EX-99.2 4 d508510dex992.htm EX-99.2 EX-99.2

Exhibit 99.2

LTS Group Holdings LLC

Condensed Consolidated Financial Statements

as of and for the nine months ended

September 30, 2017 (Unaudited)


LTS Group Holdings LLC

Table of Contents

 

     Page  

Condensed Consolidated Financial Statements as of and for the nine months ended September 30, 2017 (Unaudited)

  

Condensed Consolidated Statement of Financial Position

     3  

Condensed Consolidated Statement of Operations

     4  

Condensed Consolidated Statement of Comprehensive Income

     5  

Condensed Consolidated Statement of Cash Flows

     6  

Notes to Condensed Consolidated Financial Statements

     7-15  


LTS Group Holdings LLC

Condensed Consolidated Statement of Financial Position

As of September 30, 2017 (Unaudited)

(in thousands of dollars, except for number of units)

 

Assets

  

Current assets

  

Cash and cash equivalents

   $ 14,765  

Accounts receivable, net of doubtful accounts and sales allowance of $2,237

     59,237  

Unbilled revenue

     3,707  

Other current assets

     19,242  
  

 

 

 

Total current assets

     96,951  

Property and equipment, net

     2,170,972  

Goodwill

     2,186,008  

Intangible assets, net

     769,541  

Other long-term assets

     13,012  
  

 

 

 

Total assets

   $ 5,236,484  
  

 

 

 

Liabilities and Members’ Equity

  

Current liabilities

  

Accounts payable

   $ 42,957  

Accrued expenses and other current liabilities

     83,162  

Current portion of long-term debt

     23,209  

Current portion of deferred revenue

     55,434  

Current portion of capital leases

     326  
  

 

 

 

Total current liabilities

     205,088  

Deferred revenue

     303,300  

Deferred income tax liabilities, net

     360,068  

Other long-term liabilities

     49,886  

Long-term debt, net of current portion and unamortized debt issue costs and discounts

     2,846,566  

Long-term capital leases, net of current portion

     130  
  

 

 

 

Total liabilities

     3,765,038  
  

 

 

 

Commitments and contingencies (Note J)

  

Members’ equity

  

Class A Units, $1,000 par value, 697,133 units issued and outstanding

     697,133  

Class A-1 Units, $1,953 par value, 432,558 units issued and outstanding

     844,787  

Class B Units, $1,000 par value, 41,670 units issued and 16,668 units outstanding

     16,668  

Class B-1 Units, $1,953 par value, 10,703 units issued and 1,271 units outstanding

     2,482  

Additional paid-in capital

     2,694  

Accumulated losses

     (92,318
  

 

 

 

Total members’ equity

     1,471,446  
  

 

 

 

Total liabilities and members’ equity

   $ 5,236,484  
  

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3


LTS Group Holdings LLC

Condensed Consolidated Statement of Operations

For the nine months ended September 30, 2017 (Unaudited)

(in thousands of dollars)

 

Revenue

   $ 596,640  
  

 

 

 

Operating expenses

  

Cost of revenue

     163,611  

Depreciation and amortization

     184,428  

General and administrative expense

     82,419  

Transaction costs

     969  
  

 

 

 

Total operating expenses

     431,427  
  

 

 

 

Income from operations

     165,213  
  

 

 

 

Other expense

  

Interest expense, net

     130,409  

Other expense

     338  
  

 

 

 

Total other expense, net

     130,747  
  

 

 

 

Income before income taxes

     34,466  

Provision for income taxes

     15,593  
  

 

 

 

Net income

   $ 18,873  
  

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4


LTS Group Holdings LLC

Condensed Consolidated Statement of Comprehensive Income

For the nine months ended September 30, 2017 (Unaudited)

(in thousands of dollars)

 

Net income

   $ 18,873  

Other comprehensive income, net of tax

  

Change in fair value of cash flow hedges

     579  
  

 

 

 

Comprehensive income

   $ 19,452  
  

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5


LTS Group Holdings LLC

Condensed Consolidated Statement of Cash Flows

For the nine months ended September 30, 2017 (Unaudited)

(in thousands of dollars)

 

Cash flows from operating activities:

  

Net income

   $ 18,873  

Adjustments to reconcile net loss to net cash provided by operating activities

  

Depreciation and amortization

     184,428  

Accretion on asset retirement obligations

     3,627  

PIK interest accrued in 12% Unsecured (“HoldCo PIK”) Notes

     21,299  

Amortization of debt issue costs and discounts

     10,903  

Deferred income taxes

     9,000  

Loss on disposal of property and equipment

     1,286  

Share-based compensation

     1,473  

Decrease in allowance for doubtful accounts and sales allowance

     (4

Changes in assets and liabilities, net of acquisitions

  

Accounts receivable and unbilled revenue

     (16,563

Other current and long-term assets

     (7,674

Accounts payable, accrued expenses and other current liabilities

     3,341  

Income taxes receivable

     974  

Deferred revenue

     41,578  

Other long-term liabilities

     311  
  

 

 

 

Net cash provided by operating activities

     272,852  
  

 

 

 

Cash flows from investing activities:

  

Purchase of property and equipment

     (349,176
  

 

 

 

Net cash used in investing activities

     (349,176
  

 

 

 

Cash flows from financing activities:

  

Borrowings from Revolving loan facility

     107,500  

Payments of Revolving loan facility

     (12,500

Principal payments of First Lien loan facility

     (17,409

Principal payments on capital lease obligations

     (372
  

 

 

 

Net cash provided by financing activities

     77,219  
  

 

 

 

Net increase in cash and cash equivalents

     895  

Cash and cash equivalents

  

Beginning of period

     13,870  
  

 

 

 

End of period

   $ 14,765  
  

 

 

 

Supplemental disclosures

  

Interest paid

   $ 98,085  

Income taxes paid

     4,288  

Property and equipment in accounts payable and accrued expenses

     59,527  

Property and equipment additions from asset retirement obligation

     1,452  

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6


LTS Group Holdings LLC

Notes to Condensed Consolidated Financial Statements

As of and for the nine months ended September 30, 2017 (Unaudited)

NOTE A – BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

LTS Group Holdings LLC, incorporated on December 19, 2012 in the State of Delaware, is the ultimate parent company of a number of subsidiaries engaged in providing custom high-capacity fiber-optic based network solutions to enterprises, government, carriers and data center customers throughout the Northeast and Midwest. LTS Group Holdings LLC and its wholly-owned subsidiaries (collectively, the “Company”) is majority owned by Berkshire Partners LLC. The Company is headquartered in Boxborough, Massachusetts and its primary operating subsidiary is LTS Buyer LLC (“LTSB”).

On November 1, 2017, the Company was acquired by Crown Castle International (“CCI”) for cash consideration of approximately $7.1 billion, in accordance with the Agreement and Plan of Merger (“Merger Agreement”) dated July 18, 2017. These condensed consolidated financial statements are recorded at historical costs and do not reflect any fair value adjustments related to the purchase of the Company by CCI on November 1, 2017.

Basis of Preparation

The accompanying condensed consolidated financial statements include all the accounts of LTS Group Holdings LLC and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. The accompanying condensed consolidated financial statements and related notes are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and do not include all of the note disclosures required by GAAP for complete financial statements. These condensed consolidated financial statements should, therefore, be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2016.

In the opinion of management, all adjustments considered necessary for a fair presentation of financial position, results of operations and cash flows of the Company have been included herein.

The results of operations for the nine months ended September 30, 2017 are not necessarily indicative of the operating results for any future interim period or the full year.

Significant Accounting Policies

There have been no changes to the Company’s significant accounting policies as described in the Company’s consolidated financial statements for the year ended December 31, 2016.

Use of Estimates

Conformity with GAAP requires the use of estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The accounting estimates that require management’s most significant and subjective judgments include, but are not limited to, allowance for doubtful accounts, sales allowance, valuation and recognition of share-based compensation, useful lives of long-lived assets, valuation of goodwill and intangibles, valuation of asset retirement obligations, and fair value of assets acquired and liabilities assumed in business combinations. Actual results may differ materially from those estimates under different assumptions or conditions.

 

7


LTS Group Holdings LLC

Notes to Condensed Consolidated Financial Statements

As of and for the nine months ended September 30, 2017 (Unaudited)

 

NOTE A – BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

 

Fair Value of Financial Instruments

As of September 30, 2017 the fair values of cash and cash equivalents, accounts receivables, accounts payable and accrued liabilities approximated their carrying values due to the short-term nature of these instruments. The fair value of debt is approximately $2.93 billion based on comparable quoted market prices (level 2) at September 30, 2017.

Derivative Instruments and Hedging Activities

Derivative instruments are recognized as either assets or liabilities at fair value on the consolidated statements of financial position. The Company uses derivative instruments primarily for cash flow hedges. For derivative instruments that are designated and qualify as cash flow hedges, the changes in fair values of outstanding cash flow hedge derivatives, except the ineffective portion, are recorded in other comprehensive income (“OCI”) until net earnings is affected by the variability of cash flows of the hedged transaction. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current period earnings.

The Company enters into derivative agreements only with creditworthy counterparties and does not utilize financial instruments for trading or speculative purposes. Use of derivative instruments for risk management are reviewed and approved by the Company’s Board of Directors.

The Company entered into interest rate swap contracts to eliminate the first three years variability of interest payments cash flows due to fluctuation of interest rates applicable to the first $600 million of the First Lien Loan Facility. These interest rate swap contracts were designated as a cash flow hedge and expired on June 30, 2017.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents and accounts receivable. The Company maintains its cash equivalents with reputable financial institutions in the United States.

Most of the Company’s revenue was derived from telecommunication carriers and other large enterprises. There was no single customer that exceeded 10% of total revenue for the nine months ended September 30, 2017.

Accounts receivables are unsecured and derived from revenue from customers. The Company had 1 customer with a receivable balance of 11% of total accounts receivables as of September 30, 2017.

 

8


LTS Group Holdings LLC

Notes to Condensed Consolidated Financial Statements

As of and for the nine months ended September 30, 2017 (Unaudited)

 

NOTE A – BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

 

Recently Issued Accounting Pronouncements Not Yet Adopted

In August 2016, the FASB issued ASU 2016-15,Statement of Cash Flows (Topic 230): Classifications of Certain Cash Receipts and Cash Payments.” The new standard provides guidance for eight changes with respect to how cash receipts and cash payments are classified in the statement of cash flows, with the objective of reducing diversity in practice. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company does not plan to early adopt, nor does it expect the adoption of this new standard to have a material impact on its condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02,Leases (Topic 842).” The new guidance supersedes existing guidance on accounting for leases in Topic 840 and is intended to increase the transparency and comparability of accounting for lease transactions. ASU 2016-02 requires most leases to be recognized on the balance sheet. Lessees will need to recognize a right-of-use asset and a lease liability for virtually all leases. The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Lessor accounting remains similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard (ASU 2014-09). The ASU will require both quantitative and qualitative disclosures regarding key information about leasing arrangements. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2018, with early adoption permitted. The Company is evaluating the effect that ASU 2016-02 will have on its consolidated financial statements and related disclosures, and expects the new guidance to significantly increase the reported assets and liabilities on the Consolidated Balance Sheets. The Company does not expect to early adopt this ASU.

In May 2014, the FASB issued ASU 2014-09,Revenue from Contracts with Customers (Topic 606),” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. In July 2015, the FASB deferred the effective date to annual reporting periods and interim reporting periods within annual reporting periods beginning after December 15, 2017. The Company is in the process of performing a comprehensive analysis of its revenue streams and contractual arrangements to identify the effects of ASU 2014-09 on the consolidated financial statements and is developing new accounting and reporting policies, business and internal control processes and procedures to facilitate adoption of the standard. The Company will also have to comply with new revenue disclosure requirements. The Company will continue to review and evaluate underlying contract information that will be used to support new accounting and disclosure requirements under ASU 2014-09 and evaluate other matters that may result from adoption of the standard.

 

9


LTS Group Holdings LLC

Notes to Condensed Consolidated Financial Statements

As of and for the nine months ended September 30, 2017 (Unaudited)

 

NOTE B – OTHER CURRENT ASSETS

Other current assets consist of the following as of September 30, 2017 (in thousands of dollars):

 

Prepaid network expenses

   $ 8,715  

Prepaid property taxes

     6,375  

Prepaid expenses

     3,897  

Others

     255  
  

 

 

 

Other current assets

   $ 19,242  
  

 

 

 

NOTE C – PROPERTY AND EQUIPMENT, NET

Property and equipment, net consist of the following as of September 30, 2017 (in thousands of dollars):

 

Fiber optic lines and conduits

   $ 2,130,474  

Electronics

     409,160  

Construction-in-progress

     80,293  

Buildings and improvements

     37,351  

Equipment and office furniture

     28,057  

Leasehold improvements

     6,608  

Vehicles

     7,241  

Land

     1,109  
  

 

 

 
     2,700,293  

Less: Accumulated depreciation

     (529,321
  

 

 

 

Property and equipment, net

   $ 2,170,972  
  

 

 

 

Cost of certain fiber optic lines and vehicles under capital lease included in property and equipment as of September 30, 2017 amounted to $9.9 million and the related accumulated amortization amounted to $2.9 million.

Depreciation expense for the nine months ended September 30, 2017 amounted to $133.4 million.

 

10


LTS Group Holdings LLC

Notes to Condensed Consolidated Financial Statements

As of and for the nine months ended September 30, 2017 (Unaudited)

 

NOTE D – GOODWILL AND INTANGIBLE ASSETS

The carrying amount of goodwill for the Company’s single reporting unit as of September 30, 2017 amounted to $2.2 billion.

The Company’s intangible assets subject to amortization consist of the following as of September 30, 2017 (in thousands of dollars):

 

     Weighted
average
remaining life
     Amount  

Customer relationships

     12      $ 961,600  

Right-of-way

     6        7,724  

Tradename

     9        23,400  
     

 

 

 
        992,724  

Less: Accumulated amortization

        (223,183
     

 

 

 

Intangible assets, net

      $ 769,541  
     

 

 

 

Amortization of intangible assets for the nine months ended September 30, 2017 amounted to $51.0 million. Estimated amortization expenses on the intangible assets in the next 5 years, and thereafter, are as follows (in thousands of dollars):

 

Year ending December 31,

      

Remainder of 2017

   $ 16,534  

2018

     66,139  

2019

     66,139  

2020

     66,139  

2021

     66,139  

Thereafter

     488,451  
  

 

 

 
   $ 769,541  
  

 

 

 

 

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LTS Group Holdings LLC

Notes to Condensed Consolidated Financial Statements

As of and for the nine months ended September 30, 2017 (Unaudited)

 

NOTE E – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of the following as of September 30, 2017 (in thousands of dollars):

 

Accrued capital expenses

   $ 22,231  

Accrued payroll and benefits

     20,545  

Accrued cost of revenue

     17,799  

Accrued taxes and licenses

     11,632  

Customer deposits

     5,956  

Accrued interest expense

     2,053  

Other

     2,946  
  

 

 

 

Accrued expenses and other current liabilities

   $ 83,162  
  

 

 

 

NOTE F – ASSET RETIREMENT OBLIGATIONS

The changes in the carrying value of the Company’s asset retirement obligations, included in other long-term liabilities, for the nine months ended September 30, 2017 are as follows (in thousands of dollars):

 

Balance, beginning of period

   $ 38,751  

Accretion expense

     3,627  

Addition to liability

     1,452  
  

 

 

 

Balance, end of period

   $ 43,830  
  

 

 

 

NOTE G – MEMBERS’ EQUITY

During the nine months ended September 30, 2017, 4,167 Class B Units and 985 Class B-1 Units have vested.

 

12


LTS Group Holdings LLC

Notes to Condensed Consolidated Financial Statements

As of and for the nine months ended September 30, 2017 (Unaudited)

 

NOTE H – PROVISION FOR INCOME TAXES

The Company’s effective tax rate for the nine months ended September 30, 2017 was calculated as follows:

 

Income before income taxes

   $ 34,466  

Add: Losses from pass-through subsidiaries

     5,284  
  

 

 

 

Adjusted Corporate income before taxes

     39,750  

Provision for income taxes

     15,593  
  

 

 

 

Effective income tax rate

     39.2
  

 

 

 

For tax provision purpose, entities that are not subject to entity level federal and state income taxes are excluded from the effective tax rate calculation. The Company’s effective tax rate for each period was larger than the federal statutory rate of 35% primarily due to impact of state income taxes.

NOTE I – RELATED PARTY TRANSACTIONS

During the nine months ended September 30, 2017, the Company has provided or received certain services in arm’s-length transactions from entities where certain Members of the Company have equity interest (related parties).

The following is the summary of accounts receivables, accounts payables and accrued expenses and the related revenue and expense (including capital expenditures) of the Company with these related parties as of and for the nine months ended September 30, 2017 (in thousands of dollars):

 

          As of September 30, 2017      Nine months ended  
          Accounts
Receivable
    Accounts
Payable and
accrued
expenses
     Revenue      Capex/
expense
 

Hugh O’Kane

   Telecommunication
construction
   $ —       $ 4,145      $ —        $ 16,387  

Metro

   Network and
telecommunication
construction
     —         7        16        30  

Masergy

   Hosting services      (4     —          1,744        —    

Hosting.com

   Hosting services      12       —          58        28  
     

 

 

   

 

 

    

 

 

    

 

 

 
      $ 8     $ 4,152      $ 1,818      $ 16,445  
     

 

 

   

 

 

    

 

 

    

 

 

 

 

13


LTS Group Holdings LLC

Notes to Condensed Consolidated Financial Statements

As of and for the nine months ended September 30, 2017 (Unaudited)

 

NOTE J – COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company has operating leases for certain rights-of-way, facilities and other assets under various agreements which, in addition to rental payments, may require payments for insurance, maintenance, property taxes and other executory costs related to the lease. Certain leases provide for adjustments in lease costs based upon adjustments in various price indexes and increases in the landlord’s management costs. The right-of-way agreements have various expiration dates through March 2058. Rent expense under these right-of-way agreements included in the cost of revenue in the condensed consolidated statement of operations for the nine months ended September 30, 2017 was $33.0 million.

The Company has obligations under non-cancelable operating leases for certain colocation and office facilities. Rent expense, including common area maintenance cost, under non-cancelable lease agreements included in the cost of revenue in the condensed consolidated statements of operations for the nine months ended September 30, 2017 was $42.3 million. Rent expense, including common area maintenance cost, under non-cancelable lease agreements included in the general and administrative expense in the condensed consolidated statement of operations for the nine months ended September 30, 2017 was $3.5 million.

The following is a summary of future minimum payments due under operating leases and right-of-way agreements in the next 5 years, and thereafter (in thousands of dollars):

 

Year ending December 31,

      

Remainder of 2017

   $ 20,485  

2018

     70,929  

2019

     59,703  

2020

     41,879  

2021

     31,605  

Thereafter

     133,468  
  

 

 

 
   $ 358,069  
  

 

 

 

Sales and Use Taxes

The Company bills sales and use tax to many of its customers. Any amounts collected from customers or due from customers are remitted to the appropriate government agency. The Company has $1.6 million of taxes collected from customers included in the accrued and other current liabilities in the condensed consolidated statement of financial position as of September 30, 2017.

Indemnifications

The Company enters into agreements from time to time in the ordinary course of business pursuant to which it agrees to indemnify third parties for certain claims. The Company has also entered into purchase and sale agreements relating to the sale or acquisition of assets containing customary indemnification provisions. The Company has not made any payments under these agreements during the nine months ended September 30, 2017. Management is not aware of any agreements that could result in a material payment individually or in the aggregate as of September 30, 2017.

 

14


LTS Group Holdings LLC

Notes to Condensed Consolidated Financial Statements

As of and for the nine months ended September 30, 2017 (Unaudited)

 

NOTE J – COMMITMENTS AND CONTINGENCIES

Litigation

The Company is subject to litigation, claims, investigations and audits arising from time to time in the ordinary course of business. Management intends to vigorously defend the Company against these matters. The outcome of these matters, individually and in the aggregate, is not expected to have a material impact on the Company’s cash flows, results of operations, or financial position.

Letters of Credit

At September 30, 2017, the Company has outstanding irrevocable standby letters of credit secured under the Revolving Loan Facility that were issued to certain parties of $8.3 million.

NOTE K – SUBSEQUENT EVENTS

As discussed in Note A, the Company was acquired by and became a wholly-owned subsidiary of CCI on November 1, 2017. A portion of the cash consideration was used to pay off all of the Company’s outstanding long-term debt, including the related accrued interest and the Notional Incentive Units under the 2013 and 2015 Performance Incentive Plans that vested upon change of control. The aggregate payment of the Notional Incentive Units amounted to $83.4 million, which was recognized on October 31, 2017, the date that the change of control became probable.

The Company has evaluated events through November 13, 2017, the date the condensed consolidated financial statements are complete and approved for issuance.

 

15