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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 Fiscal Year Ended December 31, 2002
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 No. 001-14195
AMERICAN TOWER CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware |
65-0723837 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
116 Huntington Avenue
Boston, Massachusetts 02116
(Address of principal executive offices and Zip Code)
(617) 375-7500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| (Title of each Class) |
(Name of exchange on which registered) | |
| Class A Common Stock, $0.01 par value |
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
(Title of Class)
None
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for 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 the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No ¨
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of June 28, 2002 was approximately $620,176,350, based on the closing price of the registrant’s Class A Common Stock as reported on the New York Stock Exchange as of the last business day of the registrant’s most recently completed second quarter.
As of March 12, 2003, 185,506,031 shares of Class A Common Stock, 7,916,070 shares of Class B Common Stock and 2,267,813 Shares of Class C Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement (the “Definitive Proxy Statement”) to be filed with the Securities and Exchange Commission relative to the Company’s 2003 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report.
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FORM 10-K ANNUAL REPORT FISCAL YEAR ENDED DECEMBER 31, 2002
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| ITEM 1. Business |
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| ITEM 2. Properties |
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| ITEM 3. Legal Proceedings |
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| ITEM 5. Market for Registrant’s Common Equity and Related Stockholder Matters |
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| ITEM 6. Selected Financial Data |
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| ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| Information Presented Pursuant to the Indenture of Our 9 3/8% Senior Notes |
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| ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk |
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| ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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| ITEM 11. Executive Compensation |
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| ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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| ITEM 14. Controls and Procedures |
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| ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K |
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report contains statements about future events and expectations, or forward-looking statements, all of which are inherently uncertain. We have based those forward-looking statements on our current expectations and projections about future results. When we use words in this document such as “anticipate,” “intend,” “plan,” “believe,” “estimate,” “expect,” or similar expressions, we do so to identify forward-looking statements. Examples of forward-looking statements include statements we make regarding future prospects of growth in the wireless communications and broadcast infrastructure markets, the level of future expenditures by companies in those markets, and other trends in those markets, our ability to maintain or increase our market share, our future operating results, our future capital expenditure levels and our plans to fund our future liquidity needs. These forward-looking statements may be found under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” as well as in this annual report generally.
You should keep in mind that any forward-looking statement made by us in this annual report or elsewhere speaks only as of the date on which we make it. New risks and uncertainties come up from time to time, and it is impossible for us to predict these events or how they may affect us. In any event, these and other important factors may cause actual results to differ materially from those indicated by our forward-looking statements, including those set forth under the caption “Business – Factors That May Affect Future Results.” We have no duty to, and do not intend to, update or revise the forward-looking statements in this annual report after the date of this annual report, except as may be required by law. In light of these risks and uncertainties, you should keep in mind that the future events or circumstances described in any forward-looking statement made in this annual report or elsewhere might not occur.
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| Overview |
We are a leading wireless and broadcast communications infrastructure company with a portfolio of approximately 15,000 towers, including pending transactions. Our primary business is leasing antenna space on multi-tenant communications towers to wireless service providers and radio and television broadcast companies. We operate the largest portfolio of wireless communications towers in North America and are the largest independent operator of broadcast towers in North America, based on number of towers. Our tower portfolio provides us with a recurring base of leasing revenues from our existing customers and growth potential due to the capacity to add more tenants and equipment to these towers. Our broad network of towers enables us to address the needs of wireless service providers on a national basis. We also offer select tower related services, such as antennae and line installation and site acquisition and zoning services, which are strategic to our core leasing business.
We intend to capitalize on the increasing use of wireless communication services by actively marketing space available for leasing on our existing towers and selectively developing or acquiring new towers that meet our return on investment criteria.
Our core leasing business, which we refer to as our rental and management segment, accounted for approximately 93.9% and 86.6% of our segment operating profit for the years ended December 31, 2002 and December 31, 2001, respectively. In 2003, we expect that our rental and management segment will contribute at least 95% of our segment operating profit, which we define as segment revenue less direct segment expense (rental and management segment operating profit includes interest income, TV Azteca, net – see notes 6 and 16 of the consolidated financial statements).
An element of our strategy is to continue to focus our operations on our rental and management segment by divesting non-core assets, using the proceeds to purchase high quality tower assets, and reducing outstanding indebtedness. Between January 1, 2002 and March 4, 2003, we completed approximately $203.5 million of non-core asset sales comprised of certain assets in our network development services and satellite and fiber network access services segments, more than 700 non-core towers, and two office buildings in our rental and management segment.
In December 2002, we committed to a plan to dispose of our wholly owned subsidiary, Verestar, which comprised our entire satellite and fiber network access services segment. Accordingly,Verestar is now accounted for as a discontinued operation. We plan to dispose of these assets within twelve months and have nominal, if any, commitment to invest additional funds in Verestar during the pendency of such divestiture, with the exception of financial guarantees of up to $12.0 million for certain contractual obligations. In addition, we are seeking to sell approximately $50.0 million of additional non-core assets during the remainder of 2003. We expect that a portion of the proceeds from our consummated and future non-core asset sales will be reinvested in higher quality tower assets.
We believe that this strategy of focusing our operations on our rental and management segment will make our consolidated operating cash flows more stable and provide us with continuing growth because of the following characteristics of our core leasing business:
| • | Long-term tenant leases with contractual escalators. In general, a lease with a wireless carrier has a duration of five to ten years and lease payments typically increase 3% to 5% per year. |
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| • | Tower operating expenses are largely fixed. Incremental operating costs associated with adding wireless tenants to a tower are low. |
| • | Low maintenance capital expenditures. On average, a wireless tower requires minimal annual capital investments to maintain. |
| • | High lease renewal rates. Wireless carriers tend to renew leases because repositioning a site in a carrier’s network is expensive and often affects several other sites in the wireless network. |
For more financial information about our business segments and geographic information about our operating revenues, segment operating profit and long-lived assets, see note 16 to our consolidated financial statements and “Management’s Discussion of Financial Condition and Results of Operations.”
Our strategy is to capitalize on the increasing use of wireless communication services and the infrastructure requirements necessary to deploy current and future generations of wireless communication technologies. Between December 1995 and December 2002, the number of wireless phone subscribers in the United States increased from 33.8 million to 140.8 million. In addition, the minutes of use of wireless phone services among wireless carriers in the United States increased from 37.8 billion for the full year 1995 to nearly 619.0 billion for the full year 2002. From December 1995 through December 2002, the number of cell sites also increased from 22,700 to 139,300.* We expect that the continued growth of wireless subscribers and minutes of use of wireless personal communications and phone services will require wireless carriers to add a significant number of additional cell sites to maintain the performance of their networks in the areas they currently cover and to extend service to areas where coverage does not yet exist. In addition, we believe that as data wireless services, such as email and internet access, are deployed on a widespread basis, the deployment of these technologies will require wireless carriers to further increase the cell density of their existing networks, may require an overlay of new technology equipment, and may increase the demand for geographic expansion of their network coverage. To meet this demand, we believe wireless carriers will continue to outsource their tower infrastructure needs as a means of improving existing service coverage, implementing new technology, accelerating access to their markets and preserving capital, rather than constructing and operating their own towers and maintaining their own tower service and development capabilities.
We believe that our existing portfolio of towers, our tower related services and network development capabilities, and our management team, position us to benefit from these communication trends and to play an increasing role in addressing the needs of wireless service providers and broadcasters. The key elements of our strategy include:
| • | Maximize Use of Our Tower Capacity. We believe that our highest returns will be achieved by leasing additional space on our existing towers. Annual rental and management revenue and segment operating profit growth during 2002 was 26% and 41%, respectively. We anticipate that our revenues and segment operating profit will continue to grow because many of our towers are attractively located for wireless service providers and have capacity available for additional antenna space rental that we can offer to customers at low incremental costs to us. Because the costs of operating a tower are largely fixed, increasing utilization significantly improves operating margins. |
| * | Cellular Telecommunications & Internet Association (CTIA), December 2002. Subscriber and use information includes only cellular, personal communications services, and enhanced specialized mobile radio wireless services. The term cell site above refers to the number of antennae and related equipment in commercial operation, not the number of towers on which that equipment is attached. |
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| We will continue to target our sales and marketing activities to increase utilization of, and investment return on, our existing towers. |
| • | Actively Manage Our Tower Portfolio. We are actively managing our portfolio of towers by selling non-core towers and reinvesting a portion of the proceeds in high quality tower assets, such as the towers we are acquiring from NII Holdings. In 2002, we sold over 700 non-core towers. We also plan to pursue exchanges and sales of towers or tower clusters with tower operators and other entities. Our goal is to enhance operating efficiencies either by acquiring towers in regions where we have insufficient coverage or by disposing or exchanging towers in areas where we do not have operating economies of scale. If we are successful in disposing of certain tower assets, we may reinvest a portion of the proceeds received in more profitable tower assets. |
| • | Employ Selective Criteria for New Tower Construction and Acquisitions. While our first priority is leasing capacity on our existing towers, we continue to construct and acquire new towers when our strict return on investment criteria can be met. These criteria include securing leases from the economic equivalent of two broadband customers in advance of construction, ensuring reasonable estimated construction costs and obtaining the land on which to build the tower, whether by purchase or ground lease, on reasonable terms. |
| • | Continue Our Focus on Customer Service. Since speed to market and reliable network performance are critical components to the success of wireless service providers, our ability to assist our customers in meeting their goals will ultimately define our success. To that end, we intend to continue to focus on customer service by, for example, reducing cycle time for key functions, such as lease processing and antennae and line installations. |
| • | Build On Our Strong Relationships with Major Wireless Carriers. Our understanding of the network needs of our wireless carrier customers and our ability to effectively convey how we can satisfy those needs are key to our efforts to add new antennae leases, cross-sell our services and identify desirable new tower development projects. We are building on our strong relationships with our customers to gain more familiarity with their evolving network plans so we can identify opportunities where our nationwide portfolio of towers, extensive service offerings and experienced construction personnel can be used to satisfy their needs. We believe that we are well positioned to be a preferred partner to major wireless carriers in leasing tower space and new tower development projects because of the location of our towers, our proven operating and construction experience and the national scope of our tower portfolio and services. |
| • | Participation in Industry Consolidation. We believe there is compelling rationale for consolidation among tower companies. More extensive networks will be better positioned to provide more comprehensive service to customers and to support the infrastructure requirements of future generations of wireless communication technologies. Combining with one or more other tower companies also should result in improvements in cost structure efficiencies, with a corresponding positive impact on operating results. These benefits should, in turn, enhance access to capital and accelerate the de-levering process. Accordingly, we continue to be interested in participating in the consolidation of our industry on terms that are consistent with these perceived benefits and that create long-term value for our stockholders. |
In late 2001, we announced an initiative to accelerate the process of shifting our focus from acquisitions and development activities to operational execution.
Streamlined Administrative Functions. During 2002, we simplified and streamlined our United States rental and management and services organizations, moving from five regions and twenty areas to three regions and ten areas by year end. We also centralized our lease processing and accounting operations into single locations, and integrated our construction unit and tower operations unit into a single unit. These initiatives yielded a significant increase in productivity per employee, improved margin performance, and resulted in faster and more consistent customer service.
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Reduced Capital Spending. We believe that our existing tower portfolio has the scope and available capacity to address a significant portion of our customers’ tower needs. We also believe that the highest investment returns can be achieved by adding tenants to our existing portfolio. As a result, we significantly reduced our capital expenditures on new tower development in 2002 and will continue to do so in 2003. We plan to build between 100 and 150 towers in 2003 in contrast to 311 towers (including ten broadcast towers) in 2002, and 1,319 towers (including five broadcast towers) in 2001. In addition, we expect our 2003 capital expenditures to continue to decrease to approximately $50.0 to $75.0 million, compared to total capital expenditures of approximately $180.5 million in 2002 and $568.2 million in 2001. We will continue to use more selective criteria for new tower development and will not undertake any development project unless it is likely to meet our heightened near-term return on investment criteria.
Our primary business is our leasing business, which we refer to as our rental and management segment. We also offer tower related services that are strategic to our rental and management segment through our network development services segment. In December 2002, we committed to a plan to dispose of our satellite and fiber network access services segment operations within the next twelve months and now account for the segment as a discontinued operation. See “Business—Satellite and Fiber Network Access Services (Discontinued Operations).”
Rental and Management
Leasing of Antennae Sites. Our primary business is leasing antenna space on multi-tenant communications towers to wireless service providers and radio and television broadcast companies. Giving effect to pending transactions, we operate a tower network of approximately 15,000 multi-user sites in the United States, Mexico and Brazil, including more than 300 broadcast tower sites. Approximately 14,000 of these towers are owned or leased sites and approximately 1,000 are managed sites or lease/sublease sites under which we hold a position as lessee that terminates at the same time as a related sublease. Our networks in the United States and Mexico are national in scope. Our U.S. network spans 49 states and the District of Columbia. In addition, 84% of our U.S. network provides coverage in the top 100 markets or core areas such as high traffic interstate corridors. Giving effect to pending transactions, our Mexican network includes more than 1,600 sites in highly populated areas, including Mexico City, Monterrey, Guadalajara and Acapulco. Our Brazilian network consists of approximately 275 towers.
We lease antenna space on our towers to tenants in a diverse range of wireless communications and broadcast industries. Wireless industries we serve include: personal communications services, cellular, enhanced specialized mobile radio, specialized mobile radio, paging, fixed microwave and fixed wireless. Our major customers include ALLTEL, AT&T Wireless Services, Cingular Wireless, Nextel, Sprint PCS, T-Mobile (formerly called Voicestream) and Verizon and their respective affiliates.
The number of antennae that our towers can accommodate varies depending on the tower’s location, height, and the structural capacity at certain wind speeds. An antenna’s height on a tower and the tower’s location determine the line-of-sight of the antenna with the horizon and, consequently, the distance a signal can be transmitted. Some of our customers, such as personal communications services, enhanced specialized mobile radio providers and cellular companies in metropolitan areas, usually do not need to place their equipment at the highest tower point. Other customers, including paging companies and specialized mobile radio providers in rural areas, need higher elevations for broader coverage. We believe that many well-engineered and well-located towers built to serve the specifications of an initial anchor tenant in the wireless communications sector will accommodate three or more wireless tenants over time, thereby increasing revenue and enhancing margins.
Lease Terms. Our leases, like most of those in the tower industry, generally vary depending upon the region and the industry user. Television and radio broadcasters prefer long term leases while wireless communications providers favor leases in the range of five to ten years in duration. In both cases, the leases often have multiple renewal terms at the option of the tenant. Both wireless carriers and broadcasters tend to renew
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their leases with us. Repositioning an antenna in a wireless carrier’s network is expensive and often requires reconfiguring several other antennae in the carrier’s network and may require the carrier to obtain other governmental permits.
Most of our leases have provisions that periodically increase the rent due under the lease. These automatic increases are typically annual and are based on a fixed percentage, inflation or a fixed percentage plus inflation.
Annual rental payments vary considerably depending upon:
| • | number and weight of the antennae on the tower and the size of the transmission line; |
| • | ground space necessary to store equipment related to the antennae; |
| • | existing capacity of the tower; |
| • | the placement of the customer’s antenna on the tower; |
| • | range or number of carrier’s frequency spectrum; and |
| • | the location and height of the tower on which antenna space is rented. |
Tower Development. Historically, cellular and other wireless service providers had constructed and owned a majority of the towers for their own antennae needs, rather than leasing space on towers from a third party. Beginning in the late 1990s, wireless service providers expressed a growing interest in having independent companies own and operate the towers for their antennae, due to the relatively high capital costs and operating expenses for a single carrier’s use. This trend resulted in our entering into agreements with a number of wireless carriers to construct and subsequently lease space on towers in key areas identified as optimal for their network expansion requirements. In most cases, because we own the constructed towers, we are able to lease space on them to other tenants, as well as to the original tenant.
Network Development Services
We provide tower-related services that are strategic to our rental and management segment.
Antennae and Line Installation and Construction Services. We are one of the leading builders of wireless communication and broadcast towers. As part of our network development services, we provide antennae and line installation and maintenance services for wireless communication towers and broadcast towers. These services use not only our construction-related skills, but also our technical expertise to ensure that new installations do not cause interference with other tenants. We believe that our antennae and line installation services and maintenance capabilities provide us with a significant opportunity to capture incremental revenue on existing and newly built sites.
In recent years, we have built a significant number of towers, predominantly for our own account. The cost of construction of a tower varies by site location and terrain, tower type and height, and any governmental and environmental requirements. Non-broadcast towers, whether on a rooftop or the ground, generally cost between $200,000 and $300,000 to construct. Broadcast towers are generally much taller, are built to bear a greater load, vary in height much more than non-broadcast towers, and cost significantly more than non-broadcast towers.
Site Acquisition and Zoning Services. We engage in site acquisition services for our own account, in connection with tower development projects and other proprietary construction, as well as for third parties. With respect to new towers, the site selection and acquisition process begins with the network design. We identify highway corridors, population centers and topographical features within the carrier’s existing or proposed network and then select the most suitable sites, based on demographics, traffic patterns and the carrier’s frequency characteristics and technology. We also provide services related to zoning, structural engineering and construction.
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Other Services and Infrastructure. As part of our full service offering, we also provide radio frequency engineering, network design and tower-related consulting services through our Galaxy Engineering unit. In addition, we own and operate Kline Iron & Steel, an established steel fabricator that builds broadcast towers and provides steel for other construction projects.
Satellite and Fiber Network Access Services (Discontinued Operations)
Our Verestar subsidiary is a provider of integrated satellite and fiber network access services for telecommunications companies, internet service providers (ISPs), broadcasters, maritime customers, and governmental organizations, both domestic and international. We own and operate more than 175 satellite antennae at six satellite network access points in the United States and abroad. These operations enable us to access the majority of commercial satellites around the world.
In December 2002, we committed to a plan to sell Verestar, which comprised our satellite and fiber network access services segment, by December 31, 2003. Through the divestiture process, we will have nominal, if any, commitment to invest additional funds in Verestar, with the exception of approximately $12.0 million of Verestar’s contractual obligations that we have guaranteed. Depending on the terms of the final disposition, we may remain liable for these guarantees. We now account for Verestar as a discontinued operation and, accordingly, we no longer have a satellite and fiber network access services segment.
Acquisitions
NII Holdings, Inc. In December 2002, we agreed to acquire approximately 540 communications sites, from NII Holdings, predominantly in Mexico, for an aggregate purchase price of $100.0 million in cash. As part of the transaction, we also agreed to provide up to 250 additional communication sites for NII Holdings’ incremental network build-out. We acquired 140 communication sites for approximately $26.2 million in December 2002, and an additional 147 communication sites for approximately $24.0 million as of March 4, 2003. The remaining communication sites are expected to close by the end of the third quarter of 2003. We continue to expect to fund the closings with proceeds from non-core asset sales.
Dispositions
From January 1, 2002 through March 4, 2003, we completed approximately $203.5 million of non-core asset sales. Significant dispositions included the following:
Non-Core Towers. We disposed of over 700 non-core tower assets for approximately $25.0 million during 2002. These dispositions are part of our program to actively manage our portfolio of tower assets by selling non-core towers and reinvesting a portion of the total proceeds in high quality tower assets, such as the towers we are acquiring from NII Holdings.
MTS Components. In July 2002, we sold MTS Components, part of our components business, for approximately $32.0 million, which consisted of approximately $20.0 million in cash paid at closing and $12.0 million of notes receivable.
Office Buildings. In December 2002, we sold the building where we maintain our corporate headquarters at 116 Huntington Avenue, Boston, Massachusetts. Proceeds from the sale were approximately $68.0 million, of which approximately $38.5 million was used to retire the existing mortgage indebtedness. In March 2003, we sold an additional office building for approximately $10.6 million. These buildings were primarily held as rental property in our rental and management segment.
Flash Technologies. In January 2003, we sold Flash Technologies, our lighting systems business, for net cash proceeds of approximately $41.1 million, subject to a post-closing working capital adjustment.
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MTN. In February 2003, we sold Maritime Telecommunications Network (MTN), a subsidiary of Verestar, for approximately $26.8 million in cash. The net proceeds from the sale were used to repay loans as required under our credit facilities.
Our corporate headquarters is in Boston, Massachusetts. In 2002, we streamlined our rental and management organization from five to three regions and from twenty to ten areas in the United States. Each region is headed by a vice president who reports to our Executive Vice President of Tower Operations who, in turn, reports to our President and Chief Operating Officer. Our current regional centers in the United States are based in Boston, Massachusetts, Chicago, Illinois and Phoenix, Arizona and are further subdivided into ten area operations centers that are staffed with skilled engineering, construction management and marketing personnel. Our centralized lease processing for the rental and management segment is based in Woburn, Massachusetts and our related accounting operations are based in Atlanta, Georgia. Our international regional centers are based in Mexico City, Mexico and Sao Paulo, Brazil. We believe our United States and international regional and area operations centers are capable of responding effectively to the opportunities and customer needs of their defined geographic areas.
Towers and Licenses. Both the Federal Communications Commission (“FCC”) and the Federal Aviation Administration (“FAA”) regulate towers used for wireless communications and radio and television broadcasting. These regulations govern the siting, lighting, marking and maintenance of towers. Depending on factors such as tower height and proximity to public airfields, the construction of new antenna structures or modifications to existing antenna structures must be reviewed by the FAA prior to initiation to ensure that the structure will not present a hazard to aircraft navigation. After the FAA issues a “No Hazard” determination, the tower owner must register the antenna structure with the FCC and paint and light the structure in accordance with the FAA determination. The FAA review and the FCC registration processes are prerequisites to FCC authorization of communications devices placed on the antenna structure. Tower owners bear the responsibility for notifying the FAA of any tower lighting failures and for the repair of those lighting failures. Tower owners also must notify the FCC when ownership of a tower changes. We generally indemnify our customers against any failure to comply with applicable standards. Failure to comply with applicable tower-related requirements may lead to monetary penalties.
The FCC separately regulates and licenses wireless communications devices and radio and television stations transmitting from the towers based upon the particular frequency used. We hold, through various subsidiaries, certain licenses for radio transmission facilities granted by the FCC, including satellite earth stations, private microwave and specialized mobile radio stations (which are subject to regulation by the FCC). We are required to obtain the FCC’s approval prior to assigning these licenses or transferring control of any entity of ours which holds FCC licenses.
The FCC considers the construction of a new tower or collocation of an antenna on an existing antenna structure (including building rooftops and watertanks) to be a federal undertaking subject to prior environmental review and approval under the National Environmental Policy Act of 1969 (“NEPA”), which obligates federal agencies to evaluate the environmental impacts of undertakings to determine whether they may significantly affect the environment. The FCC has issued regulations implementing NEPA as well as the National Historic Preservation Act, the Endangered Species Act and the American Indian Religious Freedom Act. These regulations place responsibility on each applicant or licensee to investigate potential environmental and other effects of operations and to disclose any significant impacts in an environmental assessment prior to constructing a tower or collocating an antenna. If a tower or collocation may have a significant impact on the environment, FCC approval of the tower or collocation could be significantly delayed. In January 2002, the FCC’s Wireless Bureau dismissed, for lack of standing, challenges to the registration of seven of our towers filed by certain environmental groups. The challenges alleged that we had failed to comply with NEPA and that the FCC’s rules
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implementing NEPA are inadequate. The petitioners have appealed the Bureau’s decision to the FCC. If the Bureau’s decision is overturned, we could be subject to monetary penalties or increased compliance obligations. In August 2002, the same environmental groups asked the FCC to review the tower registrations of more than 5,000 towers in the gulf coast region to assess compliance with the Endangered Species Act and Migratory Bird Treaty Act and to require the filing of new or revised environmental assessments under NEPA for all towers in the region. We own a number of the towers identified in the pleading. However, because the pleading was not served on us, we have not been asked by the FCC to respond. PCIA, a trade association representing the tower industry, has asked the FCC to dismiss the pleading based on numerous grounds. The matter is pending. In February 2003, the same environmental groups filed suit against the FCC in a federal appeals court, asking the court to force the FCC to address the groups’ pending requests and appeals, and asked the court to force the FCC to adopt more stringent environmental rules. Depending on how the court rules, we could be subject to increased compliance obligations. In addition, a ruling in the federal appeals court could affect the groups’ pending cases with the FCC.
In January 2001, the FCC concluded investigations of several operators of communications towers, including us. The FCC sent us a Notice of Apparent Liability for Forfeiture (NAL) preliminarily determining that we had failed to file certain informational forms, had failed to properly post certain information at various tower sites, and on one occasion had failed to properly light a tower. The FCC also ordered an additional review of our overall procedures for and degree of compliance with the FCC’s regulations. We reached a settlement with the FCC regarding the compliance issues arising out of the NAL in the form of a Consent Decree. As part of the Consent Decree, the FCC has rescinded the NAL and terminated the further investigation ordered in the NAL. In September 2001 we made a voluntary contribution of $0.3 million to the U.S. Treasury and agreed to maintain an active compliance plan. Failure to comply with the Consent Decree may lead to additional monetary penalties and loss of the right to hold our various registrations and licenses.
The Telecommunications Act of 1996 amended the Communications Act of 1934 by limiting state and local zoning authorities’ jurisdiction over the construction, modification and placement of wireless communications towers. The law preserves local zoning authority but prohibits any action that would discriminate between different providers of wireless services or ban altogether the construction, modification or placement of communications towers. It also prohibits state or local restrictions based on the environmental effects of radio frequency emissions to the extent the facilities comply with FCC regulations. The Telecommunications Act of 1996 also requires the federal government to help licensees of wireless communications services gain access to preferred sites for their facilities. This may require that federal agencies and departments work directly with licensees to make federal property available for tower facilities.
We are also subject to local and county zoning restrictions and restrictive covenants imposed by local authorities or community developers. These regulations vary greatly, but typically require tower owners and/or licensees to obtain approval from local officials or community standards organizations prior to tower construction or collocations on existing towers. Local zoning authorities often are in opposition to construction in their communities and these regulations can delay or prevent new tower construction, collocations or site upgrade projects, thereby limiting our ability to respond to customer demand. In addition, those regulations increase costs associated with new tower construction and collocation. Existing regulatory policies may adversely affect the timing or cost of new tower construction and collocations, and additional regulations may be adopted which increase delays or result in additional costs to us. These factors could adversely affect our construction program and operations.
Our tower operations in Mexico and Brazil are also subject to regulation. If we pursue additional international opportunities, we will be subject to regulations in additional foreign jurisdictions. In addition, our customers, both domestic and foreign, also may be subject to new regulatory policies that may adversely affect the demand for communications sites.
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Satellite and Fiber Network Access (Discontinued Operations). We are required to obtain licenses and other authorizations from the FCC for our use of radio frequencies to provide satellite and wireless services in the United States. We are also required to obtain authorizations from foreign regulatory agencies in connection with our provision of these services abroad. We hold a number of point-to-point microwave radio licenses that are used to provide telecommunications services. Additionally, we hold a number of satellite earth station licenses in connection with our operation of satellite-based networks. We are required to obtain consent from the FCC prior to assigning these licenses or transferring control of any of our companies holding an FCC license.
Environmental Matters. Our operations, like those of other companies engaged in similar businesses, are subject to various federal, state and local and foreign environmental and occupational safety and health laws and regulations, including those relating to the management, use, storage, disposal, emission and remediation of, and exposure to, hazardous and non-hazardous substances, materials, and wastes, and the siting of our towers. As an owner, lessee and/or operator of real property and facilities, we may have liability under those laws for the costs of investigation, removal or remediation of soil and groundwater contaminated by hazardous substances or wastes. Certain of these laws impose cleanup responsibility and liability without regard to whether we, as the owner, lessee or operator, knew of or were responsible for the contamination, and whether or not we have discontinued operations or sold the property. We may also be subject to common law claims by third parties based on damages and costs resulting from off-site migration of contamination.
We, and our customers, also may be required to obtain permits, obey regulatory requirements, and make certain informational filings related to hazardous substances used at our sites by our customers. Violations of these types of regulations could subject us to fines and/or criminal sanctions. In October 2001, we paid $150,000 in civil penalties related to certain alleged environmental permitting and filing violations in the County of Santa Clara in California.
Health, Safety and Transportation. As an FCC licensee, we are subject to regulations and guidelines imposing certain operational obligations relating to radio frequency emissions. As employers, we are subject to OSHA and similar guidelines regarding employee protection from radio frequency exposure. Our construction teams are subject to regulation by OSHA and equivalent state agencies concerning health and safety matters. Our heavy vehicles and their drivers are subject to regulation by the Department of Transportation.
Competition and New Technologies
Rental and Management Segment Competition. We compete for antennae site customers with other national independent tower companies, wireless carriers that own and operate their own tower networks and lease tower space to other carriers, rooftop and other alternative site structures, site development companies that acquire space on existing towers for wireless service providers and manage new tower construction, and independent tower operators. We believe that tower location and capacity, price and quality of service historically have been and will continue to be the most significant competitive factors affecting owners, operators and managers of communications sites.
Network Development Services Segment Competition. Our network development services compete with a variety of companies offering individual, or combinations of, competing services. The field of competitors includes site acquisition consultants, zoning consultants, real estate firms, right-of-way consulting firms, construction companies, tower owners/managers, radio frequency engineering consultants, telecommunications equipment vendors who can provide turnkey site development services through multiple subcontractors, and carriers’ internal staffs. We believe that carriers base their decisions on network development services on various criteria, including a company’s experience, track record, local reputation, price, and time for completion of a project. Kline Iron & Steel competes with numerous other steel fabricators, many of which have substantially greater resources.
We believe that we compete favorably as to the key competitive factors relating to our rental and management and network development services segments.
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New Technologies. The emergence or growth of new technologies could reduce the need for tower-based transmission and reception and may, therefore, have a negative impact on our operations. These technologies include: signal combining technologies, which permit one antenna to service two different frequencies of transmission and, thereby, two customers, may reduce the need for tower-based broadcast transmission and hence demand for tower space; technologies that enhance spectral capacity, such as beam forming or “smart antennas”, which can increase the capacity at existing sites and can reduce the number of additional sites a given carrier needs to serve any given subscriber base; delivery of wireless telephony services by direct broadcast satellites or cable providers, which could reduce the demand for tower space; indoor distribution systems, which relieve some capacity on existing networks and could have an adverse effect on our operations; and capacity enhancing technologies such as lower-rate vocoders and more spectrally efficient airlink standards, which potentially relieve network capacity problems without adding sites and could adversely affect our operations.
Any increase in the use of network sharing or roaming or resale arrangements by wireless service providers could adversely affect the demand for tower space. These arrangements, which are essentially extensions of traditional roaming agreements, enable a provider to serve customers outside its license area, to give licensed providers the right to enter into arrangements to serve overlapping license areas, and to permit non-licensed providers to enter the wireless marketplace. Wireless service providers might consider such sharing or resale arrangements superior to constructing their own facilities or leasing our antenna space. One possible benefit of such arrangements, however, is that network sharing arrangements could stimulate network development in areas where a single carrier network is economically unattractive.
Construction, Manufacturing and Raw Materials
We build, maintain and install land based wireless communications and broadcast transmitting and receiving facilities by obtaining sheet metal and other raw material parts and components from a variety of vendors. We also engage third party contract manufacturers to construct certain of these facilities. We have historically obtained the majority of our sheet metal and other raw materials parts and components from a limited number of suppliers. However, substantially all of these items are available from numerous other suppliers. We have not, to date, experienced any significant difficulties in obtaining the needed quantities of materials from suppliers in a timely manner.
As of December 31, 2002, we employed approximately 1,900 full time individuals and consider our employee relations to be satisfactory.
Our Internet website is www.americantower.com. Information contained in our website is not incorporated by reference into this annual report, and you should not consider information contained in our website as part of this annual report. You may access, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, plus amendments to such reports as filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, through the Investors portion of our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.
We have adopted a written code of conduct that applies to all of our employees and directors, including, but not limited to, our principal executive officer, principal financial officer, and principal accounting officer or controller, or persons performing similar functions. The code of conduct will be available on our website at www.americantower.com. In the event we amend, or provide any waivers from, the provisions of this code of conduct, we intend to disclose these events on our website as required by law.
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Factors That May Affect Future Results
Decrease in demand for tower space would materially and adversely affect our operating results and we cannot control that demand.
Many of the factors affecting the demand for wireless communications tower space, and to a lesser extent our services business, could materially affect our operating results. Those factors include:
| • | consumer demand for wireless services; |
| • | the financial condition of wireless service providers; |
| • | the ability and willingness of wireless service providers to maintain or increase their capital expenditures; |
| • | the growth rate of wireless communications or of a particular wireless segment; |
| • | the number of wireless service providers in a particular segment, nationally or locally; |
| • | governmental licensing of broadcast rights; |
| • | mergers or consolidations among wireless service providers; |
| • | increased use of network sharing arrangements or roaming and resale arrangements by wireless service providers; |
| • | delays or changes in the deployment of 3G or other technologies; |
| • | zoning, environmental, health and other government regulations; and |
| • | technological changes. |
The demand for broadcast antenna space is dependent, to a significantly lesser extent, on the needs of television and radio broadcasters. Among other things, technological advances, including the development of satellite-delivered radio, may reduce the need for tower-based broadcast transmission. We could also be affected adversely should the development of digital television be delayed or impaired, or if demand for it were less than anticipated because of delays, disappointing technical performance or cost to the consumer.
Our substantial leverage and debt service obligations may adversely affect us.
We have a substantial amount of indebtedness. Our total indebtedness at year end, giving effect to our approximately $420.0 million offering of senior subordinated discount notes in January 2003 and the subsequent $200.0 million prepayment of term loans outstanding under our credit facilities, was approximately $3.6 billion, excluding any assumed repayment of other indebtedness out of the remaining proceeds from the discount notes offering.
Our substantial level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay when due the principal of, interest on, or other amounts due in respect of our indebtedness. A significant portion of our outstanding indebtedness bears interest at floating rates. As a result, our interest payment obligations on such indebtedness will increase if interest rates increase. We may also obtain additional long term debt and working capital lines of credit to meet future financing needs. This would have the effect of increasing our total leverage. Our substantial leverage could have significant negative consequences, including:
| • | our inability to meet one or more of the financial ratios contained in our debt agreements or to generate cash sufficient to pay interest or principal, including periodic principal amortization payments, which events could result in an acceleration of some or all of our outstanding debt as a result of cross-default provisions; |
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| • | increasing our vulnerability to general adverse economic and industry conditions; |
| • | limiting our ability to obtain additional debt or equity financing; |
| • | requiring the dedication of a substantial portion of our cash flow from operations to service our debt, thereby reducing the amount of our cash flow available for other purposes, including capital expenditures; |
| • | requiring us to sell debt or equity securities or to sell some of our core assets, possibly on unfavorable terms, to meet payment obligations; |
| • | limiting our flexibility in planning for, or reacting to, changes in our business and the industries in which we compete; and |
| • | placing us at a possible competitive disadvantage with less leveraged competitors and competitors that may have better access to capital resources. |
Our participation or inability to participate in tower industry consolidation could involve certain risks.
Any merger or acquisition transaction would involve several risks to our business, including demands on managerial personnel that could divert their attention from other aspects of our core leasing business, increased operating risks due to the integration of major national networks into our operational system, and potential antitrust constraints, either in local markets or on a regional basis, that could require selective divestitures at unfavorable prices. Any completed transaction may have an adverse effect on our operating results, particularly in the fiscal quarters immediately following its completion while we integrate the operations of the other business. In addition, once integrated, combined operations may not necessarily achieve the levels of revenues, profitability or productivity anticipated. There also may be limitations on our ability to consummate a merger or acquisition transaction. For example, any transaction would have to comply with the terms of our loan agreement and note indentures, and there are regulatory constraints on business combinations. Our inability to consummate a merger or acquisition for these or other reasons could result in our failure to participate in the expected benefits of industry consolidation and may have an adverse effect on our ability to compete effectively.
Continuation of the current U.S. economic slowdown could materially and adversely affect our business.
The existing slowdown in the U.S. economy has negatively affected the factors described under the prior heading, influencing demand for tower space and tower related services. For example, the slowdown, coupled with the deterioration of the capital markets, has caused certain wireless service providers to delay and, in certain cases, abandon expansion and upgrading of wireless networks, implementation of new systems, or introduction of new technologies. As a result, demand has also decreased for many of our network development services. The economic slowdown has also harmed, and may continue to harm, the financial condition of some wireless service providers. Many wireless service providers operate with substantial leverage and some wireless service providers, including customers of ours, have filed for bankruptcy.
If our wireless service provider customers consolidate or merge with each other to a significant degree, our growth, our revenue and our ability to generate positive cash flows could be adversely affected.
Significant consolidation among our wireless service provider customers may result in reduced capital expenditures in the aggregate because the existing networks of many wireless carriers overlap, as do their expansion plans. Similar consequences might occur if wireless service providers engage in extensive sharing or roaming or resale arrangements as an alternative to leasing our antennae space. In January 2003, the spectrum cap, which previously prohibited wireless carriers from owning more than 45 MHz of spectrum in any given geographical area, was allowed to expire. Some wireless carriers may be encouraged to consolidate with each other as a result of this regulatory change and as a means to strengthen their financial condition. Consolidation among wireless carriers would also increase our risk that the loss of one or more of our major customers could materially decrease revenues and cash flows.
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Due to the long-term expectations of revenue from tenant leases, the tower industry is sensitive to the creditworthiness of its tenants.
Due to the long-term nature of our tenant leases, we, like others in the tower industry, are dependent on the continued financial strength of our tenants. During the past two years, several of our customers have filed for bankruptcy, although to date these bankruptcies have not had a material adverse effect on our business or revenues. Many wireless service providers operate with substantial leverage. If one or more of our major lease customers experienced financial difficulties, it could result in uncollectible accounts receivable and our loss of significant customers and anticipated lease revenues.
Restrictive covenants in our credit facilities, senior notes and senior subordinated discount notes could adversely affect our business by limiting flexibility.
The indentures for our senior notes, our senior subordinated discount notes issued in January 2003, and our credit facilities contain restrictive covenants and, in the case of the credit facilities, requirements of complying with certain leverage and other financial tests. These limit our ability to take various actions, including the incurrence of additional debt, guaranteeing indebtedness and issuing preferred stock, engaging in various types of transactions, including mergers and sales of assets, and paying dividends and making distributions or other restricted payments, including investments. These covenants could have an adverse effect on our business by limiting our ability to take advantage of financing, new tower development, merger and acquisition or other opportunities.
Our foreign operations could create expropriation, governmental regulation, funds inaccessibility, foreign exchange exposure and management problems.
Our expansion in Mexico and Brazil, and any other possible foreign operations in the future, could result in adverse financial consequences and operational problems not experienced in the United States. We have loaned $119.8 million to a Mexican company, own or have the economic rights to over 1,700 towers in Mexico, including approximately 200 broadcast towers (giving effect to pending transactions), and, subject to certain rejection rights, are contractually committed to construct up to approximately 650 additional towers in that country over the next three years. Giving effect to pending transactions, we also own or have acquired the rights to approximately 275 communications towers in Brazil and are, subject to certain rejection rights, contractually committed to construct up to 350 additional towers in that country over the next three years. The actual number of sites constructed will vary depending on the build out plans of the applicable carrier. In December 2002, we agreed to acquire approximately 540 communications sites from NII Holdings, predominantly in Mexico, for an aggregate purchase price of $100.0 million in cash. We may, should economic and capital market conditions improve, also engage in comparable transactions in other countries in the future. Among the risks of foreign operations are governmental expropriation and regulation, inability to repatriate earnings or other funds, currency fluctuations, difficulty in recruiting trained personnel, and language and cultural differences, all of which could adversely affect our operations.
New technologies could make our tower antenna leasing services less desirable to potential tenants and result in decreasing revenues.
The development and implementation of signal combining technologies, which permit one antenna to service two different transmission frequencies and, thereby, two customers, may reduce the need for tower-based broadcast transmission and hence demand for our antenna space. Technologies that enhance spectral capacity, such as beam forming or “smart antennas” can increase the capacity at existing sites and can reduce the number of additional sites a given carrier needs to serve any given subscriber base.
In addition, the emergence of new technologies could reduce the need for tower-based transmission and reception and have an adverse effect on our operations. The growth in delivery of video services by direct broadcast satellites could also adversely affect demand for our antenna space.
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Indoor distribution systems relieve some capacity on existing networks and could have an adverse effect on our operations. Capacity enhancing technologies such as lower-rate vocoders and more spectrally efficient airlink standards potentially relieve network capacity problems without adding sites and could adversely effect our operations.
We could have liability under environmental laws.
Our operations, like those of other companies engaged in similar businesses, are subject to the requirements of various federal, state and local and foreign environmental and occupational safety and health laws and regulations, including those relating to the management, use, storage, disposal, emission and remediation of, and exposure to, hazardous and non-hazardous substances, materials, and wastes, and the siting of our towers. As owner, lessee or operator of approximately 15,000 real estate sites, we may be liable for substantial costs of remediating soil and groundwater contaminated by hazardous materials, without regard to whether we, as the owner, lessee or operator, knew of or were responsible for the contamination. In addition, we cannot assure you that we are at all times in complete compliance with all environmental requirements. We may be subject to potentially significant fines or penalties if we fail to comply with any of these requirements. The current cost of complying with those laws is not material to our financial condition or results of operations. However, the requirements of these laws and regulations are complex, change frequently, and could become more stringent in the future. It is possible that these requirements will change or that liabilities will arise in the future in a manner that could have a material adverse effect on our business, financial condition and results of operations.
Our business is subject to government regulations and changes in current or future laws or regulations could restrict our ability to operate our business as we currently do.
We are subject to federal, state, local and foreign regulation of our business, including regulation by the FAA, FCC, Environmental Protection Agency, Department of Transportation and OSHA. Both the FCC and the FAA regulate towers used for wireless communications and radio and television antennae and the FCC separately regulates transmitting devices operating on towers. Similar regulations exist in Mexico, Brazil and other foreign countries regarding wireless communications and the operation of communications towers. Local zoning authorities and community organizations are often opposed to construction in their communities and these regulations can delay, prevent or increase the cost of new tower construction, collocations or site upgrade projects, thereby limiting our ability to respond to customer demand. Existing regulatory policies may adversely affect the timing or cost of new tower construction and locations and additional regulations may be adopted which increase delays or result in additional costs to us or which prevent or restrict new tower construction in certain locations. These factors could adversely affect our operations.
Increasing competition in the tower industry may create pricing pressures that may adversely affect us.
Our industry is highly competitive, and our customers have numerous alternatives for leasing antenna space. Some of our competitors are larger and have greater financial resources than we do, while other competitors are in weak financial condition. Competitive pricing pressures for tenants on towers from these competitors could adversely affect our lease rates and service income. In addition, if we lose customers due to pricing, we may not be able to find new customers, leading to an accompanying adverse effect on our profitability. Increasing competition could also make the acquisition of high quality tower assets more costly.
Our competition includes:
| • | national independent tower companies; |
| • | wireless carriers that own towers and lease antenna space to other carriers; |
| • | site development companies that purchase antenna space on existing towers for wireless carriers and manage new tower construction; and |
| • | alternative site structures (e.g., building rooftops, billboards and utility poles). |
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We may not be able to maintain the leases for our tower sites.
Our property interests in our tower sites consist primarily of fee and leasehold interests, private easements and easements, licenses or rights-of-way granted by governmental entities. A loss of these interests, including losses arising from the bankruptcy of one or more of our lessors or from the default by one or more of our lessors under their mortgage financing, could interfere with our ability to conduct our business. We also may not be able to renew leases on favorable terms. In addition, we may not always have the ability to access, examine and verify all information regarding titles and other issues prior to completing a purchase or lease of tower sites.
Our costs could increase and our revenues could decrease due to perceived health risks from radio emissions, especially if these perceived risks are substantiated.
Public perception of possible health risks associated with cellular and other wireless communications media could slow the growth of wireless companies, which could in turn slow our growth. In particular, negative public perception of, and regulations regarding, these perceived health risks could slow the market acceptance of wireless communications services and increase opposition to future siting efforts. The potential connection between radio frequency emissions and certain negative health effects has been the subject of substantial study by the scientific community in recent years. To date, the results of these studies have been inconclusive.
If a connection between radio frequency emissions and possible negative health effects, including cancer, were established, or if the public perception that such a connection exists were to increase, our operations, costs and revenues would be materially and adversely affected. We do not maintain any significant insurance with respect to these matters.
The market for our Class A common stock may be volatile.
The market price of our Class A common stock could be subject to wide fluctuations. These fluctuations could be caused by:
| • | quarterly variations in our results of operations; |
| • | changes in earnings estimates by analysts; |
| • | conditions in our markets; or |
| • | general market or economic conditions. |
In addition, in recent years the stock market has experienced extreme price and volume fluctuations. These fluctuations have had a substantial effect on the market prices of many companies, often unrelated to the operating performance of the specific companies. These market fluctuations could adversely affect the price of our Class A common stock.
If we issue a significant number of shares of Class A common stock to satisfy certain obligations under our convertible notes, the trading price for our Class A common stock could be adversely affected.
Holders of our three series of convertible notes, totaling $873.6 million outstanding at December 31, 2002, may require us to repurchase all or any of their convertible notes on dates and for the prices indicated in the discussion contained under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Certain Contractual Commitments.” Our credit facilities restrict our ability to repurchase convertible notes for cash, except that we now have the right to use up to $217.0 million to prepay or repurchase the 2.25% convertible notes and, to the extent we do not and are not required to do so, to prepay or repurchase prior to June 30, 2004, any of our other convertible notes or our senior notes. We may, subject to certain conditions in the applicable indentures (including the condition that our Class A common stock trade on a national securities exchange or Nasdaq), elect to pay the repurchase price in shares of Class A common stock. Exercising this election or seeking to reduce the amount of outstanding convertible notes
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prior to these dates may involve the issuance of a significant number of shares of our Class A common stock, or securities convertible into or exercisable for these shares, which could cause the trading price of our Class A common stock to decline.
There will be dilution of the value of our Class A common stock when outstanding warrants become exercisable.
In January 2003, we issued warrants to purchase approximately 11.4 million shares of our Class A common stock in connection with our 12.25% senior subordinated discount notes offering. The shares underlying the warrants represented approximately 5.5% of our outstanding common stock at issuance (assuming all the warrants are exercised). These warrants will become exercisable on or after January 29, 2006 at an exercise price of $0.01 per share (see note 19 to our consolidated financial statements). The issuance of these shares will have a dilutive effect on the value of our Class A common stock when these warrants are exercised.
If we are unable to sell our Verestar subsidiary, we may incur additional costs if we have to wind down and liquidate this business.
In December 2002, we committed to a plan to sell Verestar, which previously comprised our satellite and fiber network access services segment, within the next twelve months. With the exception of guarantees of approximately $12.0 million of Verestar’s contractual obligations, we will have nominal, if any, obligations to fund Verestar’s business through the divestiture process. If we are unable to sell Verestar prior to December 31, 2003, however, we may be forced to discontinue its operations and liquidate its assets. If this were to occur, we could incur additional costs in connection with the winding down and liquidation of Verestar’s businesses, and our management could be distracted from the operations of our core leasing business during this process.
We maintain our corporate headquarters at 116 Huntington Avenue, Boston, Massachusetts, where we lease approximately 30,000 square feet of office space. Prior to December 2002, we owned the building containing this office space. Our operating segments occupy headquarters or regional offices, warehouses and manufacturing space which we move into and out of from time to time as our business needs change. At present, the properties used in these business segments are as follows:
| • | Our rental and management segment is organized on a regional basis without maintaining a separate headquarters facility. Of these regional offices, we own (or we hold a majority interest in) an aggregate of approximately 34,800 square feet and lease an aggregate of approximately 39,100 square feet. Sales and tower operations for wireless carrier towers are located in three United States regional offices in Gilbert, Arizona, Schaumburg, Illinois and Boston, Massachusetts. Our international offices are located in Mexico City, Mexico and Sao Paulo, Brazil. The broadcast tower division’s office is located in Westwood, Massachusetts. Our lease processing center is located in Woburn, Massachusetts and our related accounting operations are located in Atlanta, Georgia. |
| • | Our network development services segment does not maintain a headquarters but maintains key properties in: Columbia and West Columbia, South Carolina (where Kline Iron & Steel is located and maintains its steel manufacturing plant), and Alpharetta, Georgia where our engineering services business is located. We own an aggregate of approximately 639,000 square feet and lease an aggregate of approximately 330,000 square feet. |
| • | Our former satellite and fiber network access services segment (discontinued operations) maintains its headquarters in Fairfax, Virginia in approximately 21,000 square feet of leased office space. |
Our interests in individual communications sites are comprised of a variety of fee and leasehold interests. Of the approximately 15,000 towers comprising our portfolio, giving effect to pending transactions, approximately 19% are located on parcels of land that we own and approximately 81% are either located on parcels of land that
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we have leasehold interests created by long-term lease agreements, private easements and easements, licenses or rights-of-way granted by government entities, or are sites that we manage for third parties. In rural areas, a wireless communications site typically consists of 10,000 square feet tracts, which supports towers, equipment shelters and guy wires to stabilize the structure, whereas a broadcast tower site typically consists of a tract of land up to twenty-acres. Less than 2,500 square feet are required for a monopole or self-supporting tower structure of the kind typically used in metropolitan areas for wireless communication tower sites. Land leases generally have an initial term of five years with three or four additional automatic renewal periods of five years, for a total of twenty to twenty-five years.
Pursuant to our credit facilities, the lenders have liens on, among other things, all towers, leasehold interests, tenant leases, contracts relating to the management of towers for others, cash, accounts receivable, the stock and other equity interests of virtually all of our subsidiaries and all intercompany debt, fixtures, inventory and other personal property, including intellectual property, certain fee interests, and any proceeds of the foregoing.
We believe that our owned and leased facilities are suitable and adequate to meet our anticipated needs.
We periodically become involved in various claims and lawsuits that are incidental to our business. We believe, after consultation with counsel, that no matters currently pending would, in the event of an adverse outcome, have a material impact on our consolidated financial position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders in the fourth quarter of 2002.
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| ITEM | 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER |
MATTERS
The following table presents reported high and low sale prices of our Class A common stock on the Composite Tape of the New York Stock Exchange (NYSE) for the years 2002 and 2001.
| 2002 |
High |
Low | ||||
| Quarter ended March 31 |
$ |
10.40 |
$ |
3.50 | ||
| Quarter ended June 30 |
|
5.65 |
|
2.70 | ||
| Quarter ended September 30 |
|
3.55 |
|
1.10 | ||
| Quarter ended December 31 |
|
4.29 |
|
0.60 | ||
| 2001 |
||||||
| Quarter ended March 31 |
|
41.50 |
|
17.70 | ||
| Quarter ended June 30 |
|
28.75 |
|
14.20 | ||
| Quarter ended September 30 |
|
20.62 |
|
9.50 | ||
| Quarter ended December 31 |
|
16.30 |
|
5.25 | ||
On March 12, 2003, the closing price of our Class A common stock was $4.87 as reported on the NYSE.
The outstanding shares of common stock and number of registered holders as of December 31, 2002 were as follows:
| Class | ||||||
| A |
B |
C | ||||
| Outstanding shares |
185,499,028 |
7,917,070 |
2,267,813 | |||
| Registered holders |
893 |
58 |
1 | |||
Dividends
We have never paid a dividend on any class of common stock. We anticipate that we will retain future earnings, if any, to fund the development and growth of our business. We do not anticipate paying cash dividends on shares of common stock in the foreseeable future. Our borrower subsidiaries are prohibited under the terms of their credit facilities from paying cash dividends or making other distributions on, or making redemptions, purchases or other acquisitions of, their capital stock or other equity interests, including preferred stock, except that, beginning on April 15, 2004, if no default exists or would be created thereby under the credit facilities, our borrower subsidiaries may pay cash dividends or make other distributions to the extent that restricted payments, as defined in the credit facilities, do not exceed 50% of excess cash flow, as defined in the credit facilities, for the preceding calendar year. The 12.25% senior subordinated discount notes (issued in January 2003) of American Towers, Inc. (ATI), our principal operating subsidiary, impose similar limitations on the ability of ATI and certain of our subsidiaries that have guaranteed the discount notes (sister guarantors) to pay dividends and make other distributions. The indenture for our 9 3/8% senior notes due 2009 imposes significant limitations on the payment of dividends by us to our stockholders.
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ITEM 6. SELECTED FINANCIAL DATA
We have derived the following selected financial data from our audited consolidated financial statements, certain of which are included in this Annual Report on Form 10-K. You should read the selected financial data in conjunction with our “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our audited consolidated financial statements and the related notes to those consolidated financial statements included in this Annual Report on Form 10-K. Prior to our separation from our former parent on June 4, 1998, we operated as a subsidiary of American Radio Systems Corporation (American Radio) and not as an independent company. Therefore, our results of operations and the financial condition information for that period may be different from what they would have been had we operated as a separate, independent company.
Our continuing operations are reported in two segments, rental and management and network development services. In December 2002, we committed to a plan to dispose of Verestar (previously comprising our entire satellite and fiber network access services segment) by sale within the next twelve months. In the fourth quarter of 2002, we also committed to a plan to sell Flash Technologies (previously included in the network development services segment) and two office buildings (previously included in our rental and management segment). In July 2002, we consummated the sale of MTS Components (previously included in our network development services segment). In accordance with generally accepted accounting principles, the consolidated statements of operations for all periods reported in this “Selected Financial Data” have been adjusted to reflect these businesses as discontinued operations.
Year-to-year comparisons are significantly affected by our acquisitions, dispositions and construction of towers. Our principal acquisitions and dispositions are described in “Business—Recent Transactions” and in the notes to our consolidated financial statements.
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| Year Ended December 31, |
||||||||||||||||||||
| 2002 |
2001 |
2000 |
1999 |
1998 |
||||||||||||||||
| (In thousands, except per share data) |
||||||||||||||||||||
| Statement of Operations Data: |
||||||||||||||||||||
| Revenues: |
||||||||||||||||||||
| Rental and management |
$ |
548,923 |
|
$ |
435,302 |
|
$ |
270,298 |
|
$ |
131,245 |
|
$ |
60,505 |
| |||||
| Network development services |
|
239,497 |
|
|
349,848 |
|
|
239,616 |
|
|
67,039 |
|
|
23,315 |
| |||||
| Total operating revenues |
|
788,420 |
|
|
785,150 |
|
|
509,914 |
|
|
198,284 |
|
|
83,820 |
| |||||
| Operating Expenses: |
||||||||||||||||||||
| Rental and management |
|
228,519 |
|
|
211,811 |
|
|
136,300 |
|
|
60,915 |
|
|
29,455 |
| |||||
| Network development services |
|
217,690 |
|
|
312,926 |
|
|
210,313 |
|
|
55,217 |
|
|
19,479 |
| |||||
| Depreciation and amortization (1) |
|
316,876 |
|
|
346,020 |
|
|
241,211 |
|
|
116,242 |
|
|
47,177 |
| |||||
| Corporate general and administrative expense |
|
24,349 |
|
|
26,478 |
|
|
14,958 |
|
|
9,136 |
|
|
5,099 |
| |||||
| Restructuring expense |
|
10,638 |
|
|
5,236 |
|
||||||||||||||
| Development expense |
|
5,896 |
|
|
7,895 |
|
|
14,433 |
|
|
1,406 |
|
||||||||
| Tower separation expense (2) |
|
12,772 |
| |||||||||||||||||
| Impairments and net loss on sale of long-lived assets (3) |
|
90,734 |
|
|
74,260 |
|
||||||||||||||
| Total operating expenses |
|
894,702 |
|
|
984,626 |
|
|
617,215 |
|
|
242,916 |
|
|
113,982 |
| |||||
| Operating loss from continuing operations |
|
(106,282 |
) |
|
(199,476 |
) |
|
(107,301 |
) |
|
(44,632 |
) |
|
(30,162 |
) | |||||
| Interest income, TV Azteca, net |
|
13,938 |
|
|
14,377 |
|
|
12,679 |
|
|
1,856 |
|
||||||||
| Interest income |
|
3,514 |
|
|
28,622 |
|
|
15,954 |
|
|
17,850 |
|
|
9,196 |
| |||||
| Interest expense |
|
(255,645 |
) |
|
(267,825 |
) |
|
(151,702 |
) |
|
(27,274 |
) |
|
(23,228 |
) | |||||
| (Loss) income from investments and other expense |
|
(25,579 |
) |
|
(38,797 |
) |
|
(2,434 |
) |
|
367 |
|
||||||||
| Loss on term loan cancellation (4) |
|
(7,231 |
) |
|||||||||||||||||
| Note conversion expense (5) |
|
(26,336 |
) |
|
(16,968 |
) |
||||||||||||||
| Minority interest in net earnings of subsidiaries |
|
(2,118 |
) |
|
(318 |
) |
|
(202 |
) |
|
(142 |
) |
|
(287 |
) | |||||
| Loss from continuing operations before income taxes |
|
(379,403 |
) |
|
(489,753 |
) |
|
(249,974 |
) |
|
(51,975 |
) |
|
(44,481 |
) | |||||
| Income tax benefit |
|
64,634 |
|
|
99,875 |
|
|
65,897 |
|
|
4,479 |
|
|
5,511 |
| |||||
| Loss from continuing operations before extraordinary losses and cumulative effect of change in accounting principle (6) |
$ |
(314,769 |
) |
$ |
(389,878 |
) |
$ |
(184,077 |
) |
$ |
(47,496 |
) |
$ |
(38,970 |
) | |||||
| Basic and diluted loss per common share from continuing operations before extraordinary losses and cumulative effect of change in accounting principle (6) |
$ |
(1.61 |
) |
$ |
(2.04 |
) |
$ |
(1.09 |
) |
$ |
(0.32 |
) |
$ |
(0.49 |
) | |||||
| Weighted average common shares outstanding (6) |
|
195,454 |
|
|
191,586 |
|
|
168,715 |
|
|
149,749 |
|
|
79,786 |
| |||||
| December 31, |
||||||||||||||||||||
| 2002 |
2001 |
2000 |
1999 |
1998 |
||||||||||||||||
| (In thousands) |
||||||||||||||||||||
| Balance Sheet Data: |
||||||||||||||||||||
| Cash and cash equivalents (including restricted cash) (7) |
$ |
127,292 |
|
$ |
130,029 |
|
$ |
128,074 |
|
$ |
25,212 |
|
$ |
186,175 |
| |||||
| Property and equipment, net |
|
2,734,885 |
|
|
3,287,573 |
|
|
2,296,670 |
|
|
1,092,346 |
|
|
449,476 |
| |||||
| Total assets |
|
5,662,203 |
|
|
6,829,723 |
|
|
5,660,679 |
|
|
3,018,866 |
|
|
1,502,343 |
| |||||
| Long-term obligations, including current portion |
|
3,464,679 |
|
|
3,561,960 |
|
|
2,468,223 |
|
|
740,822 |
|
|
281,129 |
| |||||
| Total stockholders’ equity |
|
1,740,323 |
|
|
2,869,196 |
|
|
2,877,030 |
|
|
2,145,083 |
|
|
1,091,746 |
| |||||
21
Table of Contents
| (1) | As of January 1, 2002, we adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” (SFAS No. 142). Accordingly, we ceased amortizing goodwill on January 1, 2002. The statements of operations for all periods presented except for the year ended December 31, 2002 include goodwill amortization. The adoption of SFAS No. 142 reduced amortization expense in continuing operations by approximately $70.0 million for the year ended December 31, 2002. |
| (2) | Tower separation expense refers to the one-time expense incurred as a result of our separation from American Radio. |
| (3) | Impairments and net loss on sale of long-lived assets for the year ended December 31, 2002 was $90.7 million and was comprised primarily of impairment charges and net loss on sale of certain non-core towers aggregating $46.8 million and an impairment charge of $40.2 million related to the write-off of construction-in-progress costs associated with approximately 800 sites that we no longer plan to build. Impairments and net loss on sales of long-lived assets for the year ended December 31, 2001 was $74.3 million and was primarily comprised of impairment charges on non-core towers of $11.7 million and an impairment charge of $62.6 million related to the write-off of construction in progress costs on sites that we no longer intended to build. |
| (4) | Represents the write-off of certain deferred financing costs associated with our term loan C credit facility which was terminated in 2002. |
| (5) | Note conversion expense represents the fair value of incremental stock issued to holders of our 2.25% and 6.25% convertible notes to induce them to convert their holdings prior to the first scheduled redemption date. |
| (6) | We computed basic and diluted loss per common share from continuing operations before extraordinary losses and cumulative effect of change in accounting principle using the weighted average number of shares outstanding during each period presented. Shares outstanding following the separation from our former parent American Radio are assumed to be outstanding for all periods presented prior to June 4, 1998. We have excluded shares issuable upon exercise of options and other common stock equivalents from the computations, as their effect is anti-dilutive. |
| (7) | Includes at December 31, 2001 and 2000 approximately $94.1 million and $46.0 million, respectively, of restricted funds required under our credit facilities to be held in escrow through August 2002 to fund scheduled interest payments on our outstanding senior and convertible notes. |
22
Table of Contents
| ITEM 7. MANAGEMENT’S | DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The discussion and analysis of our financial condition and results of operations that follows are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ significantly from these estimates under different assumptions or conditions. This discussion should be read in conjunction with our consolidated financial statements and the accompanying notes thereto and the information set forth under the heading “Critical Accounting Policies” on page 40.
During the years ended December 31, 2002, 2001, and 2000, we acquired various communications sites, service businesses and satellite and fiber network access related businesses for aggregate purchase prices of approximately $55.7 million, $827.2 million, and $1.8 billion, respectively. Our results of operations only reflect the acquired towers and businesses in the periods following their respective dates of acquisition. As such, our results of operations for the year ended December 31, 2002 are not comparable to the year ended December 31, 2001, and the results for the year ended December 31, 2001 are not comparable to the year ended December 31, 2000.
Our continuing operations are reported in two segments, rental and management and network development services. Management focuses on segment profit (loss) as a means to measure operating performance in these business segments. We define segment operating profit (loss) as segment revenues less segment operating expenses excluding depreciation and amortization, corporate general and administrative expense, restructuring expense, development expense and impairments and net loss on sale of long-lived assets. Segment profit (loss) for the rental and management segment also includes interest income, TV Azteca, net (see note 16 to the consolidated financial statements).
In December 2002, we committed to a plan to dispose of Verestar (which previously comprised our entire satellite and fiber network access services segment) by sale within the next twelve months. In the fourth quarter of 2002, we also committed to a plan to sell Flash Technologies (previously included in our network development services segment) and two office buildings (previously included in our rental and management segment). In July 2002, we consummated the sale of MTS Components (previously included in our network development services segment). In accordance with generally accepted accounting principles, the consolidated statements of operations for periods reported in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” have been adjusted to reflect these businesses as discontinued operations.
23
Table of Contents
Years Ended December 31, 2002 and 2001
As of December 31, 2002, we owned or operated approximately 14,600 communications sites, as compared to approximately 14,500 communications sites as of December 31, 2001. The acquisitions and construction completed throughout 2001 and, to a lesser extent, 2002, have significantly affected operations for the year ended December 31, 2002, as compared to the year ended December 31, 2001.
| Year Ended December 31, |
Amount of Increase (Decrease) |
Percent Increase (Decrease) |
|||||||||||||
| 2002 |
2001 |
||||||||||||||
| (In thousands) |
|||||||||||||||
| REVENUES: |
|||||||||||||||
| Rental and management |
$ |
548,923 |
|
$ |
435,302 |
|
$ |
113,621 |
|
26 |
% | ||||
| Network development services |
|
239,497 |
|
|
349,848 |
|
|
(110,351 |
) |
(32 |
) | ||||
| Total revenues |
|
788,420 |
|
|
785,150 |
|
|
3,270 |
|
1 |
| ||||
| OPERATING EXPENSES: |
|||||||||||||||
| Rental and management |
|
228,519 |
|
|
211,811 |
|
|
16,708 |
|
8 |
| ||||
| Network development services |
|
217,690 |
|
|
312,926 |
|
|
(95,236 |
) |
(30 |
) | ||||
| Depreciation and amortization |
|
316,876 |
|
|
346,020 |
|
|
(29,144 |
) |
(8 |
) | ||||
| Corporate general and administrative expense |
|
24,349 |
|
|
26,478 |
|
|
(2,129 |
) |
(8 |
) | ||||
| Restructuring expense |
|
10,638 |
|
|
5,236 |
|
|
5,402 |
|
103 |
| ||||
| Development expense |
|
5,896 |
|
|
7,895 |
|
|
(1,999 |
) |
(25 |
) | ||||
| Impairments and net loss on sale of long-lived assets |
|
90,734 |
|
|
74,260 |
|
|
16,474 |
|
22 |
| ||||
| Total operating expenses |
|
894,702 |
|
|
984,626 |
|
|
(89,924 |
) |
(9 |
) | ||||
| OTHER INCOME (EXPENSE): |
|||||||||||||||
| Interest income, TV Azteca, net of interest expense of $1,494 and $1,160, respectively |
|
13,938 |
|
|
14,377 |
|
|
(439 |
) |
(3 |
) | ||||
| Interest income |
|
3,514 |
|
|
28,622 |
|
|
(25,108 |
) |
(88 |
) | ||||
| Interest expense |
|
(255,645 |
) |
|
(267,825 |
) |
|
12,180 |
|
(5 |
) | ||||
| Loss on investments and other expense |
|
(25,579 |
) |
|
(38,797 |
) |
|
13,218 |
|
(34 |
) | ||||
| Loss on term loan cancellation |
|
(7,231 |
) |
|
(7,231 |
) |
N/A |
| |||||||
| Note conversion expense |
|
(26,336 |
) |
|
26,336 |
|
N/A |
| |||||||
| Minority interest in net earnings of subsidiaries |
|
(2,118 |
) |
|
(318 |
) |
|
(1,800 |
) |
566 |
| ||||
| Income tax benefit |
|
64,634 |
|
|
99,875 |
|
|
(35,241 |
) |
(35 |
) | ||||
| Loss from discontinued operations, net |
|
(263,427 |
) |
|
(60,216 |
) |
|
(203,211 |
) |
337 |
| ||||
| Extraordinary loss on extinguishment of debt, net |
|
(1,065 |
) |
|
(1,065 |
) |
N/A |
| |||||||
| Cumulative effect of change in accounting principle, |
|
(562,618 |
) |
|
(562,618 |
) |
N/A |
| |||||||
| Net loss |
$ |
(1,141,879 |
) |
$ |
(450,094 |
) |
$ |
(691,785 |
) |
154 |
% | ||||
Total Revenues
Total revenues for the year ended December 31, 2002 were $788.4 million, an increase of $3.3 million from the year ended December 31, 2001. The increase resulted from an increase in rental and management revenues of $113.6 million, offset by a decrease in network development services revenue of $110.3 million.
24
Table of Contents
Rental and Management Revenue
Rental and management revenue for the year ended December 31, 2002 was $548.9 million, an increase of $113.6 million from the year ended December 31, 2001. The increase resulted primarily from leasing activity on towers acquired and constructed subsequent to January 1, 2001 and, to a lesser extent, increased revenue on towers that existed as of January 1, 2001. The 4,270 towers that we have acquired and constructed since January 1, 2001 have significantly increased our revenues. The increased depth and strength of our national and international portfolio provided us with a much larger base of tower revenue for a full year in 2002 as compared to the year ended December 31, 2001. The remaining component of the increase is attributable to an increase in same tower revenue related to towers included in our portfolio as of January 1, 2001. This increase was driven by our ability to market and add additional tenants to those towers.
We continue to believe that our leasing revenue, which drives our core business, is likely to grow more rapidly than revenue from our network development services segment due to our expected increase in utilization of existing tower capacity. In addition, we believe that the majority of our leasing activity will continue to come from broadband type customers.
Network Development Services Revenue
Network development services revenue for the year ended December 31, 2002 was $239.5 million, a decrease of $110.3 million from the year ended December 31, 2001. The significant decline in revenues during 2002 resulted primarily from decreases in revenue related to construction management, installation, tower maintenance services and radio frequency engineering services, resulting from a corresponding decrease in the growth of the wireless telecommunications industry.
Total Operating Expenses
Total operating expenses for the year ended December 31, 2002 were $894.7 million, a decrease of $89.9 million from the year ended December 31, 2001. The principal component of the decrease was attributable to expense decreases in our network development services segment of $95.2 million. The remaining components of the decrease were attributable to decreases in depreciation and amortization of $29.1 million, as well as decreases in corporate general and administrative expense of $2.1 million and development expense of $2.0 million. These decreases were offset by increases in expenses within our rental and management segment of $16.7 million, coupled with increases in impairments and net loss on sale of long-lived assets of $16.5 million and restructuring expense of $5.4 million.
Rental and Management Expense/Segment Profit
Rental and management expense for the year ended December 31, 2002 was $228.5 million, an increase of $16.7 million from the year ended December 31, 2001. The majority of the increase resulted from incremental operating expenses incurred in 2002 for the more than 3,700 towers that were acquired or constructed during 2001 (due to a full year of inclusion in our results of operations in 2002). The balance of the increase reflects operating expenses incurred in 2002 for the more than 570 towers acquired/constructed in 2002. These increases were partially offset by cost reduction efforts in administrative and operational functions.
Rental and management segment profit for the year ended December 31, 2002 was $334.3 million, an increase of $96.5 million from the year ended December 31, 2001. The increase resulted primarily from incremental revenues and operating profit from both newly acquired and constructed towers and existing towers.
Network Development Services Expense/Segment Profit
Network development services expense for the year ended December 31, 2002 was $217.7 million, a decrease of $95.2 million from the year ended December 31, 2001. The majority of the decrease was due to an overall decline in demand for the services performed by this segment, as discussed above, coupled with decreases in overhead and related infrastructure costs.
25
Table of Contents
Network development services segment profit for the year ended December 31, 2002 was $21.8 million, a decrease of $15.1 million from the year ended December 31, 2001. The decrease resulted primarily from a decline in revenue, as discussed above, partially offset by a reduction in personnel, overhead and infrastructure costs as a result of restructuring initiatives that were implemented in 2002 and 2001.
Depreciation and Amortization
Depreciation and amortization for the year ended December 31, 2002 was $316.9 million, a decrease of $29.1 million from the year ended December 31, 2001. The decrease reflects the adoption of SFAS No. 142, which reduced amortization expense by approximately $70.0 million. This decrease was partially offset by an increase in depreciation expense related to the acquisition/construction of approximately $236.9 million of property and equipment in 2002 and a full year of depreciation on the $1.4 billion of property and equipment acquired in 2001.
Corporate General and Administrative Expense
Corporate general and administrative expense for the year ended December 31, 2002 was $24.3 million, a decrease of $2.1 million from the year ended December 31, 2001. The majority of the decrease is a result of cost reduction efforts in adminstrative and information technology functions related to our restructuring initiatives.
Restructuring Expense
In November 2001, we announced a restructuring of our organization to include a reduction in the scope of our tower development and acquisition activities and the centralization of certain operational and administrative functions. As a result of this continuing initiative, during the year ended December 31, 2002, we incurred employee separation costs associated with the termination of approximately 460 employees (primarily development and administrative), as well as costs associated with the termination of lease obligations and other incremental facility closing costs aggregating $10.6 million, an increase of $5.4 million from the year ended December 31, 2001.
As of December 31, 2002, we have completed our restructuring initiatives to consolidate operations and do not expect future charges associated with this restructuring.
Development Expense
Development expense for the year ended December 31, 2002 was $5.9 million, a decrease of $2.0 million from the year ended December 31, 2001. This decrease resulted primarily from reduced expenses related to tower site data gathering and acquisition costs as a result of our curtailed acquisition and development related activities.
Impairments and Net Loss on Sale of Long-Lived Assets
Impairments and net loss on sale of long-lived assets for the year ended December 31, 2002 was $90.7 million, an increase of $16.5 million from the year ended December 31, 2001. The increase was primarily attributable to an increase in impairment charges and net loss on sale of assets of approximately $35.1 million related to the write-down and sale of certain non-core towers, partially offset by a decrease in impairment charges of approximately $22.4 million related to the write-off of construction-in progress costs associated with sites that we no longer plan to build.
26
Table of Contents
Interest Income
Interest income for the year ended December 31, 2002 was $3.5 million, a decrease of $25.1 million from the year ended December 31, 2001. The decrease resulted primarily from a decrease in interest earned on invested cash primarily attributable to a decrease in cash on hand during 2002, coupled with lower interest rates.
Interest Expense
Interest expense for the year ended December 31, 2002 was $255.6 million, a decrease of $12.2 million from the year ended December 31, 2001. The majority of the decrease, $26.6 million, resulted primarily from a reduction in the interest rates under our credit facilities. The decrease was partially offset by an increase of $7.6 million related to a full year of interest incurred on our senior notes (issued in January 2001) and a reduction in capitalized interest of $9.5 million as a result of our reduced capital expenditures in 2002.
Loss on Investments and Other Expense
Loss on investments and other expense for the year ended December 31, 2002 was $25.6 million, a decrease of $13.2 million from the year ended December 31, 2001. The decrease resulted primarily from decreased impairment and equity losses on our cost and equity investments offset by increased losses on foreign currency exchange related to our Mexican subsidiary.
Loss on Term Loan Cancellation
In January 2002, we terminated the $250.0 million multi-draw term loan C component of our credit facilities and recorded a non-cash charge of approximately $7.2 million related to the write-off of certain deferred financing fees associated with that component. No similar charge was incurred for the year ended December 31, 2001.
Note Conversion Expense
During the year ended December 31, 2001, we acquired a portion of our 2.25% convertible notes in exchange for shares of our Class A common stock. As a consequence of those negotiated exchanges with certain of our noteholders, we recorded a non-cash charge of $26.3 million. These charges represent the fair value of incremental stock issued to noteholders to induce them to convert their holdings prior to the first scheduled redemption date. No similar charge was incurred for the year ended December 31, 2002.
Income Tax Benefit
The income tax benefit for the year ended December 31, 2002 was $64.6 million, a decrease of $35.2 million from the year ended December 31, 2001. The effective tax rate was 17.0% for the year ended December 31, 2002, as compared to 20.4% for the year ended December 31, 2001. The decrease in the effective tax rate was primarily attributable to a valuation allowance of $27.5 million recorded in 2002 in connection with our plan to implement a tax planning strategy to accelerate the utilization of certain federal net operating losses (the valuation allowance represents the estimated lost tax benefit and costs associated with implementing this strategy). This decrease is offset by the impact of our ceasing to amortize goodwill (the majority of which is non-deductible for tax purposes) in 2002 in connection with the adoption of SFAS No. 142.
The effective tax rate on loss from continuing operations in 2002 differs from the statutory rate due primarily to valuation allowances related to our state net operating losses, capital losses, tax planning strategy and foreign items. The effective tax rate in 2001 differs from the statutory rate due to valuation allowances related to state net operating losses and capital losses and other non-deductible items consisting principally of goodwill amortization, and to a lesser extent, note conversion expense.
27
Table of Contents
SFAS No. 109, “Accounting for Income Taxes,” requires that we record a valuation allowance when it is “more likely than not that some portion or all of the deferred tax assets will not be realized.” At December 31, 2002, we have provided a valuation allowance primarily related to state net operating loss carryforwards, capital loss carryforwards and the lost tax benefit and costs associated with implementing our tax planning strategy. We have not provided a valuation allowance for the remaining deferred tax assets, primarily federal net operating loss carryforwards, as management believes that we will have sufficient time to realize these assets during the carryforward period.
We intend to recover a portion of our deferred tax asset from our tax planning strategy to accelerate the utilization of certain federal net operating losses. The recoverability of our remaining net deferred tax asset has been assessed utilizing stable state (no growth) projections based on our current operations. The projections show a significant decrease in depreciation and interest expense in the later years of the carryforward period as a result of a significant portion of our assets being fully depreciated during the first fifteen years of the carryforward period and debt repayments reducing interest expense. Accordingly, the recoverability of our net deferred tax asset is not dependent on material improvements to operations, material asset sales or other non-routine transactions. Based on our current outlook of future taxable income during the carryforward period, management believes that our net deferred tax asset will be realized. The realization of our deferred tax assets as of December 31, 2002 will be dependent upon our ability to generate approximately $800.0 million in taxable income from January 1, 2003 to December 31, 2022. If we are unable to generate sufficient taxable income in the future, or accelerate the utilization of losses as contemplated in our tax planning strategy, we will be required to reduce our net deferred tax asset through a charge to income tax expense, which would result in a corresponding decrease in stockholders’ equity.
Loss from Discontinued Operations, Net
In December 2002, we committed to a plan to dispose of our wholly owned subsidiary Verestar by sale within the next twelve months. In the fourth quarter of 2002, we also committed to a plan to sell Flash Technologies and two office buildings held primarily as rental property. In July 2002, we consummated the sale of our MTS Components operations. Accordingly, we presented the results of these operations, $(249.9) million and $(60.2) million, net of tax, as loss from discontinued operations, net, in the accompanying statements of operations for the years ended December 31, 2002 and 2001, respectively. The net loss from discontinued operations for the year ended December 31, 2002 also includes a net loss on disposal from the sale of MTS Components and the two office buildings of approximately $13.5 million, net of a tax benefit.
All of these businesses held for sale as of December 31, 2002 and a subsidiary of Verestar were sold in the first quarter of 2003. We expect to sell the remaining portion of Verestar by December 31, 2003.
Extraordinary Loss on Extinguishment of Debt, Net
In February 2002, we repaid the $95.0 million outstanding under our Mexican Credit Facility with borrowings under our credit facilities. As a result of such repayment, we recognized an extraordinary loss on extinguishment of debt of approximately $1.1 million, net of an income tax benefit of $0.6 million for the year ended December 31, 2002. No similar losses were recorded in 2001.
Cumulative Effective of Change in Accounting Principle, Net
As of January 1, 2002, we adopted the provisions of SFAS No. 142 “Goodwill and Other Intangible Assets.” As a result, we recognized a $562.6 million non-cash charge (net of a tax benefit of $14.4 million) as the cumulative effect of change in accounting principle related to the write-down of goodwill to its fair value. The non-cash charge was comprised of goodwill within our satellite and fiber network access services segment ($189.3 million) and network development services segment ($387.8 million). In accordance with the provisions of SFAS No. 142, the charge is reflected as of January 1, 2002 and included in our results of operations for the year ended December 31, 2002.
28
Table of Contents
Years Ended December 31, 2001 and 2000
As of December 31, 2001, we owned or operated approximately 14,500 communications sites, as compared to approximately 11,000 communications sites as of December 31, 2000. The acquisitions and construction completed in 2001 and 2000 have significantly affected operations for the year ended December 31, 2001, as compared to the year ended December 31, 2000.
| Year Ended December 31, |
Amount of Increase (Decrease) |
Percent Increase (Decrease) |
|||||||||||||
| 2001 |
2000 |
||||||||||||||
| (In thousands) |
|||||||||||||||
| REVENUES: |
|||||||||||||||
| Rental and management |
$ |
435,302 |
|
$ |
270,298 |
|
$ |
165,004 |
|
61 |
% | ||||
| Network development services |
|
349,848 |
|
|
239,616 |
|
|
110,232 |
|
46 |
| ||||
| Total operating revenues |
|
785,150 |
|
|
509,914 |
|
|
275,236 |
|
54 |
| ||||
| OPERATING EXPENSES: |
|||||||||||||||
| Rental and management |
|
211,811 |
|
|
136,300 |
|
|
75,511 |
|
55 |
| ||||
| Network development services |
|
312,926 |
|
|
210,313 |
|
|
102,613 |
|
49 |
| ||||
| Depreciation and amortization |
|
346,020 |
|
|
241,211 |
|
|
104,809 |
|
43 |
| ||||
| Corporate general and administrative expense |
|
26,478 |
|
|
14,958 |
|
|
11,520 |
|
77 |
| ||||
| Restructuring expense |
|
5,236 |
|
|
5,236 |
|
N/A |
| |||||||
| Development expense |
|
7,895 |
|
|
14,433 |
|
|
(6,538 |
) |
(45 |
) | ||||
| Impairments and net loss on sale of long-lived assets |
|
74,260 |
|
|
74,260 |
|
N/A |
| |||||||
| Total operating expenses |
|
984,626 |
|
|
617,215 |
|
|
367,411 |
|
60 |
| ||||
| OTHER INCOME (EXPENSE): |
|||||||||||||||
| Interest income, TV Azteca, net of interest expense of $1,160 and $1,047, respectively |
|
14,377 |
|
|
12,679 |
|
|
1,698 |
|
13 |
| ||||
| Interest income |
|
28,622 |
|
|
15,954 |
|
|
12,668 |
|
79 |
| ||||
| Interest expense |
|
(267,825 |
) |
|
(151,702 |
) |
|
(116,123 |
) |
77 |
| ||||
| Loss on investments and other expense |
|
(38,797 |
) |
|
(2,434 |
) |
|
(36,363 |
) |
1,494 |
| ||||
| Note conversion expense |
|
(26,336 |
) |
|
(16,968 |
) |
|
(9,368 |
) |
55 |
| ||||
| Minority interest in net earnings of subsidiaries |
|
(318 |
) |
|
(202 |
) |
|
(116 |
) |
57 |
| ||||
| Income tax benefit |
|
99,875 |
|
|
65,897 |
|
|
33,978 |
|
52 |
| ||||
| Loss from discontinued operations, net |
|
(60,216 |
) |
|
(6,213 |
) |
|
(54,003 |
) |
869 |
| ||||
| Extraordinary losses on extinguishment of debt, net |
|
(4,338 |
) |
|
4,338 |
|
N/A |
| |||||||
| Net loss |
$ |
(450,094 |
) |
$ |
(194,628 |
) |
$ |
(255,466 |
) |
131 |
% | ||||
Total Revenues
Total revenues for the year ended December 31, 2001 were $785.2 million, an increase of $275.2 million from the year ended December 31, 2000. The increase resulted from increases in rental and management revenues of $165.0 million and increases in network development services revenue of $110.2 million.
Rental and Management Revenue
Rental and management revenue for the year ended December 31, 2001 was $435.3 million, an increase of $165.0 million from the year ended December 31, 2000. The increase resulted primarily from leasing activity on towers acquired and constructed subsequent to January 1, 2000 and, to a lesser extent, increased revenue on towers that existed as of January 1, 2000. The 9,900 towers that we have acquired and constructed since January 1, 2000 have significantly increased our revenues. The increased depth and strength of our national and
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international portfolio provided us with a much larger base of tower revenue for a full year in 2001 as compared to the year ended December 31, 2000. The remaining component of the increase is attributable to an increase in same tower revenue related to towers included in our portfolio as of January 1, 2000. This increase was driven by our ability to market and add additional tenants to those towers.
Network Development Services Revenue
Network development services revenue for the year ended December 31, 2001 was $349.8 million, an increase of $110.2 million from the year ended December 31, 2000. The significant growth in revenues during 2001 resulted primarily from increased volume related to construction management, antennae and line installation and related collocation services, and tower site maintenance. The increase was also driven by a full year of revenue in 2001 related to acquisitions consummated in 2000, primarily a steel fabrication business. These increases were partially offset by decreases in revenue related to radio frequency engineering services.
Total Operating Expenses
Total operating expenses for the year ended December 31, 2001 were $984.6 million, an increase of $367.4 million from the year ended December 31, 2000. The increase was attributable to depreciation and amortization of $104.8 million, increases in expenses within rental and management of $75.5 million, network development services of $102.6 million, restructuring expense of $5.2 million, corporate general and administrative expense of $11.5 million and impairments and net loss on sale of long-lived assets of $74.3 million. These increases were offset by a decrease in development expense of $6.5 million.
Rental and Management Expense/Segment Profit
Rental and management expense for the year ended December 31, 2001 was $211.8 million, an increase of $75.5 million from the year ended December 31, 2000. The majority of the increase resulted from incremental operating expenses incurred in 2001 for the more than 6,200 towers that were acquired or constructed during 2000 (due to a full year of inclusion in our results of operations in 2001). The balance of the increase reflects operating expenses incurred in 2001 for the more than 3,700 towers acquired/constructed in 2001. These increases were partially offset by cost reduction efforts in administrative and operational functions.
Rental and management segment profit for the year ended December 31, 2001 was $237.9 million, an increase of $91.2 million from the year ended December 31, 2000. The increase resulted primarily from incremental revenues and operating profit from both newly acquired and constructed towers and existing towers.
Network Development Services Expense/Segment Profit
Network development services expense for the year ended December 31, 2001 was $312.9 million, an increase of $102.6 million from the year ended December 31, 2000. The majority of the increase resulted from overall increases in volume (as discussed above), incremental expenses related to the operations of acquisitions and increases in overhead costs necessary to support both internal construction and external sales.
Network development services segment profit for the year ended December 31, 2001 was $36.9 million, an increase of $7.6 million from the year ended December 31, 2000. The increase resulted primarily from an increase in the volume of services, as discussed above.
Depreciation and Amortization
Depreciation and amortization for the year ended December 31, 2001 was $346.0 million, an increase of $104.8 million from the year ended December 31, 2000. The principal component of the increase is an increase
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in depreciation expense of $86.7 million. This is primarily a result of our purchase, construction and acquisition of approximately $1.4 billion of property and equipment during 2001 and a full year of depreciation on acquisitions and additions made in 2000. The other component of the increase is increased amortization of $31.1 million, resulting from our recording and amortizing approximately $184.1 million of goodwill and other intangible assets related to acquisitions consummated during 2001, and a full year of amortization on goodwill and other intangible assets related to acquisitions made in 2000.
Corporate General and Administrative Expense
Corporate general and administrative expense for the year ended December 31, 2001 was $26.5 million, an increase of $11.5 million from the year ended December 31, 2000. The majority of the increase is a result of increased personnel and information technology costs to support our overall growth, coupled with expenses incurred to implement a new company-wide Enterprise Resource Planning (ERP) system.
Restructuring Expense
In November 2001, we announced a restructuring of our organization to include a reduction in the scope of our tower development and acquisition activities and the centralization of certain operating and administrative functions. As part of that initiative, we incurred employee separation costs relating to the termination of approximately 525 employees (primarily development and administrative), as well as costs associated with closing certain facilities, aggregating $5.2 million in the fourth quarter of 2001. No similar charges were incurred in 2000.
Development Expense
Development expense for the year ended December 31, 2001 was $7.9 million, a decrease of $6.5 million from the year ended December 31, 2000. This decrease resulted primarily from reduced expenses related to tower site, data gathering and acquisition integration in 2001.
Impairments and Net Loss on Sale of Long-Lived Assets
Impairments and net loss on sale of long-lived assets for the year ended December 31, 2001 was $74.3 million. The increase is attributed to non-cash impairment charges aggregating $11.7 million related to the write-down of certain non-core towers and a non-cash impairment charge of $62.6 related to the write-off of construction-in progress costs associated with sites that we no longer planned to build. No similar charges were incurred in 2000.
Interest Income, TV Azteca, Net
Interest income, TV Azteca, net for the year ended December 31, 2001 was $14.4 million, an increase of $1.7 million from the year ended December 31, 2000. The increase resulted from interest earned on the entire principal amount of the note, $119.8 million, during 2001 as compared to 2000 when less than the entire principal amount of the note was outstanding for the year.
Interest Income
Interest income for the year ended December 31, 2001 was $28.6 million, an increase of $12.7 million from the year ended December 31, 2000. The increase resulted primarily from an increase in interest earned on invested cash on hand, resulting principally from the sale of our senior notes in January 2001.
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Interest Expense
Interest expense for the year ended December 31, 2001 was $267.8 million, an increase of $116.1 million from the year ended December 31, 2000. The majority of the increase, $113.0 million, resulted primarily from increased borrowings outstanding under our credit facilities and the issue of $1.0 billion of senior notes in January 2001, offset by a decrease in interest rates under our credit facilities. The remaining component of the increase represented increases in interest on capital leases and other notes payable and incremental deferred financing amortization.
Loss on Investments and Other Expense
Loss on investments and other expense for the year ended December 31, 2001 was $38.8 million, an increase of $36.4 million from the year ended December 31, 2000. The increase resulted primarily from the write off of our investment in US Wireless of $23.4 million, coupled with additional investment impairment losses of $4.3 million and increases in losses on equity investments of $6.6 million.
Note Conversion Expense
During the year ended December 31, 2001, we acquired a portion of our 2.25% convertible notes in exchange for shares of our Class A common stock. As a consequence of those negotiated exchanges with certain of our noteholders, we recorded a non-cash charge of $26.3 million. In similar transactions during the year ended December 31, 2000, we acquired a portion of our 6.25% and 2.25% convertible notes in exchange for shares of our Class A common stock. As a result, we recorded a non-cash charge of $17.0 million during that year. These charges represent the fair value of incremental stock issued to noteholders to induce them to convert their holdings prior to the first scheduled redemption date.
Income Tax Benefit
The income tax benefit for the year ended December 31, 2001 was $99.9 million, an increase of $34.0 million from the year ended December 31, 2000. The primary reason for the increase is a result of the increase in our loss from continuing operations, partially offset by an increase in amortization of non-deductible intangible items. The effective tax rate on our loss from continuing operations was 20.4% for the year ended December 31, 2001, as compared to 26.4% for the year ended December 31, 2000.
The effective tax rate on loss from continuing operations in 2001 differs from the statutory rate due to certain non-deductible amounts for tax purposes such as the valuation allowances related to state net operating losses, capital losses and the effects of other non-deductible items such as goodwill amortization and note conversion expense. The effective tax rate in 2000 differs from the statutory rate due to the recording of valuation allowances related to state net operating losses and other non-deductible items consisting principally of goodwill amortization, and to a lesser extent, note conversion expense.
SFAS No. 109, “Accounting for Income Taxes,” requires that we record a valuation allowance when it is “more likely than not that some portion or all of the deferred tax assets will not be realized.” At December 31, 2001, we have provided a valuation allowance primarily related to state net operating loss carryforwards and capital losses. We have not provided a valuation allowance for the remaining deferred tax assets, primarily federal net operating loss carryforwards, as management believes that we will have sufficient time to realize these assets during the carryforward period.
As of December 31, 2001, the recoverability of our net deferred tax asset has been assessed utilizing stable state (no growth) projections based on our current operations. The projections show a significant decrease in depreciation and interest expense in the later years of the carryforward period as a result of a significant portion of our assets being fully depreciated during the first fifteen years of the carryforward period and debt repayments
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reducing interest expense. Accordingly, the recoverability of our net deferred tax asset is not dependent on material improvements to operations, material asset sales or other non-routine transactions. Based on our current outlook of future taxable income during the carryforward period, management believes that its net deferred tax asset will be realized. The realization of our deferred tax assets as of December 31, 2001 will be dependent upon our ability to generate approximately $740.0 million in taxable income from January 1, 2002 to December 31, 2021. If we are unable to generate sufficient taxable income in the future we will be required to reduce our net deferred tax asset through a charge to income tax expense, which would result in a corresponding decrease in stockholders’ equity.
Loss from Discontinued Operations, Net
In December 2002, we committed to a plan to dispose of our wholly owned subsidiary Verestar by sale within the next twelve months. In the fourth quarter of 2002, we also committed to a plan to sell Flash Technologies and two office buildings held primarily as rental property. In July 2002, we consummated the sale of MTS Components. Accordingly, we presented the results of these operations, $(60.2) million and $(6.2) million, net of tax, as loss from discontinued operations, net, in the accompanying statements of operations for the years ended December 31, 2001 and 2000, respectively.
Extraordinary Losses on Extinguishment of Debt, Net
We incurred extraordinary losses on the extinguishment of debt, net in 2000 of $4.3 million. The losses were incurred as a result of an amendment and restatement of our primary credit facilities ($3.0 million, net of a tax benefit of $2.0 million) and our early retirement of debt ($1.3 million, net of a tax benefit of $0.9 million). No comparable losses were recorded in 2001.
Liquidity and Capital Resources
Our primary sources of liquidity have been internally generated funds from operations, borrowings under our credit facilities, proceeds from equity and debt offerings, proceeds from the sale of non-core assets and cash on hand. We have used those funds to meet our capital requirements, which consist primarily of operational needs, debt service and capital expenditures for tower construction and acquisitions.
In the fourth quarter of 2002, we generated sufficient cash flow from operations to fund our capital expenditures and service our cash interest expense. We believe cash flow from operations in 2003 will be sufficient to fund our capital expenditures and cash interest payments for that year.
In January 2003, we completed an offering (discount note offering) of approximately $420.0 million, consisting of 12.25% senior subordinated discount notes due 2008 (discount notes) of ATI and warrants to purchase 11.4 million shares of our Class A common stock. In connection with the financing, we obtained an amendment of our credit facilities (credit agreement amendment). Pursuant to the credit agreement amendment, we repaid $200.0 million of term loans outstanding under our credit facilities and reduced our revolving loan commitments by $225.0 million to $425.0 million. That amendment also gives us the right to use $217.0 million, which we have placed in escrow for that purpose, to purchase our 2.25% convertible notes on or prior to October 22, 2003, at which time the holders have the right to put those notes to us. We may elect to satisfy all or a portion of our obligations with respect to the 2.25% convertible notes through the issuance of shares of our Class A common stock (subject to certain restrictions) on October 22, 2003 pursuant to the put right or, prior to that time, pursuant to a limited number of privately negotiated transactions. We also may use any escrowed funds not used to purchase 2.25% convertible notes to purchase, prior to June 30, 2004, our other convertible notes and our senior notes. We are required to use any funds remaining in escrow on June 30, 2004 to reduce our term loans under the credit facilities.
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We expect our 2003 capital needs to consist primarily of the following: debt service, including cash interest of approximately $215.0 million, repayment of approximately $54.4 million of term loans under our amended credit facilities and up to $217.0 million of 2.25% convertible notes (assuming all holders exercise their put rights); capital expenditures of between $50.0 and $75.0 million; and tower acquisitions of approximately $74.0 million. We expect to meet those needs through a combination of cash on hand of approximately $127.3 million at December 31, 2002, remaining net proceeds from the discount note offering of approximately $197.0 million (after the repayment of $200.0 million of term loans), cash generated by operations, proceeds from sales of non-core assets, and nominal, if any, borrowings under our credit facilities. Due to the risk factors outlined above, however, there can be no assurance that we will be able to meet our capital needs without additional borrowings under our credit facilities.
Our principal uses of liquidity, in addition to funding operations, are debt service and capital expenditures for tower construction and acquisitions.
Debt Service. As of December 31, 2002, we had outstanding debt of approximately $3.5 billion, consisting of the following:
| • | credit facilities—$1.5 billion; |
| • | senior notes—$1.0 billion; |
| • | convertible notes, net of discount—$873.6 million; and |
| • | other—$81.0 million (primarily capital leases and notes payable). |
Our debt instruments require us to make current interest payments and significant principal payments at their respective maturities. In addition, in the case of our credit facilities, we must make scheduled amortization payments in increasing amounts designed to repay the loans at maturity. During 2003, we will be required to repay approximately $13.6 million of the amended term loans each quarter.
Prior to maturity, there are no mandatory redemption provisions for cash in the senior notes, the convertible notes or the discount notes. The holders of the convertible notes, however, have the right to require us to repurchase their notes on specified dates prior to maturity, but we may at our election pay the repurchase price in cash or by issuing shares of our Class A common stock, subject to certain conditions in the applicable indenture. Our credit facilities restrict our ability to repurchase convertible notes for cash, except that we now have the right to use up to $217.0 million to prepay or repurchase the 2.25% convertible notes and, to the extent we do not and are not otherwise required to do so, to prepay or repurchase prior to June 30, 2004, any of our other convertible notes or our senior notes.
Tower Construction and Acquisition Needs. We have significantly reduced our planned level of tower construction and acquisitions for 2003 from prior years. As a result, we anticipate that our liquidity needs for new tower development and acquisitions during 2003 will be significantly less than in previous periods.
| • | Construction. In 2003, we expect to build between 100 and 150 towers (including broadcast towers) and expect total capital expenditures to be between $50.0 million and $75.0 million. |
| • | Acquisitions. As of December 31, 2002, we were committed to make expenditures of approximately $74.0 million for pending acquisitions, principally the NII Holdings transaction, of which approximately $24.0 million had been paid as of March 4, 2003. |
We expect to meet our cash requirements for 2003 through a combination of cash on hand, net proceeds from the discount note offering, cash generated by operations, proceeds from sales of non-core assets, and nominal, if any, borrowings under our credit facilities.
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Cash on Hand. As of December 31, 2002, we had approximately $127.3 million in cash on hand. As a result of the net proceeds from the discount note offering and the $200.0 million repayment of term loans under our credit facilities described above, we had approximately $324.3 million of cash on hand, including $217.0 million in escrow. As explained above, while we have the right to use up to $217.0 million of the escrowed funds to purchase the 2.25% convertible notes, we may elect to satisfy all or a portion of our obligations with respect to those notes through the issuance of shares of our Class A common stock.
Cash Generated by Operations. We expect our cash flow needs by segment for 2003 to be as follows (excluding cash requirements to fund debt service, as interest expense is not allocated to our segments). Our rental and management and network development services segments are expected to generate cash flows from operations during 2003 in excess of their cash needs for operations and capital expenditures. We expect to use the excess cash generated from these segments principally to service our debt. Effective December 31, 2002, we committed to a plan to dispose of our satellite and fiber network access services segment. Accordingly, these operations are reflected as discontinued operations in our consolidated financial statements. The businesses in our former satellite and fiber network access services segment are expected to be near cash flow break-even from operations, but may require additional sources of liquidity to fund minimal capital expenditures until final disposition. In addition, we currently provide financial guarantees of up to $12.0 million for certain Verestar contractual obligations. Depending on the terms of any disposition, we may continue to be obligated with respect to those guarantees.
Divestiture Proceeds. We are continuing to pursue strategic divestitures of non-core assets in an effort to enhance efficiency and increase our focus on our core tower operations. Through March 4, 2003, we completed approximately $203.5 million in non-core asset sales (including approximately $78.5 million subsequent to December 31, 2002) related to (a) our two components businesses, (b) a Verestar subsidiary, (c) our corporate office building and other real estate assets, and (d) non-core towers. Proceeds from those and any future transactions have and will be used, to the extent permitted under our credit facilities and mortgages, to fund capital expenditures for tower construction and acquisitions. We anticipate approximately $50.0 million of proceeds from additional sales of non-core assets during the remainder of 2003.
Credit Facilities. As of December 31, 2002, we had drawn $160.0 million of the $650.0 million revolving line of credit under our credit facilities (the only component of our credit facilities which is not fully drawn). We also had outstanding letters of credit of $19.2 million as of December 31, 2002. Availability under our revolving line of credit as of December 31, 2002, was $470.8 million, net of $19.2 million of outstanding letters of credit. The credit agreement amendment decreased the revolving loan commitment to $425.0 million, thereby reducing availability to $245.8 million.
For the year ended December 31, 2002, cash flows provided by operating activities were $105.1 million, as compared to $26.1 million for the year ended December 31, 2001. The increase is primarily due to an increase in cash flow generated from our rental and management segment, coupled with a decrease in our overall investment in working capital.
For the year ended December 31, 2002, cash flows used for investing activities were $115.3 million, as compared to $1.4 billion for the year ended December 31, 2001. The decrease is primarily due to a decrease in cash expended for acquisitions, property and equipment and construction activities, coupled with an increase in proceeds received from the sale of non-core businesses and assets.
For the year ended December 31, 2002, cash flows provided by financing activities were $101.4 million, as compared to $1.4 billion for the year ended December 31, 2001. The decrease is primarily related to a reduction in proceeds from the issuance of debt and equity securities.
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Certain Contractual Commitments
Below is a summary of certain provisions of our credit facilities, discount notes, senior notes, convertible notes and certain other contractual obligations. It is qualified in its entirety by the terms of the actual agreements which have been filed as exhibits to this Annual Report on Form 10-K. For information about the restrictive covenants in our debt instruments, see “Factors Affecting Sources of Liquidity.” For more information about our obligations, commitments and contingencies, see our consolidated financial statements herein and the accompanying notes thereto and “Quantitative and Qualitative Disclosures About Market Risk” for principal payments and contractual maturity dates as of December 31, 2002.
Credit Facilities. Our credit facilities (prior to the February 2003 credit agreement amendment), provided us with a borrowing capacity of up to $2.0 billion (after giving effect to the amendment — $1.575 billion). Our principal operating subsidiaries (other than Verestar) are the borrowers under our credit facilities. Borrowings under the credit facilities are subject to compliance with certain financial ratios as described below. Our credit facilities currently include:
| • | a $650.0 million (as amended — $425.0 million) revolving credit facility, of which $160.0 million was drawn and against which $19.2 million of undrawn letters of credit were outstanding on December 31, 2002, maturing on June 30, 2007; |
| • | an $850.0 million (as amended — $725.0 million) multi-draw term loan A, which was fully drawn on December 31, 2002, maturing on June 30, 2007; and |
| • | a $500.0 million (as amended — $425.0 million) term loan B, which was fully drawn on December 31, 2002, maturing on December 31, 2007. |
We are required under our credit facilities to make scheduled amortization payments in increasing amounts designed to repay the loans at maturity. During 2003, we will be required to repay approximately $13.6 million of the amended term loans each quarter.
We and our restricted subsidiaries, as well as Verestar and its subsidiaries, have guaranteed all of the loans under our credit facilities. We have secured the loans by liens on substantially all assets of the borrowers and the restricted subsidiaries, as well as Verestar and its subsidiaries, and substantially all outstanding capital stock and other debt and equity interests of all of our direct and indirect subsidiaries.
The amended credit facilities permit us to use up to $217.0 million to repurchase the 2.25% convertible notes. We may use any escrowed funds not used to purchase 2.25% convertible notes to purchase, prior to June 30, 2004, our other convertible notes and our senior notes. We are required to use any escrowed funds remaining at June 30, 2004 to reduce our term loans under the credit facilities.
Discount Notes and Warrants. In January 2003, American Towers, Inc. (ATI), our principal operating subsidiary, issued 12.25% senior subordinated discount notes due 2008 with a principal amount at maturity of $808.0 million. The discount notes will mature on August 1, 2008. No cash interest is payable on the discount notes. Instead, the accreted value of each discount note increases between the date of original issuance and the maturity date at a rate of 12.25% per annum.
The discount notes rank junior in right of payment to all existing and future senior indebtedness of ATI, the sister guarantors and their domestic subsidiaries and structurally senior in right of payment to all of our existing and future indebtedness. The discount notes are jointly and severally guaranteed on a senior subordinated basis by us and all of our wholly owned domestic subsidiaries, other than Verestar and its subsidiaries.
As part of the discount notes offering, we issued warrants to purchase an aggregate of 11.4 million shares of our Class A common stock at a price of $0.01 per share. The warrants and the discount notes were originally issued together as 808,000 units, each unit consisting of (1) one discount note having a principal value of $1,000
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at maturity, and (2) one warrant to purchase 14.0953 shares of our Class A common stock at $0.01 per share. The warrants are exercisable at any time on or after January 29, 2006 and will expire on August 1, 2008. At the time of issuance, the warrants represented approximately 5.5% of our outstanding common stock (assuming exercise of all warrants). The holders of the discount notes and the warrants have registration rights requiring us to file registration statements with respect to the discount notes and warrants and subjecting us to penalties if such registration statements are not timely filed and declared effective by the Securities and Exchange Commission.
9 3/8% Senior Notes. As of December 31, 2002, we had outstanding an aggregate principal amount of $1.0 billion of 9 3/8% senior notes. The senior notes mature on February 1, 2009. Interest on the senior notes is payable semiannually on February 1 and August 1. The senior note indenture does not contain any sinking fund or mandatory redemption requirement for the senior notes prior to maturity.
October 1999 Convertible Notes. In October 1999, we issued 6.25% convertible notes due 2009 in an aggregate principal amount of $300.0 million and 2.25% convertible notes due 2009 at an issue price of $300.1 million, representing 70.52% of their principal amount at maturity of $425.5 million. The difference between the issue price and the principal amount at maturity of the 2.25% convertible notes will be accreted each year at the rate of 6.25% per annum as interest expense in our consolidated financial statements. The 6.25% convertible notes are convertible into shares of our Class A common stock at a conversion price of $24.40 per share. The 2.25% convertible notes are convertible into shares of Class A common stock at a conversion price of $24.00 per share.
The indentures under which the convertible notes were issued do not contain any sinking fund or mandatory redemption requirement for the convertible notes prior to maturity. However, holders may require us to repurchase all or any of their 6.25% convertible notes on October 22, 2006 at their principal amount, together with accrued and unpaid interest. Holders may require us to repurchase all or any of their 2.25% convertible notes on October 22, 2003 at $802.93, which is its issue price plus accreted original issue discount, together with accrued and unpaid interest. Based on the principal amount of the 2.25% notes outstanding as of December 31, 2002, we may be required to repurchase up to $216.7 million (accreted through October 22, 2003) principal amount of our 2.25% convertible notes on October 22, 2003, if all the holders exercise this put right.
We may, subject to certain conditions in the applicable indenture, elect to pay the repurchase price of each series of convertible notes in cash or shares of our Class A common stock, or any combination thereof.
The amended credit facilities permit us to use up to $217.0 million of escrowed cash to purchase the 2.25% convertible notes, whether pursuant to the holders’ put rights on October 22, 2003, in privately negotiated transactions, or otherwise. Notwithstanding this right, we will continue to evaluate financing opportunities with respect to our convertible notes generally and, in particular, with respect to the put right of the 2.25% convertible notes. Since we issued the convertible notes, we have successfully reduced the principal amount outstanding of these convertible notes by entering into, from time to time, a limited number of privately negotiated agreements with noteholders to induce them to convert their convertible notes into shares of our Class A common stock. As a result of such conversions, we acquired $155.6 million principal amount (face) of the 2.25% convertible notes and $87.3 million of the 6.25% convertible notes during 2000 and 2001. We may seek, from time to time, to reduce further our indebtedness through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such purchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. If the put option of the holders of the 2.25% convertible notes is satisfied by other means or if it is not exercised in full by the holders, we may use any remaining escrowed funds to pay, prior to June 30, 2004, any of our other convertible notes or our senior notes.
As of December 31, 2002, the total amounts outstanding under the 2.25% and 6.25% convertible notes were $210.9 million and $212.7 million, respectively.
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February 2000 Convertible Notes. In February 2000, we issued 5.0% convertible notes due 2010 in an aggregate principal amount of $450.0 million. The 5.0% convertible notes are convertible into shares of our Class A common stock at a conversion price of $51.50 per share. The indenture under which the 5.0% convertible notes are outstanding does not contain any sinking fund or mandatory redemption requirement for the convertible notes prior to maturity. However, holders may require us to repurchase all or any of the 5.0% convertible notes on February 20, 2007 at their principal amount, together with accrued and unpaid interest. We may, subject to certain conditions in the indenture, elect to pay the repurchase price in cash or shares of Class A common stock or any combination thereof.
The total amount outstanding under the 5.0% convertible notes as of December 31, 2002 was $450.0 million.
Other Long-Term Debt. As of December 31, 2002, we had approximately $81.0 million of other long-term debt, including $47.2 million of capital lease obligations and $33.8 million of mortgage indebtedness and other notes payable.
Tower Construction and Acquisition. As of December 31, 2002, we were party to various arrangements relating to the construction of tower sites under existing build-to-suit agreements. In addition, as of December 31, 2002, we were committed to acquire approximately 400 communication sites for an aggregate purchase price of approximately $74.0 million, of which $24.0 million had been funded as of March 4, 2003.
ATC Separation. In connection with the ATC Separation, we agreed to reimburse CBS for any tax liabilities incurred by American Radio as a result of the transaction. Upon completion of the final American Radio tax returns, the amount of these tax liabilities was determined and paid by us. We continue to be obligated under a tax indemnification agreement with CBS, however, until June 30, 2003, subject to the extension of federal and applicable state statutes of limitations.
We are currently aware that the Internal Revenue Service (IRS) is in the process of auditing certain tax returns filed by CBS and its predecessors, including those that relate to American Radio and the ATC Separation transaction. In the event that the IRS imposes additional tax liabilities on American Radio relating to the ATC Separation, we would be obligated to reimburse CBS for such liabilities. We cannot currently anticipate or estimate the potential additional tax liabilities, if any, that may be imposed by the IRS, however, such amounts could be material to our consolidated financial position and results of operations. We are not aware of any material obligations relating to this tax indemnity as of December 31, 2002. Accordingly, no amounts have been provided for in the consolidated financial statements relating to this indemnification.
Liquidity Table For Contractual Obligations. The following table sets forth information with respect to our long-term obligations payable in cash (related to continuing operations) as of December 31, 2002 (in thousands):
| Payments Due by Period | |||||||||||||||
| Contractual Obligations |
Total |
Less than 1 year |
1-3 Years |
3-5 Years |
More than 5 years | ||||||||||
| Long-term debt obligations * |
$ |
3,417,459 |
$ |
267,636 |
$ |
436,700 |
$ |
1,713,123 |
$ |
1,000,000 | |||||
| Capital lease obligations |
|
47,220 |
|
2,506 |
|
3,108 |
|
183 |
|
41,423 | |||||
| Operating lease obligations |
|
759,802 |
|
81,487 |
|
133,966 |
|
98,373 |
|
445,976 | |||||
| Purchase obligations for acquisitions |
|
73,851 |
|
73,851 |
|||||||||||
| Total |
$ |
4,928,332 |
$ |
425,480 |
$ |
573.774 |
$ |
1,811,679 |
$ |
1,487,399 | |||||
| * | The holders of our convertible notes have the right to require us to repurchase their notes on specified dates prior to their maturity dates in 2009 and 2010, but we may pay the purchase price by issuing shares of our Class A common stock, subject to certain conditions discussed elsewhere in this annual report. The obligation with respect to the right of the holders to put the 2.25% convertible notes on October 22, 2003 of approximately $210.9 million as of December 31, 2002 has been classified as an obligation due in “Less than 1 year”. The obligations with respect to the right of the holders to put the 6.25% convertible notes ($212.7 million) and 5% notes ($450.0 million) on October 22, 2006 and February 20, 2007, respectively, have been classified as an obligation due in “3-5 years” as of December 31, 2002. |
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The above table does not include approximately $116.9 million of aggregate principal payments for Verestar capital leases that are included in liabilities held for sale as of December 31, 2002 and financial guarantees of up to $12.0 million that we may be obligated to pay in connection with certain Verestar contractual obligations. Such amounts have been excluded from the table as we expect to sell the remaining portion of Verestar by December 31, 2003. The above table also excludes certain commitments relating to the construction of tower sites under existing build to suit agreements as of December 31, 2002, as we cannot currently estimate the timing and amounts of such payments.
Factors Affecting Sources of Liquidity
Internally Generated Funds. The key factors affecting our internally generated funds are the demand for antennae space on wireless communications towers and for related services, our ability to maximize the utilization of our existing towers and our ability to minimize costs and fully achieve our operating efficiencies.
Credit Facilities. Our credit facilities, as amended in February 2003, contain certain financial ratios and operational covenants and other restrictions (including limitations on additional debt, guarantees, dividends and other distributions, investments and liens) with which our borrower subsidiaries and restricted subsidiaries must comply. Any failure to comply with these covenants would not only prevent us from being able to borrow additional funds under our revolving line of credit, but would also constitute a default. These covenants also restrict our ability, as the parent, to incur any debt other than that presently outstanding and refinancings of that debt. Our credit facilities, as amended, contain five financial tests:
| • | a leverage ratio (Total Debt to Annualized Operating Cash Flow). As of December 31, 2002, we were required to maintain a ratio of not greater than 6.00 to 1.00, increasing to 6.25 to 1.00 at January 1, 2003, decreasing to 6.00 to 1.00 at July 1, 2003, to 5.75 to 1.00 at October 1, 2003, to 5.50 to 1.00 at January 1, 2004, to 5.25 to 1.00 at April 1, 2004, to 5.00 to 1.00 at July 1, 2004, to 4.75 to 1.00 at October 1, 2004, to 4.50 to 1.00 at January 1, 2005, to 4.25 to 1.00 at April 1, 2005 and to 4.00 to 1.00 at July 1, 2005 and thereafter; |
| • | a senior leverage ratio (Senior Debt to Annualized Operating Cash Flow). As of January 1, 2003, we were required to maintain a ratio of not greater than 4.90 to 1.00, decreasing to 4.75 to 1.00 at April 1, 2003, to 4.50 to 1.00 at July 1, 2003, to 4.25 to 1.00 at October 1, 2003, to 4.00 to 1.00 at January 1, 2004, to 3.75 to 1.00 at April 1, 2004, to 3.50 to 1.00 at July 1, 2004, to 3.25 to 1.00 at October 1, 2004 and to 3.00 to 1.00 at January 1, 2005 and thereafter; |
| • | a pro forma debt service test (Annualized Operating Cash Flow to Pro Forma Debt Service). As of December 31, 2002, we were required to maintain a ratio of not less than 1.00 to 1.00; |
| • | an interest coverage test (Annualized Operating Cash Flow to Interest Expense). As of December 31, 2002, we were required to maintain a ratio of not less than 2.00 to 1.00, increasing by 0.50 on each of January 1, 2003 and January 1, 2004; and |
| • | a fixed charge coverage test (Annualized Operating Cash Flow to Fixed Charges). As of December 31, 2003, we will be required to maintain a ratio of not less than 1.0 to 1.0. |
The amended credit facilities also limit our revolving loan drawdowns based on our cash on hand.
Because the credit facilities are with certain of our subsidiaries, including ATI, our senior notes and convertible notes are not included in the computations of any of the tests, except in the case of the pro forma debt service and fixed charge coverage tests in which case interest includes the amount of funds that we need our subsidiaries to distribute to us so we can pay interest on our senior notes and our convertible notes. Annualized Operating Cash Flow is based, among other things, on four times the Operating Cash Flow for the most recent quarter of our tower rental and management business and trailing 12 months for our other businesses and for corporate general and administrative expenses. In the case of the leverage ratio, we may include the Operating Cash Flow from Brazil and Mexico only to the extent of 10% of Annualized Operating Cash Flow and we receive credit for only 75% of Annualized Operating Cash Flow from our services businesses.
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We were in compliance with the borrowing ratio covenants in effect as of December 31, 2002, and as amended by the February 2003 amendment.
9 3/8% Senior Note Indenture. The senior note indenture contains certain restrictive covenants with which we and our restricted subsidiaries (which includes all of our subsidiaries other than Verestar and its subsidiaries) must comply. These include restrictions on our ability to incur additional debt, guarantee debt, pay dividends and make other distributions, make certain investments and, as in the credit facilities, use the proceeds from asset sales. Any failure to comply with these covenants would not only prevent us from being able to borrow additional funds, but would also constitute a default. Specifically, the senior note indenture restricts us from incurring additional debt or issuing certain types of preferred stock unless our consolidated debt (which excludes debt of Verestar and its subsidiaries but includes the liquidation value of certain preferred stock) is not greater than 7.5 times our Adjusted Consolidated Cash Flow. However, we are permitted, even if we are not in compliance with the ratio, to incur debt under our credit facilities, or renewals, refundings, replacements or refinancings of them, up to $2.65 billion. Even if not in compliance with the ratio, we are also permitted to, among other things, have certain types of capital leases and to refund or refinance our convertible notes, subject to certain requirements. Adjusted Consolidated Cash Flow is substantially similar to the definition of Annualized Operating Cash Flow, as defined in the credit facilities, except it applies to us and our subsidiaries (other than Verestar and its subsidiaries).
12.25% Discount Notes. The discount note indenture contains certain restrictive covenants with which ATI, the sister guarantors and its and their subsidiaries must comply. These include restrictions on the ability to incur additional debt, guarantee debt, pay dividends and make other distributions, make certain investments and, as in the credit facilities, use the proceeds from asset sales. Any failure to comply with these covenants would not only prevent us from being able to borrow additional funds, but would also constitute a default. Specifically, the discount note indenture restricts ATI, each of the sister guarantors and its and their restricted subsidiaries from incurring additional debt or issuing certain types of preferred stock. However, ATI, the sister guarantors and its and their subsidiaries are permitted to incur debt under our credit facilities, or renewals, refundings, replacements or refinancings of them, up to $1.6 billion. They are also permitted, among other things, to have certain types of capital leases and to refund or refinance existing indebtedness, subject to certain requirements.
Convertible Notes. The indentures under which our convertible notes are outstanding do not contain any restrictions on, among other things, the payment of dividends or the making of other distributions, the incurrence of debt, or liens or the repurchase of our equity securities, or any financial covenants.
Capital Markets. Our ability to raise additional funds in the capital markets depends on, among other things, general economic conditions, the condition of the wireless industry, our financial performance and the state of the capital markets.
In December 2001, the SEC requested that all registrants disclose their most “critical accounting policies” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of the company’s financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Further, “critical accounting policies” are those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions.
We believe that our accounting policies described below fit the definition of “critical accounting policies.” We reviewed our policies for the year ended December 31, 2002 and determined that they remain our most critical accounting policies. With the exception of the asset impairment charges and the adoption of SFAS No. 142, we did not make any changes to those policies during the year ended December 31, 2002.
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| • | Income Taxes. We record a valuation allowance to reduce our net deferred tax asset to the amount that management believes is more likely than not to be realized. At December 31, 2002, we provided a valuation allowance of approximately $118.6 million primarily related to our state operating loss carryforwards and capital loss carryforwards. In addition, we also recorded a valuation allowance in 2002 related to implementing a tax planning strategy to accelerate the utilization of certain federal net operating losses (the valuation allowance represents the estimated lost tax benefit and costs associated with implementing this strategy). We have not provided a valuation allowance for the remaining deferred tax assets, primarily our federal net operating loss carryforwards as management believes that we will have sufficient time to realize these assets during the carryforward period. |
We intend to recover a portion of our net deferred tax asset from our tax planning strategy to accelerate the utilization of certain federal net operating losses. The recoverability of our remaining net deferred tax asset has been assessed utilizing stable state (no growth) projections based on our current operations. The projections show a significant decrease in depreciation and interest expense in the later years of the carryforward period as a result of a significant portion of our assets being fully depreciated during the first fifteen years of the carryforward period and debt repayments reducing interest expense. Accordingly, the recoverability of our net deferred tax asset is not dependent on material improvements to operations, material asset sales or other non-routine transactions. Based on our current outlook of future taxable income during the carryforward period, management believes that our net deferred tax asset will be realized. The realization of our deferred tax assets will be dependent upon our ability to generate approximately $800.0 million in taxable income from January 1, 2003 to December 31, 2022. If we are unable to generate sufficient taxable income in the future, or accelerate the utilization of our losses as contemplated in our tax planning strategy, we will be required to reduce our net deferred tax asset through a charge to income tax expense, which would result in a corresponding decrease in stockholders equity.
| • | Impairment of Assets. |
Assets subject to amortization and non-core assets held for sale: We review long-lived assets, including intangibles, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We assess recoverability by determining whether the net book value of the related assets will be recovered through projected undiscounted cash flows. If we determine that the carrying value of an asset may not be recoverable, we will measure any impairment based on the projected future discounted cash flows to be provided from the asset or available market information relative to the asset’s fair market value as compared to its carrying value. We record any related impairment losses in the period in which we identify such impairment. We also review the carrying value of assets held for sale for impairment based management’s best estimate of the anticipated net proceeds expected to be received upon final disposition. We record any impairment charges or estimated losses on disposal in the period in which we identify such impairment or loss.
Goodwill—Assets not subject to amortization: As of January 1, 2002, we adopted the provisions of SFAS No. 142 “Goodwill and Other Intangible Assets,” which requires that goodwill and intangible assets with indefinite lives no longer be amortized, but reviewed for impairment at least annually. SFAS No. 142 also requires that we assess whether goodwill is impaired by performing a transitional impairment test. The impairment test is comprised of two steps. The initial step is designed to identify potential goodwill impairment by comparing an estimate of fair value of the applicable reporting unit to its carrying value, including goodwill. If the carrying value exceeds fair value, a second step is performed, which compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill to measure the amount of goodwill impairment, if any. Fair value estimates were determined based on independent third party appraisals for the rental and management segment and former SFNA segment and future discounted cash flows and market information in the services segment.
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We completed our transitional impairment testing in the second quarter of 2002 and concluded that all of the goodwill related to our former SFNA segment was impaired and that the majority of the goodwill in the services segment was impaired. As a result, we recognized a $562.6 million non-cash charge (net of a tax benefit of $14.4 million) related to the write-down of goodwill to its fair value. In accordance with the provisions of SFAS No. 142, the charge is reflected as of January 1, 2002 and included in the results of operations for the year ended December 31, 2002 as the cumulative effect of a change in accounting principle.
We also completed our annual impairment testing in December 2002 related to the goodwill of the tower rental and management reporting unit that contains goodwill and Kline (the only services business with remaining goodwill) and determined that goodwill was not impaired. We obtained an independent third party appraisal of the tower and rental management reporting unit that contains goodwill and utilized market information to value Kline.
We will perform our annual goodwill impairment test in December of each year and when events or circumstances indicate that the asset might be impaired.
| • | Investment Impairment Charges. Investments in those entities where we own less than twenty percent of the voting stock of the individual entity and do not exercise significant influence over operating and financial policies of the entity are accounted for using the cost method. Investments in entities where we own less than twenty percent but have the ability to exercise significant influence over operating and financial policies of the entity or where we own more than twenty percent of the voting stock of the individual entity, but not in excess of fifty percent, are accounted for using the equity method. Our investments are in companies that are not publicly traded, and, therefore, no established market for these securities exists. We have a policy in place to review the fair value of our investments on a regular basis to evaluate the carrying value of the investments in these companies. If we believe that the carrying value of an investment is carried at an amount in excess of fair value, it is our policy to record an impairment charge to adjust the carrying value to the market value. |
| • | Revenue Recognition. A portion of our network development services revenue is derived under contracts or arrangements with customers that provide for billings on a fixed price basis. Revenues under these contracts are recognized using the percentage-of-completion methodology. Under the percentage-of-completion methodology, revenues are recognized in accordance with the percentage of contract costs incurred to date compared to the estimated total contract costs. Due to uncertainties and estimates inherent within percentage-of-completion accounting it is possible that estimates will be revised as project work progresses. Changes to total estimated contract costs or losses, if any, are recognized in the period in which they are determined. |
The above listing is not intended to be a comprehensive list of all of our accounting policies. See our audited consolidated financial statements and notes thereto which begin on page F-1 of this annual report where our significant accounting policies are discussed.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” This statement establishes accounting standards for the recognition and measurement of liabilities associated with the retirement of tangible long-lived assets and the related asset retirement costs. The requirements of SFAS No. 143 are effective for us as of January 1, 2003. We will adopt this statement in the first quarter of 2003 and do not expect the impact of adopting this statement to have a material impact on our consolidated financial position or results of operations.
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In April 2002, the FASB issued SFAS No. 145 “Rescission of FASB Statement Nos. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections.” Upon the adoption of SFAS No. 145, gains and losses from extinguishment of debt will no longer be classified as an extraordinary item, but rather will generally be classified as part of other income (expense) on our consolidated statement of operations. Any such gains or losses classified as extraordinary items in prior periods will be reclassified in future financial statement presentations upon the adoption of SFAS No. 145. We will adopt the provisions of SFAS No. 145 for all reporting periods subsequent to January 1, 2003.
In July 2002, the FASB issued SFAS No. 146 “Accounting For Costs Associated with Exit or Disposal Activities.” The statement requires costs associated with exit or disposal activities to be recognized when they are incurred rather than at the date of the commitment to an exit or disposal plan. The requirements of SFAS No. 146 are effective for exit or disposal activities initiated after January 1, 2003. We will apply the provisions of this statement to all restructuring activity initiated after January 1, 2003.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation- Transition and Disclosure—an amendment of SFAS No. 123,” which provides optional transition guidance for those companies electing to voluntarily adopt the accounting provisions of SFAS No. 123. In addition, the statement mandates certain new disclosures that are incremental to those required by SFAS No. 123. We will continue to account for stock-based compensation in accordance with APB No. 25. As such, we do not expect this standard to have a material impact on our consolidated financial position or results of operations. We have adopted the disclosure-only provisions of SFAS No. 148 as of December 31, 2002. (See note 1 to our consolidated financial statements).
In January 2003, the FASB issued Interpretation No. 46, “Consolidation for Variable Interest Entities, an Interpretation of ARB No. 51” which requires all variable interest entities (VIEs) to be consolidated by the primary beneficiary. The primary beneficiary is the entity that holds the majority of the beneficial interest in the VIE. In addition, the interpretation expands the disclosure requirements for both variable interest entities that are consolidated as well as VIEs from which the entity is the holder of a significant amount of beneficial interests, but not the majority. FIN 46 is effective for all VIE’s created or acquired after January 31, 2003. For VIE’s created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The adoption of this interpretation is not expected to be material to our consolidated financial position or results of operations.
Information Presented Pursuant to the Indenture of Our 9 3/8% Senior Notes
The following table sets forth information that is presented solely to address certain reporting requirements contained in the indenture for our senior notes. This information presents certain of our financial data on a consolidated basis and on a restricted group basis, as defined in the indenture governing the senior notes. All of our subsidiaries are part of the restricted group, except our wholly owned subsidiary Verestar. In December 2002, we committed to a plan to dispose of Verestar by sale within the next twelve months. Pursuant to that plan, the results of the operations related to Verestar are included in loss from discontinued operations, net of tax in our consolidated statements of operations and the assets and liabilities of Verestar are included in assets held for sale and liabilities held for sale, respectively, within the consolidated balance sheet as of December 31, 2002.
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| Consolidated |
Restricted Group |
|||||||||||||||
| Year Ended December 31, |
Year Ended December 31, |
|||||||||||||||
| 2002 |
2001 |
2002 |
2001 |
|||||||||||||
| (In thousands) |
||||||||||||||||
| Statement of Operations Data: |
||||||||||||||||
| Operating revenues |
$ |
788,420 |
|
$ |
785,150 |
|
$ |
788,420 |
|
$ |
785,150 |
| ||||
| Operating expenses: |
||||||||||||||||
| Rental and management |
|
228,519 |
|
|
211,811 |
|
|
228,519 |
|
|
211,811 |
| ||||
| Network development services |
|
217,690 |
|
|
312,926 |
|
|
217,690 |
|
|
312,926 |
| ||||
| Depreciation and amortization |
|
316,876 |
|
|
346,020 |
|
|
316,876 |
|
|
346,020 |
| ||||
| Corporate general and administrative expense |
|
24,349 |
|
|
26,478 |
|
|
24,349 |
|
|
26,478 |
| ||||
| Restructuring expense |
|
10,638 |
|
|
5,236 |
|
|
10,638 |
|
|
5,236 |
| ||||
| Development expense |
|
5,896 |
|
|
7,895 |
|
|
5,896 |
|
|
7,895 |
| ||||
| Impairments and net loss on sale of long-lived assets |
|
90,734 |
|
|
74,260 |
|
|
90,734 |
|
|
74,260 |
| ||||
| Total operating expenses |
|
894,702 |
|
|
984,626 |
|
|
894,702 |
|
|
984,626 |
| ||||
| Operating loss from continuing operations |
|
(106,282 |
) |
|
(199,476 |
) |
|
(106,282 |
) |
|
(199,476 |
) | ||||
| Interest income, TV Azteca, net |
|
13,938 |
|
|
14,377 |
|
|
13,938 |
|
|
14,377 |
| ||||
| Interest income |
|
3,514 |
|
|
28,622 |
|
|
3,514 |
|
|
28,622 |
| ||||
| Interest expense |
|
(255,645 |
) |
|
(267,825 |
) |
|
(255,645 |
) |
|
(267,825 |
) | ||||
| Loss on investments and other expense |
|
(25,579 |
) |
|
(38,797 |
) |
|
(25,579 |
) |
|
(38,797 |
) | ||||
| Loss on term loan cancellation |
|
(7,231 |
) |
|
(7,231 |
) |
||||||||||
| Note conversion expense |
|
(26,336 |
) |
|
(26,336 |
) | ||||||||||
| Minority interest in net earnings of subsidiaries |
|
(2,118 |
) |
|
(318 |
) |
|
(2,118 |
) |
|
(318 |
) | ||||
| Loss from continuing operations before income taxes |
|
(379,403 |
) |
|
(489,753 |
) |
|
(379,403 |
) |
|
(489,753 |
) | ||||
| Income tax benefit |
|
64,634 |
|
|
99,875 |
|
|
64,634 |
|
|
99,875 |
| ||||
| Loss from continuing operations before extraordinary losses and cumulative effect of change in accounting principle |
|
(314,769 |
) |
|
(389,878 |
) |
|
(314,769 |
) |
|
(389,878 |
) | ||||
| Loss from discontinued operations, net of tax |
|
(263,427 |
) |
|
(60,216 |
) |
|
(21,852 |
) |
|
(9,251 |
) | ||||
| Loss before extraordinary losses and cumulative effect of change in accounting principle |
$ |
(578,196 |
) |
$ |
(450,094 |
) |
$ |
(336,621 |
) |
$ |
(399,129 |
) | ||||
| December 31, 2002 |
||||||||||||||||
| Consolidated |
Restricted Group |
|||||||||||||||
| (In thousands) |
||||||||||||||||
| Balance Sheet Data: |
||||||||||||||||
| Cash and cash equivalents |
$ |
127,292 |
|
$ |
127,292 |
| ||||||||||
| Assets held for sale |
|
234,724 |
|
|
39,026 |
| ||||||||||
| Property and equipment, net |
|
2,734,885 |
|
|
2,734,885 |
| ||||||||||
| Total assets |
|
5,662,203 |
|
|
5,466,505 |
| ||||||||||
| Long-term obligations, including current portion |
|
3,464,679 |
|
|
3,464,679 |
| ||||||||||
| Liabilities held for sale |
|
165,006 |
|
|
2,525 |
| ||||||||||
| Total stockholders’ equity |
|
1,740,323 |
|
|
1,740,323 |
| ||||||||||
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Information Presented Pursuant to the Indentures of Our 9 3/8% Senior Notes and Our 12.25% Senior Subordinated Discount Notes
The following table sets forth information that is presented solely to address certain tower cash flow reporting requirements contained in the indentures for our senior and discount notes. The information contained in note 20 to our consolidated financial statements is also presented to address certain reporting requirements contained in the indenture for our discount notes.
Tower Cash Flow, Adjusted Consolidated Cash Flow and Non-Tower Cash Flow for the Company and its restricted subsidiaries, as defined in our senior note and discount note indentures are as follows (in thousands):
| Senior Notes |
Discount Notes |
|||||||
| Tower Cash Flow, for the three months ended December 31, 2002 |
$ |
95,933 |
|
$ |
93,825 |
| ||
| Consolidated Cash Flow, for the twelve months ended December 31, 2002 |
$ |
324,676 |
|
$ |
316,007 |
| ||
| Less: Tower Cash Flow, for the twelve months ended December 31, 2002 |
|
(334,342 |
) |
|
(325,708 |
) | ||
| Plus: four times Tower Cash Flow, for the three months ended December 31, 2002 |
|
383,732 |
|
|
375,300 |
| ||
| Adjusted Consolidated Cash Flow, for the twelve months ended December 31, 2002 |
$ |
374,066 |
|
$ |
365,599 |
| ||
| Non-Tower Cash Flow, for the twelve months ended December 31, 2002 |
$ |
(10,591 |
) |
$ |
(14,228 |
) | ||
| ITEM | 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to market risk from changes in interest rates on long-term debt obligations. We attempt to reduce these risks by utilizing derivative financial instruments, namely interest rate caps, swaps, and collars pursuant to our policies. All derivative financial instruments are for purposes other than trading. For the year ended December 31, 2002, we increased our borrowings under our credit facilities by $65.0 million. We also terminated two swaps with aggregate notional amounts totaling $150.0 million and caps with total notional amounts of $365.0 million expired. In addition, swaps with total notional amounts of $30.0 million and a collar with a total notional amount of $95.0 million expired. Lastly, we entered into four cap agreements with total notional amounts of $500.0 million.
The following tables provide information as of December 31, 2002 and 2001 about our market risk exposure associated with changing interest rates. For long-term debt obligations, the tables present principal cash flows by maturity date and average interest rates related to outstanding obligations. For interest rate caps, swaps and collars, the tables present notional principal amounts and weighted-average interest rates by contractual maturity dates.
As of December 31, 2002
Principal Payments and Interest Rate Detail by Contractual Maturity Dates (In thousands)
| Long-Term Debt |
2003 |
2004 |
2005 |
2006 |
2007 |
Thereafter |
Total |
Fair Value | ||||||||||||||||||||||
| Fixed Rate Debt(a) |
$ |
214,142 |
|
$ |
3,086 |
|
$ |
1,722 |
|
$ |
244,294 |
|
$ |
450,012 |
|
$ |
1,041,423 |
|
$ |
1,954,679 |
$ |
1,484,055 | ||||||||
| Average Interest Rate(a) |
|
7.81 |
% |
|
7.81 |
% |
|
7.81 |
% |
|
8.04 |
% |
|
9.35 |
% |
|
9.35 |
% |
||||||||||||
| Variable Rate Debt(a) |
$ |
56,000 |
|
$ |
192,000 |
|
$ |
243,000 |
|
$ |
321,500 |
|
$ |
697,500 |
|
$ |
1,510,000 |
$ |
1,510,000 | |||||||||||
| Average Interest Rate(a) |
||||||||||||||||||||||||||||||
45
Table of Contents
Aggregate Notional Amounts Associated with Interest Rate Caps, Swaps and Collars in Place
As of December 31, 2002 and Interest Rate Detail by Contractual Maturity Dates (In thousands)
| Interest Rate CAPS |
2003 |
2004 |
2005 |
2006 |
2007 |
Thereafter |
Total |
Fair Value |
||||||||||||||
| Notional Amount |
$ |
500,000 |
|
$ |
500,000 |
(c) |
$ |
150 |
| |||||||||||||
| Cap Rate |
|
5.00% |
|
|
5.00% |
|
||||||||||||||||
| Interest Rate SWAPS |
||||||||||||||||||||||
| Notional Amount |
$ |
400,000 |
(d) |
$ |
(10,383 |
) | ||||||||||||||||
| Weighted-Average Fixed Rate Payable(b) |
|
5.59% |
|
|||||||||||||||||||
| Interest Rate COLLARS |
||||||||||||||||||||||
| Notional Amount |
$ |
232,500 |
(e) |
$ |
(5,307 |
) | ||||||||||||||||
| Weighted-Average Below Floor Rate Payable, Above Cap Rate Receivable(b) |
|
5.96%, 8.18% |
|
|||||||||||||||||||
As of December 31, 2001
Principal Payments and Interest Rate Detail by Contractual Maturity Dates (In thousands)
| Long-Term Debt |
2002 |
2003 |
2004 |
2005 |
2006 |
Thereafter |
Total |
Fair Value | ||||||||||||||||||||||
| Fixed Rate Debt(a) |
$ |
12,585 |
|
$ |
12,133 |
|
$ |
12,775 |
|
$ |
64,860 |
|
$ |
26,352 |
|
$ |
1,988,255 |
|
$ |
2,116,960 |
$ |
1,654,718 | ||||||||
| Average Interest Rate(a) |
|
7.83 |
% |
|
7.82 |
% |
|
7.81 |
% |
|
7.78 |
% |
|
7.78 |
% |
|
7.78 |
% |
||||||||||||
| Variable Rate Debt(a) |
$ |
151,000 |
|
$ |
192,000 |
|
$ |
243,000 |
|
$ |
255,750 |
|
$ |
603,250 |
|
$ |
1,445,000 |
$ |
1,445,000 | |||||||||||
| Average Interest Rate(a) |
||||||||||||||||||||||||||||||
Aggregate Notional Amounts Associated with Interest Rate Caps, Swaps and Collars in Place
As of December 31, 2001 and Interest Rate Detail by Contractual Maturity Dates (In thousands)
| Interest Rate CAPS |
2002 |
2003 |
2004 |
2005 |
2006 |
Thereafter |
Total |
Fair Value |
||||||||||||||
| Notional Amount |
$ |
364,980 |
(f) |
|||||||||||||||||||
| Cap Rate |
|
9.00 |
% |
|||||||||||||||||||
| Interest Rate SWAPS |
||||||||||||||||||||||
| Notional Amount |
$ |
580,000 |
(g) |
$ |
550,000 |
(h) |
$ |
(21,601 |
) | |||||||||||||
| Weighted-Average Fixed Rate Payable(b) |
|
5.86 |
% |
|
5.80 |
% |
||||||||||||||||
| Interest Rate COLLARS |
||||||||||||||||||||||
| Notional Amount |
$ |
327,500 |
(i) |
$ |
232,500 |
(e) |
$ |
(13,579 |
) | |||||||||||||
| Weighted-Average Below Floor Rate Payable, Above Cap Rate Receivable(b) |
|
5.96%,8.27 |
% |
|
5.96%,8.18 |
% |
||||||||||||||||
| (a) | As of December 31, 2002 variable rate debt consists of our credit facilities ($1.51 billion) and fixed rate debt consists of the 2.25% convertible notes ($210.9 million), the 6.25% convertible notes ($212.7 million), the 5.0% convertible notes ($450.0 million), the 9 3/8% senior notes ($1.0 billion) and other debt of $81.0 million. Interest on the credit facilities is payable in accordance with the applicable London Interbank Offering Rate (LIBOR) agreement or quarterly and accrues at our option either at LIBOR plus margin (as defined) or the Base Rate plus margin (as defined). The average interest rate in effect at December 31, 2002 for the credit facilities was 4.48%. For the year ended December 31, 2002, the weighted average interest rate under the credit facilities was 4.41%. The 2.25% and 6.25% convertible notes each bear interest (after giving effect to the accretion of the original discount on the 2.25% convertible notes) at 6.25% per annum, which is payable semiannually on April 15 and October 15 of each year. The 5.0% convertible notes bear |
46
Table of Contents
| interest at 5.0% per annum, which is payable semiannually on February 15 and August 15 of each year. The 9 3/8% senior notes bear interest at 9 3/8% per annum, which is payable semiannually on February 1 and August 1 of each year beginning August 1, 2001. Other debt consists of notes payable, capital leases and other obligations bearing interest at rates ranging from 7.09% to 12.00%, payable monthly. |
As of December 31, 2001 variable rate debt consists of our credit facilities ($1.45 billion) and fixed rate debt consists of the 2.25% convertible notes ($204.2 million) and 6.25% convertible notes ($212.7 million), the 5.0% convertible notes ($450.0 million), the 9 3/8% senior notes ($1.0 billion) and other debt of $250.1 million. The average interest rate in effect at December 31, 2001 for the credit facilities was 4.76%. For the year ended December 31, 2001, the weighted average interest rate under the credit facilities was 7.26%. The 2.25% and 6.25% convertible notes each bear interest (after giving effect to the accretion of the original discount on the 2.25% convertible notes) at 6.25% per annum, which is payable semiannually on April 15 and October 15 of each year. The 5.0% convertible notes bear interest at 5.0% per annum, which is payable semiannually on February 15 and August 15 of each year. The 9 3/8% senior notes bear interest at 9 3/8% per annum, which is payable semiannually on February 1 and August 1 of each year beginning August 1, 2001. Other debt consists of notes payable, capital leases and other obligations bearing interest at rates ranging from 7.09% to 12.00%, payable monthly.
| (b) | Represents the weighted-average fixed rate or range of interest based on contract notional amount as a percentage of total notional amounts in a given year. |
| (c) | Includes notional amounts of $125,000, $250,000 and $125,000 that will expire in May, June and July 2004, respectively. |
| (d) | Includes notional amounts of $215,000 and $185,000 that will expire in February and November 2003, respectively. |
| (e) | Includes notional amounts of $185,000 and $47,500 that will expire in May and June 2003, respectively. |
| (f) | Includes notional amount of $364,980 that expired in February 2002. |
| (g) | Includes notional amount of $30,000 that expired in March 2002. |
| (h) | Includes notional amounts of $75,000, $290,000 and $185,000 that will expire in January, February and November 2003, respectively. |
| (i) | Includes notional amount of $95,000 that expired in July 2002. |
We maintain a portion of our cash and cash equivalents in short-term financial instruments that are subject to interest rate risks. Due to the relatively short duration of such instruments, we believe fluctuations in interest rates with respect to those investments will not materially affect our financial condition or results of operations.
Our foreign operations, which primarily include Mexico, have not been significant to date. The remeasurement loss (gain) for the years ended December 31, 2002, 2001 and 2000 approximated $3,713,000, $(207,000) and 11,000, respectively.
| ITEM | 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
See Item 15(a).
| ITEM 9. CHANGES | IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Not applicable.
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Table of Contents
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers and their respective ages and positions as of March 17, 2003 are set forth below:
| Steven B. Dodge |
57 |
Chairman of the Board and Chief Executive Officer | ||
| James D. Taiclet, Jr. |
42 |
President and Chief Operating Officer | ||
| J. Michael Gearon, Jr. |
38 |
Vice Chairman, Director and President of American Tower International | ||
| Bradley E. Singer |
36 |
Chief Financial Officer and Treasurer | ||
| Steven J. Moskowitz |
39 |
Executive Vice President, Tower Division | ||
| William H. Hess |
39 |
Executive Vice President and General Counsel | ||
| Justin D. Benincasa |
40 |
Senior Vice President and Corporate Controller |
Steven B. Dodge has served as Chairman of the Board and Chief Executive Officer since our separation from American Radio Systems in June 1998. He also served as President until September 2001. Mr. Dodge was the Chairman of the Board of Directors, President and Chief Executive Officer of American Radio from its founding in November 1993 until the ATC Separation. In 1988, Mr. Dodge founded Atlantic Radio, one of the predecessor entities of American Radio. Mr. Dodge currently serves as a director of Nextel Partners, Inc. and Sothebys Holdings, Inc.
James D. Taiclet, Jr. is our President and Chief Operating Officer. Prior to joining us in that capacity in September 2001, Mr. Taiclet had been President of Honeywell Aerospace Services, a part of Honeywell International, since March 1999. Mr. Taiclet was with United Technologies from March 1996 until March 1999, serving as Vice President, Pratt & Whitney Engine Services.
J. Michael Gearon, Jr. is our Vice Chairman and President of American Tower International, and has been a director since our acquisition of Gearon Communications in January 1998. From January 1998 until January 2002, Mr. Gearon served as an Executive Vice President. Prior to joining us, Mr. Gearon had been the founder and Chief Executive Officer of Gearon Communications since September 1991. Mr. Gearon currently serves as a director of TV Azteca, S.A. de C.V.
Bradley E. Singer is our Chief Financial Officer and Treasurer. Mr. Singer joined us in September 2000 as Executive Vice President, Strategy, and was appointed Vice President and General Manager of the Southeast Region in November 2000, positions he held until July 2001. He was appointed Executive Vice President, Finance in July 2001, and to his current position in December 2001. Prior to joining us, Mr. Singer was an investment banker focusing on the telecommunications industry with Goldman, Sachs & Co., which he joined in 1997.
Steven J. Moskowitz is our Executive Vice President, Tower Division. Mr. Moskowitz joined us in January 1998, initially as a Vice President and General Manager of our Northeast Region, and was appointed Executive Vice President, Marketing and Vice President and General Manager of our Northeast Region in March 1999. He was named to his current position in January 2002. Prior to joining us, Mr. Moskowitz had served as a Vice President of The Katz Media Group, the largest broadcast media representation firm in the United States, since 1989.
William H. Hess is our Executive Vice President and General Counsel. Mr. Hess joined us in 2001 as Chief Financial Officer of American Tower International, and was appointed Executive Vice President in May 2001. Mr. Hess was appointed to his current position in September 2002. Prior to joining us, Mr. Hess had been a partner with the law firm of King & Spalding, LLP, which he joined in 1990.
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Table of Contents
Justin D. Benincasa is our Senior Vice President and Corporate Controller. Mr. Benincasa was a Vice President and Corporate Controller of American Radio from its founding in 1993 until we separated from American Radio in 1998.
The information under “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” from the Definitive Proxy Statement is hereby incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION
The information under “Compensation and Other Information Concerning Directors and Officers” from the Definitive Proxy Statement is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information under “Security Ownership of Certain Beneficial Owners and Management” and “Securities Authorized for Issuance Under Equity Compensation Plans” from the Definitive Proxy Statement is hereby incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under “Certain Relationships and Related Transactions” from the Definitive Proxy Statement is hereby incorporated by reference herein.
ITEM 14. CONTROLS AND PROCEDURES
We have established disclosure controls and procedures to ensure that material information relating to us, including our consolidated subsidiaries, is made known to the officers who certify our financial reports and to other members of senior management and the Board of Directors.
Based on their evaluation as of a date within 90 days of the filing date of this Annual Report on Form 10-K, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
There were no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of their most recent evaluation.
49
Table of Contents
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
| (a) | Financial Statements and Schedules. See Index to Consolidated Financial Statements, which appears on page F-1 hereof. |
| (b) | Reports on Form 8-K. |
Form 8-K (Items 5 and 7) filed on October 10, 2002.
| (c) | Exhibits. The exhibits listed on the Exhibit Index hereof are filed herewith in response to this Item. |
50
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 24th day of March 2003.
| AMERICAN TOWER CORPORATION | ||
| By: |
/S/ STEVEN B. DODGE | |
| Steven B. Dodge Chief Executive Officer and Chairman | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signature |
Title |
Date | ||
| /s/ STEVEN B. DODGE Steven B. Dodge |
Chief Executive Officer and Chairman (Principal Executive Officer) |
March 24, 2003 | ||
| /s/ BRADLEY E. SINGER Bradley E. Singer |
Chief Financial Officer and Treasurer (Principal Financial Officer) |
March 24, 2003 | ||
| /s/ JUSTIN D. BENINCASA Justin D. Benincasa |
Senior Vice President and Corporate Controller (Principal Accounting Officer) |
March 24, 2003 | ||
| /s/ ALAN L. BOX Alan L. Box |
Director |
March 24, 2003 | ||
| /s/ ARNOLD L. CHAVKIN Arnold L. Chavkin |
Director |
March 24, 2003 | ||
| /s/ RAYMOND P. DOLAN Raymond P. Dolan |
Director |
March 24, 2003 | ||
| /s/ J. MICHAEL GEARON, JR. J. Michael Gearon, Jr. |
Director |
March 24, 2003 | ||
| /s/ FRED R. LUMMIS Fred R. Lummis |
Director |
March 24, 2003 | ||
| /s/ PAMELA D.A. REEVE Pamela D. A. Reeve |
Director |
March 24, 2003 | ||
| /s/ MARY AGNES WILDEROTTER Mary Agnes Wilderotter |
Director |
March 24, 2003 |
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I, Steven B. Dodge, certify that:
| 1. | I have reviewed this annual report on Form 10-K of American Tower Corporation; |
| 2. | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have: |
| a. | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; |
| b. | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and |
| c. | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a. | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. | The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: March 24, 2003
| /s/ STEVEN B. DODGE |
| Steven B. Dodge Chief Executive Officer |
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Table of Contents
CERTIFICATIONS
I, Bradley E. Singer, certify that:
| 1. | I have reviewed this annual report on Form 10-K of American Tower Corporation; |
| 2. | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have: |
| a. | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; |
| b. | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and |
| c. | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a. | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. | The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: March 24, 2003
| /s/ BRADLEY E. SINGER |
| Bradley E. Singer Chief Financial Officer |
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Table of Contents
AMERICAN TOWER CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | ||
| Independent Auditors’ Report |
F-2 | |
| Consolidated Balance Sheets as of December 31, 2002 and 2001 |
F-3 | |
| Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000 |
F-4 | |
| Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2002, 2001 and 2000 |
F-5 | |
| Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000 |
F-6 | |
| Notes to Consolidated Financial Statements |
F-7 |
F-1
Table of Contents
INDEPENDENT AUDITORS’ REPORT
To the Board of Directors of
American Tower Corporation:
We have audited the accompanying consolidated balance sheets of American Tower Corporation and subsidiaries (the “Company”) as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America.
As discussed in notes 1 and 8 to the consolidated financial statements, in 2001 the Company adopted the provisions of Statement of Financial Accounting Standard No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. Also, as discussed in notes 1 and 5 to the consolidated financial statements, in 2002 the Company adopted Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets.”
/s/ Deloitte & Touche LLP
Boston, Massachusetts
February 24, 2003
F-2
Table of Contents
AMERICAN TOWER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
(In thousands, except share data)
| 2002 |
2001 |
|||||||
| ASSETS |
||||||||
| CURRENT ASSETS: |
||||||||
| Cash and cash equivalents |
$ |
127,292 |
|
$ |
35,958 |
| ||
| Restricted cash |
|
94,071 |
| |||||
| Accounts receivable, net of allowance for doubtful accounts |
|
83,177 |
|
|
182,612 |
| ||
| Prepaid and other current assets |
|
44,769 |
|
|
89,645 |
| ||
| Inventories |
|
9,092 |
|
|
49,332 |
| ||
| Costs and earnings in excess of billings on uncompleted contracts and unbilled receivables |
|
24,088 |
|
|
46,453 |
| ||
| Deferred income taxes |
|
13,111 |
|
|
24,136 |
| ||
| Assets held for sale |
|
234,724 |
|
|||||
| Total current assets |
|
536,253 |
|
|
522,207 |
| ||
| PROPERTY AND EQUIPMENT, net |
|
2,734,885 |
|
|
3,287,573 |
| ||
| OTHER INTANGIBLE ASSETS, net |
|
1,142,511 |
|
|
1,347,518 |
| ||
| GOODWILL, net |
|
602,993 |
|
|
1,160,393 |
| ||
| DEFERRED INCOME TAXES |
|
383,431 |
|
|
245,215 |
| ||
| NOTES RECEIVABLE |
|
109,414 |
|
|
114,454 |
| ||
| DEPOSITS, INVESTMENTS AND OTHER LONG-TERM ASSETS |
|
152,716 |
|
|
152,363 |
| ||
| TOTAL |
$ |
5,662,203 |
|
$ |
6,829,723 |
| ||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
| CURRENT LIABILITIES: |
||||||||
| Accounts payable and accrued expenses |
$ |
110,430 |
|
$ |
174,921 |
| ||
| Accrued interest |
|
63,611 |
|
|
59,492 |
| ||
| Accrued tower construction costs |
|
13,982 |
|
|
39,618 |
| ||
| Current portion of other long-term obligations |
|
59,243 |
|
|
12,585 |
| ||
| Billings in excess of costs on uncompleted contracts and unearned revenue |
|
47,123 |
|
|
56,098 |
| ||
| Convertible notes, net—2.25% |
|
210,899 |
|
|||||
| Liabilities held for sale |
|
165,006 |
|
|||||
| Total current liabilities |
|
670,294 |
|
|
342,714 |
| ||
| LONG-TERM OBLIGATIONS |
|
3,194,537 |
|
|
3,549,375 |
| ||
| OTHER LONG-TERM LIABILITIES |
|
41,482 |
|
|
54,501 |
| ||
| Total liabilities |
|
3,906,313 |
|
|
3,946,590 |
| ||
| COMMITMENTS AND CONTINGENCIES (Note 9) |
||||||||
| MINORITY INTEREST IN SUBSIDIARIES |
|
15,567 |
|
|
13,937 |
| ||
| STOCKHOLDERS’ EQUITY: |
||||||||
| Preferred Stock: $.01 par value; 20,000,000 shares authorized; no shares issued or outstanding |
||||||||
| Class A Common Stock: $.01 par value; 500,000,000 shares authorized; 185,643,625 and 185,162,631 shares issued, 185,499,028 and 185,018,034 shares outstanding, respectively |
|
1,856 |
|
|
1,851 |
| ||
| Class B Common Stock: $.01 par value; 50,000,000 shares authorized; 7,917,070 and 8,001,769 shares issued and outstanding, respectively |
|
79 |
|
|
80 |
| ||
| Class C Common Stock: $.01 par value; 10,000,000 shares authorized; and 2,267,813 shares issued and outstanding, respectively |
|
23 |
|
|
23 |
| ||
| Additional paid-in capital |
|
3,642,019 |
|
|
3,639,510 |
| ||
| Accumulated deficit |
|
(1,887,030 |
) |
|
(745,151 |
) | ||
| Accumulated other comprehensive loss |
|
(5,564 |
) |
|
(16,057 |
) | ||
| Note receivable |
|
(6,720 |
) |
|
(6,720 |
) | ||
| Treasury stock (144,597 shares at cost) |
|
(4,340 |
) |
|
(4,340 |
) | ||
| Total stockholders’ equity |
|
1,740,323 |
|
|
2,869,196 |
| ||
| TOTAL |
$ |
5,662,203 |
|
$ |
6,829,723 |
| ||
See notes to consolidated financial statements.
F-3
Table of Contents
AMERICAN TOWER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2002, 2001, and 2000
(In thousands, except per share data)
| 2002 |
2001 |
2000 |
||||||||||
| REVENUES: |
||||||||||||
| Rental and management |
$ |
548,923 |
|
$ |
435,302 |
|
$ |
270,298 |
| |||
| Network development services |
|
239,497 |
|
|
349,848 |
|
|
239,616 |
| |||
| Total operating revenues |
|
788,420 |
|
|
785,150 |
|
|
509,914 |
| |||
| OPERATING EXPENSES: |
||||||||||||
| Rental and management |
|
228,519 |
|
|
211,811 |
|
|
136,300 |
| |||
| Network development services |
|
217,690 |
|
|
312,926 |
|
|
210,313 |
| |||
| Depreciation and amortization |
|
316,876 |
|
|
346,020 |
|
|
241,211 |
| |||
| Corporate general and administrative expense |
|
24,349 |
|
|
26,478 |
|
|
14,958 |
| |||
| Restructuring expense |
|
10,638 |
|
|
5,236 |
|
||||||
| Development expense |
|
5,896 |
|
|
7,895 |
|
|
14,433 |
| |||
| Impairments and net loss on sale of long-lived assets |
|
90,734 |
|
|
74,260 |
|
||||||
| Total operating expenses |
|
894,702 |
|
|
984,626 |
|
|
617,215 |
| |||
| OPERATING LOSS FROM CONTINUING OPERATIONS |
|
(106,282 |
) |
|
(199,476 |
) |
|
(107,301 |
) | |||
| OTHER INCOME (EXPENSE) |
||||||||||||
| Interest income, TV Azteca, net of interest expense of $1,494, $1,160, and $1,047, respectively |
|
13,938 |
|
|
14,377 |
|
|
12,679 |
| |||
| Interest income |
|
3,514 |
|
|
28,622 |
|
|
15,954 |
| |||
| Interest expense |
|
(255,645 |
) |
|
(267,825 |
) |
|
(151,702 |
) | |||
| Loss on investments and other expense |
|
(25,579 |
) |
|
(38,797 |
) |
|
(2,434 |
) | |||
| Loss on term loan cancellation |
|
(7,231 |
) |
|||||||||
| Note conversion expense |
|
(26,336 |
) |
|
(16,968 |
) | ||||||
| Minority interest in net earnings of subsidiaries |
|
(2,118 |
) |
|
(318 |
) |
|
(202 |
) | |||
| Total other expense |
|
(273,121 |
) |
|
(290,277 |
) |
|
(142,673 |
) | |||
| LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |
|
(379,403 |
) |
|
(489,753 |
) |
|
(249,974 |
) | |||
| INCOME TAX BENEFIT |
|
64,634 |
|
|
99,875 |
|
|
65,897 |
| |||
| LOSS FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY |
|
(314,769 |
) |
|
(389,878 |
) |
|
(184,077 |
) | |||
| LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAX BENEFIT (PROVISION) OF $33,107, $16,912 AND $(6,241), RESPECTIVELY |
|
(263,427 |
) |
|
(60,216 |
) |
|
(6,213 |
) | |||
| LOSS BEFORE EXTRAORDINARY LOSSES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE |
|
(578,196 |
) |
|
(450,094 |
) |
|
(190,290 |
) | |||
| EXTRAORDINARY LOSSES ON EXTINGUISHMENT OF DEBT, NET OF INCOME TAX BENEFIT OF $573 IN 2002 AND $2,892 IN 2000 |
|
(1,065 |
) |
|
(4,338 |
) | ||||||
| LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE |
|
(579,261 |
) |
|
(450,094 |
) |
|
(194,628 |
) | |||
| CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF INCOME TAX BENEFIT OF $14,438 |
|
(562,618 |
) |
|||||||||
| NET LOSS |
$ |
(1,141,879 |
) |
$ |
(450,094 |
) |
$ |
(194,628 |
) | |||
| BASIC AND DILUTED LOSS PER COMMON SHARE AMOUNTS: |
||||||||||||
| Loss from continuing operations before extraordinary losses and cumulative effect of change in accounting principle |
$ |
(1.61 |
) |
$ |
(2.04 |
) |
$ |
(1.09 |
) | |||
| Loss from discontinued operations |
|
(1.34 |
) |
|
(0.31 |
) |
|
(0.04 |
) | |||
| Extraordinary losses |
|
(0.01 |
) |
|
(0.02 |
) | ||||||
| Cumulative effect of change in accounting principle |
|
(2.88 |
) |
|||||||||
| NET LOSS PER COMMON SHARE |
$ |
(5.84 |
) |
$ |
(2.35 |
) |
$ |
(1.15 |
) | |||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING |
|
195,454 |
|
|
191,586 |
|
|
168,715 |
| |||
See notes to consolidated financial statements.
F-4
Table of Contents
AMERICAN TOWER CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended December 31, 2002, 2001, and 2000
(In thousands, except share data)
| Common Stock |
Common Stock |
Common Stock |
Treasury Stock |
Note Receivable |
Additional Paid-in Capital |
Accumulated Other Comprehensive Loss |
Accumulated Deficit |
Total Stockholders’ Equity |
Total Comprehensive Loss |
||||||||||||||||||||||||||||||||||||||||
| Class A |
Class B |
Class C |
|||||||||||||||||||||||||||||||||||||||||||||||
| Issued Shares |
Amount |
Issued Shares |
Amount |
Issued Shares |
Amount |
Shares |
Amount |
||||||||||||||||||||||||||||||||||||||||||
| BALANCE, JANUARY 1, 2000 |
144,965,623 |
$ |
1,450 |
8,387,910 |
|
$ |
84 |
|
2,422,804 |
|
$ |
24 |
|
(76,403 |
) |
$ |
(1,528 |
) |
$ |
2,245,482 |
$ |
(100,429 |
) |
$ |
2,145,083 |
|
|||||||||||||||||||||||
| 6.25% and 2.25% convertible notes exchanged for common stock |
6,126,594 |
|
61 |
|
153,306 |
|
153,367 |
|
|||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock—June offering |
12,500,000 |
|
125 |
|
513,780 |
|
513,905 |
|
|||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, options and warrants—mergers |
4,522,692 |
|
45 |
|
227,462 |
|
227,507 |
|
|||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock—Employee Stock Purchase Plan |
33,794 |
|
865 |
|
865 |
|
|||||||||||||||||||||||||||||||||||||||||||
| Exercise of options |
1,418,560 |
|
14 |
165,390 |
|
|
2 |
|
|
23,461 |
|
23,477 |
|
||||||||||||||||||||||||||||||||||||
| Share class exchanges |
613,286 |
|
6 |
(458,295 |
) |
|
(5 |
) |
(154,991 |
) |
|
(1 |
) |
||||||||||||||||||||||||||||||||||||
| Treasury stock |
(68,194 |
) |
|
(2,812 |
) |
|
(2,812 |
) |
|||||||||||||||||||||||||||||||||||||||||
| Tax benefit of stock options |
|
10,266 |
|
10,266 |
|
||||||||||||||||||||||||||||||||||||||||||||
| Net Loss |
|
(194,628 |
) |
|
(194,628 |
) |
$ |
(194,628 |
) | ||||||||||||||||||||||||||||||||||||||||