UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549  

 

FORM 8-K

 

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): April 17, 2017 

 

Uniti Group Inc.

(Exact name of registrant as specified in its charter)

 

Registrant’s telephone number, including area code: (501) 850-0820

Not Applicable

(Former name or former address, if changed since last report.)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

 

 

 

Indicate by check mark whether the registrant is an emerging growth company as defined in as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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Item 2.02 Results of Operations and Financial Condition

 

On April 17, 2017, the Company is providing the following information in a prospectus supplement related to a potential equity offering.

Preliminary First Quarter Results

Set forth below are selected preliminary, unaudited financial results for the three months ended March 31, 2017. We have not yet completed our financial closing process, and the information set out below should be considered preliminary and subject to change. These estimates have been prepared by and are the responsibility of management. Our independent registered public accounting firm has not reviewed our preliminary financial data, and does not express an opinion or any other form of assurance with respect to the preliminary financial data. The below summary of financial data is not a comprehensive statement of our financial results for the three months ended March 31, 2017, and our actual results may differ materially from these estimates due to the completion of our financial closing procedures, final adjustments, review by our auditors and other developments that may arise between now and the time the financial results are finalized.

The following are the selected preliminary, unaudited financial results for the three months ended March 31, 2017, as well as a comparison to our unaudited financial results for the three months ended March 31, 2016.

 

For the three months ended March 31, 2017, net loss and net loss applicable to common shareholders includes the impact of approximately $10 million of transaction related costs and a non-cash charge of approximately $11.0 million related to a change in the fair value of contingent consideration liabilities.

The following table presents a reconciliation of the midpoint of our preliminary estimated Adjusted EBITDA and AFFO per common share to the midpoint of our preliminary estimated low end and high end ranges for our net (loss) income, the most directly comparable GAAP measure, for the three months ended March 31, 2017.

Adjusted EBITDA

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AFFO per common share

 

NON-GAAP FINANCIAL MEASURES

We refer to EBITDA, Adjusted EBITDA, Funds From Operations (“FFO”) as defined by the National Association of Real Estate Investment Trusts (“NAREIT”), Normalized Funds From Operations (“NFFO”) and Adjusted Funds From Operations (“AFFO”) in our analysis of our results of operations, which are not required by, or presented in accordance with, accounting principles generally accepted in the United States (“GAAP”). While we believe that net income, as defined by GAAP, is the most appropriate earnings measure, we also believe that EBITDA, Adjusted EBITDA, FFO, NFFO and AFFO are important non-GAAP supplemental measures of operating performance for a real estate investment trust (“REIT”).

We define “EBITDA” as net income, as defined by GAAP, before interest expense, provision for income taxes and depreciation and amortization. We define “Adjusted EBITDA” as EBITDA before stock-based compensation expense and the impact, which may be recurring in nature, of transaction and integration related costs (collectively, “transaction related costs”), the write off of unamortized deferred financing costs, costs incurred as a result of the early repayment of debt, changes in the fair value of contingent consideration and financial instruments, and other similar items (although we may not have had such charges in the periods presented). We believe EBITDA and Adjusted EBITDA are important supplemental measures to net income because they provide additional information to evaluate our operating performance on an unleveraged basis. Since EBITDA and Adjusted EBITDA are not measures calculated in accordance with GAAP, they should not be considered as an alternative to net income determined in accordance with GAAP.

Because the historical cost accounting convention used for real estate assets requires the recognition of depreciation expense except on land, such accounting presentation implies that the value of real estate assets diminishes predictably over time. However, since real estate values have historically risen or fallen with market and other conditions, presentations of operating results for a REIT that uses historical cost accounting for depreciation

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could be less informative. Thus, NAREIT created FFO as a supplemental measure of operating performance for REITs that excludes historical cost depreciation and amortization, among other items, from net income, as defined by GAAP. FFO is defined by NAREIT as net income applicable to common shareholders computed in accordance with GAAP, excluding gains or losses from real estate dispositions, plus real estate depreciation and amortization and impairment charges. We compute FFO in accordance with NAREIT’s definition.

We define NFFO, as FFO excluding the impact, which may be recurring in nature, of transaction and integration related costs. We define AFFO as NFFO excluding (i) noncash revenues and expenses such as stock-based compensation expense, amortization of debt and equity discounts, amortization of deferred financing costs, depreciation and amortization of non-real estate assets, straight-line revenues and revenue associated with the amortization of tenant funded capital improvements and (ii) the impact, which may be recurring in nature, of the write-off of unamortized deferred financing fees, additional costs incurred as a result of the early repayment of debt, changes in the fair value of contingent consideration and financial instruments, and similar items less maintenance capital expenditures. We believe that the use of FFO, NFFO and AFFO, and their respective per share amounts, combined with the required GAAP presentations, improves the understanding of operating results of REITs among investors and analysts, and makes comparisons of operating results among such companies more meaningful. We consider FFO, NFFO and AFFO to be useful measures for reviewing comparative operating and financial performance. In particular, we believe AFFO, by excluding certain revenue and expense items, can help investors compare our operating performance between periods and to other REITs on a consistent basis without having to account for differences caused by unanticipated items and events, such as transaction and integration related costs. We use FFO, NFFO and AFFO, and their respective per share amounts, as performance measures, and FFO, NFFO and AFFO do not purport to be indicative of cash available to fund our future cash requirements. While FFO, NFFO and AFFO are relevant and widely used measures of operating performance of REITs, they do not represent cash flows from operations or net income as defined by GAAP and should not be considered an alternative to those measures in evaluating our liquidity or operating performance.

Further, our computations of EBITDA, Adjusted EBITDA, FFO, NFFO and AFFO may not be comparable to that reported by other REITs or companies that do not define FFO in accordance with the current NAREIT definition or that interpret the current NAREIT definition or define EBITDA, Adjusted EBITDA, NFFO and AFFO differently than we do.

The information contained in this Item 2.02 is being “furnished” and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of Section 18 of the Exchange Act. The information in this Item 2.02 shall not be incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933, as amended, or into any filing or other document pursuant to the Exchange Act, except as otherwise expressly stated in any such filing.

Item 7.01 Regulation FD Disclosure

Uniti has obtained commitments, subject to a number of conditions including execution of definitive documentation, for an increase in the commitments under its revolving credit facility from $500 million to $750 million.

Item 8.01 Other Information

 

As previously announced, on April 10, 2017, Uniti Group Inc. (the “Company”) entered into a definitive agreement to acquire Southern Light, LLC, an Alabama limited liability company (“Southern Light”). The Company is filing this report to present historical audited financial statements of Southern Light as well as certain pro forma financial information relating to the Company’s pending acquisition of Southern Light. Accordingly, audited consolidated financial statements of Southern Light and unaudited pro forma condensed combined financial statements giving effect to the pending acquisition of Southern Light are attached as Exhibits 99.1 and 99.2, respectively.

 

Item 9.01 Financial Statements and Exhibits

 

(a) Financial statements of businesses acquired.

 

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The audited consolidated financial statements of Southern Light as of December 31, 2016 and 2015 and for each of the two years in the period ended December 31, 2016 are filed as Exhibit 99.1 hereto.

 

(b) Pro forma financial information.

 

Uniti Group Inc.’s unaudited pro forma condensed combined financial statements as of and for the year ended December 31, 2016 giving effect to the acquisition of Southern Light and certain other acquisitions consummated since January 1, 2016, and the financing therefor, are filed as Exhibit 99.2 hereto.

 

(d) The following exhibits are included with this Current Report.

 

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Forward Looking Statements

Certain statements in this Current Report on Form 8-K may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended from time to time.  Those forward-looking statements include all statements that are not historical statements of fact and those regarding the registrant’s intent, belief or expectations including, without limitation, statements regarding its expectations with respect to the proposed transaction with Southern Light, LLC.

Words such as “anticipate(s),” “expect(s),” “intend(s),” “estimate(s),” “foresee(s),” “plan(s),” “believe(s),” “may,” “will,” “would,” “could,” “should,” “seek(s)” and similar expressions, or the negative of these terms, are intended to identify such forward-looking statements.  These statements are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties that could lead to actual results differing materially from those projected, forecasted or expected.  Although the registrant believes that the assumptions underlying the forward-looking statements are reasonable, it can give no assurance that its expectations will be attained.  Factors which could materially alter its expectations with regard to the proposed transaction with Southern Light, LLC, include, among other things, the possibility that the terms of the transaction as described in this Current Report on Form 8-K are modified; the risk that the transaction agreements may be terminated prior to expiration; risks related to satisfying the conditions to the transactions, including timing and possible delays and receipt of regulatory approvals from various governmental entities (including any conditions, limitations or restrictions placed on these approvals) and the risk that one or more governmental entities may deny approval.

The registrant expressly disclaims any obligation to release publicly any updates or revisions to any of the forward looking statements set forth in this Current Report on Form 8-K to reflect any change in its expectations or any change in events, conditions or circumstances on which any statement is based.

 

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SIGNATURE

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.

 

 

 

 

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EXHIBIT INDEX

 

 

 

Exhibit 23.1

 

Consent of Independent Certified Public Accountants

 

        We have issued our report dated March 18, 2017 with respect to the consolidated financial statements of

Southern Light, LLC as of December 31, 2016 and 2015 and for the two year period ended December 31, 2016,

included in the Current Report on Form 8-K of Uniti Group Inc. filed on April 17, 2017. We consent to the

incorporation by reference of said report in the Registration Statements of Communications Sales & Leasing, Inc.

(subsequently renamed “Uniti Group, Inc.”) on Form S-3 (No. 333-212046) and Form S-8 (No. 333-203591).

/s/ Grant Thornton LLP
Raleigh, North Carolina
April 17, 2017

 

 

Exhibit 99.1

 

 

 

Consolidated Financial Statements

 

Southern Light, LLC and Affiliate

 

Years Ended December 31, 2016 and 2015

 

 

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Southern Light, LLC and Affiliate

 

 

 

Table of contents

 

 

Report of Independent Certified Public Accountants1

Financial statements:

Consolidated balance sheets3

Consolidated statements of comprehensive income4

Consolidated statements of changes in member’s equity5

Consolidated statements of cash flows6

Notes to consolidated financial statements7

 

 

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Members of

Southern Light, LLC and Affiliate:

We have audited the accompanying consolidated financial statements of Southern Light, LLC and Affiliate (the “Company”), which comprise the consolidated balance sheets as of December 31, 2016 and 2015, and the related consolidated statements of comprehensive income, changes in member’s equity, and cash flows for the years then ended, and the related notes to the financial statements.

Management’s responsibility for the financial statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles  generally  accepted  in  the  United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

 

Grant Thornton LLP

U.S. member firm of Grant Thornton International Ltd

 

 

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2

 

 

 

 

 

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Southern Light, LLC and Affiliate as of December 31, 2016 and 2015, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Raleigh, North Carolina March 18, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grant Thornton LLP

U.S. member firm of Grant Thornton International Ltd

 

 

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Southern Light, LLC and Affiliate

3

 

 

 

Consolidated balance sheets

 

 

 

 

 

 

 

 

 

 

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

 

 

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Southern Light, LLC and Affiliate

4

 

 

 

Consolidated statements of comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

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Southern Light, LLC and Affiliate

7

 

 

 

Consolidated statements of changes in member’s equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

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Southern Light, LLC and Affiliate

8

 

 

 

Consolidated statements of cash flows

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

Non-cash purchases of property and equipment through capital leasing of $1,373,793 and $1,653,640 in 2016 and 2015, respectively

Cash paid for interest of $3,079,926 and $3,261,105 in 2016 and 2015, respectively

 

 

 

 

 

 

 

 

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

 

 

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Southern Light, LLC and Affiliate

9

 

 

 

Notes to consolidated financial statements

The Company, a wholly owned subsidiary of SLF Holdings, LLC, was organized July 10, 1998 under the laws of the State of Alabama as a limited liability company for the purposes of delivering high bandwidth connectivity  and colocation services for its communications intensive customers. The Company’s operations to date consist of providing large bandwidth communications solutions to customers in the southeastern United States. The Company constructs, operates, and maintains its own fiber optic infrastructure for the provision of transport services to carrier, government and enterprise customers across the region.

The Company has been certified as a competitive local exchange (CLEC) and interexchange carrier in Alabama,  an alternative local exchange (ALEC) and an alternative access vendor (AAV) in Florida, and as a CLEC in Louisiana, Mississippi and Georgia. In this capacity, the Company can purchase and install the  necessary switching and transmitting equipment to provide interactive voice and data communication services.

 

 

Principles of Consolidation

The accompanying consolidated financial statements include all of the Company’s accounts and Southern Longleaf Pine, LLC (SLLP) in which it has a controlling interest and is required to be consolidated in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP). All significant intercompany accounts and transactions have been eliminated in consolidation.

To determine whether the Company is the primary beneficiary of a variable interest entity and therefore required to consolidate, a qualitative approach is applied to determine whether the Company has a controlling financial interest. A controlling financial interest exists if the Company has both the power to direct the economically significant activities of the entity and the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the entity.

Management Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results may differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include cash on deposit with banks. The Company’s cash balances held at financial institutions are insured by the Federal Deposit Insurance Corporation (FDIC) up to certain limits. From time to time the Company has amounts that exceed the FDIC limit.

Book overdrafts occur when checks have been issued but have not been presented to the Company’s controlled disbursement bank accounts for payment. Disbursement bank accounts allow the Company to delay funding of issued checks until the checks are presented for payment. Until the issued checks are presented for payment, the book overdrafts are included in accounts payable on the consolidated balance sheet. This activity is included in  the financing activities section of the Company’s consolidated statements of cash flows.

Accounts Receivable / Allowance for Doubtful Accounts

The Company reports trade receivables net of an allowance for doubtful accounts and generally does not charge interest on its accounts receivable. Management determines the allowance for doubtful accounts based on historical losses and current economic conditions. On a continuing basis management analyzes delinquent receivables; once the receivables are determined to be uncollectible using a combination of contractual terms and historical data, they are written off through a charge against an existing allowance account.

 

 

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Southern Light, LLC and Affiliate

10

 

 

 

 

 

 

Other Current Assets

Other current assets are comprised of prepaid expenses, prepaid service contracts, and prepaid insurance. At December 31, 2016 and 2015, prepaid expenses were $479,685 and $465,582, respectively.

 

Inventory

Inventory is carried at a weighted average cost and consists of materials to be used in construction of additions to the fiber optic network and elements of the fiber optic network.

Property and Equipment

The fiber optic transmission network and related equipment are recorded at cost. Employee-related costs that are associated with network construction and service installations are capitalized. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income or expense for the period. The cost of maintenance and repairs is charged to expense as incurred. Depreciation is generally computed using the straight-line method. Estimated useful lives are as follows: fiber optic network, 5-20 years; wireless network, 5 years; office furniture and equipment, 5-7 years; and telecommunication equipment, 5 years.

Deferred Financing Costs

The Company capitalizes costs associated with the issuance of debt and amortizes these costs as additional  interest expense over the lives of the debt instruments using the straight line method. The Company has determined that the difference between the effective interest method and straight line method is immaterial to the financial statements. These costs are recorded as deferred loan fees within other assets in the accompanying consolidated balance sheets with amortization recorded within interest expense, net in the accompanying consolidated statements of comprehensive income.

Asset Retirement Obligations

In association with tower space leases, the Company has an obligation to remove its equipment at the conclusion of the lease terms. A liability for the cost of future removal has not been recorded on the consolidated balance sheets, as the projected cost is deemed immaterial to the current consolidated financial statements.

Derivatives

The Company uses derivatives to manage risks related to interest rate movements. Interest rate swap contracts designated and qualifying as cash flow hedges are reported at fair value. The gain or loss on the effective portion of the hedge is included as a component of other comprehensive income. The Company documents its risk management strategy and hedge effectiveness at the inception of and during the term of each hedge. The Company’s interest rate risk management strategy is to stabilize cash flow requirements by maintaining interest rate swap contracts to convert variable-rate debt to a fixed rate.

Recognition of Revenue

The Company offers private line services (fixed amounts of capacity on fiber optic transmission lines that use optronics equipment installed by the Company) and long-term service contracts for dark fiber (fiber optic transmission lines utilized without optronics equipment installed by the Company) at fixed cost pricing over multi-year terms. Revenues from these services are recognized ratably over the term of the applicable service period or service contracts with customers, which range from 1 to 20 years. Monthly revenue under recurring agreements related to colocation, internet access, network services and managed services is recognized over the period that service is provided. Installation income is deferred and amortized over the life of its related monthly contract.

 

 

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Southern Light, LLC and Affiliate

11

 

 

 

 

 

 

Advertising

The Company expenses advertising costs as incurred. Advertising expense amounted to $352,907 and $296,340 for the years ended December 31, 2016 and 2015, respectively.

Patronage Income

The Company receives patronage income from one of its long term debt providers which is paid partially in cash and partially in equity in the lender. Total patronage income was $670,317 and $491,021 in 2016 and 2015, respectively, and is included in other income. Investment balances are reported using the cost method and are included in security deposits and other assets on the consolidated balance sheets in the amounts of $634,004   and

$466,424 in 2016 and 2015, respectively.

Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. There is a three-tier fair value hierarchy that distinguishes between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). Fair value measurements are classified under the following hierarchy:

 

The determination of where an asset or liability falls in the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each reporting period and, based on various factors, it is possible that an asset or liability may be classified differently from period to period. However, the Company expects that changes in classifications between different levels will be rare.

 

Limited Liability Company / Income Taxes

The Company has elected to be treated as a partnership for federal and state income tax purposes. Accordingly,  no income tax expense has been recorded in these financial statements. All income or losses will be reported on the individual member’s income tax returns.

With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations  by tax authorities for years before 2012.

As a limited liability company, each member’s liability is limited to amounts reflected in their respective member’s capital account, notwithstanding any personal guarantees.

Presentation of Certain Taxes

The Company collects various taxes from customers and remits these amounts to applicable taxing authorities. The Company’s accounting policy is to exclude these taxes from revenues and cost of sales.

 

 

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Southern Light, LLC and Affiliate

12

 

 

 

 

 

 

Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts  with Customers, as subsequently amended, as part of its ongoing efforts to assist in the convergence of U.S. GAAP and International Financial Reporting Standards, the FASB issued a new standard related to revenue recognition. Under the new standard, recognition of revenue occurs when a customer obtains control  of promised goods or services in an amount that reflects the consideration to which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard will be effective for annual reporting periods beginning after December 15, 2018. The Company is currently evaluating the impact this standard will have on its financial statements.

In February 2016, the FASB issued ASU 2016-02 regarding ASC Topic 842, “Leases,” which amends various aspects of existing lease guidance for leases. ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. The main difference between GAAP and the amended standard is the recognition of lease assets and lease liabilities by lessees on the balance sheet for those leases classified as operating leases under previous GAAP. As a result, the Company will have to recognize a liability representing its lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact this standard will have on its financial statements.

Date of Management’s Review

Management has evaluated all  events  or  transactions  that  occurred  after  December  31,  2016  through  March 18, 2017, the date which the consolidated financial statements were available to be issued.

 

Member’s equity is comprised of two available classes: members, and holders of financial rights. Members and holders of financial rights have the same rights upon sale or dissolution of the limited liability company, namely, to share in the distribution of net assets in proportion to the balances in their capital accounts; however, holders of financial rights have no governance rights in the Company.

No member or holder of financial rights may sell, assign, transfer, mortgage, or pledge his interest in the limited liability company without the prior written consent of all members.  As of December 31, 2016 and 2015,  members held $75,547,174 and $64,561,396, respectively, of equity in Southern Light, LLC, and there were no holders of financial rights in the Company.

 

The Company has certain financial instruments, none of which are held for trading purposes. The Company estimates that the fair value of all financial instruments at December 31, 2016, does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying balance sheet. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value, and, accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange.

 

 

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Southern Light, LLC and Affiliate

13

 

 

 

 

 

 

The following table represents the Company’s fair value hierarchy for its financial instruments (asset/liability under interest rate swaps) measured at fair value on a recurring basis as of December 31, 2016 and 2015. The interest rate swaps are valued using models which are primarily based on market observable inputs including interest rate curves.

 

 

 

 

$$$$

Derivative instruments

Interest rate swaps asset*-461,727-461,727

 

 

 

 

 

$$$$

Derivative instruments

Interest rate swaps liability-147,477-147,477

 

* Included in security deposits and other assets on the consolidated balance sheets

 

 

Employee-related costs of $8,780,097 and $7,357,116 were capitalized in 2016 and 2015, respectively. No interest was capitalized during the years ended December 31, 2016 and 2015.

 

The Company had a credit agreement, with a financial institution, which provided the Company with a Term  Loan Facility, two Incremental Term Loan Facilities and a Revolver Loan Facility. The Term Loan Facility dated July 27, 2011 provided for $30,000,000 of senior secured debt with five year amortizing term loans and was amended on April 19, 2013 to provide for a $20,000,000 Incremental Term Loan Facility and  again  on  December 23, 2014 to provide for an additional $20,000,000 Incremental Term Loan Facility. The Term Loans under each facility amortized at 0.25% per quarter (for an aggregate of 1.00% per year). All unpaid balances were to be due at maturity, September 30, 2016.

 

 

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Southern Light, LLC and Affiliate

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On December 22, 2015, the Company paid $68,600,000 in order to satisfy the term loan and the Company’s  credit agreement was amended and restated as a Revolver Loan Facility and a Multi-Draw Term Loan Facility. These loans have been secured by substantially all assets of the Company. The amended and restated Revolver Loan Facility dated as of December 22, 2015 provides for a maximum of $130,000,000 of senior  secured revolving debt, which includes a $10,000,000 Swingline subfacility and a $5,000,000 sublimit for the issuance of Letters of Credit. Any loans under the $20,000,000 Multi-Draw Term Loan Facility will be available from the closing date, December 22, 2015, through December 22, 2018. There were no amounts outstanding under the Multi-Draw Term Loan Facility during 2015 or 2016. All outstanding balances under either facility mature at December 22, 2022, with no required principal payment prior to maturity.

As of December 31, 2016 and 2015, the balances outstanding on the Revolver Loan Facility were $88,000,000 and

$75,140,893. The balances outstanding on the Multi-Draw Term Loan Facility were $0 at December 31, 3016 and 2015. The Company had a total of $62,000,000 and $74,859,107 of availability under the Revolver Loan Facility and the Multi-Draw Term Loan Facility as of December 31, 2016 and 2015, respectively.

Amounts borrowed under these agreements bear interest at the Company’s option of either a defined Base Rate plus a margin or LIBOR plus a margin. At December 31, 2016, the interest rates on the Revolver Loan Facility ranged from 3.04% to 5.38%. At December 31, 2015, the interest rates on the Revolver Loan Facility ranged  from 3.04% to 5.13%.

The provisions of the loan and security agreement contain various affirmative, negative, financial and reporting covenants. The Company was in compliance with all loan covenants for all years.

During 2016, the Company’s consolidated variable interest entity, SLLP, entered into two five year Term Loans with a financial institution for the purpose of purchasing commercial property to lease to the Company. The  loans, for $950,000 and $945,000, carrying a variable interest rate based on one month LIBOR, were dated      June 24, 2016  and  July  15,  2016,  respectively,  and  are  fully  guaranteed  by  the  Company.   As   of December 31, 2016, balances outstanding on each of the loans were $926,250 and $925,313. Unpaid principal balances outstanding for both Term Loans are due at maturity.

Maturities of the SLLP Term Loans as of December 31, 2016 and for each of the remaining five years and thereafter are as follows:

Amount

 

 

 

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Southern Light, LLC and Affiliate

15

 

 

 

 

 

 

 

 

As disclosed in Note 6, loan facilities bear interest at a variable rate. To minimize the effect of interest rate changes, the Company had several contracts in place during 2016 and 2015:

 

 

These agreements effectively changed the interest rate on notional amounts listed above of the loan facilities from a variable rate to a fixed rate. At December 31, 2016, the effective rate for $20,000,000 of the Revolver Loan Facility was fixed at 3.869%. At December 31, 2015, the effective rate for $18,000,000 of the Revolver Loan Facility was fixed at 4.635%. All effective rates listed above in this paragraph include the fixed rates from the notional amounts listed in the table above plus the applicable margin for LIBOR rate loans.

In accordance with FASB Accounting Standards Codification (ASC) 815-10, the Company recognized the interest rate swap derivatives on the consolidated balance sheets at fair value. The derivatives were designated as and met all of the criteria for a cash flow hedge. The contracts are effective in offsetting the interest rate exposure of the forecasted interest rate payments hedged. Therefore, the Company adjusts the interest rate swaps to fair values through other comprehensive income.

The Company anticipates that these contracts will continue to be effective. As of December 31, 2016 and 2015, unrealized net gains/(losses) on the derivative instruments of $461,727 and $(147,477), respectively, were  recorded in security deposits and other assets (gains), obligations under interest rate swaps (losses) and changes to these balances in other comprehensive income.

 

The Company has entered into multiple “Indefeasible Right of Use” (IRU) agreements for the use of certain  fibers and conduit for periods ranging from 10 to 20 years. The Company is amortizing its accumulated investments totaling $4,573,622, ratably over the life of the agreements. The agreements expire at various times ranging from October 2017 through January 2037. Amortization of these leases included in depreciation and amortization expense was $237,043 and $207,435 per year for the years ended December 31, 2016 and 2015, respectively.   The remaining unamortized balances included in other current assets and prepaid leases were

$1,946,890 and $1,860,933 at December 31, 2016 and 2015, respectively.

Associated with these IRU agreements are certain support and maintenance fees the Company is contractually obligated to pay over the life of the agreements. Minimum future support and maintenance fees to be paid, excluding consumer price index adjusted annual escalators, are as follows as of December 31, 2016:

Amount

 

 

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Southern Light, LLC and Affiliate

16

 

 

 

 

 

 

The Company leases telecommunications equipment and software under various capital leases. The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The assets are amortized over their estimated productive lives. Amortization of assets  under capital leases is included in depreciation expense for the year ended December 31, 2016. Property held under capital lease, net of amortization, totaled $3,106,427 at  December  31,  2016  and  $3,227,960  at  December 31, 2015. Interest rates on capitalized leases vary from 3.339% to 4.260%.

Minimum future lease payments under capital leases, including purchase options of $166,686 are as follows at December 31, 2016:

Amount

Year ending December 31:$

2017997,743

2018858,510

2019771,637

2020318,021

2021-

Thereafter-

Total2,945,911

Less amount representing interest*(177,526)

Present value of minimum lease payments2,768,385

 

* Interest amounts are excluded from capital lease obligations presented in the consolidated balance sheets.

 

The Company leases office space and various properties including warehouse space and colocation facilities for use in its operations under long-term real estate operating leases. These leases expire at various times through   July 2036 or are under month-to-month agreements. The Company’s real estate leases provide for fixed rental payments, generally contain renewal options and certain leases require the Company to reimburse its proportionate share of building, maintenance and operating expenses which includes property taxes and  insurance.

The Company also leases tower space for use in its operation under long-term operating leases, usually with an original term ranging from 24 to 60 months. The leases provide for fixed rental payments and generally contain renewal options and escalator clauses.

During 2014, the Company entered into an agreement to lease additional office space which will enable the Company to consolidate much of its professional, sales and administrative staff at one location. The lease anticipates July 1, 2017 as the beginning of the initial fifteen year lease term and provides for two five year renewal options. The lease provides for an initial rent-free period with future minimum payments beginning at $305,500 for 2018 and including an escalator ranging from 1.56% to 1.92% annually through 2032, an aggregate of

$9,623,251 over the initial term of the lease. Rental expense will be recognized on a straight line basis over the term of the lease in accordance with Accounting Standards Codification (“ASC”) 840-20-25.

 

 

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Southern Light, LLC and Affiliate

17

 

 

 

 

 

 

The following is a summary of the future minimum lease payments required under long-term  leases  at  December 31, 2016:

 

The Company incurred rent expense of $1,564,822 and $1,663,425 for the years ending December 31, 2016 and 2015, respectively.

 

Employees of the Company are eligible to participate in the Southern Light, LLC 401(k) Plan (the plan). The plan covers employees who are at least age 21 and have worked one hour. The plan allows both elective (employee)  and non-elective (employer) contributions. The plan is Qualified under Code Sec. 401(k) of the Internal Revenue Code and includes discretionary profit sharing contributions.

The Company’s contribution to the plan, as determined by the Company’s management, is discretionary but cannot exceed certain maximum defined limitations.  Contributions  to  the  plan  for  the  years  ended  December 31, 2016 and 2015 were $486,747 and $415,165, respectively.

 

The Company is generally limited in establishing its customer base to the geographic area in which its fiber optic network is located.

At various times during the year, the Company’s cash in bank balances exceeded federally insured limits.

The Company extends credit to customers based on various contractual terms in the normal course of business. The Company does not generally require collateral on these receivables. Total revenues for the years ended December 31, 2016 and 2015 include sales to two major customers which accounted for more than 10% of the total service revenues of the Company. The revenues and accounts receivable from these customers accounted  for the following amounts and percentages in 2016 and 2015:

 

Total salesAccounts receivable

 

 

 

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Southern Light, LLC and Affiliate

18

 

 

 

 

 

 

The Company transacts business with companies that are related to the member through ownership.  At December 31, 2016 and 2015, the Company had accounts receivable of $56,731 and $24,042, respectively, with these related companies.

Revenues from these related companies for the years ended December 31, 2016 and 2015 were:

 

 

 

 

 

 

 

The Company is subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability (if any) with respect to these actions will not materially affect the financial position of the Company.

The Company maintains bank letters of credit as required for certain municipal franchise agreements. These letters of credit were issued by financial institutions not associated with the Revolver or Term Loan Facilities described in note 6.   At December 31, 2016 and 2015, total letters of credit outstanding were $150,000 and

$150,000.

The Company purchases surety bonds in conjunction with the normal operations of constructing and maintaining a fiber optic network.         At December 31, 2016 and 2015, the total amounts of surety bonds outstanding  were

$1,847,865 and $1,882,525.

 

The Company is the primary beneficiary of a  variable  interest  entity,  SLLP,  which  was  founded  on  December 8, 2015, by SLF Holdings, LLC for the purpose of acquiring real property to lease to the Company.   As such, SLLP purchased two commercial properties, one on June 24, 2016 and the other on July 15, 2016, and leased them to the Company as of the purchase dates.

At December 31, 2016, the book values of the assets and liabilities associated with the variable interest entity included in the Company’s consolidated balance sheets were $1,962,173 and $1,851,563, respectively. Assets included $1,874,467 of real property, and liabilities included $1,851,563 of long term debt. The impact of consolidating this variable interest entity on the Company’s consolidated statements of comprehensive income was not significant.

 

Certain reclassifications have been made to the December 31, 2015 consolidated financial statement presentation to correspond to the current year’s format. Book overdrafts in the consolidated statement of cash flows were reclassified from operating activities to financing activities. Total equity and net income remain unchanged due to these reclassifications.

 

Exhibit 99.2

Uniti Group Inc.’s

Unaudited Pro Forma Combined Financial Data

 

 

The following unaudited pro forma consolidated financial statements present Uniti Group Inc.’s (“Uniti” or the “Company”) unaudited pro forma combined statement of income for the year ended December 31, 2016, and its unaudited pro forma combined balance sheet as of December 31, 2016.  These statements have been derived from (a) the historical financial statements of Uniti as of and for the year ended December 31, 2016, which includes the results of PEG Bandwidth, LLC (“PEG”) from the May 2, 2016 acquisition date to December 31, 2016 and the results of Tower Cloud, Inc. (“Tower Cloud”) from the August 31, 2016 acquisition date to December 31, 2016; (b) the historical financial statements of PEG for the period from January 1, 2016 to May 1, 2016; (c) the historical financial statements of Tower Cloud for the period from January 1, 2016 to August 31, 2016; and (d) the historical financial statements of Southern Light, LLC (“Southern Light”) as of and for the year ended December 31, 2016.

The following unaudited pro forma combined financial statements give effect to the acquisition of Southern Light and the related transactions, including: (i) an assumed issuance of $250 million of senior unsecured debt securities and $450 million of common stock (assumed to be 17.7 million shares of the Company’s common stock, $0.0001 par value (“Common Stock”), using an assumed price of $25.41 (the closing share price on the Nasdaq Global Select Market on December 30, 2016) per share) to fund the cash portion of the Southern Light purchase consideration and for other general corporate purposes and (ii) issuance of 2.5 million Operating Partnership units (“OP Units”), exchangeable subject to certain conditions on a 1:1 basis for common stock (or cash equivalent value, at Uniti’s election), for purchase consideration to Southern Light equity holders.  Additionally, the unaudited pro forma combined financial statements give effect to the 2016 acquisitions of PEG and Tower Cloud and the related transactions, including: (i) revolving credit facility borrowings and related interest expense to fund the cash portion of the purchase consideration, (ii) issuance of 2.9 million shares of Common Stock for purchase consideration and (iii) issuance of 87,500 shares of the Company’s 3% Series A Convertible Preferred Stock, liquidation preference $1,000 per share (the “Convertible Preferred Stock”), for purchase consideration in the PEG acquisition.  The unaudited pro forma combined statement of income assumes the purchases of Southern Light, PEG and Tower Cloud (the “Acquisitions”) occurred on January 1, 2016, and the unaudited pro forma combined balance sheet assumes the Southern Light Acquisition occurred on December 31, 2016.  

The pro forma adjustments are based on currently available information and assumptions we believe are reasonable, factually supportable, directly attributable to the Acquisitions, and for the purposes of the pro forma combined financial statements, are expected to have a continuing impact on us. The pro forma financial statements do not reflect other transactions since January 1, 2016, including our issuance of additional debt securities during 2016, the repricings of our term loans or other acquisitions including the completed acquisition of NMS and the pending acquisition of Hunt, for which financial statements and pro forma financial statements are not required.

Our unaudited pro forma combined financial statements were prepared in accordance with Article 11 of Regulation S-X, using the assumptions set forth in the notes to our unaudited pro forma combined financial statements.  The following unaudited pro forma combined financial statements are presented for illustrative purposes only and do not purport to reflect the results we may achieve in future periods or the historical results that would have been obtained had the Acquisitions occurred on January 1, 2016 or had the Southern Light Acquisition occurred as of December 31, 2016, as the case may be.  Our unaudited pro forma combined financial statements also do not give effect to the potential impact of final purchase

1

 

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Exhibit 99.2

Uniti Group Inc.’s

Unaudited Pro Forma Combined Financial Data

 

accounting adjustments, current financial conditions, any anticipated synergies, operating efficiencies, costs savings, or integration costs that may result from the transactions described above.

Our unaudited pro forma combined financial statements are derived from, and should be read in conjunction with the historical financial statements of Uniti, Southern Light, PEG and Tower Cloud and accompanying notes filed herewith or previously filed with the SEC.

 

2

 

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Uniti Group Inc.

Unaudited Pro Forma Balance Sheet

As of December 31, 2016

 

 

3

 

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Uniti Group Inc.

Unaudited Pro Forma Statement of Income

Year Ended December 31, 2016

 

 

4

 

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Uniti Group Inc.

Notes to Unaudited Pro Forma Combined Financial Data - Continued

 

Basis of Presentation

Uniti Group Inc. (“Uniti” or the “Company”), formally known as Communications Sales & Leasing, Inc. (“CS&L”), was incorporated in the state of Delaware in February 2014 and reorganized in the state of Maryland on September 4, 2014 as a subsidiary or Windstream Holdings, Inc. (“Windstream Holdings” and together with its consolidated subsidiaries “Windstream”), On April 24, 2015 Uniti was separated and spun-off from Windstream, whereby Windstream contributed certain telecommunications network assets, including fiber and copper networks and other real estate (the “Distribution Systems”), and the Consumer CLEC Business, a small consumer competitive local exchange carrier business, to Uniti in exchange for cash, shares of common stock of Uniti and certain indebtedness of Uniti.  

On April 10, 2017, the Company announced that it had entered into a definitive agreement to acquire Southern Light, LLC (“Southern Light”).  The acquisition of Southern Light is expected to close in the third quarter of 2017, subject to customary closing conditions including obtaining the necessary regulatory approvals.  On May 2, 2016 and August 31, 2016, Uniti completed its previously announced acquisitions of PEG Bandwidth, LLC (“PEG Bandwidth”) and Tower Cloud, Inc. (“Tower Cloud”), respectively.  As a result of these acquisitions, PEG and Tower Cloud became wholly-owned subsidiaries of Uniti. The unaudited pro forma combined financial statements give effect to the acquisitions of Southern Light, PEG, and Tower Cloud, and the related transactions discussed above.

Consideration Transferred

The acquisitions of Southern Light, PEG and Tower Cloud have been accounted for using the acquisition method of accounting in accordance with Accounting Standards Codification 805, Business Combinations (“ASC 805”), which requires, among other things, that the assets acquired and liabilities assumed be recognized at their fair values, with any excess of the purchase price over the estimated fair values of the identifiable net assets acquired recorded as goodwill.  Additionally, ASC 805 establishes that equity issued to effect the acquisition be measured at the closing date of the transaction at the then-current market price.

Southern Light, LLC

The fair value of the consideration transferred is as follows:

 

 

5

 

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Uniti Group Inc.

Notes to Unaudited Pro Forma Combined Financial Data - Continued

 

 

Southern Light Preliminary Purchase Price Allocation

The following is a summary of the preliminary estimated fair values of the net assets acquired:

 

 

The above purchase price allocation is considered preliminary and is subject to revision when the valuation of assets and liabilities are finalized upon receipt of the final valuation report from a third party valuation specialist, and resolution of contractual adjustments, such as working capital adjustments, set forth in the Membership Interest Purchase Agreement, dated April 7, 2017.

PEG Bandwidth, LLC

The fair value of the consideration transferred is as follows:

 

 

6

 

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Uniti Group Inc.

Notes to Unaudited Pro Forma Combined Financial Data - Continued

 

PEG Purchase Price Allocation

The following is a summary of the estimated fair values of the net assets acquired:

 

 

Tower Cloud, Inc.

The fair value of the consideration transferred is as follows:

 

 

7

 

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Uniti Group Inc.

Notes to Unaudited Pro Forma Combined Financial Data - Continued

 

Tower Cloud Preliminary Purchase Price Allocation

The following is a summary of the preliminary estimated fair values of the net assets acquired:

 

 

The above purchase price allocation is considered preliminary and is subject to revision when the valuation of assets and liabilities are finalized upon receipt of the final valuation report from a third party valuation specialist, and resolution of contractual adjustments, such as working capital adjustments, set forth in the merger agreement.

Pro Forma Adjustments

 

 

 

The difference in the amount of debt issued and cash consideration paid in partial consideration for Southern Light is reflected as an increase to cash on the balance sheet, calculated as follows:

8

 

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Uniti Group Inc.

Notes to Unaudited Pro Forma Combined Financial Data - Continued

 

 

The above calculations do not give effect to the payment of transaction fees and expenses in connection with the transactions described.

 

 

(F) To reflect the adjustment to interest expense related to the draw on the revolving credit facility, offset by removal of interest expense related to PEG’s loan from parent, calculated as follows:

 

 

For the purposes of the unaudited pro forma combined financial statements, we have assumed LIBOR as the average monthly 1-month LIBOR rate during the pre-acquisition period, which was 0.44%.

(G) To reflect impact on depreciation and amortization of step-up in net assets acquired.

(H) To reflect removal of the acquired company stock-based compensation expense, as all historical stock-based awards were cancelled at closing in accordance with the relevant purchase agreement.

(I) To remove acquisition and transaction costs directly attributable to the acquisition of respective companies.

(J) To remove the impact of the accretion of PEG preferred units to their redemption value, as Uniti acquired 100% of the interests in PEG.

(K) To reflect preferred stock dividends related to the issuance of 87,500 shares of Convertible Preferred Stock, with a liquidation preference of $87.5 million.

(L) To reflect accretion of the estimated fair value of the Convertible Preferred Stock issued in partial consideration for the acquisition of PEG to its liquidation value.  The difference is amortized, using the effective interest rate method, over the expected term of the Convertible Preferred Stock, which is estimated at 3 years. Based on the estimated fair value of the Convertible Preferred stock, the accretion was calculated assuming a 3.66% effective interest rate.

9

 

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Uniti Group Inc.

Notes to Unaudited Pro Forma Combined Financial Data - Continued

 

(M) To reflect adjustment to weighted-average common shares outstanding as if the 1 million shares of Uniti common stock issued as partial consideration for the acquisition of PEG were outstanding as of January 1, 2016.

(N) To reflect the adjustment to interest expense related to the draw on the revolving credit facility, offset by removal of interest expense related to Tower Cloud’s revolving loan agreement, calculated as follow:

 

 

For the purposes of the unaudited pro forma combined financial statements, we have assumed LIBOR as the average monthly 1-month LIBOR rate during the pre-acquisition period, which was 0.45%.

 

(O) To reflect the estimated deferred taxes and income tax expense. This does not reflect Uniti’s effective tax rate, which includes other tax charges or benefits, and does not take into account any historical or possible future tax events that may impact the combined company.

(P) To reflect adjustment to weighted-average common shares outstanding as if the 1.9 million shares of Uniti common stock issued as partial consideration for the acquisition of Tower Cloud were outstanding as of January 1, 2016.

(Q) To reflect the adjustment to interest expense related to the issuance of debt to fund the cash portion of the acquisition cost, offset by removal of interest expense related to Southern Light’s debt, calculated as follows:

 

(R) To reflect net income related to noncontrolling interests associated with the outstanding OP Units issued as partial consideration for the acquisition of Southern Light.

(S) To reflect adjustment of weighted-average common shares outstanding as if the assumed 17.7 million shares of Uniti common stock to be issued in the contemplated equity offering to partially fund the

10

 

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Uniti Group Inc.

Notes to Unaudited Pro Forma Combined Financial Data - Continued

 

cash portion of the consideration for the acquisition of Southern Light were outstanding as of January 1, 2016.

(T) The 2016 audited financial statements of Southern Light include the consolidation of a Variable Interest Entity (“VIE”), an entity in which Southern Light held a controlling interest. The VIE is not being acquired by Uniti in the Southern Light Acquisition, and therefore the financial statements of Southern Light have been adjusted to give effect to the de-consolidation of the financial impact of the VIE. The impact of de-consolidating the VIE from Southern Light’s financial statements results in the following increase (decrease) to the financial statements:

 

 

 

11