, our
indebtedness thereby, reducing the availability of such cash flow to
fund our growth strategy, working capital, capital expenditures or
other general corporate purposes;
o limit our flexibility in planning for, or reacting to, changes in our
business and the industry; and
o place us at a competitive disadvantage relative to our competitors
with less debt.
We may incur substantial additional debt in the future. The terms of
our outstanding debt do not fully prohibit us from doing so. If new debt is
added to our current levels, the related risks described above could intensify.
See "Selected Financial Data."
WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH TO SERVICE OUR
INDEBTEDNESS AND MEET OUR OTHER LIQUIDITY NEEDS. OUR ABILITY TO
GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL.
Our ability to meet our debt service and other obligations will depend
on our future performance, which is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are, to a large
extent, beyond our control. We anticipate the need for substantial capital
expenditures in connection with our future expansion plans.
If we are unable to generate sufficient cash flow from operations to
service our indebtedness and fund our other liquidity needs, we will be forced
to adopt an alternative strategy that may include reducing, delaying or
eliminating acquisitions, tower construction and other capital expenditures,
selling assets, restructuring or refinancing our indebtedness or seeking
additional equity capital. We cannot assure you that any of these alternative
strategies could be effected on satisfactory terms, if at all, and the
implementation of any of these alternative strategies could have a negative
impact on our business. We may also need to refinance all or a portion of our
debt on or before maturity. We cannot assure you that we will be able to
refinance any of our debt on commercially reasonable terms or at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
THERE ARE CERTAIN RISKS ASSOCIATED WITH THE MOTOROLA ANTENNA SITE
ACQUISITION.
On August 31, 1999, we acquired approximately 1,858 communications
sites from Motorola. We have never consummated a transaction as large as the
Motorola Antenna Site Acquisition and face significant challenges in integrating
the 1,858 acquired communications sites into our operations. In addition,
integration of these communications sites will require substantial attention
from our management team,
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which has had limited experience in integrating an acquisition of this size.
Diversion of management attention from our existing business could have an
adverse impact on our revenues and operating results. We cannot assure you that
tenants on the sites obtained in the Motorola Antenna Site Acquisition will not
cancel their leases. Additionally, Motorola's tower revenues decreased from
$89.1 million in 1997 to $85.6 million in 1998, and from $43.1 million for the
six month period ended June 26, 1998 to $42.1 million for the six month period
ended July 4, 1999. The decrease was primarily the result of a reduction in the
number of communications sites used by Nextel for its analog SMR business. We
anticipate that Nextel will continue to phase out its analog SMR business for
the forseeable future.
Due to timing, logistical and other constraints, we did not have the
ability to access, analyze and verify all information regarding title and other
issues related to the Motorola communications sites prior to closing the
Motorola Antenna Site Acquisition. Our indemnification rights under the
definitive purchase agreement between us and Motorola (the "Motorola Purchase
Agreement") and the related documents are subject to various limitations.
Therefore, our ability to obtain compensation for defects in title or other
site-related and other issues is limited.
PINNACLE HOLDINGS INC. IS A HOLDING COMPANY. ITS ONLY SOURCE OF CASH IS
FROM DISTRIBUTIONS FROM ITS SUBSIDIARIES.
Pinnacle Holdings Inc. is a holding company with no operations of its
own and conducts all of its business through its subsidiaries. Pinnacle Holdings
Inc.'s only significant asset is the outstanding capital stock of its
subsidiaries. Pinnacle Holdings Inc. is wholly dependent on the cash flow of its
subsidiaries and dividends and distributions from its subsidiaries to it in
order to service its current indebtedness and any of its future obligations. The
ability of Pinnacle Holdings Inc.'s subsidiaries to pay such dividends and
distributions will be subject to, among other things, the terms of any debt
instruments of its subsidiaries then in effect and applicable law.
Pinnacle Holdings Inc.'s rights, and the rights of its creditors, to
participate in the distribution of assets of any of its subsidiaries upon such
subsidiary's liquidation or reorganization will by subject to the prior claims
of such subsidiary's creditors, except to the extent that Pinnacle Holdings Inc.
is itself reorganized as a creditor of such subsidiary in which case our claims
would still be subject to the claims of any secured creditor of such subsidiary.
As of December 31, 1999, the aggregate amount of debt and other obligations of
Pinnacle Holdings Inc.'s subsidiaries (including trade payables current,
long-term and other liabilities) was approximately $785 million.
WE WILL NOT BE ABLE TO EFFECT OUR BUSINESS PLAN IF WE DO NOT HAVE THE
REQUIRED CASH.
Our business plan is materially dependent upon the acquisition of
additional suitable communications sites and the construction of new towers at
prices we consider reasonable in light of the revenue we believe we will be able
to generate from such sites when acquired or constructed. We will need
significant additional capital to finance future acquisitions as well as our
tower construction plan and other capital expenditures. During 1997, 1998 and
1999, we made capital investments aggregating approximately $89.5 million,
$373.6 million and $551.7 million, respectively, in communications site
acquisitions, site upgrades and new tower construction. We currently estimate
that they will be at least $300 million in 2000. To the extent that we commit to
additional significant acquisition opportunities beyond those we have identified
and currently believe it is probable that we will complete, that amount may
materially increase. Accordingly, we cannot assure you that our actual cash
requirements will not materially exceed our estimated capital requirements and
available capital. We historically have financed our capital expenditures
through a combination of borrowings under bank credit facilities, a debt
offering, bridge financings, equity issuances, seller financing and cash flow
from operations. Significant additional acquisition or tower construction
opportunities will create a need for additional capital financing. If our
revenue and cash flow are not as expected, or if our
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borrowing base is reduced as a result of operating performance, we may have
limited ability to access necessary capital. We cannot assure you that adequate
funding will be available as needed or, if available, on terms acceptable to us
or permitted under the terms of our existing indebtedness. The terms of
additional debt financing could have important consequences to you. See "--The
terms of our indebtedness impose significant restrictions on us." In addition,
to qualify and remain qualified as a REIT, we must distribute to our
stockholders 95% of our taxable income computed without regard to net capital
gains and deductions for distributions to our stockholders and 95% of certain
foreclosure income. If made, such distributions could reduce the amount of cash
available to us to effect our business plan. Insufficient available funds may
require us to scale back or eliminate some or all of our planned expansion. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
THE TERMS OF OUR INDEBTEDNESS IMPOSE SIGNIFICANT RESTRICTIONS ON US.
Certain provisions of the indenture governing our 10% senior discount
notes due 2008 (the "Notes") by and between us and The Bank of New York, as
trustee (the "Indenture"), contain covenants that restrict our ability to:
o incur additional indebtedness;
o incur liens;
o make investments;
o pay dividends or make certain other restricted payments;
o consummate certain asset sales;
o consolidate with any other person; and
o sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of our assets.
In addition, our credit facility requires us to comply with certain
financial ratios and tests, under which we are required to achieve certain
financial and operating results. Our ability to meet these financial ratios and
tests may be affected by events beyond our control, and we cannot assure you
that they will be met. In the event of a default under our credit facility, the
lenders may declare the indebtedness immediately due and payable, which would
result in a default under the Indenture. We cannot assure you that we will have
sufficient assets to pay indebtedness outstanding under our credit facility and
the Notes. Any refinancing of our credit facility is likely to contain similar
restrictive covenants.
WE DEPEND ON ACQUISITIONS AND THE INTEGRATION OF THOSE ACQUISITIONS
INTO OUR BUSINESS.
Our business plan is materially dependent upon the acquisition of
additional suitable communications sites at prices we consider reasonable in
light of the revenue we believe we will be able to generate from these sites
when acquired. Since our inception, however, the prices of acquisitions within
the industry have generally increased over time. Additionally, we compete with
certain wireless communications providers, site developers and other independent
communications site owners and operators for acquisitions of communications
sites, some of which have greater financial and other resources than we have.
Increased demand for acquisitions may result in fewer acquisition opportunities
for us as well as higher acquisition prices. Our inability to grow by
acquisition or to accurately estimate the amount of revenue that will be
generated from such acquisitions may affect us adversely. Although we believe
that opportunities may exist for us to grow through acquisitions, we cannot
assure you that we will be able to identify and consummate
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<PAGE>
acquisitions on terms we find acceptable. Certain provisions of our credit
facility and the Notes may limit our ability to effect acquisitions. See "--Our
substantial indebtedness could adversely affect our financial condition; we may
incur substantially more debt." Further, we cannot assure you that we will be
able to profitably manage and market the space on additional communications
sites acquired or successfully integrate acquired sites with our operations and
sales and marketing efforts without substantial costs or delays. Acquisitions
involve a number of potential risks, including the potential loss of customers,
increased leverage and debt service requirements, combining disparate company
cultures and facilities and operating sites in geographically diverse markets.
Accordingly, we cannot assure you that one or more of our past or future
acquisitions may not have a material adverse effect on our financial condition
and results of operations. See "Business-Our Acquisition Strategy."
IF WE FAIL TO PROTECT OUR RIGHTS AGAINST PERSONS CLAIMING SUPERIOR
RIGHTS IN OUR COMMUNICATIONS SITES, OUR BUSINESS MAY BE ADVERSELY
AFFECTED.
Our real property interests relating to our communications sites
consist of fee interests, leasehold interests, private easements and licenses,
easements and rights-of-way. For various reasons, we may not always have the
ability to access, analyze and verify all information regarding title and other
issues prior to completing an acquisition of communications sites. We generally
obtain title insurance on fee properties we acquire and rely on title warranties
from sellers. Our ability to protect our rights against persons claiming
superior rights in communications sites depends on our ability to:
o recover under title policies, the policy limits of which may be less
than the purchase price of the particular site;
o in the absence of insurance coverage, realize on title warranties
given by the sellers, which warranties often terminate after the
expiration of a specific period, typically one to three years; and
o realize on title covenants from landlords contained in leases.
THE LOSS OF ANY SIGNIFICANT CUSTOMER COULD ADVERSELY AFFECT OUR
BUSINESS.
We have certain customers that account for a significant portion of our
revenue. As of December 31, 1999, Arch Communications (which acquired
MobileMedia Communications in 1999), Nextel and Motorola represented 10.8%, 9.4%
and 4.7%, respectively, of our revenue, on a run rate basis. The loss of one or
more of these major customers, or a reduction in their utilization of our
communications site rental space due to their insolvency or other inability or
unwillingness to pay, could have a material adverse effect on our business,
results of operations and financial condition. See "Business--Our Customers and
Customer Leases."
THERE ARE SIGNIFICANT RISKS ASSOCIATED WITH CONSTRUCTION OF NEW TOWERS
The success of our growth strategy is dependent in part on our ability
to construct new towers. Such construction can be delayed by factors beyond our
control, including zoning and local permitting requirements, availability of
erection equipment and skilled construction personnel and weather conditions.
Certain communities have placed restrictions on new tower construction or have
delayed granting permits required for construction. In addition, as the pace of
tower construction has increased in recent years, the demand for manpower and
equipment needed to erect towers has been increasing. Additionally, we cannot
assure you that build opportunities will become available that meet our economic
criteria. Our expansion plans call for a significant increase in construction
activity. We cannot assure you that we will be able to overcome the barriers to
new construction or that the number of towers planned for construction will be
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completed. Our failure to complete the necessary construction could have a
material adverse effect on our business, financial condition and results of
operations. See "Business--Our New Tower Construction Strategy."
WE COMPETE WITH COMPANIES THAT HAVE GREATER FINANCIAL RESOURCES.
We face competition for customers from various sources, including:
o wireless communications providers and utility companies that own and
operate their own communications site networks and lease
communications site space to other carriers;
o site development companies that acquire space on existing
communications sites for wireless communications providers and manage
new tower construction;
o other independent communications site companies; and
o traditional local independent communications site operators.
Wireless communications providers that own and operate their own
communications site networks generally are substantially larger and have greater
financial resources than we have. We believe that site location and capacity,
price, quality of service, type of service and density within a geographic
market historically have been and will continue to be the most significant
competitive factors affecting communications site rental companies. We believe
that competition for communications site acquisitions will increase and that
additional competitors will enter the tower rental market, certain of whom may
have greater financial and other resources than we have. See "Business--Our
Competition."
OUR BUSINESS DEPENDS ON DEMAND FOR WIRELESS COMMUNICATIONS.
Substantially all of our revenue is derived from leases of
communications site space, most of which are with wireless communications
providers. Accordingly, our future growth depends, to a considerable extent,
upon the continued growth and increased availability of cellular and other
wireless communications services. We cannot assure you that the wireless
communications industry will not experience severe and prolonged downturns in
the future or that the wireless communications industry will expand as quickly
as forecasted. The wireless communications industry, which includes paging,
cellular, personal communications services ("PCS"), fixed microwave, specialized
mobile radio ("SMR"), enhanced specialized mobile radio ("ESMR") and other
wireless communications providers, has undergone significant growth in recent
years and remains highly competitive, with service providers in a variety of
technologies and two or more providers of the same service (up to seven for PCS)
within a geographic market competing for subscribers. The demand for rental
space on our communications sites is dependent on a number of factors that are,
to a large extent, beyond our control, including the following:
o demand for wireless services;
o financial condition and access to capital of wireless communications
providers;
o strategy of wireless communications providers with respect to owning
or leasing communications sites;
o government licensing of broadcast rights;
o changes in telecommunications regulations; and
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o general economic conditions.
The demand for space on our communications sites is primarily dependent
on the demand for wireless communications services. A slowdown in the growth of
the wireless communications industry in the United States would depress network
expansion activities and reduce the demand for our communications sites. In
addition, a downturn in a particular wireless segment as a result of
technological competition or other factors beyond our control could adversely
affect the demand for rental communications sites. Advances in technology could
also reduce the need for site-based transmission and reception. In addition,
wireless services providers often enter into "roaming" and "resale" arrangements
that permit providers to serve customers in areas where they do not have
facilities. In most cases, these arrangements are intended to permit a
provider's customers to obtain service in areas outside the provider's license
area or, in the case of resale arrangements, to permit a provider that does not
have any licenses to enter the wireless marketplace.
Current FCC rules, which are subject to sunset requirements that vary
from service to service and market to market, also give licensed wireless
service providers the right to enter into roaming and resale arrangements with
other providers licensed to serve overlapping service areas. Such roaming and
resale arrangements could be viewed by some wireless service providers as
superior alternatives to constructing their own facilities or leasing space on
communications sites that we own. If such arrangements were to become common,
there could be a material adverse effect on our prospects, financial condition
and results of operations. See "Business--Industry Background."
The emergence of new technologies that do not require terrestrial
antenna sites and can be substituted for those that do also could have a
negative impact on our operations. For example, the FCC has granted license
applications for four low-earth orbiting satellite systems that are intended to
provide mobile voice or data services. In addition, the FCC has issued licenses
for several low-earth orbiting satellite systems that are intended to provide
solely data services. Although such systems are currently highly
capital-intensive and technologically untested, mobile satellite systems could
compete with land-based wireless communications systems, thereby reducing the
demand for the infrastructure services we provide. The occurrence of any of
these factors could have a material adverse effect on our business, financial
condition or results of operations.
OUR BUSINESS REQUIRES COMPLIANCE AND APPROVAL WITH REGULATORY
AUTHORITIES.
The FCC and the FAA regulate towers used for wireless communications
transmitters and receivers. Such regulations control siting, lighting and
marking of towers and may, depending on the characteristics of the tower,
require registration of tower facilities. Wireless communications equipment
operating on communications sites is separately regulated and independently
licensed by the FCC. Certain proposals to construct new towers or to modify
existing towers are reviewed by the FAA to ensure that the tower will not
present a hazard to aviation. Tower owners may have an obligation to paint
towers or install lighting to conform to FAA standards and to maintain such
painting and lighting. Tower owners may also bear the responsibility of
notifying the FAA of any tower lighting failures. Failure to comply with
existing or future applicable requirements may lead to civil penalties or other
liabilities. Such factors could have a material adverse effect on our financial
condition or results of operations.
Local regulations, including municipal or local ordinances, zoning
restrictions and restrictive covenants imposed by community developers, vary
greatly, but typically require tower owners to obtain approval from local
officials or community standards organizations prior to tower construction.
Local regulations can delay or prevent new tower construction or site upgrade
projects, thereby limiting our ability to respond to customer demand. In
addition, such regulations increase costs associated with new tower
construction. We cannot assure you that existing regulatory policies will not
adversely affect the timing or cost of new tower construction or that additional
regulations will not be adopted that increase such delays or result in
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additional costs to us. Such factors could have a material adverse effect on our
future growth. Our customers may also become subject to new regulations or
regulatory policies that adversely affect the demand for tower sites. We cannot
assure you that existing regulatory policies will not adversely affect the
timing or cost of new tower construction or that additional regulations will not
be adopted that increase such delays or result in additional costs to us. Such
factors could have a material adverse effect on our future growth. Our customers
may also become subject to new regulations or regulatory policies that adversely
affect the demand for tower sites. See "Business--Our New Tower Construction
Strategy."
Our growth strategy will be affected by our ability to obtain the
permits, licenses and zoning relief necessary to build new towers. The tower
rental industry often encounters significant public resistance when attempting
to obtain the necessary permits, licenses and zoning relief for construction or
improvements of towers. We cannot assure you that we can obtain the permits,
licenses and zoning relief necessary to continue the expansion of our
communications site rental business. The failure to obtain such permits,
licenses and zoning relief would have a material adverse effect on our business,
financial condition and results of operations. See "Business--Regulatory
Matters."
OUR SUCCESS DEPENDS UPON OUR RETAINING KEY EXECUTIVES.
Our success depends to a significant degree upon the continued
contributions of key management, engineering, sales and marketing, customer
support and finance personnel, some of whom may be difficult to replace.
Although we maintain employment agreements with certain of our employees, we
cannot assure you that the services of such personnel will continue to be
available to us. We do not maintain key man life insurance policies on our
executives that would adequately compensate us for any loss of services of such
executives. The loss of the services of these executives could have a material
adverse effect on our business.
COMPETING TECHNOLOGIES AND OTHER ALTERNATIVES COULD REDUCE THE DEMAND
FOR OUR SERVICES.
Most types of wireless services currently require ground-based network
facilities, including communications sites, for transmission and reception. The
extent to which wireless service providers lease such communications sites
depends on a number of factors beyond our control, including the level of demand
for such wireless services, the financial condition and access to capital of
such providers, the strategy of providers with respect to owning or leasing
communications sites, government licensing of communications services, changes
in telecommunications regulations and general economic conditions. In addition,
wireless service providers frequently enter into agreements with competitors
allowing each other to utilize one another's wireless communications facilities
to accommodate customers who are out of range of their home provider's services.
Such agreements may be viewed by wireless service providers as a superior
alternative to leasing space for their own antenna on communications sites we
own. The proliferation of such agreements could have a material adverse effect
on our business, financial condition or results of operations.
The emergence of new technologies that do not require terrestrial
antenna sites and can be substituted for those that do also could have a
negative impact on our operations. For example, the FCC has granted license
applications for four low-earth orbiting satellite systems that are intended to
provide mobile voice or data services. In addition, the FCC has issued licenses
for several low-earth orbiting satellite systems that are intended to provide
solely data services. Although such systems are currently highly
capital-intensive and technologically untested, mobile satellite systems could
compete with land-based wireless communications systems, thereby reducing the
demand for the infrastructure services we provide. The occurrence of any of
these factors could have a material adverse effect on our business, financial
condition or results of operations.
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WE ARE SUBJECT TO ENVIRONMENTAL LAWS THAT IMPOSE LIABILITY WITHOUT
REGARD TO FAULT AND ENVIRONMENTAL REGULATIONS THAT COULD ADVERSELY
AFFECT OUR OPERATIONS.
Our operations are subject to federal, state and local environmental
laws and regulations regarding the use, storage, disposal, emission, release and
remediation of hazardous and nonhazardous substances, materials or wastes. Under
certain of these laws, we could be held strictly, jointly and severally liable
for the remediation of hazardous substance contamination at its facilities or at
third-party waste disposal sites and also could be held liable for any personal
or property damage related to such contamination. Although we believe that we
are in substantial compliance with and have no material liability under all
applicable environmental laws, there can be no assurance that the costs of
compliance with existing or future environmental laws and liability related
thereto will not have a material adverse effect on our business, financial
condition or results of operations.
The FCC requires tower owners subject to the agency's antenna structure
registration program to comply at the time of registration with federal
environmental rules that may restrict the location of towers. Under these rules,
tower owners are required initially to identify whether proposed sites are in
environmentally sensitive locations. If so, the tower owners must prepare and
file environmental assessments, which must be reviewed by the FCC staff prior to
registration and construction of the particular towers. See
"Business--Regulatory Matters."
IF WE SUSTAIN DAMAGE TO OUR COMMUNICATIONS SITES IN EXCESS OF OUR
INSURANCE COVERAGE, OUR BUSINESS COULD BE ADVERSELY AFFECTED.
Our communications sites are subject to risks from vandalism and risks
associated with natural disasters such as tornadoes, hurricanes, fires and
earthquakes. We maintain certain insurance to cover the cost of replacing
damaged communications sites and general liability insurance to protect us in
the event of an accident involving a communications site, but we do not maintain
business interruption insurance. Accordingly, damage to a group of our
communications sites could result in a significant loss of revenue and could
have a material adverse effect on our results of operations and financial
condition. In addition, a communications site accident for which we are
uninsured or underinsured could have a material adverse effect on our financial
condition or results of operations.
WE MAY NOT BE ABLE TO REPURCHASE THE NOTES OR REPAY DEBT UNDER OUR
CREDIT FACILITY IN THE EVENT OF A CHANGE OF CONTROL.
Upon the occurrence of certain change of control events, holders of the
Notes may require us to offer to repurchase all of their Notes. We may not have
sufficient funds at the time of the change of control to make the required
repurchases or restrictions in our credit facility may not allow such
repurchases. Additionally, a "change of control" (as defined in the Indenture)
is an event of default under our credit facility, which would permit the lenders
to accelerate the debt, which also would cause an event of default under the
indentures.
The source of funds for any repurchase required as a result of any
change of control will be our available cash or cash generated from operating or
other sources, including borrowings, sales of assets, sales of equity or funds
provided by a new controlling entity. We cannot assure you, however, that
sufficient funds will be available at the time of any change of control to make
any required repurchases of the Notes tendered and to repay debt under our
credit facility. Furthermore, the use of available cash to fund the potential
consequences of a change of control may impair our ability to obtain additional
financing in the future. Any future credit agreements or other agreements
relating to indebtedness to which we may become a party may contain similar
restrictions and provisions.
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RISKS CONCERNING POTENTIAL NEGATIVE HEALTH EFFECTS OF RADIO FREQUENCY
EMISSIONS.
Along with wireless communications providers that utilize our
communications sites, we are subject to government requirements and other
guidelines relating to radio frequency emissions. The potential connection
between radio frequency emissions and certain negative health effects, including
some forms of cancer, has been the subject of substantial study by the
scientific community in recent years. To date, the results of these studies have
been inconclusive. Although we have not been subject to any claims relating to
radio frequency emissions, we cannot assure you that we will not be subject to
such claims in the future, which could have a material adverse effect on our
results of operations and financial condition. See "Business--Regulatory
Matters."
IF WE FAIL TO QUALIFY AS A REIT, WE MAY BE SUBJECT TO A VARIETY OF
TAXES AND PENALTIES.
We have elected to be taxed as a REIT under Sections 856-860 of the
Internal Revenue Code of 1986 (the "Code"). We believe that we have been
organized and operated to date in such a manner as to qualify for taxation as a
REIT. However, prospective investors should be aware that the federal tax rules
and regulations relating to REITs are highly technical and complex, and that our
qualification as a REIT during each taxable year (including prior years) will
depend on our ability to meet these requirements, through actual annual
operating results, income distribution levels, stock ownership requirements and
tests relating to our assets and sources of income. Therefore, we cannot assure
you that we have operated or will operate in a manner so as to qualify or remain
qualified as a REIT. Furthermore, depending on our assessment of the strategic
importance of acquisitions which may become available to us in our existing line
of business or in complementary non-real estate based communications site or
services activities, we may acquire, operate and derive income from assets,
businesses or entities that will cause us to no longer qualify as a REIT. In
this regard, we recently acquired certain assets from Motorola prior to
determining whether such assets, and the income derived from such assets, would
permit us to continue to meet the qualification requirements for a REIT.
Subsequent to making such commitment, we structured the ownership of the assets
so acquired in a manner that we believe will ensure our continued qualifications
as a REIT. See "Business--Our Acquisition Strategy--Motorola Antenna Site
Acquisition" and "Business--REIT Status."
However, because of the restrictions imposed on our operations by
seeking to retain our qualification as a REIT, we have evaluated whether to
terminate our REIT qualification. With respect to taxable years for which we are
qualified as a REIT, we could be subject to a variety of taxes and penalties if
we engage in certain prohibited transactions, fail to satisfy REIT distribution
requirements or recognize gain on the sale or other disposition of certain types
of property. See "Business--REIT Status." If we cease to remain qualified as a
REIT and we cannot utilize any of the relief provisions which may be applicable,
or terminate our REIT election voluntarily, we will be subject to corporate
level income tax at regular corporate rates on our net income unreduced by
distributions to stockholders, together with interest and penalties to the
extent applicable to prior periods. However, because we have not reported any
net taxable income (determined before the deduction for dividends paid) in any
of our corporate income tax returns since our filing of an election to be taxed
as a REIT, unless our reported net taxable loss is adjusted, any corporate
income tax liability from a retroactive determination by the Internal Revenue
Service (the "Service") that we, to date, failed to satisfy all of the
requirements for REIT qualification during any such year would likely be
minimal. Nevertheless, with respect to any year in which we recognize positive
net taxable income, the loss of REIT status or a determination that we did not
qualify as a REIT may have a material adverse affect on our financial condition
or results from operations. In such circumstances, we may have made
distributions to our stockholders as required to retain our REIT status but
would neither be entitled to receive such distributions back from our
stockholders nor be entitled to a tax deduction for such distributions. At the
present time, we do not anticipate that we will recognize net taxable income for
the foreseeable future.
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WE CANNOT ASSURE YOU THAT THE IMPACT OF THE YEAR 2000 DATE CHANGE ON
COMPUTER SYSTEMS WILL NOT HAVE SIGNIFICANT ADVERSE EFFECTS ON US.
Many computer systems and software products are coded to accept only
two digit entries in the year code field. These date code fields need to accept
four digit entries to distinguish 21st century dates from 20th century dates. As
a result, many companies' software and computer systems may need to be upgraded
or replaced in order to comply with such "Year 2000" requirements. We and third
parties with whom we do business rely on numerous computer programs in our
day-to-day operations. Prior to entering Year 2000, we implemented plans to
assess our systems to determine their ability to meet our internal and external
requirements. We completed our initial comprehensive testing of and
modifications to our information systems in response to that testing. Now that
we have entered the Year 2000, we have continued testing our information systems
and to date, we have not experienced any material Year 2000 disruptions or
failures of our systems, nor have we been notified of any disruptions or
failures of the systems of any of our third parties with whom we do business.
However, there is an ongoing risk that Year 2000 related problems could still
occur and we will continue to monitor Year 2000 issues as they relate to our
internal computer systems and third party computer systems with whom we
interact. We have incurred internal staff costs as well as approximately
$100,000 of consulting and other expenses related to the Year 2000 compliance
program we have undertaken in order to address these issues. We cannot assure
you that our Year 2000 compliance program, or similar programs by third parties
with whom we do business, will be successful. We may incur significant costs in
resolving any Year 2000 issues that may arise in the future. If not resolved,
these issues could have a significant adverse impact on our business, operating
results and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000."
WE HAVE ADOPTED ANTI-TAKEOVER PROVISIONS THAT COULD AFFECT THE SALE OF
PINNACLE.
Provisions of our certificate of incorporation, our bylaws and Delaware
law could make it more difficult for a third party to acquire us, even if doing
so would be beneficial to our stockholders.
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ITEM 2. PROPERTIES
The following is a summary of our communications sites, as of December 31, 1999
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF COMMUNICATIONS TOTAL NUMBER OF
COMMUNICATIONS SITES COMMUNICATIONS
STATE/PROVINCE SITES OWNED MANAGED/LEASED SITES
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Florida 251 117 368
George 220 55 275
Texas 121 44 165
Alabama 125 34 159
Louisiana 134 13 147
California 66 73 139
Illinois 19 107 126
North Carolina 81 38 119
South Carolina 74 40 114
Tennessee 81 31 112
Ontario, Canada 9 96 105
Ohio 17 65 82
New York 37 43 80
Mississippi 66 13 79
Quebec, Canada 25 50 75
Michigan 8 66 74
Iowa 45 17 62
Virginia 43 17 60
Pennsylvania 12 42 54
Indiana 4 49 53
Wisconsin 12 37 49
Maryland 24 18 42
Alberta, Canada 22 16 38
Kentucky 18 20 38
Washington 27 10 37
British Columbia, Canada 6 29 35
New Jersey 11 23 34
Minnesota 12 19 31
Missouri 7 23 30
Colorado 14 14 28
Nebraska 13 14 27
Oklahoma 9 17 26
Massachusetts 11 14 25
Arizona 9 16 25
Kansas 8 15 23
Oregon 10 12 22
Arkansas 11 8 19
Hawaii 5 14 19
South Dakota 9 10 19
New Mexico 14 3 17
Connecticut 8 8 16
North Dakota 5 11 16
New Hampshire 12 2 14
West Virginia 2 12 14
Maine 3 9 12
Nevada 5 6 11
Nova Scotia, Canada 5 4 9
Delaware 4 5 9
Saskatchewan, Canada 4 5 9
Utah 5 3 8
Alaska 4 3 7
Wyoming 3 4 7
Montana 7 7
Rhode Island 5 1 6
Idaho 1 5 6
New Brunswick, Canada 6 6
Washington DC 1 3 4
Manitoba, Canada 4 4
New Foundland, Canada 1 1
Vermont 1 1
----------------------------------------------------------------
1,757 1,442 3,199
</TABLE>
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ITEM 3. LEGAL PROCEEDINGS
We are from time to time involved in ordinary litigation incidental to
the conduct of our business. We believe that none of our pending litigation will
have a material adverse effect on our business, financial condition or results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
In order to qualify as a REIT for federal income tax purposes, among
other things we must make distributions each taxable year (not including any
return of capital for federal income tax purposes) equal to at least 95% of our
real estate investment trust taxable income, although our board of directors, in
its discretion, may increase that percentage as it deems appropriate and 95% of
certain foreclosure income. The declaration of distributions is within the
discretion of our board of directors and depends upon our cash available for
distribution, current and projected cash requirements, tax considerations and
other factors.
We intend to make distributions to holders of our common stock only in
the minimum amount necessary to satisfy the REIT distribution requirements
necessary to maintain REIT status and intend to retain available cash in excess
of such amount for future operation and expansion of our business. In this
regard, we do not expect for the foreseeable future that we will have real
estate investment trust taxable income which will be required to be distributed
in order to maintain our REIT status. Any determination to declare or pay
dividends in the future will be at the discretion of our board of directors and
will depend upon our results of operations, financial condition and any
contractual restrictions, considerations imposed by applicable law and other
factors deemed relevant by our board of directors.
Our common stock began trading on the Nasdaq National Market under the
symbol "BIGT" on February 19, 1999. The following table sets forth the range of
high and low sale prices per share for our common stock as reported on the
Nasdaq National Market for the periods indicated:
HIGH LOW
--------- ------
2000
First quarter (through February 24, 2000).......... $ 55.9375 $35.875
1999
First quarter...................................... $ 15.125 $14.00
Second quarter..................................... $ 24.50 $15.00
Third quarter...................................... $ 28.3125 $22.75
Fourth quarter..................................... $ 42.375 $22.00
On February 24, 2000, the last sale price of our common stock as
reported on the Nasdaq National Market was $51.00 per share. On February 24,
2000, there were 86 holders of record of our common stock.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data for the
period of our inception (May 3, 1995) through December 31, 1995 and for each of
the three years ended December 31, 1996, 1997, 1998 and 1999 were derived from
our consolidated historical financial statements, 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 our consolidated audited financial
statements and the related notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
herein.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MAY 3, 1995)
THROUGH YEARS ENDED DECEMBER 31,
DECEMBER 31, -------------------------------------------------------
1995 1996 1997 1998 1999
------------ ------------ ------------- ------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenue .......................................... $ 733 $ 4,842 $ 12,881 $ 32,019 $ 85,421
Direct operating expenses, excluding depreciation
and amortization .............................. 181 1,135 2,633 6,166 24,867
---------- ---------- ---------- ---------- -----------
Gross margin, excluding depreciation and
amortization .................................. 552 3,707 10,248 25,853 60,554
Other expenses:
General and administrative(a) ................. 306 916 1,367 4,175 4,882
Corporate development(a) ...................... 369 1,421 3,723 6,382 9,912
State franchise, excise and minimum taxes ..... -- 26 67 686 1,108
Depreciation and amortization ................. 282 2,041 6,335 22,513 58,813
---------- ---------- ---------- ---------- -----------
Loss from operations ............................. (405) (697) (1,244) (7,903) (14,160)
Interest expense ................................. 181 1,155 6,925 12,300 22,953
Amortization of original issue discount and debt .
issuance costs ................................ 59 164 292 16,427 23,708
---------- ---------- ---------- ---------- -----------
Loss before extraordinary item ................... $ (645) $ (2,016) $ (8,461) $ (36,630) $ (60,821)
Extraordinary loss from extinguishment of debt ... -- -- -- 5,641 --
---------- ------------ ---------- ---------- -----------
Net loss ......................................... $ (645) $ (2,016) $ (8,461) $ (42,271) $ (60,821)
Dividends and accretion on preferred stock ....... -- -- -- 3,094 2,930
---------- ---------- ---------- ---------- -----------
Loss attributable to common stock ................ $ (645) $ (2,016) $ (8,461) $ (45,365) $ (63,751)
========== ========== ========== ========== ===========
Basic loss per common share:
Loss before extraordinary item ................ $ (0.30) $ (0.38) $ (1.16) $ (4.06) $ (1.96)
Extraordinary item ............................ -- -- -- (0.58) --
---------- ---------- ---------- ---------- ------------
Net loss ................................... $ (0.30) $ (0.38) $ (1.16) $ (4.64) $ (1.96)
========== ========== ========== ========== ============
Weighted average number of shares of common stock 2,182,103 5,336,141 7,318,717 9,781,893 32,588,050
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------
1995 1996 1997 1998 1999
-------------- ---------- ------------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 31 $ 47 $ 1,694 $ 13,801 $ 94,863
Fixed assets, net.................................. 11,532 48,327 127,946 473,942 955,689
Total assets....................................... 13,972 55,566 143,178 516,148 1,159,434
Total debt......................................... 5,523 30,422 120,582 433,218 719,365
Stockholders' equity............................... $ 6,226 $ 22,220 $ 14,753 $ 39,672 $ 374,498
</TABLE>
(a) "General and administrative" expenses represent those costs directly related
to the day-to-day management and operation of our communications sites.
"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 sites.
30
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING IS A DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR EACH OF THE THREE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999.
THE DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND
NOTES THERETO INCLUDED ELSEWHERE HEREIN. THE STATEMENTS REGARDING THE WIRELESS
COMMUNICATIONS INDUSTRY, OUR EXPECTATIONS REGARDING OUR FUTURE PERFORMANCE AND
OTHER NON-HISTORICAL STATEMENTS IN THIS DISCUSSION ARE FORWARD-LOOKING
STATEMENTS. THESE FORWARD-LOOKING STATEMENTS INCLUDE NUMEROUS RISKS AND
UNCERTAINTIES, AS DESCRIBED IN "BUSINESS--FORWARD LOOKING STATEMENTS AND
ASSOCIATED CONSIDERATIONS."
OVERVIEW
We acquire communications sites and construct rental towers and lease
space on these communications sites to a broad base of wireless communications
providers, operators of private networks, government agencies and other
customers. Our objective is to acquire or construct clusters of rental
communications sites in areas where there is significant existing and expected
continued growth in the demand for rental communications sites by wireless
communications providers. We seek to obtain a significant ownership position of
communications site assets in our targeted markets in order to offer "one-stop
shopping" to wireless communications providers who are deploying or expanding
wireless communications networks.
Our growth has come primarily from the acquisition of communications
sites and construction of towers and from adding new tenants to these towers.
Our business strategy focuses on aggressively pursuing communications site
acquisitions and selectively constructing towers in areas that complement our
existing base of rental communications sites and the expansion into additional
high growth wireless communications markets. Since commencing operations in May
1995, we have completed acquisitions and builds as follows:
PERIODS ENDED DECEMBER 31,
----------------------------------------------
1995 1996 1997 1998 1999 TOTAL
------- ------ -------- ------- ------ -------
Number of owned sites
Acquired .................. 29 119 134 517 858 1,657
Number of managed sites
Acquired .................. * * * * 584 584
Number of leased sites
Acquired .................. * * * * 858 858
Number of towers built ....... 4 4 22 47 23 100
----- ----- ----- ----- ----- -----
Number of sites acquired or
built during the period ... 33 123 156 564 2,323 3,199
===== ===== ===== ===== ===== =====
Number of acquisition
transactions completed .... 13 49 72 82 130 346
- --------
* Does not include 34 communications sites currently managed or leased that were
acquired between 1995 and 1998.
As of December 31, 1999, we had agreements or letters of intent to
acquire 698 additional communications sites. In addition, we have identified
numerous additional acquisition candidates. We expect that internal growth
related to completed acquisitions and the business potential of pending
acquisitions will have a material impact on our future revenues and EBITDA.
We believe that significant opportunities for growth exist by
maximizing the use of our existing and future communications sites. Because the
costs of operating a communications site are primarily fixed on
31
<PAGE>
owned sites, increasing tower utilization significantly improves tower level
operating margins on these sites. We believe that "same site" revenue growth on
owned communications sites (measured by comparing the annualized run rate
revenue of our owned communications sites at the end of a period to the
annualized run rate revenue for the same owned communications sites at the end
of a prior period), is a meaningful indicator of the quality of these sites and
our ability to generate incremental revenue on such sites. Taking into
consideration new leases written as of December 31, 1999, we experienced "same
site" revenue growth of approximately 19.0% for the year ended December 31, 1999
on the base of communications sites we owned as of December 31, 1998.
We have generated net losses since inception and at December 31, 1999,
had an accumulated deficit totaling approximately $114.2 million. Due to the
nature of our business (the leasing of cash-generating assets) and our 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, we expect to continue to
generate losses for the foreseeable future.
Our 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. We believe that growth in our annualized run rate revenue is a
meaningful indicator of our performance. As of December 31, 1999, our annualized
run rate revenue was $148.4 million.
On August 31, 1999, we completed the Motorola Antenna Site Acquisition.
In connection with that transaction, we acquired approximately 1,858
communications sites, consisting of approximately 499 owned sites, 526 managed
sites and 833 leased sites, for $254 million in cash and stock, plus fees and
expenses. For the year ended December 31, 1999 on a pro forma basis, the
Motorola sites generated $55.7 million in revenue, $25.6 million in tower level
cash flow and $17.7 million in EBITDA for the eight months ended prior to
closing on August 30, 1999. Previously, we have not had a significant number of
managed or leased sites in our portfolio. Generally, managed and leased sites
have higher operating costs than owned towers, primarily as a result of higher
rental costs related to revenue sharing with site owners. In addition, on leased
sites, we generally have a right to lease only a limited portion of a site,
which limits total revenue potential. Higher relative operating costs and
limited revenue growth results in substantially lower tower cash flow and EBITDA
margin performance on managed and leased sites. Accordingly, the acquisition of
managed and leased sites in the Motorola Antenna Site Acquisition or any
potential future acquisitions will substantially decrease our site level
operating margins.
Following the closing of the Motorola Antenna Site Acquisition we
transferred a portion of the rooftop communication sites we acquired from
Motorola to PT III, a corporation in which we own substantially all of the
equity interests, in exchange for $9.8 million of convertible preferred stock
and a $39.2 million Convertible Promissory note, in order to minimize the risk
that the ownership of or income from such assets might negatively affect our
qualification as a REIT. We also agreed to make our personnel, facilities and
general and administrative overhead available to PT III, the cost thereof to be
reimbursed to us by PT III. Certain members of our management currently own
approximately 91% of the outstanding voting stock of PT III, which represents a
very limited portion of the overall equity capital of PT III. See "Business--Our
Acquisition Strategy--Motorola Site Acquisition".
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, each
statement of operations item as a percentage of total site 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 our consolidated
financial statements and notes thereto included elsewhere herein.
32
<PAGE>
YEARS ENDED DECEMBER 31,
------------------------
1997 1998 1999
---- ---- ----
Statement of Operations Data:
Revenue ................................. 100.0% 100.0% 100.0%
Operating expenses, excluding
depreciation and amortization ........ 20.4 19.3 29.1
Gross margin, excluding
depreciation and amortization ........ 79.6 80.7 70.9
Expenses:
General and administrative .............. 10.6 13.0 5.7
Corporate development ................... 28.9 19.9 11.6
State franchise, excise and minimum taxes 0.5 2.1 1.3
Depreciation ............................ 49.2 70.3 68.9
Loss from operations ......................... (9.6) (24.6) (16.6)
Interest expense ............................. 53.8 38.4 26.9
Amortization of original issue discount ...... 2.3 51.3 27.8
Loss before extraordinary items .............. (65.7%) (114.3%) (71.2)
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Site rental increased by $53.4 million, or 167%, to $85.4 million for
the year ended December 31, 1999 from $32.0 million for the year ended December
31, 1998. This additional revenue is mainly attributable to the acquisition and
construction of 2,887 sites since January 1, 1998. They are as follows: 99 sites
during the fourth quarter 1999, 2,027 sites during third quarter, 1999; 197
sites during first two quarters of 1999; and 564 sites during 1998. A portion of
the revenue increase is related to same-sites organic growth. Same-site organic
growth is a result of expanded marketing efforts to increase the number of
customers per site, renegotiating leases that are subject to renewal, and,
contractual price escalations for existing customers.
Direct operating expenses, excluding depreciation and amortization,
increased by $18.7 million or 303% to $24.9 million for the year ended December
31, 1999 from $6.2 million for the year ended December 31, 1998. This increase
is consistent with the acquisition and construction of the 2,887 sites discussed
above. Direct operating expenses as a percentage of revenue increased to 29.1%
for the year ended December 31, 1999 from 19.3% for the year ended December 31,
1998. The percentage increase is primarily a result of the change in mix of
sites. Both managed and leased sites produce lower margins than owned sites
because of their variable rent expense. Notwithstanding, these sites are
financially and strategically consistent with our objective of providing
wireless service providers a large selection of antenna site locations.
General and administrative expenses increased slightly for the year
ended December 31, 1999 to $4.9 million from $4.2 million for the year ended
December 31, 1998. The increases in expenses are from additional staffing
required for the increased work volume, our becoming a public registrant,
increased levels of advertising and marketing expenditures, and other related
costs associated with our growth. However, as a percentage of revenue, it
decreased to 5.7% of revenue for the year ended December 31, 1999 from 13% for
the year ended December 31, 1998 reflecting the disproportionate higher growth
in revenues relative to expenses. The decrease in percentage is from economies
of scale realized from increases in tower revenues as a result of our
acquisitions and construction of communications sites.
Corporate development expenses increased $3.5 million, but decreased as
a percentage of revenue from 11.6% for the year ended December 31, 1999 compared
to 19.9% for the year ended December 31, 1998. The increase in expense is
related to the overall growth in the business and related activity during this
same period. The decrease in percentage is from economies of scale realized from
increases in tower revenues relative to direct operating expenses as a result of
the Company's acquisitions and construction of communications sites.
33
<PAGE>
State franchise, excise and minimum taxes, which represent taxes
assessed in connection with our operations in various state jurisdictions,
increased to $1.1 million in 1999 from $0.7 million in 1998. Such taxes are
calculated using various methods such as a portion of our property within a
given state, our capital structure or based upon a minimum tax in lieu of income
taxes. The increase in 1999 is primarily attributable to the significant
expansion of our geographic region primarily through acquisitions.
Interest expense, net of amortization of original issue discount,
increased 87.0% to $23.0 million in 1999 from $12.3 million in 1998. The
increase in interest expense was attributable to increased borrowing associated
with our acquisitions and construction activity during the period.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
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
communications sites during 1998. In addition, the increase is due to growth in
per communications site revenue as a result of expanded marketing efforts to
increase the number of customers per communications site, as well as regular,
contractual price escalations for existing customers.
Direct operating expenses, excluding depreciation and amortization,
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 communications
sites as discussed above.
General and administrative expenses increased to 13.0% of revenue in
1998 from 10.6% in 1997. This increase resulted from increases in staffing when
we became 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 our communications sites and increases
in rent and related costs.
Corporate development expenses 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 expansion of our acquisition and
construction strategies. Corporate development expenses decreased as a
percentage of site rental revenue to 19.9% in 1998 from 28.9% in 1997 because of
the incremental increase in communications site rental revenue from the
comparative period in 1997 and our ability to use our personnel and
infrastructure more effectively as we grow.
State franchise, excise and minimum taxes, which represent taxes
assessed in connection with our 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 our property within a
given state, our capital structure or based upon a minimum tax in lieu of income
taxes. The increase in 1998 is primarily attributable to the significant
expansion of our 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 our
acquisitions and construction activity during the period.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity needs arise from our acquisition-related activities, debt
service obligations, working capital needs and capital expenditures. We have
historically funded our liquidity needs with proceeds from equity contributions,
public equity offerings, bank borrowings, a debt offering, and cash flow from
operations. We had net working capital of $40.4 million and net working capital
deficit of $9.3 million (inclusive of a $15.0 million bridge loan owed to ABRY
Broadcast Partners II, L.P. ("ABRY II"), which was repaid on February 24, 1999),
as of December 31, 1999 and 1998, respectively. Our ratio of total debt to
stockholders' equity was 1.9 to 1.0 at December 31, 1999 and 10.9 to 1.0 at
December 31, 1998.
34
<PAGE>
Our credit facility provides us with a $235 million revolving line of
credit, with an uncommitted increase option which could increase the revolving
line of credit to $435 million, a $125 million term loan and a $110 million term
loan, for a total availability of up to $670 million, of which $520 million
(including letters of credit) is currently committed. Under our revolving line
of credit, we may make borrowings and repayments until June 30, 2006. Under one
term loan, advances must be repaid in full by June 30, 2006. Under the other
term loan, advances must be repaid in full by June 30, 2007. Once repaid,
amounts under the term loans may not be reborrowed. Advances under the term
loans may be used for refinancing certain existing indebtedness, acquisitions,
working capital, and other general corporate purposes. Advances under our
revolving line of credit are limited to acquisitions. Advances under our credit
facility have been used primarily to fund acquisitions and construction of
sites.
Beginning September 30, 2001, the availability under our revolving line
of credit and one term loan starts reducing by specified amounts on a quarterly
basis until June 30, 2006, when the availability under such credits will be
reduced to zero. Beginning June 30, 2001, the availability under the other term
loan starts reducing by specified amounts on a quarterly basis until June 30,
2007, when the term loan must be repaid in full. As of December 31, we had $41.3
million available under our credit facility, after giving effect to
approximately $26.7 million of outstanding letters of credit, which reduced
availability under our credit facility.
We also use seller financing to fund certain of our communications site
acquisitions. As of December 31, 1999, we had outstanding, in the aggregate
amount, $28.9 million of seller notes bearing interest at rates ranging from
8.5% to 13.0% per annum.
In March 1998, we completed the offering of the Notes. We received net
proceeds of approximately $192.8 million from that offering. The proceeds were
used to repay outstanding borrowings under our 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 certain holders of our common stock. The Notes were
issued under the Indenture and will mature on March 15, 2008. Cash interest is
not payable on the Notes prior to March 15, 2003. Thereafter, the Notes will
require semi-annual cash interest payments of $16.25 million.
On February 19, 1999, we completed our initial public offering ("IPO")
where we sold 20,000,000 shares of our common stock and on March 19, 1999, the
over-allotment options were exercised and an additional 2,026,000 shares were
sold. The initial price per share was $14, resulting in net proceeds of
approximately $290 million before deducting the costs of our IPO. The proceeds
were used to acquire communications sites.
On July 27, 1999, we completed a public offering (the "Secondary
Offering") where we sold 11,000,000 shares of our common stock (including
2,350,000 shares sold by certain of our stockholders) at a price per share of
$25.00, resulting in net proceeds to us of approximately $206.5 million before
deducting the costs of the Secondary Offering. The proceeds received by Pinnacle
were used to acquire communications sites.
On January 24, 2000, we completed an additional public offering (the
"January Offering") where we sold 10,350,000 shares of our common stock
(including 3,150,000 shares sold by certain of our stockholders) at a price per
share of $41.00, resulting in net proceeds to us of approximately $283 million
before deducting the costs of the January Offering. The proceeds from the
January Offering have initially been invested in short-term liquid securities
and will be used to reduce our debt or be used with borrowing made under our
credit facility to fund acquisitions and the construction of new communication
sites and improvements to existing communication sites. The total shares sold
included a concurrent exercise of the underwriters' over-allotment option
whereby 1,350,000 shares were sold (including 450,000 shares sold by certain of
our stockholders).
Capital investments, including acquisitions, for the year ended
December 31, 1999 were $551.7 million, compared to $373.6 million in the
comparable 1998 period. We spent approximately $80.0 million on capital
investments during the period from October 1, 1999 through December 31, 1999,
including various individually immaterial acquisitions in our current targeted
acquisitions pipeline, construction and
35
<PAGE>
upgrading of additional towers. Depending on availability of additional capital,
we expect that we may make substantial capital investments for acquisitions,
construction and upgrading of additional towers in 2000.
We currently estimate that we will make capital investments in 2000 of
at least $300 million. To the extent we commit to complete additional
significant acquisition opportunities beyond those we have identified and
currently believe it is probable that we will complete, that amount may increase
materially.
We believe that the proceeds from the January Offering, availability
under our credit facility, cash flow from operations and existing cash balances
will be sufficient to meet working capital requirements for existing properties
and to fund our current probable acquisitions. To the extent that we pursue
additional acquisitions, construction activity and other capital expenditures
requiring funding in excess of that then available under our credit facility, we
will be required to obtain additional financing. To the extent that we are
unable to finance future capital expenditures, we may not be able to achieve our
current business strategy.
36
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks inherent in our financial
instruments. These instruments arise from transactions entered into in the
normal course of business and, in some cases, relate to our acquisitions of
related businesses. We are subject to interest rate risk on our credit facility
and any future financing requirements. Our fixed rate debt consists primarily of
outstanding balances on the Notes and notes payable to former tower owners and
our variable rate debt relates to borrowings under our credit facility. See
"--Liquidity and Capital Resources."
The following table presents the future principal payment obligations
and weighted-average interest rates associated with our existing long-term debt
instruments assuming our actual level of long-term indebtedness of $325,000,000
under the Notes and $452,021,230 under our credit facility as of December 31,
1999:
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
----------------------
2000 2001 2002 2003 2004 THEREAFTER
---- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Liabilities
Long-term Debt
Fixed Rate (10.00%) ....................... -- -- -- -- -- $325,000,000
Variable Rate (Weighted Average
Interest Rate of 8.62%) ................. -- $35,302,123 $52,403,185 $62,663,821 $76,344,671 $225,307,430
</TABLE>
Our primary market risk exposure relates to the following:
o the interest rate risk on long-term and short-term borrowings;
o our ability to refinance the Notes at maturity at market rates;
o the impact of interest rate movements on our ability to meet
interest expense requirements and exceed financial covenants; and
o the impact of interest rate movements on our ability to obtain
adequate financing to fund future acquisitions.
We manage interest rate risk on our outstanding long-term and
short-term debt through our use of fixed and variable rate debt. While we cannot
predict or manage our ability to refinance existing debt or the impact interest
rate movements will have on our existing debt, we continue to evaluate our
financial position on an ongoing basis.
INFLATION
Because of the relatively low levels of inflation experienced in 1996,
1997, 1998 and 1999, inflation did not have a significant effect on our results
in such years.
YEAR 2000
Many computer systems in use today were designed and developed using
two digits, rather than four, to specify years. As a result, such systems will
recognize the year 2000 as "00" or 1900. This could cause many computer
applications to fail completely or to create erroneous results unless corrective
measures are taken.
We utilize management information systems and software technology that
may be affected by Year 2000 issues throughout our businesses. During 1996, we
began to implement plans to assess our systems to determine their ability to
meet our internal and external requirements. During 1998, we completed our
37
<PAGE>
initial comprehensive testing of and modifications to our information systems in
response to that testing. We developed questionnaires and contacted key
suppliers regarding their Year 2000 compliance to determine any impact on our
operations. In general, our suppliers and customers appear to have developed
plans to address Year 2000 issues.
Now that we have entered the Year 2000, we have continued testing our
information systems and to date, we have not experienced any material Year 2000
disruptions or failures of our systems, nor have we been notified of any
disruptions or failures of the systems of any of our third parties with whom we
do business. However, there is an ongoing risk that Year 2000 related problems
could still occur and we will continue to monitor Year 2000 issues as they
relate to our internal computer systems and third party computer systems with
whom we interact. We have incurred internal staff costs as well as approximately
$100,000 of consulting and other expenses related to the Year 2000 compliance
program we have undertaken in order to address these issues. We cannot assure
you that our Year 2000 compliance program, or similar programs by third parties
with whom we do business, will be successful. We may incur significant costs in
resolving any Year 2000 issues that may arise in the future. If not resolved,
these issues could have a significant adverse impact on our business, operating
results and financial condition. See "--Forward Looking Statements and
Associated Considerations--We cannot assure you that the impact of the Year 2000
date change on computer systems will not have significant adverse effects on
us."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated Financial Statements and notes thereto and the report
of PricewaterhouseCoopers LLP, our independent accountants, are set forth on the
pages indicated in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
38
<PAGE>
PART III
Certain information required by Part III is omitted from this Annual
Report on Form 10-K because we will file a definitive Proxy Statement for our
Annual Meeting of Stockholders scheduled to be held on May 2, 2000, pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended (the "Proxy
Statement"), not later than 120 days after the end of the year covered by this
Report, and certain information included in the Proxy Statement is incorporated
herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference from
the section entitled "Directors and Executive Officers" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from
the section entitled "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is incorporated by reference from
the section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from
the section entitled "Certain Relationships and Related Transaction" in the
Proxy Statement.
39
<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. Financial Statements PAGE
----
Report of Independent Certified Public Accountants................... 39
Consolidated Balance Sheets as of December 31, 1998 and 1999......... 40
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999.................................. 41
Consolidated Statement of Changes in Stockholders' Equity for
the years ended December 31, 1997, 1998 and 1999.................. 42
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999.................................. 43
Notes to Consolidated Financial Statements........................... 44-60
2. Financial Statement Schedules
Schedule II - Schedule of Valuation and Qualifying Accounts for each of
the years in the three-year period ended December 31, 1999.
3. Exhibits
The Exhibits listed in the "Index to Exhibits" are filed as part of
this Annual Report on Form 10-K.
(b) Reports on Form 8-K
We filed a Form 8-K on September 14, 1999 with respect to the acquisition
of communication sites from Motorola, Inc. We indicated in such Form 8-K
that we intended to file the required financial statements and pro forma
financial information as soon as practicable, but no later than 60 days
from the date of that filing. The Form 8-K/A was filed on November 15,
1999. No other reports on Form 8-K were filed during the last quarter of
our fiscal year ended December 31, 1999.
40
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Pinnacle Holdings Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 40 present fairly, in all material
respects, the financial position of Pinnacle Holdings Inc. and its subsidiaries
(the "Company") at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. In addition, in our opinion the financial statement
schedules listed in the index appearing under Item 14(a)(2) on page 40 present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. 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
auditing standards generally accepted in the United States 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 27, 2000
41
<PAGE>
PINNACLE HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
--------------- --------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................................. $ 13,801,190 $ 94,862,918
Accounts receivable, less allowance for doubtful accounts of
$125,000 and $3,327,411, respectively ................................... 1,679,390 12,076,689
Prepaid expenses and other current assets .................................. 1,432,428 5,235,972
--------------- ---------------
Total current assets .................................................... 16,913,008 112,175,579
Fixed assets, net of accumulated deprecation of $29,896,098 and $79,423,999,
respectively ............................................................... 491,032,340 955,689,136
Leasehold interests, net of accumulated amortization of $9,254,695 ........... -- 74,037,558
Deferred debt issue costs, net of accumulated amortization of $568,773
and $1,547,508, respectively ............................................... 6,686,683 14,299,519
Other assets .................................................................. 1,516,070 3,232,248
--------------- ---------------
$ 516,148,101 $ 1,159,434,040
=============== ===============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ........................................................... $ 3,280,809 $ 7,297,498
Accrued expenses ........................................................... 5,761,016 53,853,059
Deferred revenue ........................................................... 1,448,432 3,910,551
Current portion of long-term debt .......................................... 15,692,912 6,705,578
--------------- ---------------
Total current liabilities ............................................... 26,183,169 71,766,686
Long-term debt ................................................................ 417,524,802 712,659,042
Other liabilities ............................................................. 125,152 510,090
--------------- ---------------
443,833,123 784,935,818
--------------- ---------------
Redeemable stock:
Series A senior preferred stock, Class B common stock, and
Class D common stock ..................................................... 31,643,338 --
Warrants ................................................................... 1,000,000 --
--------------- ---------------
32,643,338 --
--------------- ---------------
Commitments and contingencies (Note 7)
Stockholders' equity:
Series B junior preferred stock ............................................ 59,928,980 --
Common stock:
Class A common stock, 202,500 issued and outstanding at December 31, 1998 203 --
Class E common stock, 174,766 issued and outstanding at December 31, 1998 175 --
Common Stock, $.001 par value, 100,000,000 shares authorized; 0 and
41,094,471 shares issued and outstanding at December 31, 1998 and
December 31, 1999, respectively ...................................... -- 41,094
Additional paid-in capital ................................................. 33,136,302 489,090,451
Foreign currency translation ............................................... -- (418,488)
Accumulated deficit ........................................................ (53,394,020) (114,214,835)
--------------- ---------------
39,671,640 374,498,222
--------------- ---------------
$ 516,148,101 $ 1,159,434,040
=============== ===============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
42
<PAGE>
PINNACLE HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenues ........................................................ $ 12,880,631 $ 32,018,651 $ 85,421,231
Direct operating expenses, excluding depreciationand amortization 2,632,274 6,165,897 24,866,769
------------ ------------ ------------
Gross margin, excluding depreciation and amortization ........... 10,248,357 25,852,754 60,554,462
------------ ------------ ------------
Other expenses:
General and administrative ..................................... 1,367,400 4,175,477 4,881,978
Corporate development .......................................... 3,723,180 6,381,516 9,911,896
State franchise, excise and minimum taxes ...................... 66,942 686,040 1,107,625
Depreciation and amortization .................................. 6,334,769 22,512,819 58,813,075
------------ ------------ ------------
11,492,291 33,755,852 74,714,574
------------ ------------ ------------
Loss from operations ............................................ (1,243,934) (7,903,098) (14,160,112)
Interest expense ................................................ 6,925,094 12,300,182 22,953,015
Amortization of original issue discount and debt issuance costs . 292,143 16,426,224 23,707,688
------------ ------------ ------------
Loss before extraordinary item .................................. (8,461,171) (36,629,504) (60,820,815)
Extraordinary loss from extinguishment of debt .................. -- 5,641,573 --
------------ ------------ ------------
Net loss ........................................................ (8,461,171) (42,271,077) (60,820,815)
Payable-in-kind preferred dividends and accretion ............... -- 3,094,162 2,930,338
------------ ------------ ------------
Net loss attributable to common shareholders $ (8,461,171) $(45,365,239) $(63,751,153)
============ ============ ============
Basic loss per common share:
Loss before extraordinary item .................................. $ (1.16) $ (4.06) $ (1.96)
Extraordinary item .............................................. ( -- ) (0.58) ( -- )
------------ ------------ ------------
Net loss $ (1.16) $ (4.64) $ (1.96)
============ ============ ============
Weighted average number of common shares outstanding ............ 7,318,717 9,781,893 32,588,050
============ ============ ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
43
<PAGE>
PINNACLE HOLDINGS INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES B
COMPRE- JUNIOR CLASS A
HENSIVE PREFERRED STOCK COMMON STOCK COMMON STOCK
INCOME ---------------------- ---------------------- ---------------------
(LOSS) SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ -------- ---------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 ............. -- -- -- -- 202,500 $ 203
Issuance of common stock, net of
issuance costs..........................
Adjustment to Class B common stock .......
Net loss .................................
-------- ----------- ---------- -------- --------- -----
Balance at December 31, 1997 ............. -- -- -- -- 202,500 203
Issuance of common stock, net of
issuance costs .........................
Distribution to Class B common
stockholders ...........................
Issuance of preferred stock, net of
issuance costs:
Series B Junior preferred stock ........ 58.74 $58,269,159
Dividends and accretion on preferred
stock .................................. 1.66 1,659,821
Net loss .................................
-------- ----------- ---------- -------- --------- -----
Balance at December 31, 1998 ............. 60.40 59,928,980 -- -- 202,500 203
Dividends and accretion on Preferred
Stock .................................. 1.27 1,767,106 -- --
Issuance of common stock, net of
issuance costs, and conversion ......... 41,094,471 $ 41,094 (202,500) (203)
Liquidation of Series B Junior
Preferred Stock ........................ (61.67) (61,696,086)
Distribution of contributed capital and
yield on various classes of common
stock ..................................
Foreign currency translation gain (loss) . (418,488)
Net Loss ................................. (60,820,815)
------------ -------- ----------- ---------- -------- --------- -----
Balance at December 31, 1999 ............. $(61,239,303) -- $ -- 41,094,471 $ 41,094 -- $ --
============ -------- ----------- ---------- -------- --------- -----
</TABLE>
[RESTUBBED FROM ABOVE TABLE]
<TABLE>
<CAPTION>
CLASS E
COMMON STOCK ADDITIONAL ACCUMU- STOCK-
----------------------- PAID-IN LATED HOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 ............. 51,300 $ 51 $24,881,219 $ (2,661,772) $ 22,219,701
Issuance of common stock, net of
issuance costs.......................... 15,789 16 1,555,533 1,555,549
Adjustment to Class B common stock ....... (561,000) (561,000)
Net loss ................................. (8,461,171) (8,461,171)
------- ------ ------------ ------------- ------------
Balance at December 31, 1997 ............. 67,089 67 25,875,752 (11,122,943) 14,753,079
Issuance of common stock, net of
issuance costs ......................... 107,677 108 10,767,600 10,767,708
Distribution to Class B common
stockholders ........................... (412,888) (412,888)
Issuance of preferred stock, net of
issuance costs:
Series B Junior preferred stock ........ (1,434,341) 56,834,818
Dividends and accretion on preferred
stock .................................. (1,659,821)
Net loss ................................. (42,271,077) (42,271,077)
------- ------ ------------ ------------- ------------
Balance at December 31, 1998 ............. 174,766 175 33,136,302 (53,394,020) 39,671,640
Dividends and accretion on Preferred
Stock .................................. (2,930,338) (1,163,232)
Issuance of common stock, net of
issuance costs, and conversion ......... (174,766) (175) 502,632,221 502,672,937
Liquidation of Series B Junior
Preferred Stock ........................ (61,696,086)
Distribution of contributed capital and
yield on various classes of common
stock .................................. (43,747,734) (43,747,734)
Foreign currency translation gain (loss) . (418,488) (418,488)
Net Loss ................................. (60,820,815) (60,820,815)
------- ------ ------------ ------------- ------------
Balance at December 31, 1999 ............. -- $ -- $489,090,451 $(114,633,323) $374,498,222
======= ====== ============ ============= ============
</TABLE>
The accompanying Notes to Consolidated Financial statements are an integral part
of these financial statements.
44
<PAGE>
PINNACLE HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1998 1999
------------ ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ............................................................. $( 8,461,171) $( 42,271,077) $( 60,820,815)
------------ ------------- -------------
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization ................................... 6,334,769 22,512,819 58,813,075
Amortization of original issue discount and debt issuance costs . 292,143 16,426,224 23,707,688
Extraordinary loss from extinguishment or debt .................. -- 5,641,573 --
Reserve for doubtful accounts ................................... 25,000 462,003 623,419
(Increase) decrease in:
Accounts receivable, gross ................................... (1,118,692) (563,818) (8,112,615)
Prepaid expenses and other current assets .................... (746,299) (394,981) 197,848
Other assets ................................................. (358,587) (902,630) (1,716,178)
Increase (decrease) in:
Accounts payable ............................................. 1,435,305 1,038,412 1,963,175
Accrued expenses ............................................. 2,371,605 2,665,967 9,242,043
Deferred revenue ............................................. 507,037 808,972 (137,627)
Other liabilities ............................................ 44,253 20,140 384,938
------------ ------------- -------------
Net cash provided by operating activities ............................ 8,786,534 47,714,681 84,965,766
------------ ------------- -------------
325,363 5,443,604 24,144,951
------------ ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments made in connection with acquisitions:
Fixed assets ................................................. (73,617,123) (328,537,064) (467,921,172)
Leasehold interests in telecommunications sites .............. -- -- (83,482,018)
Net current liabilities acquired ............................. -- -- 36,135,378
Capital expenditures:
Fixed assets ................................................. (15,839,376) (45,089,114) (36,388,579)
------------ ------------- -------------
Net cash used in investing activities ................................ (89,456,499) (373,626,178) (551,656,391)
------------ ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under long-term debt, net ............................ 89,918,073 487,247,329 563,310,130
Repayment of long-term debt ..................................... (695,982) (205,029,425) (318,313,958)
Proceeds from issuance of common stock, net ..................... 1,555,549 10,767,709 500,911,897
Proceeds from issuance of PIK preferred stock and warrants, net . -- 87,717,116 --
Liquidation of PIK preferred stock and warrants ................. -- -- (93,741,617)
Distribution of contributed capital and payment of accretion
on various classes of common stock ........................... -- (412,888) (43,747,734)
------------ ------------- -------------
Net cash provided by financing activities ............................ 90,777,640 380,289,841 608,418,718
------------ ------------- -------------
Effect of exchange rate changes on cash .............................. -- -- 154,450
------------ ------------- -------------
Net increase in cash and cash equivalents ............................ 1,646,504 12,107,267 81,061,728
Cash and cash equivalents, beginning or period ....................... 47,419 1,693,923 13,801,190
------------ ------------- -------------
Cash and cash equivalents, end of period ............................. $ 1,693,923 $ 13,801,190 $ 94,862,918
============ ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS:
Cash paid for interest ............................................... $ 5,786,216 $ 12,271,070 $ 26,770,421
============ ============= =============
Non-Cash Transactions:
Seller debt issued in acquisition ............................... $ 19,251,850 $ 2,414,965 $ 10,088,931
Payable-in-kind preferred dividends and accretion ............... $ -- $ 3,094,162 $ 2,930,338
Stock issued for acquisitions ................................... $ -- $ -- $ 8,804,163
</TABLE>
The accompanying notes to Consolidated Financial Statements are an integral part
of these financial statements.
45
<PAGE>
PINNACLE HOLDINGS INC.
NOTES TO CONDENSED 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., Pinnacle Towers
Canada Inc., Coverage Plus Antenna Systems, Inc. and Tower Systems, Inc. In
addition, during 1999 Pinnacle Holdings Inc. contributed capital to PT III ("PT
III") to establish a preferred stock interest. Certain members of management of
Pinnacle Holdings Inc. own the common stock of PT III. PT III utilized the
capital contributed to purchase certain leasehold interest from Pinnacle
Holdings Inc. As a result of Pinnacle Holdings Inc.'s ability to direct the
policies and management that guide the ongoing activities of PT III, the
financial position and results of operations and cash flows of PT III are
consolidated in the financial statements of Pinnacle Holdings Inc. These
entities are collectively referred to as the "Company". All significant
intercompany balances and transactions have been eliminated.
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 one customer accounted for 14.6% of
revenues in 1999. Sales to two customers accounted for 14.4% and 13.3% in 1998.
FIXED ASSETS
Telecommunications assets consists of towers, licenses, permits, tower
attachments, equipment such as air conditioners and generators to support the
equipment buildings and monitoring and safety equipment, and land, which are
recorded at cost and depreciated using the straight-line method over the
estimated useful life of the assets.
Other 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.
46
<PAGE>
Betterments, renewals and extraordinary repairs which increase the
value or extend the life of the asset are capitalized. Repairs and maintenance
costs are expensed as incurred.
LEASEHOLD INTERESTS
Leasehold interests represents the Company's interest in various
rooftop and other leased telecommunications sites and are recorded based on
discounted cash flows at the date of acquisition. Leasehold interests are
amortized over the related remaining term of the lease. The average remaining
terms is approximately three years.
OTHER ASSETS
Other assets includes $168,000 of costs incurred in connection with a
pending secondary public offering by the Company at December 31, 1999, 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 (Note 11), and tenant lease receivables recorded in connection with the
revenue recognition on non-cancelable 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, 1998 and 1999 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, 1998 and 1999, 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 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 11.65% yield at December 31, 1999, indicating a fair value
of the Notes of approximately $212.9 million. The Company's only financial
instruments not reflected at estimated market value are its interest rate swap
agreements. See Note 6. The unrecorded fair value of these swaps at December 31,
1999 was approximately $0.9 million.
REVENUE RECOGNITION
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.
47
<PAGE>
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, 1998 and 1999 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 and after giving
retroactive effect for the conversion of the Company's common stock outstanding
prior to the Company's initial public offering in accordance with the
recapitalization effected contemporaneously with the completion of the initial
public offering. The computation of diluted loss per share, assuming the
exercise of warrants issued in connection with the Series A Senior Preferred
Stock and the Subordinated-Term Loan Agreement and the exercise of stock options
granted and outstanding, 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 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 $73.6 million, which consisted of $54.3 million in cash and $19.3 million 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 $83.5 million 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 paid initial annual
aggregate rent of approximately $5 million 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 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
48
<PAGE>
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 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 $331.2 million, consisting of $328.8 million in cash and $2.4
million of notes payable to the former tower owners.
On August 31, 1999, the Company acquired 1858 communications sites and
related assets from Motorola, Inc. ("Motorola") for $254 million, comprised of
$245 million in cash and $9 million in the Company's common stock, plus fees and
expenses of approximately $17 million (the "Motorola Antenna Site Acquisition").
The purchase price allocations related to this transaction are preliminary.
However, we do not expect that the final allocation of the purchase price will
be materially different from its preliminary allocation. This acquisition
results in the Company having sites in all fifty States and nine Canadian
Provinces. The Company transferred certain of the rooftop communication sites it
acquired from Motorola to PT III.
Included in the total purchase price recorded on a preliminary basis
for the Motorola acquisition were accrued costs related to completion of the
transaction of approximately $31.5 million. These accrued deal costs were
comprised primarily of employee severance and relocation costs ($1.7 million),
contract and title work related to telecommunications sites, due diligence and
closing costs ($29.8 million). As of December 31, 1999, approximately $5.9
million of these accrued costs had been paid by the Company.
In addition to the Motorola Antenna Site Acquisition, during the year
ended December 31, 1999 the Company completed 129 acquisitions of 442
communications sites and related assets, all of which were individually
insignificant to the Company, from various sellers for an aggregate purchase
price of $238 million consisting of $228 million in cash and $10 million of
notes payable to the former tower owners.
49
<PAGE>
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, 1998. 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>
PRO FORMA
--------------------------------------
DECEMBER 31, DECEMBER 31,
1998 1999
-------------- --------------
(unaudited) (unaudited)
<S> <C> <C>
Revenue....................................... $ 138,178,831 $ 149,945,428
Gross profit, excluding depreciation and
amortization.............................. 81,149,927 93,802,431
Loss before extraordinary item................ (104,288,842) (98,766,281)
Net loss...................................... (109,930,415) (98,766,281)
Net loss attributable to common shareholders (113,024,577) (101,696,619)
Basic net loss per common share $ 11.55) $ (3.12)
</TABLE>
50
<PAGE>
4. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
ESTIMATED USEFUL
LIVES IN YEARS 1998 1999
------------------ ------------- --------------
<S> <C> <C> <C>
Telecommunications assets:
Telecommunications tower assets .... 15 $ 471,983,916 $ 931,255,870
Telecommunications site equipment .. 5 14,192,557 33,325,183
Buildings .......................... 30 5,488,737 15,770,087
Land ............................... 14,613,365 38,978,222
Construction in progress ........... 11,241,561 9,846,611
------------- --------------
Total telecommunications assets 517,520,136 1,029,175,973
Other:
Vehicles ........................... 5 657,062 975,192
Furniture, fixtures and other
office equipment ............... 5 315,345 1,233,250
Data processing equipment .......... 5 2,435,895 3,728,720
------------- --------------
Total fixed assets ............. 520,928,438 1,035,113,135
Accumulated depreciation ............... (29,896,098) (79,423,999)
------------- --------------
Fixed assets, net ...................... $ 491,032,340 $ 955,689,136
============= ==============
</TABLE>
51
<PAGE>
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31,
----------------------------
1998 1999
----------- -----------
Construction and acquisition costs:
Motorola (Notes)............... $ -- $25,583,529
Other ......................... 2,429,893 3,777,340
Interest .......................... 1,334,552 1,245,013
Professional fees ................. 543,705 15,443,062
Taxes other than income ........... 736,698 3,620,935
Payroll and other ................. 716,168 4,193,180
----------- -----------
$ 5,761,016 $53,853,059
=========== ===========
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
--------------- -------------
<S> <C> <C>
Senior Credit Facility, interest at variable rates (8.55% to 8.63% at
December 31, 1998 and 8.00% to 10.00% at December 31, 1999),
secured, quarterly principal installments beginning June 30, 2000,
maturing December 31, 2005 ....................................... $ 182,450,000 $ 452,021,230
Senior 10% discount notes, net of unamortized original
issue discount of $109,041,993 and $86,591,292, 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 ................................ 215,958,009 238,408,708
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 letter of
credit or guaranty by related party (Note 9) ..................... 19,809,705 28,934,682
ABRY bridge loan, interest at 9% per annum, principal
and interest due in April 1999 and September 1999
(Note 9) ......................................................... 15,000,000 --
------------- -------------
433,217,714 719,364,620
Less: current portion of long-term debt ............................... (15,692,912) (6,705,578)
------------- -------------
Long-term debt ........................................................ $ 417,524,802 $ 712,659,042
============= =============
</TABLE>
52
<PAGE>
The remaining principal payments at December 31, 1999 were due as
follows: 2000-$6,705,578; 2001-$37,696,008; 2002-$55,113,354; 2003-$63,920,629;
2004- $79,567,666; 2005 and thereafter-$562,952,678.
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.
As of June 25, 1999, the Company amended its Senior Credit Facility to
provide $520 million of financing, of which $470 million was committed. 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 1.75%. Additionally, certain financial covenants
were modified.
As of September 17, 1999, the Company again amended its Senior Credit
Facility to provide $670 million of financing, of which $520 million was
committed and $467.7 million was utilized at December 31, 1999.
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, 1997, 1998, and 1999 the Company
incurred commitment fees of approximately $192,000, $210,000, and $430,084,
respectively.
53
<PAGE>
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 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 and 1999 was $16,167,507 and $22,450,701, respectively.
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 was outstanding
under the ABRY Bridge Loan and accrued interest of $526,438 was included in
accrued expenses at December 31, 1998. The Company satisfied the loan balance,
including interest due of $729,863, and the facility was eliminated in February
1999 in conjunction with the IPO.
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.
54
<PAGE>
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 counter-parties on these agreements, which the
Company does not believe is significant. The following table summarizes the
interest rate swap agreements:
NOTIONAL AMOUNT
FIXED ---------------------------------------
EXPIRATION DATE PAY RATE DECEMBER 31, 1998 DECEMBER 31, 1999
--------------- -------- ----------------- -----------------
September 30, 2000 6.03% $ -- $160,000,000
May 1, 2001 5.85% 50,000,000 50,000,000
June 24, 1999 5.14% 30,000,000 --
September 30, 2000 5.84% -- 30,000,000
September 30, 2000 5.75% 20,000,000 20,000,000
Approximately $51,000, $216,696 and $369,350 of interest expense was
incurred in 1997, 1998 and 1999, 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
2099. 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, 1999 are as follows:
Year ending
December 31,
2000..................................... $ 28,026,414
2001..................................... 24,065,914
2002..................................... 21,237,446
2003..................................... 18,531,475
2004..................................... 14,264,677
2005 and thereafter...................... 251,284,910
------------
Total minimum lease payments............. $357,410,836
============
Total rent expense under noncancellable operating leases was
approximately $1,468,323, $3,623,798 and $16,994,547 for the years ended
December 31, 1997, 1998 and 1999, respectively.
55
<PAGE>
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, 1999:
Year ending
December 31,
2000..................................... $ 60,067,027
2001..................................... 58,849,486
2002..................................... 58,704,833
2003..................................... 33,771,010
2004..................................... 31,985,533
2005 and thereafter...................... 394,296,799
------------
$637,674,688
============
Principally all of the leases provide for renewal at varying
escalations. Leases with fixed-rate escalations have been included above.
8. PUBLIC OFFERINGS AND STOCKHOLDERS' EQUITY
PUBLIC OFFERINGS
INITIAL PUBLIC OFFERING
On February 19, 1999, the Company completed its initial public offering
of common stock ("the IPO") whereby the Company sold 20,000,000 shares of a new
class of common stock (the "Common Stock"). In addition, on March 19, 1999, the
Underwriters over-allotment option was exercised to the extent that an
additional 2,026,000 shares were sold. The initial price per share was $14,
resulting in net proceeds from the IPO of approximately $288 million.
56
<PAGE>
In connection with the IPO, pursuant to a recapitalization agreement
between the Company, its largest stockholder, ABRY Broadcast Partners II, L.P.
("ABRY II"), and certain members of the Company's management that are
stockholders of the Company, the Company converted all outstanding shares of
each class of the Company's five classes of common stock into shares identical
to the Common Stock sold in the IPO and paid to the holders of certain of such
classes of common stock preferential amounts and yields. The certificate of
incorporation of the Company was amended immediately prior to the consummation
of the IPO to eliminate the multiple classes of the Company's common stock and
create the now single class of Common Stock. All of the outstanding shares of
all the classes of common stock of the Company other than Class D Common Stock
were converted into approximately 8,571,260 shares of Common Stock and all
shares of Class D common Stock were converted into approximately 1,428,691
shares of Common Stock. All unvested shares of Class D Common Stock held by
employees at the date of the IPO become vested shares.
The holders of the Company's outstanding (prior to the above described
conversion) shares of Class A Common Stock, Class B Common Stock and Class E
Common Stock were collectively paid approximately $38.9 million by the Company
from proceeds of the IPO, which amount equaled the amount of preferences such
shares were entitled to over the other classes of the Company's common stock
pursuant to the Company's certificate of incorporation before giving effect to
the amendment relative to the conversion of those shares as described above. In
addition, the holders of the Company's outstanding (prior to the above described
conversion) shares of Class A Common Stock were collectively paid approximately
$4.8 million by the Company from proceeds of the IPO, which amount equaled the
amount of yield such shares had accrued from the date of their issuances through
June 30, 1997 pursuant to the Company's certificate of incorporation before
giving effect to the amendment relative to the conversion of those shares as
described above.
Other uses of proceeds from the IPO were: (1) approximately $32.0
million redeemed the outstanding shares of the Company's Series A Senior
Preferred Stock (the "Senior Preferred Stock"); (2) approximately $61.7 million
redeemed the outstanding shares of the Company's Series B Junior Preferred Stock
(the "Junior Preferred Stock"); (3) approximately $15.7 million repaid in full
and retired a loan from ABRY II; (4) approximately $123.8 million repaid
outstanding borrowings under the Company's Senior Credit Facility (as defined
herein); and, (5) $11.4 million was used to fund the closing of pending
acquisitions proximate to the date the funds were available from the IPO.
SECONDARY OFFERING
On July 22, 1999, the Company completed a secondary offering of common
stock (the "Secondary Offering") whereby the Company sold 8,650,000 shares of
its Common Stock. The price per share was $25, resulting in net proceeds from
the Secondary Offering of approximately $206 million. Certain stockholders of
the Company also sold 2,350,000 shares of common stock, the net proceeds of
which are not available to the Company. The proceeds from the Secondary Offering
were invested initially in short-term liquid securities and will be used in
conjunction with the Company's availability of senior debt under its amended
Senior Credit Facility to fund acquisitions and development of communications
sites. Approximately $136 million of this cash had been used in acquisitions as
of December 31, 1999, $20 million of which was used to consummate the Motorola
Antenna Site Acquisition.
Also in conjunction with the Motorola Antenna Site Acquisition the
Company issued 418,520 shares of its common stock to Motorola as part of the
consideration given for the acquisition. These shares were recorded at the fair
value of the securities when the terms of the acquisition were agreed to and
announced.
57
<PAGE>
STOCKHOLDERS' EQUITY PRIOR TO THE IPO
CAPITAL CONTRIBUTION COMMITMENT
As of December 31, 1998, the principal stockholders of the Company
(ABRY II, and Messrs. Wolsey, Dell'Apa and Day) were 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 terminated upon the closing of the IPO. Additionally, as
of December 31, 1998, ABRY II or an affiliate had contributed separately $73.7
million to the Company, including $15.0 million outstanding under the ABRY
Bridge Loan and $58.7 million of Junior Preferred Stock. The Stockholders
Agreement was terminated upon completion of the IPO.
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.
58
<PAGE>
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.
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:
Vesting fraction
of shares
remaining unvested
Anniversary of
the closing date
First...................................... 1/10
Second..................................... 1/9
Third...................................... 1/8
Fourth..................................... 2/7
Fifth...................................... 1/2
Sixth...................................... 1/1
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.
59
<PAGE>
COMMON STOCK
The Company has six classes of authorized common stock: Class A, B, C,
D, E and F. Under the Company's Amended and Restated Certificate of
Incorporation, the relative rights and preferences of each class of common stock
are as follows:
VOTING RIGHTS
All classes of common stock will vote together as a single combined
class on all matters submitted to a vote of the shareholders, with each holder
of Class A, B, C, E or F common shares being entitled to one vote per share of
such stock held and each holder of Class D common shares being entitled to a
number of votes equal to the number of shares of Class C stock which would be
issued upon conversion of the Class D stock, as described below.
DISTRIBUTIONS
The holders of the Class A and B common shares have an initial
distribution preference equal to 15% per annum (the "Yield") based on the
initial purchase price of $100 per share from the date of issuance through June
30, 1997. 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.
60
<PAGE>
ADDITIONAL STOCK INFORMATION
Additional stock information is as follows:
DECEMBER 31
-----------------------
1998 1999
--------- ---------
Preferred Stock:
Par value per share ........................... $ 0.001 $ 0.001
Shares authorized: ............................ 1,000,000 5,000,000
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 n/a
Shares authorized ............................. 202,500 n/a
Shares issued and outstanding ................. 202,500 n/a
Class B common stock:
Par value per share ........................... $ 0.001 n/a
Shares authorized ............................. 12,000 n/a
Shares issued and outstanding ................. 12,000 n/a
Class C common stock:
Par value per share ........................... $ 0.001 n/a
Shares authorized ............................. 200,000 n/a
Shares issued and outstanding ................. -- n/a
Class D common stock:
Par value per share ........................... $ 0.001 n/a
Shares authorized ............................. 100,000 n/a
Shares issued and outstanding ................. 40,000 n/a
Class E common stock:
Par value per share ........................... $ 0.001 n/a
Shares authorized ............................. 302,500 n/a
Shares issued and outstanding ................. 174,766 n/a
Class F common stock:
Par value per share ........................... $ 0.001 n/a
Shares authorized ............................. 1,000,000 n/a
Shares issued and outstanding ................. -- n/a
61
<PAGE>
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.
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 for death or disability, options granted to the employee will expire on
the earlier of the expiration date specified in the agreement or 1 year from the
date of termination. Upon termination of an Optionee's employment with the
Company for retirement or involuntary termination other than for cause, options
granted to the employee will expire on the earlier of the expiration date
specified in the agreement or 90 days from the date of termination. Upon
termination of an Optionee's employment for any other reasons, options granted
to the employee will expire on the earlier of the expiration date specified in
the agreement or 30 days from the date of termination. 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.
62
<PAGE>
A summary of the Company's stock option plan for each of two years
ended December 31, 1999, is summarized as follows:
<TABLE>
<CAPTION>
NUMBER EXERCISE WEIGHTED AVERAGE
OF SHARES PRICE RANGE EXERCISE PRICE
--------- ----------------- ----------------
<S> <C> <C> <C>
Under option, December 31, 1998 0 $ -- $ --
Granted 2,973,693 $ 14.00 - $ 22.75 $ 16.40
Forfeited 29,000 $ 16.50 - $ 22.75 $ 19.73
--------- --------
Under option, December 31, 1999 2,944,693 $ 14.00 - $ 22.75 $ 16.36
(0 shares exercisable)
</TABLE>
A summary of outstanding and exercisable options at December 31, 1999 is
summarized as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------------------- ------------------------------
WEIGHTED-
AVERAGE
RANGE OF NUMBER OF REMAINING WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
EXERCISE PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE PRICE
--------------- ------ ---------------- -------------- ------ --------------
<S> <C> <C> <C> <C>
$14.00 - $16.50 2,207,693 9.34 years $ 15.81 -- $ 0.00
$22.75 237,000 9.79 years $ 22.75 -- $ 0.00
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation costs for the stock option plans been determined based
on the fair value at the date of grant for awards in 1999 consistent with the
provisions of SFAS No. 123, the Company's net loss would have been increased to
the pro forma amounts indicated below:
YEAR ENDED
DECEMBER 31, 1999
-----------------
Net loss:
As reported $ (60,820,815)
Pro forma $ (64,752,198)
Basic loss per common share:
As reported $ (1.96)
Pro forma $ (1.99)
There was no pro forma effect for 1997 and 1998 as no options were
vested or granted. These pro forma amounts may not be representative of future
disclosures since the estimated fair value of stock options is amortized to
expense over the vesting period and additional options may be granted in future
years. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1999: cumulative volatility of 73.25%; dividend
yield of 0%, risk-free interest rate of 5.66%, and expected term of 6 years.
63
<PAGE>
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 management services. The
Company paid approximately $78,166, $834,192 and $232,500 for such services and
related reimbursable expenses for the years ended December 31, 1997, 1998, and
1999, respectively. At December 31, 1998 and 1999, $232,500 and $0,
respectively, was due to these related parties for management services and
related reimbursable costs. A balance due from current or former officers of
$16,097 and $161,246 is included in other assets at December 31, 1998 and 1999,
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 (UNAUDITED)
SECONDARY OFFERING
During January 2000, the Company completed another secondary offering
of common stock whereby the Company sold 7,200,000 shares of its Common Stock.
The price per share was $41, resulting in net proceeds from the Secondary
Offering of approximately $283 million. Certain stockholders of the Company also
sold 3,150,000 shares of common stock, the net proceeds of which are not
available to the Company. The proceeds from the Secondary Offering were invested
initially in short-term liquid securities and will be used in conjunction with
the Company's availability of senior debt under its amended Senior Credit
Facility to fund acquisitions and development of communications sites. Proceeds
are not reflected in these accompanying financial statements.
ACQUISITIONS
Subsequent to December 31, 1999 through February 17, 2000 the Company
has completed acquisitions of 436 telecommunications sites for a purchase price
of approximately $74.5 million and as of February 17, 2000 is party to several
letters of intent with various third parties to purchase 500 telecommunications
sites, reflecting an aggregate commitment to pay approximately $189.5 million.
64
<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 29, 2000.
Pinnacle Holdings Inc.
(Registrant)
By: /s/ STEVEN DAY
-----------------------------
Steven Day, Chief Financial Officer
and Secretary
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Robert Wolsey and Steven Day
and each of them, jointly and severally, his attorneys-in-fact, each with full
power of substitution, for him in any and all capacities, to sign any and all
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each said
attorneys-in-fact or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities and 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 29, 2000.
/SIGNATURE TITLE
/S/ ROBERT WOLSEY President, Chief Executive Officer
- ------------------------------------ and Director
Robert Wolsey
/S/ STEVEN DAY Chief Financial Officer, Vice
- ------------------------------------ President and Secretary
Steven Day
/S/ G. PETER O'BRIEN Director
- ------------------------------------
G. Peter O'Brien
/S/ ANDREW BANKS Director
- ------------------------------------
Andrew Banks
/S/ ROYCE YUDKOFF Director
- ------------------------------------
Royce Yudkoff
/S/ J. CLARKE SMITH Director
- ------------------------------------
J. Clarke Smith
65
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of the Registrant (2)
3.2 Bylaws of the Registrant(2)
4.1 Indenture dated as of March 20, 1998 among the Registrant and The Bank of New York, as
Trustee(2)
4.2 Exchange and Registration Rights Agreement dated as of March 20, 1998 by and among the
Registrant and each of the Purchasers referred to therein(2)
4.3 Specimen Stock Certificate(5)
4.4 Registration Agreement(4)
4.5 Recapitalization Agreement(4)
10.1 Second Amended and Restated Credit Agreement dated February 26, 1998 by and among
Pinnacle Towers, Inc., a wholly-owed subsidiary of the Registrant ("PTI"), NationsBank
of Texas, N.A. and Goldman, Sachs Credit Partner L.P.(2)
10.2 First Amendment to Second Amended and Restated Credit Agreement dated March 17, 1998(2)
10.3 Third Amended and Restated Credit Agreement Dated May 29, 1998(3)
10.4 First Amendment to Third Amended and Restated Credit Agreement(8)
10.5 Second Amendment to Third Amended and Restated Credit Agreement(7)
10.6 Third Amendment to Third Amended and Restated Credit Agreement (4)
10.7 Fourth Amended and Restated Credit Agreement(10)
10.8 Fifth Amended and Restated Credit Agreement (11)
10.9 Agreement for Purchase and Sale of Assets between PTI and Motorola, Inc., dated June 25,
1999(9)
10.10 Form of Purchase and Sale Agreement dated January 9, 1998 by and among PTI and Southern
Communications(2)
10.11 Form of Southern Communications Master Site Lease Agreement by and among PTI and
Southern Communications(2)
10.12 Form of Option to Direct Construction or Acquisition of Additional Tower Facilities by
and among PTI and Southern Communications(2)
10.13 Form of Exchange Agreement by and among PTI and Southern Communications(1)
10.14 Form of Lease Agreement?Non-Restricted Premises(2)
10.15 Form of Lease Agreement?Restricted Premises(2)
10.16 Form of Master Antenna Site Lease by and among PTI and Tylotic Communications, Inc.(2)
10.17 Contract of Sale by and among PTI and Teletouch Communications, Inc. and First Amendment
to Control of Sale(2)
10.18 Executive Employment Agreement between the Registrant and Robert Wolsey dated May 3,
1995(2)
10.19 Executive Employment Agreement between the Registrant and Steven Day dated February 17,
1997(2)
10.20 Executive Employment Agreement between the Registrant and James Dell'Apa dated May 3,
1995(2)
10.21 Subscription Agreement dated December 31, 1995 by and among ABRY II and PTI(2)
10.22 Second Amended and Restated Subscription and Stockholders Agreement dated May 16, 1996
by and among PTI, the Registrant and certain stockholders(2)
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.23 Capital Contribution Agreement dated February 26, 1998(2)
10.24 Convertible Promissory Note due 1998 dated February 11, 1998 by and among the Registrant
and ABRY II(2)
10.25 Services Agreement by and among PTI and PTI II(2)
10.26 Amended Capital Contribution Agreement dated May 29, 1998(3)
10.27 Purchase Agreement dated as of July 7, 1998 among MobileMedia, its affiliates and the
Registrant(4)
10.28 Proposed Form of Master Lease for Transmitter Systems Space between the Registrant and
MobileMedia Communications, Inc.(4)
10.29 Amendment to Purchase Agreement dated September 2, 1998 between PTI and MobileMedia and
certain of its affiliates(6)
10.30 Form of Management and Consulting Services Agreement dated as of April __, 1995 between
Pinnacle Towers Inc. and ABRY(1)
10.31 Stock Incentive Plan(5)
10.32 Subscription Agreement between Pinnacle Towers Inc. and Pinnacle Towers III Inc., dated
as of August 31, 1999(11)
10.33 Amended and Restated Articles of Incorporation of Pinnacle Towers III Inc., dated
September 28, 1999(11)
10.34 Agreement For Purchase and Sale Agreement of Assets by and between Pinnacle Towers Inc.
and Pinnacle Towers III Inc., dated as of August 31, 1999(11)
10.35 Services Agreement by and between Pinnacle Towers Inc. and Pinnacle Towers III Inc.,
dated as of August 31, 1999(11)
10.36 Agreement by and between Pinnacle Towers III Inc. and Pinnacle Towers Inc., dated as of
September 28, 1999(11)
10.37 Amended and Restated Articles of Incorporation of Pinnacle Towers III Inc., dated
October 28, 1999(11)
10.38 Convertible Promissory Note of Pinnacle Towers III Inc., dated October 29, 1999(11)
10.39 Cost and Expense Sharing and Reimbursement Agreement by and between Pinnacle Towers Inc.
and Pinnacle Towers III Inc., effective as of August 31, 1999(11)
21.1 List of Subsidiaries(2)
27.1 Financial Data Schedule
</TABLE>
(1) Previously filed on July 27, 1998 with Amendment No. 1 to the
Registrant's Registration Statement on Form S-11.
(2) Previously filed on April 1, 1998 with the Registrant's Registration
Statement on Form S-4 (SEC file no. 333-49147).
(3) Previously filed on June 11, 1998 with Amendment No. 1 to the
Registrant's Registration Statement on Form S-4.
(4) Previously filed on July 17, 1998 with the Registrant's Registration
Statement on Form S-11 (SEC file no. 333-59297).
(5) Previously filed on August 11, 1998 with Amendment No. 2 to the
Registrant's Registration Statement on Form S-11.
(6) Previously filed on September 18, 1998 with the Registrant's Report
on Form 8-K.
(7) Previously filed on January 5, 1999 with Amendment No. 4 to the
Registrant's Registration Statement on Form S-11.
(8) Previously filed on January 21, 1999 with Amendment No. 5 to the
Registrant's Registration Statement on Form S-11.
(9) Previously filed on July 2, 1999 with the Registrant's Registration
Statement on Form S-3.
67
<PAGE>
(10) Previously filed on July 21, 1999 with Amendment No. 2 to the
Registrant's Registration Statement on Form S-3.
(11) Previously filed on November 15, 1999 with the Registrant's Quarterly
Report on Form 10-Q.
68
<PAGE>
Pinnacle Holdings Inc. and Consolidated Subsidiaries
Schedule II - Schedule of Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING CHARGED TO END OF
DESCRIPTION OF PERIOD OPERATIONS DEDUCTIONS OTHER (1) PERIOD
- -------------------------------------------- ----------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts receivable:
December 31, 1999 $125,000 $1,668,000 $703,000 $2,237,411 $3,327,411
December 31, 1998 $ 70,000 $ 452,000 $397,000 $ 125,000
December 31, 1997 $ 45,000 $ 25,000 $ 70,000
</TABLE>
(1) Other includes recoveries, acquisitions of $2,578,992, and the effect of
fluctuations in foreign currency.
69
<PAGE>
INDEX TO EXHIBITS
-----------------
EXHIBIT
NO. DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-3-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 DEC-31-1999
<CASH> 13,801,190 94,862,918
<SECURITIES> 0 0
<RECEIVABLES> 1,804,390 15,404,100
<ALLOWANCES> (125,000) (3,327,411)
<INVENTORY> 0 0
<CURRENT-ASSETS> 16,913,008 112,175,579
<PP&E> 520,928,438 1,035,113,135
<DEPRECIATION> 29,896,098 79,423,999
<TOTAL-ASSETS> 516,148,101 1,159,434,040
<CURRENT-LIABILITIES> 26,183,169 71,766,686
<BONDS> 433,217,714 719,364,620
29,882,298 0
59,928,980 0
<COMMON> 1,761,418 41,094
<OTHER-SE> (19,257,718) 374,457,128
<TOTAL-LIABILITY-AND-EQUITY> 516,148,101 1,159,434,040
<SALES> 32,018,651 85,421,231
<TOTAL-REVENUES> 32,018,651 85,421,231
<CGS> 0 0
<TOTAL-COSTS> 6,165,897 24,866,769
<OTHER-EXPENSES> 33,755,852 74,714,574
<LOSS-PROVISION> 100,000 868,000
<INTEREST-EXPENSE> 28,726,406 46,660,703
<INCOME-PRETAX> (36,629,504) (60,820,815)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (36,629,504) (60,820,815)
<DISCONTINUED> 0 0
<EXTRAORDINARY> (5,641,573) 0
<CHANGES> 0 0
<NET-INCOME> (42,271,077) (60,820,815)
<EPS-BASIC> (4.64) (1.96)
<EPS-DILUTED> (4.64) (1.96)
</TABLE>
