10-K 1 d10k.htm FORM 10-K Form 10-K
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-K

 


 

(Mark One):

x Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

For the fiscal year ended December 31, 2004

 

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

For the transition period from              to             

 

Commission File Number: 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)

 

Telephone Number (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:

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.    x

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act): 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 30, 2004 was approximately $3,349,427,403, 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 18, 2005, there were 230,604,932 shares of Class A Common Stock 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 2005 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report.

 



Table of Contents

AMERICAN TOWER CORPORATION

 

TABLE OF CONTENTS

 

FORM 10-K ANNUAL REPORT

FISCAL YEAR ENDED DECEMBER 31, 2004

 

          Page

Special Note Regarding Forward-Looking Statements    ii
PART I          
ITEM 1.    Business    1
    

Overview

   1
    

Strategy

   2
    

Products and Services

   3
    

Recent Transactions

   5
    

Management Organization

   7
    

Regulatory Matters

   7
    

Competition

   9
    

Employees

   10
    

Available Information

   10
    

Factors That May Affect Future Results

   11
ITEM 2.    Properties    17
ITEM 3.    Legal Proceedings    17
ITEM 4.    Submission of Matters to a Vote of Security Holders    17
PART II          
ITEM 5.   

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

   18
ITEM 6.    Selected Financial Data    19
ITEM 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    22
    

Executive Overview

   22
    

Results of Operations

   24
    

Years Ended December 31, 2004 and 2003

   24
    

Years Ended December 31, 2003 and 2002

   28
    

Liquidity and Capital Resources

   33
    

Overview

   33
    

Uses of Cash

   33
    

Sources of Cash

   35
    

Financing Activities

   36
    

Factors Affecting Sources of Liquidity

   39
    

Critical Accounting Policies and Estimates

   40
    

Recent Accounting Pronouncements

   43
    

Information Presented Pursuant to the Indentures of Our 9 3/8% Notes, 7.50% Notes, 7.125% Notes, ATI 12.25% Notes and ATI 7.25% Notes

   43
ITEM 7A.    Quantitative and Qualitative Disclosures About Market Risk    44

 

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AMERICAN TOWER CORPORATION

 

TABLE OF CONTENTS—(Continued)

 

FORM 10-K ANNUAL REPORT

FISCAL YEAR ENDED DECEMBER 31, 2004

 

          Page

ITEM 8.    Financial Statements and Supplementary Data    46
ITEM 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    46
ITEM 9A.    Controls and Procedures    46
ITEM 9B.    Other Information    49
PART III          
ITEM 10.    Directors and Executive Officers of the Registrant    50
ITEM 11.    Executive Compensation    51
ITEM 12.   

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   51
ITEM 13.    Certain Relationships and Related Transactions    51
ITEM 14.    Principal Accountant Fees and Services    51
PART IV          
ITEM 15.    Exhibits and Financial Statement Schedules    52
Signatures    53
Index to Consolidated Financial Statements    F-1
Index to Exhibits    EX-1

 


 

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 such as “anticipates,” “intends,” “plans,” “believes,” “estimates,” “expects,” 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 planned dispositions of non-core assets, 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 statements are based on our management’s beliefs and assumptions, which in turn are based on currently available information. These assumptions could prove inaccurate. 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 arise 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 made by us 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 by us in this annual report or elsewhere might not occur.

 

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PART I

 

ITEM 1.    BUSINESS

 

Overview

 

We are a leading wireless and broadcast communications infrastructure company with a portfolio of approximately 15,000 towers. Our primary business is leasing antenna space on multi-tenant communications towers to wireless service providers and radio and television broadcast companies. We own and operate towers throughout the United States and Mexico, as well as in selected markets in Brazil. We operate the largest independent portfolio of wireless communications and broadcast towers in the United States and Mexico, based on number of towers and revenue.

 

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. With the sale of our tower construction services unit in November 2004, we substantially completed our strategic transition to a focused tower leasing business and now offer only limited services that directly support our rental and management operations and the addition of new tenants on our towers. We intend to capitalize on the continuing increase in the 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 also refer to as our rental and management segment, accounted for approximately 99.3% and 99.2% of our segment operating profit for the years ended December 31, 2004 and 2003, respectively. In 2005, we expect that our rental and management segment will continue to contribute approximately 99% 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).

 

An element of our strategy is to continue focusing 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, 2003 and December 31, 2004, we completed approximately $142.7 million of non-core asset sales and have used or will use the net proceeds to acquire new tower assets and to repay outstanding indebtedness. These sales include the disposition of certain non-core services businesses, including Flash Technologies (“Flash”), Galaxy Engineering (“Galaxy”), Kline Iron & Steel (“Kline”) and our tower construction services unit.

 

We believe that our strategy of focusing operations on our rental and management segment has made our consolidated operating cash flows more stable, will provide us with continuing growth and will enhance our returns on invested capital 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 an initial term of five-to-ten years with multiple five-year renewal terms thereafter, and lease payments typically increase 3% to 5% per year.

 

    Tower operating expenses are largely fixed. Incremental operating costs associated with adding wireless tenants to a tower are minimal.

 

    Low maintenance capital expenditures. On average, a wireless tower requires low 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 may adversely affect network quality, and because suitable alternative sites may not exist or be available.

 

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Strategy

 

Our strategy is to capitalize on the continuing growth in the use of wireless communication services and the infrastructure requirements necessary to deploy current and future generations of wireless communication technologies. Between December 2001 and December 2004, the number of wireless service subscribers in the United States increased from 128.4 million to 180.5 million, representing an increase of approximately 41% and market penetration of approximately 61%. From December 2001 through December 2004, the number of cell sites (i.e., the number of antennae and related equipment in commercial operation, not the number of towers on which that equipment is located) increased approximately 38% from approximately 127,500 cell cites to approximately 175,700. In Mexico, the number of wireless service subscribers increased from approximately 21.8 million in December 2001, to approximately 38.5 million in December 2004, representing an increase of approximately 77% and market penetration of approximately 36%. In Brazil, the number of wireless service subscribers increased from approximately 28.7 million in December 2001, to approximately 65.6 million in December 2004, representing an increase of approximately 129% and market penetration of approximately 36%.

 

We believe the continuing growth in the number of wireless subscribers and the minutes of use per subscriber will require wireless carriers to add 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. As wireless carriers continue to add subscribers and seek to limit churn, we also anticipate they will focus on network quality as a competitive necessity and will invest in upgrades to their networks. In addition, we believe that as wireless data services, such as email, internet access and video, 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 offerings and our management team position us to benefit from these 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 grew by approximately 10% and 16%, respectively, during 2004. 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. 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 actively manage our portfolio of towers by selling non-core towers and reinvesting a portion of the proceeds in high quality tower assets. In 2004, we sold 52 non-core towers and used a portion of the proceeds from these sales and other funds to acquire 214 towers. Our goal is to enhance operating efficiencies either by acquiring towers with high growth potential 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 in tower assets that are expected to provide a greater return.

 

   

Employ Selective Criteria for New Tower Construction and Acquisitions. We continue to construct, re-develop and acquire new towers when our initial and long-term return on investment criteria are met. These criteria include securing leases from customers in advance of construction, ensuring reasonable

 

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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 and Processes. Because speed to market and reliable network performance are critical components to the success of wireless service providers, our ability to assist customers in meeting their goals will contribute to our success. We intend to continue to focus on customer service by, for example, reducing cycle time for key functions, such as lease processing. Accordingly, we have established a team dedicated to exploring and leveraging customer-driven process improvement capabilities. We believe that this effort should enable us to increase revenue generation through improved speed, accuracy and quality. In addition, sharing operational processes and outcomes establishes another connection point with our customers and provides us valuable input and relationship enhancing opportunities.

 

    Build On Our Strong Relationships with Major Wireless Carriers. Our understanding of the network needs of our customers and our ability to convey effectively how we can satisfy those needs are key to our efforts to add new antenna 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 and experienced personnel can be used to satisfy their needs. We believe that we are well positioned to be a preferred partner to major wireless carriers and broadcasters in leasing tower space and new tower development projects because of the location of our towers, our proven operating experience and the national scope of our tower portfolio and services.

 

    Participation in Industry Consolidation. We believe there are benefits to 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.

 

Products and Services

 

We operate in two business segments: rental and management and network development services. For more information about our business segments, as well as financial information about the geographic areas in which we operate, see note 16 to our consolidated financial statements included in this annual report and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Our primary business is our leasing business, which we refer to as our rental and management segment, and which accounted for approximately 99.3% and 99.2% of our segment operating profit for the years ended December 31, 2004 and 2003, respectively. We also offer tower related services through our network development services segment that are complementary to our rental and management segment. In December 2004, we sold our tower construction services unit, which constituted a significant component of our network development services segment. Since that sale, our remaining network development services segment has continued to provide non-construction services, including site acquisition, zoning, permitting and structural analysis.

 

Prior to December 2002, we also operated a satellite and fiber network access services segment through our Verestar, Inc., subsidiary (“Verestar”). In December 2002, we committed to a plan to dispose of this business, and in December 2003, Verestar and its affiliates filed for protection under Chapter 11 of the federal bankruptcy laws. Accordingly, we have accounted for Verestar as a discontinued operation through the date of the bankruptcy filing and we ceased to consolidate Verestar’s financial results as of that date. See “—Factors That May Affect Future Results—The bankruptcy proceeding of our Verestar subsidiary exposes us to risks and uncertainties.”

 

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Rental and Management

 

Leasing of Antenna Sites. Our primary business is leasing antenna space on multi-tenant communications towers to wireless service providers and radio and television broadcast companies. 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. 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, 85% of our U.S. network provides coverage in the top 100 markets or core areas such as high traffic interstate corridors. Our Mexican network includes approximately 1,900 sites, including approximately 190 broadcast tower sites, in highly populated areas, including Mexico City, Monterrey, Guadalajara and Acapulco. Our Brazilian network consists of approximately 450 towers, which are concentrated in southern Brazil in major metropolitan areas like Sao Paulo, Rio de Janeiro, Brasilia and Curitiba.

 

We lease antenna space on our towers to tenants in a diverse range of wireless communications and broadcast industries. Wireless industries we serve primarily include: personal communications services, cellular, enhanced specialized mobile radio, paging and fixed microwave. Our major domestic wireless customers include ALLTEL, Cingular Wireless, Nextel, Sprint PCS, T-Mobile USA and Verizon Wireless, and their respective affiliates. Our major international wireless customers include Iusacell Celular, Nextel Mexico, Telefonica Moviles and Unefon in Mexico, and Nextel Brazil, Telecom Americas and Telecom Italia Mobile in Brazil. Our largest customer is Cingular Wireless, which merged with AT&T Wireless in October 2004. The combined revenues of Cingular Wireless and AT&T Wireless represented approximately 14% of our total revenues for the year ended December 31, 2004. Verizon Wireless represented approximately 12% of our total revenues for the year ended December 31, 2004, and Sprint PCS and Nextel, which announced their merger plans in December 2004, had combined revenues that would have represented approximately 10% of our total revenues for the year ended December 31, 2004. No other customer accounted for greater than 10% of our total revenues for the year ended December 31, 2004. Approximately 64% of our total revenues for the year ended December 31, 2004 were derived from ten customers. See “—Factors That May Affect Future Results—A substantial portion of our revenues is derived from a small number of customers” and “Due to the long-term expectations of revenue from tenant leases, the tower industry is sensitive to the credit worthiness of its tenants.”

 

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, coupled with the specific band of radio frequency and technology used by the carrier, determine 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, typically do not place their equipment at the highest tower point. Other customers, including paging companies and specialized mobile radio providers in rural areas, prefer higher elevations for broader coverage. We believe that a significant majority of our towers have the capacity to add additional tenants.

 

Lease Terms. Our customer leases, which we refer to as tenant leases, generally vary depending upon the region and the industry of the tenant. In the United States, initial terms for television and radio broadcast leases typically range between ten and twenty years, while leases for wireless communications providers generally have initial terms of five-to-ten years. In Mexico and Brazil, our typical tenant lease has an initial term of 10 years. In most cases, our tenant leases have multiple renewal terms at the option of the tenant. Both wireless carriers and broadcasters generally renew their leases with us. Repositioning an antenna in an existing carrier’s network is expensive and often requires reconfiguring several other antennae in the carrier’s network, which may impact the quality of the carrier’s coverage and may require the carrier to obtain other governmental permits.

 

Most of our tenant 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.

 

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Annual rental payments vary considerably depending upon:

 

    the location of the tower;

 

    number and weight of the antennae on the tower and the size of the transmission lines;

 

    ground space necessary to store equipment related to the antennae;

 

    existing capacity of the tower;

 

    the placement of the customer’s antennae on the tower; and

 

    range or number of carrier’s frequency spectrum.

 

Network Development Services

 

We historically offered extensive tower-related services to support our leasing business. As we continued to focus our operations on our rental and management segment, we divested the significant majority of businesses from our network development services segment that did not provide incremental value to our core leasing business. At the beginning of 2003, our network development services segment included network engineering services through Galaxy and steel fabrication and tall tower design and construction services through Kline. In August 2003, we sold Galaxy and in June 2003 we committed to a plan to sell Kline, which was sold in March 2004. In November 2004, we sold our tower construction services unit. Accordingly, the results of operations of these businesses are accounted for as discontinued operations and are not included in our network development services segment.

 

Our network development services segment continues to provide the following tower-related services that are complementary to our rental and management segment:

 

Site Acquisition, Zoning and Permitting Services. We engage in site acquisition services for our own account, in connection with tower development projects, as well as for third parties. We typically work with our customers’ network design engineers to determine the geographic areas where the applicable customer needs a tower site to address its coverage objectives. Once a site is identified, we acquire the rights to the land or structure on which the site will be constructed, and manage the permitting process to ensure all necessary approvals are obtained to construct and operate the communications site under applicable law.

 

Structural Analysis. We offer structural analysis services to wireless carriers with respect to collocating new equipment on towers. A structural analysis of a tower is often performed prior to a decision by a wireless carrier to collocate new equipment on a tower. Our team of engineers can evaluate whether a tower can support the additional burden of the new equipment or if augmentation is needed, which enables our customers to better assess potential tower sites before making a decision to collocate new equipment.

 

Recent Transactions

 

Acquisitions

 

NII Holdings, Inc. In December 2002, we agreed to acquire over 500 communications sites from NII Holdings (“NII”), predominantly in Mexico, for an aggregate purchase price of $100.0 million in cash. Although we have satisfied our minimum purchase obligation under the agreement, we have continued to purchase additional towers from NII. As of December 31, 2004, we had acquired an aggregate of 708 towers in Mexico and Brazil from NII for a total purchase price of $120.0 million. We have the option to purchase additional tower sites from NII in Mexico and Brazil through 2007. We expect to fund any additional acquisitions using funds from operations.

 

Iusacell Celular. In December 2003, we agreed to acquire up to 143 communications sites from Iusacell Celular (“Iusacell”) in Mexico for up to $31.4 million. As of December 31, 2004, we had acquired an aggregate of 131 towers in Mexico from Iusacell for a total purchase price of $29.3 million, and we expect to acquire the remaining towers in early 2005. We expect to fund any additional acquisitions out of funds from operations.

 

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We seek out high-quality tower assets and opportunistically acquire towers that meet our return on investment criteria. In addition to the towers acquired from NII and Iusacell, from January 1, 2003 through December 31, 2004, we purchased 76 towers in the United States for a total purchase price of $4.5 million. We expect to fund any additional purchases out of funds from operations.

 

Dispositions

 

From January 1, 2003 through December 31, 2004, we completed approximately $142.7 million of non-core asset sales. Significant dispositions included the following:

 

Rental and Management

 

    Non-Core Towers. We sold approximately 400 non-core tower assets for approximately $51.2 million. 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.

 

    Office Buildings. In 2003, we sold two office buildings for an aggregate of approximately $28.8 million, including the assumption by one of the buyers of $16.1 million of related mortgage indebtedness. These buildings were held primarily as rental property in our rental and management segment.

 

Network Development Services

 

    Flash Technologies. In January 2003, we sold Flash, our lighting systems business, for net cash proceeds of approximately $35.5 million.

 

    Galaxy Engineering. In August 2003, we sold Galaxy, our radio frequency engineering, network design and tower-related consulting business. We received approximately $2.0 million in cash at closing, $0.5 million in January 2005 and will receive an additional $1.0 million payable on or before January 15, 2008.

 

    Kline Iron & Steel. In March 2004, we sold substantially all the net assets of Kline, our steel fabrication and tall tower design business, for approximately $4.0 million in cash, subject to a post closing working capital adjustment, and we may receive up to an additional $2.0 million in cash payable in 2006 based on the revenues generated by Kline in 2005.

 

    Tower Construction Services Unit. In November 2004, we sold our tower construction services unit for total consideration of approximately $9.1 million, consisting of cash and the assumption of certain capital lease obligations by the purchaser.

 

Other

 

    MTN. In February 2003, Verestar sold its subsidiary, Maritime Telecommunications Network (“MTN”), for approximately $25.5 million in cash. The net proceeds from the sale were used by Verestar to repay loans as required under the credit facility in place at the time of the sale.

 

ATC Mexico Holding Corp.

 

In the year ended December 31, 2004, we repurchased a 12.0% interest in ATC Mexico Holding Corp., the subsidiary through which we conduct our Mexico operations (“ATC Mexico”), from certain stockholders of ATC Mexico. We own 100% of ATC Mexico as a result of these repurchases.

 

In April 2004, we repurchased an 8.8% interest in ATC Mexico from J. Michael Gearon, Jr. (Mr. Gearon), one of our executive officers. In the first quarter of 2004, Mr. Gearon exercised his previously disclosed right to require the Company to purchase his interest in ATC Mexico. In consideration for his interest in ATC Mexico,

 

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we issued to Mr. Gearon 2,203,968 shares of our Class A common stock and paid $3.7 million in cash, representing 80% of the aggregate purchase price for Mr. Gearon’s interest. The 2,203,968 shares issued to Mr. Gearon had an aggregate market value on the date of issuance of $24.8 million. Payment of the remaining 20% of the purchase price of $7.3 million, plus interest, was contingent upon ATC Mexico satisfying certain performance criteria. In February 2005, our Board of Directors determined that the performance criteria had been satisfied, and we paid Mr. Gearon $7.7 million in cash. Our Board approved the determination of the fair market value of Mr. Gearon’s interest with the assistance of an independent financial advisor.

 

In October 2004, we repurchased a 3.2% interest in ATC Mexico from certain employees, including William H. Hess (Mr. Hess), one of our executive officers. In the first quarter of 2004, these employees exercised options to purchase an aggregate of 318 shares of ATC Mexico under the ATC Mexico Stock Option Plan. In October 2004, these employees exercised their previously disclosed rights to require the Company to purchase their collective 3.2% interest in ATC Mexico. In consideration for their interests in ATC Mexico, we issued to these employees an aggregate of 1,155,678 shares of our Class A common stock, representing 80% of the aggregate purchase price for their collective interests. The 1,155,678 shares issued to these employees had an aggregate market value on the date of issuance of $18.5 million. Payment of the remaining 20% of the purchase price of 218,566 shares of Class A common stock was contingent upon ATC Mexico satisfying certain performance criteria. In February 2005, our Board of Directors determined that the performance criteria had been satisfied, and we issued to these employees 159,836 shares of our Class A common stock, net of 58,730 shares of Class A common stock retained by the Company to satisfy tax withholding obligations. On the date of issuance, the aggregate market value of these 218,566 shares was $3.9 million. Our Board approved the determination of the fair market value of the interests held by these employees with the assistance of an independent financial advisor.

 

Management Organization

 

Our corporate headquarters is located in Boston, Massachusetts. Since 2003, we have streamlined our United States rental and management organization from three regions and ten areas to centralized management over six areas. In addition, with the sale of our tower construction services unit in November 2004, we consolidated our network development services organization with our US Tower Division. Each of our six United States tower areas is led by an area general manager and staffed with skilled operating and marketing personnel. The six area general managers report to a vice president, who reports to our President, US Tower Division who, in turn, reports to our Chief Executive Officer. Our international organization is divided into two regions, Mexico and Brazil, each of which is led by a vice president. The two vice presidents report to the President, American Tower International, who, in turn, reports to our Chief Executive Officer. Our US Tower Division is based in Boston. Our centralized lease processing for the US Tower Division 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.

 

Regulatory Matters

 

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 towers or modifications to existing towers must be pre-approved by the FAA. Towers requiring FAA approval must be registered with the FCC and must be painted and lighted in accordance with the FAA’s standards. The FAA review and the FCC registration processes are prerequisites to use of the tower by FCC licensees, as well as our other customers. Tower owners are responsible for notifying the FAA of any tower lighting outages or malfunctions and for timely

 

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repairing lighting outages or malfunctions. Tower owners also must notify the FCC when ownership of a tower changes. We generally indemnify our customers against non-compliance with applicable standards. Non-compliance 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 towers. We hold, through a subsidiary, certain common carrier microwave licenses granted by the FCC. We are required to obtain the FCC’s approval prior to assigning these licenses or transferring control of the entity which holds FCC licenses, or any of its parent companies.

 

In January 2001, the FCC sent us a Notice of Apparent Liability for Forfeiture (“NAL”) preliminarily determining that we had not filed certain informational forms, had not properly posted certain information at various tower sites, and on one occasion had not properly lit a tower. The FCC also ordered an additional review of our overall procedures for 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 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. The Consent Decree expired in August 2004.

 

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, and the Endangered Species Act. These regulations obligate each FCC 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.

 

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 towers.

 

We are 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 and community residents often are opposed to construction in their communities, which can delay or prevent new tower construction, collocations or site upgrade projects, thereby limiting our ability to respond to customer demand. In addition, zoning regulations can 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

 

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customers, both domestic and foreign, also may be subject to new regulatory policies that may adversely affect the demand for communications sites.

 

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. 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 and entered into a settlement agreement that expires in 2006 related to certain alleged environmental permitting and filing violations in the County of Santa Clara in California.

 

We are finalizing an Audit Agreement with the United States Environmental Protection Agency (“EPA”) pursuant to the EPA’s voluntary audit and disclosure policy. Under the Audit Agreement, we have agreed to audit over a three-year period ending in August 2007 all of our tower sites for compliance with the notice and record-keeping requirements under the Emergency Protection and Community Right to Know Act (“EPCRA”), the Clean Air Act, the Clean Water Act and the Resource Conservation and Recovery Act. We will inform the EPA of any violations of the above-referenced statutes at a given tower site and take steps to cure the violations. The Audit Agreement provides for stipulated penalties for violations under EPCRA and, for violations under the remaining statutes, we will pay a penalty based on our economic benefit of non-compliance.

 

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 an employer, we are subject to the Occupational Safety and Health Act and similar guidelines regarding employee protection from radio frequency exposure. Our field personnel are subject to regulation by the Occupational Safety and Health Administration and equivalent state agencies concerning health and safety matters.

 

Competition

 

Rental and Management

 

We compete for antenna site customers with other national tower companies (such as Crown Castle International Corp., Global Signal Inc., SpectraSite, Inc., and SBA Communications Corp.), wireless carriers and broadcasters that own and operate their own tower networks and lease tower space to third parties, numerous independent tower owners and the owners of non-tower sites, including rooftops, water towers and other alternative structures. 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.

 

The emergence or growth of new technologies also may make it possible for wireless carriers to expand their use of existing infrastructure, which could reduce customer demand for our communications sites. The increased use of capacity enhancing technologies, such as lower-rate vocoders, and more spectrally efficient air-link standards, which potentially can relieve some network capacity problems, could reduce the demand for tower-based antenna space.

 

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Any increase in the use of network sharing or roaming or resale arrangements by wireless service providers also 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.

 

Consolidation among wireless carriers, such as the October 2004 merger between Cingular Wireless and AT&T Wireless and the announced merger between Sprint PCS and Nextel, could have a similar impact on customer demand for our tower sites because the existing networks of many wireless carriers overlap. Although we do not expect the Cingular/AT&T Wireless merger or the Sprint PCS/Nextel merger to have a material adverse effect on our results of operations, significant consolidation among wireless carriers may adversely affect demand for our tower sites and, accordingly, our revenues and cash flows.

 

Network Development Services

 

Our network development services segment competes 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, tower owners/managers, telecommunications equipment vendors who can provide turnkey site development services through multiple subcontractors, and our customers’ internal staffs. We believe that our customers 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.

 

We believe that we compete favorably as to the key competitive factors relating to our rental and management and network development services segments.

 

Employees

 

As of December 31, 2004, we employed 726 full-time individuals and consider our employee relations to be satisfactory.

 

Available Information

 

Our Internet website address 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, our corporate governance guidelines, and the charters of our audit, compensation, and nominating and corporate governance committees, are available at the Investors portion of our website. 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 the regulations of the New York Stock Exchange and applicable law.

 

In addition, paper copies of these documents may be obtained free of charge by writing us at the following address: 116 Huntington Avenue, Boston, Massachusetts 02116, Attention: Investor Relations; or by calling us at (617) 375-7500.

 

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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 network development 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;

 

    governmental licensing of spectrum;

 

    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 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 further delayed or impaired, or if demand for it were less than anticipated because of delays, disappointing technical performance or cost to the consumer.

 

Substantial leverage and debt service obligations may adversely affect us.

 

We have a substantial amount of indebtedness. As of December 31, 2004, we had approximately $3.3 billion of consolidated debt. 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 with respect to our indebtedness. Approximately 21% 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. Subject to certain restrictions under our existing indebtedness, 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 on our financial condition and results of operations, including:

 

    impairing our ability 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;

 

    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;

 

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    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.

 

Restrictive covenants in the credit facility and indentures could adversely affect our business by limiting flexibility.

 

The credit facility and the indentures governing the terms of our other debt securities contain restrictive covenants and, in the case of the credit facility, requirements that we comply with certain leverage and other financial tests. These limit our ability to take various actions, including incurring additional debt, guaranteeing indebtedness, 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 participation or inability to participate in tower industry consolidation could involve certain risks.

 

We believe there are benefits to consolidation among tower companies, and have in the past and may in the future explore merger or acquisition transactions with one or more other companies in our industry. 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 the credit facility and the indentures for our other indebtedness, or may require the consent of lenders under those instruments that might not be obtainable on acceptable terms. In addition, regulatory constraints might impede or prevent 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.

 

If our wireless service provider customers consolidate or merge with each other to a significant degree, our growth, revenue and ability to generate positive cash flows could be adversely affected.

 

Significant consolidation among our wireless service provider customers, such as the recently completed transaction between Cingular Wireless and AT&T Wireless and the recently announced transaction between Sprint PCS and Nextel, 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, roaming or resale arrangements as an alternative to leasing our antennae space. In January 2003, the Federal Communications Commission (FCC) eliminated its spectrum cap, which prohibited wireless carriers from owning more than 45 MHz of spectrum in any given geographical area. The FCC has also eliminated the cross-interest rule for metropolitan areas, which limited an entity’s ability to own interests in multiple cellular licenses in an overlapping geographical service area. Also, in May 2003, the FCC adopted new rules authorizing wireless radio services holding exclusive licenses to freely lease unused spectrum. Some wireless carriers may be encouraged to consolidate with each other as a result of these regulatory changes 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. Many wireless service providers operate with substantial leverage. During the past few 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. If one or more of our major customers experience financial difficulties, it could result in uncollectible accounts receivable and our loss of significant customers and anticipated lease revenues.

 

Our foreign operations are subject to economic, political and other risks that could adversely affect our revenues or financial position.

 

Our business operations 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. For the year ended December 31, 2004, approximately 16.6% of our consolidated revenues were generated by our international operations. We anticipate that our revenues from our international operations may grow in the future. Accordingly, our business is subject to risks associated with doing business internationally, including:

 

    changes in a specific country’s or region’s political or economic conditions;

 

    laws and regulations that restrict repatriation of earnings or other funds;

 

    difficulty in recruiting trained personnel; and

 

    language and cultural differences.

 

In addition, we face risks associated with changes in foreign currency exchange rates. While many of the contracts for our international operations are denominated in the U.S. dollar, others are denominated in the Mexican Peso or the Brazilian Real. We have not historically engaged in significant hedging activities relating to our non-U.S. dollar operations, and we may suffer future losses as a result of changes in currency exchange rates.

 

A substantial portion of our revenues is derived from a small number of customers.

 

A substantial portion of our total operating revenues is derived from a small number of customers. Approximately 64% of our revenues for the year ended December 31, 2004 were derived from ten customers. Our largest domestic customer is Cingular Wireless, which merged with AT&T Wireless in October 2004. The combined revenues of Cingular Wireless and AT&T Wireless represented approximately 14% of our total revenues for the year ended December 31, 2004. Verizon Wireless represented approximately 12% of our revenues for the year ended December 31, 2004, and Sprint PCS and Nextel, which announced their merger plans in December 2004, had combined revenues that would have represented approximately 10% of our total revenues for the year ended December 31, 2004. Our largest international customer is Iusacell Celular, which is an affiliate of TV Azteca. Iusacell Celular accounted for approximately 5% of our total revenues for the year ended December 31, 2004. TV Azteca also owns a minority interest in Unefon, which is our second largest customer in Mexico and accounted for approximately 3% of our total revenues for the year ended December 31, 2004. In addition, we received $14.3 million in interest income, net, from TV Azteca for the year ended December 31, 2004. If any of these customers were unwilling or unable to perform their obligations under our agreements with them, our revenues, results of operations, and financial condition could be adversely affected.

 

In the ordinary course of our business, we also sometimes experience disputes with our customers, generally regarding the interpretation of terms in our agreements. Although historically we have resolved these disputes in a manner that did not have a material adverse effect on our company or our customer relationships, these disputes could lead to a termination of our agreements with customers or a material modification of the terms of those agreements, either of which could have a material adverse effect on our business, results of operations and

 

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financial condition. If we are forced to resolve any of these disputes through litigation, our relationship with the applicable customer could be terminated or damaged, which could lead to decreased revenues or increased costs, resulting in a corresponding adverse effect on our operating results.

 

Status of Iusacell Celular’s financial restructuring exposes us to certain risks and uncertainties.

 

Iusacell Celular is our largest customer in Mexico and accounted for approximately 5% of our total revenues for the year ended December 31, 2004. Iusacell currently is in default under certain of its debt obligations and is involved in litigation with certain of its creditors. If Iusacell files for bankruptcy, or if the creditor litigation has an adverse impact on Iusacell’s overall liquidity, it could interfere with Iusacell’s ability to meet its operating obligations, including rental payments under our leases with them.

 

New technologies could make our tower antenna leasing services less desirable to potential tenants and result in decreasing revenues.

 

The development and implementation of new technologies designed to enhance the efficiency of wireless networks could reduce the use and need for tower-based wireless services transmission and reception and have the effect of decreasing demand for antenna space. Examples of such technologies include technologies that enhance spectral capacity, such as lower-rate vocoders, which can increase the capacity at existing sites and 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 broadcast services transmission and reception. For example, the growth in delivery of video services by direct broadcast satellites could adversely affect demand for our antenna space. The development and implementation of any of these and similar technologies to any significant degree could have an adverse effect on 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. 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 these 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, the FCC, the EPA and the Occupational Safety and Health Administration. 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 that

 

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increase delays or result in additional costs to us or that 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, such as national wireless carriers that allow collocation on their towers, are larger and have greater financial resources than we do, while other competitors are in weak financial condition or may have lower return on investment criteria than we do. Competitive pricing pressures for tenants on towers from these competitors could adversely affect our lease rates and services 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 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).

 

If we are unable to protect our rights to the land under our towers, it could adversely affect on our business and operating results.

 

Our real property interests relating to our towers consist primarily of leasehold and sub-leasehold interests, fee interests, easements, licenses and rights-of-way. A loss of these interests may interfere with our ability to operate our towers and generate revenues. For various reasons, we may not always have the ability to access, analyze and verify all information regarding titles and other issues prior to completing an acquisition of sites. Further, we may not be able to renew ground leases on commercially viable terms. Of the approximately 14,000 towers in our portfolio that we own or hold subject to long-term capital lease, approximately 80% are located on leased land. Approximately 13% of these sites are on land where our property interests in such land have a final expiration date of less than 10 years. Our inability to protect our rights to the land under our towers may have a material adverse affect on us.

 

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 the development and expansion of tower sites. 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.

 

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The bankruptcy proceeding of our Verestar subsidiary exposes us to risks and uncertainties.

 

Our wholly owned subsidiary, Verestar, Inc., filed for protection under Chapter 11 of the federal bankruptcy laws on December 22, 2003. Verestar was reported as a discontinued operation through the date of the bankruptcy filing in 2003 for financial statement purposes and, as of the date of the bankruptcy filing, was deconsolidated for financial statement purposes. In December 2004, substantially all of the remaining fixed assets of Verestar were sold. The bankruptcy proceeding will continue until such time as all claims against Verestar are settled and approved by the Bankruptcy Court.

 

If Verestar fails to honor certain of its contractual obligations because of its bankruptcy filing or otherwise, claims may be made against us for breaches by Verestar of those contracts as to which we are primarily or secondarily liable as a guarantor, which as of December 31, 2004, we do not expect will exceed $5.0 million. In addition, Verestar’s bankruptcy estate may bring certain claims against us or seek to hold us liable for certain transfers made by Verestar to us and/or for Verestar’s obligations to creditors under various equitable theories recognized under bankruptcy law. The Official Committee of Unsecured Creditors appointed in the Verestar bankruptcy proceeding (the “Committee”) has requested, and we have agreed to produce, certain documents in connection with the subpoena for Rule 2004 Examination (as defined under federal bankruptcy laws) issued by the Committee. The Bankruptcy Court also has entered an order approving a stipulation between Verestar and the Committee that permits the Committee to file claims against us and/or our affiliates on behalf of Verestar. Although as of March 25, 2005, the Committee had not filed any claims against the Company or any of its current or former officers or directors, in papers filed with the Bankruptcy Court and in oral statements to the Company’s counsel, counsel for the Committee has stated that the Committee may pursue claims against these parties. The outcome of complex litigation (including claims which may be asserted against us by the Committee) cannot be predicted with certainty and is dependent upon many factors beyond our control; however, any such claims, if successful, could have a material adverse impact on our financial condition. Finally, we will incur additional costs in connection with our involvement in the Verestar bankruptcy proceedings.

 

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ITEM 2.    PROPERTIES

 

Our principal offices are located in Boston, Southborough and Woburn, Massachusetts; Atlanta, Georgia; Mexico City, Mexico; and Sao Paulo, Brazil. Details of each of these offices are provided below:

 

Location


  

Function


   Size (square feet)

   Property Interest

 

Boston, MA

   Corporate Headquarters and US Tower Division Headquarters    19,600    Leased  

Southborough, MA

   Information Technology Data Center    13,900    Leased  

Woburn, MA

   US Tower Division, Lease Administration and Broadcast Division Headquarters    26,000    Owned (1)

Atlanta, GA

   US Tower and Services Division, Accounting Services Division    17,900
4,800
   Leased
Leased
 
 

Mexico City, Mexico

   Mexico Headquarters    12,300    Leased  

Sao Paulo, Brazil

   Brazil Headquarters    3,200    Leased  

(1) The facility in Woburn contains a total of 162,000 square feet of space. Except for the 26,000 square feet of space occupied by our lease administration office and our broadcast division, the space in the facility is leased to unaffiliated tenants.

 

In addition, we maintain area offices in the United States through which we operate our tower leasing and services businesses on a local basis. We believe that our owned and leased facilities are suitable and adequate to meet our anticipated needs.

 

Our interests in our tower sites are comprised of a variety of ownership interests, leases created by long-term lease agreements, easements, licenses or rights-of-way granted by government entities. Of the approximately 15,000 towers in our portfolio, we own or hold subject to long-term capital lease approximately 14,000 towers. Of these towers, approximately 80% are located on leased land. In rural areas, a wireless communications site typically consists of a 10,000 square foot tract, which supports towers, equipment shelters and guy wires to stabilize the structure. A broadcast tower site typically consists of a tract of land of 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. Ground leases for land underlying our towers 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, our lenders have liens on, among other things, all towers, leasehold interests, tenant leases and contracts relating to the management of towers for others.

 

ITEM 3.    LEGAL PROCEEDINGS

 

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

 

None.

 

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PART II

 

ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The following table presents reported quarterly high and low per share sale prices of our Class A common stock on the New York Stock Exchange (NYSE) for the years 2004 and 2003.

 

2004


   High

   Low

Quarter ended March 31

   $ 13.12    $ 9.89

Quarter ended June 30

     16.00      11.13

Quarter ended September 30

     15.85      13.10

Quarter ended December 31

     18.75      15.19

2003


   High

   Low

Quarter ended March 31

   $ 5.94    $ 3.55

Quarter ended June 30

     9.90      5.41

Quarter ended September 30

     11.74      8.73

Quarter ended December 31

     12.00      9.59

 

On March 18, 2005, the closing price of our Class A common stock was $18.79 per share as reported on the NYSE.

 

As of March 18, 2005, we had 230,604,932 outstanding shares of Class A common stock and 743 registered holders.

 

In February 2004, all outstanding shares of our Class B common stock were converted into shares of our Class A common stock on a one-for-one basis pursuant to the occurrence of the “Dodge Conversion Event” as defined in our charter. Our charter prohibits the future issuance of shares of Class B common stock. Also in February 2004, all outstanding shares of Class C common stock were converted into shares of Class A common stock on a one-for-one basis. Our charter permits the issuance of shares of Class C common stock in the future.

 

The information under “Securities Authorized for Issuance Under Equity Compensation Plans” from the Definitive Proxy Statement is hereby incorporated by reference into Item 12 of this annual report.

 

Dividends

 

We have never paid a dividend on any class of common stock. We anticipate that we may retain future earnings, if any, to fund the development and growth of our business. The indentures governing our 9 3/8% senior notes due 2009, our 7.50% senior notes due 2012, and our 7.125% senior notes due 2012 prohibit us from paying dividends to our stockholders unless we satisfy certain financial covenants.

 

Our borrower subsidiaries are generally prohibited under the terms of the credit facility, subject to certain exceptions, from making to us any direct or indirect distribution, dividend or other payment on account of their limited liability company interests, partnership interests, capital stock or other equity interests, except that, if no default exists or would be created thereby under the credit facility, our borrower subsidiaries may pay cash dividends or make other distributions to us in accordance with the credit facility within certain specified amounts and, in addition, may pay cash dividends or make other distributions to us in respect of our outstanding indebtedness and permitted future indebtedness. The indentures governing the 12.25% senior subordinated discount notes due 2008 and the 7.25% senior subordinated notes due 2011 of American Towers, Inc. (ATI), our principal operating subsidiary, prohibit ATI and certain of our other subsidiaries that have guaranteed those notes (sister guarantors) from paying dividends and making other payments or distributions to us unless certain

 

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financial covenants are satisfied, except that our borrower subsidiaries may pay dividends or make other payments or distributions to us up to certain specified amounts in respect of certain of our outstanding indebtedness and permitted future indebtedness and, if no default exists or would be created thereby under the indentures governing such indebtedness and certain additional tests are met that could not currently be met, up to certain specified amounts.

 

Recent Sales of Unregistered Securities

 

In October 2004, we issued 1,155,678 shares of our Class A common stock in connection with our repurchase of a 3.2% interest in ATC Mexico. As discussed above, in October 2004, certain employees, including Mr. Hess, exercised their previously disclosed rights to require the Company to purchase their collective 3.2% interest in ATC Mexico. In consideration for their interests in ATC Mexico, we issued to these employees an aggregate of 1,155,678 shares of our Class A common stock, representing 80% of the aggregate purchase price for their collective interests. The 1,155,678 shares issued to these employees had an aggregate market value on the date of issuance of $18.5 million. Payment of the remaining 20% of the purchase price of 218,566 shares of Class A common stock was contingent upon ATC Mexico satisfying certain performance criteria. In February 2005, our Board determined that the performance criteria had been satisfied, and we issued to these employees 159,836 shares of our Class A common stock, net of 58,730 shares of Class A common stock retained by the Company to satisfy tax withholding obligations. The shares were issued in reliance upon the exemptions provided under Section 4(2) and Regulation S of the Securities Act of 1933, as amended. The shares issued in reliance on Section 4(2) were issued based upon, among other things, the following factors: (i) the shares were issued in a private offering; (ii) the individuals receiving the shares were accredited investors, as defined in Rule 501 under the Securities Act; and (iii) the shares issued cannot be resold without registration under the Securities Act or an exemption therefrom.

 

ITEM 6.    SELECTED FINANCIAL DATA

 

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.

 

Our continuing operations are reported in two segments, rental and management and network development services. In accordance with generally accepted accounting principles, the consolidated statements of operations for all periods presented in this “Selected Financial Data” have been adjusted to reflect certain businesses as discontinued operations (see note 2 to our consolidated financial statements).

 

Year-to-year comparisons are significantly affected by our acquisitions, dispositions and, to a lesser extent, 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,

 
    2004

    2003

    2002

    2001

    2000

 
    (In thousands, except per share data)  

Statements of Operations Data:

                                       

Revenues

                                       

Rental and management

  $ 684,422     $ 619,697     $ 544,906     $ 431,051     $ 269,282  

Network development services

    22,238       12,796       32,888       85,063       41,430  
   


 


 


 


 


Total operating revenues

    706,660       632,493       577,794       516,114       310,712  
   


 


 


 


 


Operating expenses:

                                       

Rental and management

    237,312       236,680       242,801       221,759       147,147  

Network development services

    18,801       9,493       29,214       69,371       33,451  

Depreciation, amortization and accretion(1)

    329,449       330,414       327,665       354,298       248,249  

Corporate general, administrative and development expense

    27,468       26,867       30,229       34,310       29,378  

Impairments, net loss on sale of long-lived assets and restructuring expense

    23,876       31,656       101,372       79,496          
   


 


 


 


 


Total operating expenses

    636,906       635,110       731,281       759,234       458,225  
   


 


 


 


 


Operating income (loss) from continuing operations

    69,754       (2,617 )     (153,487 )     (243,120 )     (147,513 )

Interest income, TV Azteca, net

    14,316       14,222       13,938       14,377       12,679  

Interest income

    4,844       5,255       3,496       28,372       15,948  

Interest expense

    (262,237 )     (279,783 )     (254,345 )     (266,769 )     (151,392 )

Loss on retirement of long-term obligations

    (138,016 )     (46,197 )     (8,869 )     (26,336 )     (24,198 )

Other (expense) income

    (2,798 )     (8,598 )     (7,004 )     (27,838 )     926  
   


 


 


 


 


Loss from continuing operations before income taxes, minority interest and loss on equity method investments

    (314,137 )     (317,718 )     (406,271 )     (521,314 )     (293,550 )

Income tax benefit

    80,176       77,796       81,141       115,841       84,107  

Minority interest in net earnings of subsidiaries

    (2,366 )     (3,703 )     (2,118 )     (318 )     (202 )

Loss on equity method investments

    (2,915 )     (21,221 )     (18,555 )     (10,957 )     (3,391 )
   


 


 


 


 


Loss from continuing operations before cumulative effect of change in accounting principle

  $ (239,242 )   $ (264,846 )   $ (345,803 )   $ (416,748 )   $ (213,036 )
   


 


 


 


 


Basic and diluted loss per common share from continuing operations before cumulative effect of change in accounting principle

  $ (1.07 )   $ (1.27 )   $ (1.77 )   $ (2.18 )   $ (1.26 )
   


 


 


 


 


Weighted average common shares outstanding(2)

    224,336       208,098       195,454       191,586       168,715  
   


 


 


 


 


Other Operating Data:

                                       

Ratio of earnings to fixed charges(3)

    —         —         —         —         —    
    As of December 31,

 
    2004

    2003

    2002

    2001

    2000

 
    (In thousands)  

Balance Sheet Data:

                                       

Cash and cash equivalents (including restricted cash and investments)(4)

  $ 215,557     $ 275,501     $ 127,292     $ 130,029     $ 128,074  

Property and equipment, net

    2,273,356       2,483,324       2,650,490       3,254,905       2,278,940  

Total assets

    5,085,972       5,290,654       5,628,317       6,801,483       5,642,546  

Long-term obligations, including current portion

    3,293,614       3,359,731       3,448,514       3,561,960       2,468,223  

Total stockholders’ equity

    1,470,953       1,610,178       1,660,858       2,811,392       2,841,169  

 

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(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 years ended December 31, 2001 and 2000 do not include goodwill amortization. The adoption of SFAS No. 142 reduced amortization expense in continuing operations by approximately $67.6 million per year.
(2) We computed basic and diluted loss per common share from continuing operations before cumulative effect of change in accounting principle using the weighted average number of shares outstanding during each period presented. We have excluded shares issuable upon exercise of options and other common stock equivalents from these computations, as their effect is anti-dilutive.
(3) For purposes of calculating this ratio, “earnings” consists of loss from continuing operations before income taxes, fixed charges (excluding interest capitalized), minority interest in net earnings of subsidiaries, losses from equity investments and amortization of interest capitalized. “Fixed charges” consist of interest expensed and capitalized, amortization of debt discount and related issuance costs and the component of rental expense associated with operating leases believed by management to be representative of the interest factor thereon. We had a deficiency in earnings to fixed charges in each period as follows (in thousands): 2004–$311,831; 2003–$315,903; 2002–$409,814; 2001–$535,048; 2000–$304,217.
(4) As of December 31, 2004, no escrows are required under the terms of the credit facility. Includes, as of December 31, 2003, approximately $170.0 million of restricted funds that were held in escrow to pay, repurchase, redeem or retire certain of our outstanding debt through January 2004. Includes, as of December 31, 2001 and 2000, approximately $94.1 million and $46.0 million, respectively, of restricted funds required under the previous credit facility to be held in escrow.

 

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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 disclosures in 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 and Estimates” on page 40.

 

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 expense, corporate general, administrative and development expense, and impairments, net loss on sale of long-lived assets and restructuring expense. Segment profit (loss) for the rental and management segment includes interest income, TV Azteca, net (see note 16 to our consolidated financial statements). In accordance with generally accepted accounting principles, the consolidated statements of operations for periods presented in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” have been adjusted to reflect certain businesses as discontinued operations (see note 2 to our consolidated financial statements).

 

Executive Overview

 

Our principal operating segment is our rental and management segment, which accounted for approximately 96.9% and 98.0% of our total revenues and approximately 99.3% and 99.2% of our segment operating profit for the years ending December 31, 2004 and 2003, respectively. The primary factors affecting the stability and growth of our revenues and cash flows for this segment are our recurring revenues from existing tenant leases and the contractual escalators in those leases, leasing additional space on our existing towers, acquiring and building additional tower sites and the degree to which any of our existing customer leases are cancelled. We continue to believe that our leasing revenue is likely to grow more rapidly than revenue from our network development services segment due to our strategic focus on our rental and management segment, the continuing growth in the use of wireless communications services and our ability to utilize existing tower capacity. In addition, we believe the majority of our leasing activity will continue to come from wireless broadband-services customers.

 

The majority of our tenant leases with wireless carriers are for an initial term of five-to-ten years, with multiple five year renewal terms thereafter. Accordingly, a significant majority of the revenue generated by our rental and management segment as of the end of December 2004 is recurring revenue that we should continue to receive in future periods. In addition, most of our leases have provisions that periodically increase the rent due under the lease. These contractual escalators are typically annual and are based on a fixed percentage (generally three-to-five percent), inflation, or a fixed percentage plus inflation. Rate increases based on fixed escalation clauses are recognized on a straight-line basis over the initial non-cancelable term of the applicable agreement.

 

A significant majority of our revenue growth in 2004 was attributable to incremental revenue generated from leasing additional space on our existing towers. During 2004, incremental revenue attributable to towers that existed during the entire period between January 1, 2003 and December 31, 2004, was approximately $51 million. Our ability to lease additional space on our towers is a function of the rate at which wireless carriers deploy capital to improve and expand their wireless networks and, to a lesser extent, the location of and available capacity on our existing towers. This rate, in turn, is influenced by the growth of wireless communications services and related infrastructure, the financial performance of our customers and their access to capital, and general economic conditions. We believe leasing additional space on our existing towers will continue to contribute the substantial majority of our year-over-year revenue growth in 2005.

 

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We also generate revenues by building and acquiring new towers. In 2004 and 2003, we constructed or acquired 275 and 618 towers, respectively. Because of the nature of our recurring revenues described above, our results of operations only reflect revenues generated on these towers following the respective dates of their construction or acquisition, which affects year-over-year comparisons.

 

The revenues generated by our rental and management segment also may be affected by cancellations of existing customer leases. As discussed above, most of our tenant leases with wireless carriers and broadcasters are multi-year contracts, which typically may not be cancelled or, in some instances, may be cancelled in exchange for payment of a termination fee. Accordingly, lease cancellations historically have not had a material adverse impact on the revenues generated by our rental and management segment.

 

Our rental and management segment operating expenses are comprised of two major categories: direct tower level expenses and selling, general and administrative expenses. Our direct tower level expenses consist primarily of ground rent, maintenance, taxes and utilities. Our selling, general and administrative expenses consist of expenses to support our rental and management and network development services such as sales and property management functions and are included in our rental and management and network development services segment operating expenses. These expenses exclude corporate selling, general and administrative expenses, which are included in corporate general, administrative and development expense. As a result of organizational initiatives in 2002 and 2003 to manage our operations more efficiently, our segment operating expenses have decreased over these periods and were stable in 2004. Because our operating expenses generally do not increase significantly when we add additional customers on a tower site, leasing space to new customers on our existing sites provides significant incremental cash flow. Our profit margin growth is, therefore, directly related to the number of new tenants added to our existing tower sites and the related rental revenue generated in a particular period.

 

Our tower network consists of approximately 15,000 sites in the United States, Mexico and Brazil. As of December 31, 2004, approximately 12,500 tower sites were located in the United States, 1,900 tower sites were located in Mexico and approximately 450 tower sites were located in Brazil. For the year ended December 31, 2004, approximately 16.6% of our consolidated revenues were generated by our international operations. We anticipate that the revenues from our international operations as a percentage of our consolidated revenues may grow in the future.

 

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Results of Operations

 

Years Ended December 31, 2004 and 2003

 

    

Year Ended

December 31,


    Amount of
Increase
(Decrease)


    Percent
Increase
(Decrease)


 
     2004

    2003

     
     (In thousands)  

REVENUES:

                              

Rental and management

   $ 684,422     $ 619,697     $ 64,725     10 %

Network development services

     22,238       12,796       9,442     74  
    


 


 


     

Total revenues

     706,660       632,493       74,167     12  
    


 


 


     

OPERATING EXPENSES:

                              

Rental and management

     237,312       236,680       632     1  

Network development services

     18,801       9,493       9,308     98  

Depreciation, amortization and accretion

     329,449       330,414       (965 )   (1 )

Corporate general, administrative and development expense

     27,468       26,867       601     2  

Impairments, net loss on sale of long-lived assets and restructuring expense

     23,876       31,656       (7,780 )   (25 )
    


 


 


     

Total operating expenses

     636,906       635,110       1,796     1  
    


 


 


     

OTHER INCOME (EXPENSE):

                              

Interest income, TV Azteca, net of interest expense $1,497 and $1,496

     14,316       14,222       94     1  

Interest income

     4,844       5,255       (411 )   (8 )

Interest expense

     (262,237 )     (279,783 )     (17,546 )   (6 )

Loss on retirement of long-term obligations

     (138,016 )     (46,197 )     91,819     199  

Other expense

     (2,798 )     (8,598 )     (5,800 )   (67 )

Income tax benefit

     80,176       77,796       2,380     3  

Minority interest in net earnings of subsidiaries

     (2,366 )     (3,703 )     (1,337 )   (36 )

Loss on equity method investments

     (2,915 )     (21,221 )     (18,306 )   (86 )

Loss from discontinued operations, net

     (8,345 )     (60,475 )     (52,130 )   (86 )
    


 


 


     

Net loss

   $ (247,587 )   $ (325,321 )   $ (77,734 )   (24 )%
    


 


 


     

 

Total Revenues

 

Total revenues for the year ended December 31, 2004 were $706.7 million, an increase of $74.2 million from the year ended December 31, 2003. The increase resulted from an increase in rental and management revenues of $64.7 million and an increase in network development services revenue of $9.4 million.

 

Rental and Management Revenue

 

Rental and management revenue for the year ended December 31, 2004 was $684.4 million, an increase of $64.7 million from the year ended December 31, 2003. The increase resulted primarily from adding additional wireless and broadband tenants to towers that existed as of January 1, 2003 and, to a lesser extent, from revenue generated on the approximately 900 towers acquired and/or constructed subsequent to January 1, 2003. This increase was partially offset by a reduction in revenue on the approximately 400 owned towers sold or disposed of subsequent to January 1, 2003. In 2004, our revenue growth on towers that existed during the entire period beginning January 1, 2003 and ending December 31, 2004, was approximately $51 million. We believe that our rental and management revenue will continue to grow as we utilize existing tower capacity. We anticipate that the majority of our new leasing activity will continue to come from wireless and broadcast service providers.

 

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Network Development Services Revenue

 

Network development services revenue for the year ended December 31, 2004 was $22.2 million, an increase of $9.4 million from the year ended December 31, 2003. The increase in revenues during 2004 resulted primarily from a long-term construction contract that we did not have in the prior year.

 

In October 2004, we entered into an agreement to sell our tower construction services unit. Commencing in the fourth quarter of 2004, we reported our tower construction services unit as a discontinued operation. The sale closed in November 2004. After the sale, our network development services segment is focused on providing complementary non-construction services to the rental and management segment, including site acquisition, zoning, permitting and structural analysis.

 

Total Operating Expenses

 

Total operating expenses for the year ended December 31, 2004 were $636.9 million, an increase of $1.8 million from the year ended December 31, 2003. The principal components of the increase were attributable to expense increases in our network development services segment of $9.3 million, our rental and management segment of $0.6 million and corporate general, administrative and development expense of $0.6 million. These increases were partially offset by decreases in impairments, net loss on sale of long-lived assets and restructuring expense of $7.8 million and in depreciation, amortization and accretion of $1.0 million.

 

Rental and Management Expense/Segment Profit

 

Rental and management expense for the year ended December 31, 2004 was $237.3 million, an increase of $0.6 million from the year ended December 31, 2003. The increase resulted primarily from our acquisition/construction of approximately 900 towers partially offset by a reduction in expenses related to the 400 towers that were sold or disposed of subsequent to January 2003, coupled with an overall decrease in rental and management segment expenses.

 

Rental and management segment profit for the year ended December 31, 2004 was $461.4 million, an increase of $64.2 million from the year ended December 31, 2003. The increase resulted primarily from incremental revenues and operating profit from adding additional broadband tenants to existing towers and newly acquired and/or constructed towers.

 

Network Development Services Expense

 

Network development services expense for the year ended December 31, 2004 was $18.8 million, an increase of $9.3 million from the year ended December 31, 2003. The increase in expenses during 2004 resulted primarily from expenses associated with a long-term construction contract that we did not have in the prior year.

 

Impairments, Net Loss on Sale of Long-Lived Assets and Restructuring Expense

 

Impairments, net loss on sale of long-lived assets and restructuring expense for the year ended December 31, 2004 was $23.9 million, a decrease of $7.8 million from the year ended December 31, 2003. The majority of the decrease resulted from decreased impairments and losses on sales of long-lived tower and other non-core assets.

 

Interest Expense

 

Interest expense for the year ended December 31, 2004 was $262.2 million, a decrease of $17.5 million from the year ended December 31, 2003. The decrease resulted primarily from the retirement of a portion of our 9 3/8% senior notes and 12.25% senior subordinated discount notes partially offset by additional interest incurred related to the issuance of our 3.00% convertible notes, 7.125% senior notes and 7.5% senior notes in 2004.

 

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Loss on Retirement of Long-Term Obligations

 

During the year ended December 31, 2004, we retired all or a portion of our 6.25% convertible notes, 9 3/8% senior notes and ATI 12.25% senior subordinated discount notes. As a result, we incurred a charge of approximately $103.2 million, which represented the cash paid in excess of the carrying value of the debt at the time of retirement. In addition, we also incurred a charge of $34.8 million related to the write-off of deferred financing fees related to the retirements discussed above, the retirement of a portion of our 5.0% convertible notes and the refinancing of our credit facility. The total of these charges, $138.0 million, represents our loss on retirement of long-term obligations for the year ended December 31, 2004.

 

During the year ended December 31, 2003, we amended our credit facility and made certain prepayments and unscheduled principal payments on the term loans thereunder, which collectively reduced the borrowing capacity under our credit facility. As a result, we recorded an aggregate charge of approximately $11.9 million related to the write-off of deferred financing fees associated with the reduction in our overall borrowing capacity. We also repurchased a portion of our 2.25% convertible notes and 5.0% convertible notes (inclusive of the cash tender offer for our 2.25% convertible notes that expired on October 22, 2003) throughout the year. As a result, we incurred an aggregate charge of approximately $34.3 million, which primarily represented the fair market value of the shares of stock issued to our 2.25% convertible note holders in excess of the shares originally issuable upon conversion of the notes, offset by a net gain on the repurchases of our 5.0% convertible notes. The total of these charges, $46.2 million, represents our loss on retirement of long-term obligations for the year ended December 31, 2003.

 

Other Expense

 

Other expense for the year ended December 31, 2004 was $2.8 million, a decrease of $5.8 million from the year ended December 31, 2003. The decrease resulted primarily from fees and expenses incurred in 2003 in connection with a financing transaction that we did not consummate as a result of the ATI 12.25% senior subordinated discount notes offering.

 

Income Tax Benefit

 

The income tax benefit for the year ended December 31, 2004 was $80.2 million, an increase of $2.4 million from the year ended December 31, 2003. The effective tax rate was 25.5% for the year ended December 31, 2004, as compared to 24.5% for the year ended December 31, 2003. The primary reason for the increase in the effective tax rate is a result of non-deductible losses on retirements of our debt in 2003. The effective tax rate on loss from continuing operations for the year ended December 31, 2004 differs from the federal statutory rate due primarily to valuation allowances related to capital losses and foreign items. The effective tax rate on loss from continuing operations for the year ended December 31, 2003 differs from the federal statutory rate due primarily to valuation allowances related to our capital losses, foreign items and non-deductible losses on retirement of our debt.

 

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, 2004, we have provided a valuation allowance of approximately $173.1 million primarily related to net state deferred tax assets, capital loss carryforwards, certain foreign items and the lost tax benefit and costs associated with our tax refund claims. We have not provided a valuation allowance for the remaining deferred tax assets, primarily our tax refund claims as discussed below and our federal net operating loss carryforwards, as management believes that we will be successful with our tax refund claims and will have sufficient time to realize these federal net operating loss carryforwards during the twenty-year tax carryforward period.

 

In June 2003, we filed an income tax refund claim with the IRS relating to carrying back net operating losses that we generated in 1998, 1999 and 2001. We filed a similar claim in October 2003, with respect to net

 

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operating losses generated in 2002. In total, we carried back approximately $380.0 million of federal net operating losses generated prior to 2003. We anticipate receiving a refund of approximately $90.0 million as a result of these claims, which will monetize a portion of our deferred tax asset. We estimate recovery of these amounts within two to three years of the dates the claims were filed with the IRS. There can be no assurances, however, with respect to the specific amount and timing of the refund.

 

We intend to recover a portion of our deferred tax asset through our tax refund claims discussed above. 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, 2004 will be dependent upon our ability to generate approximately $1.4 billion in taxable income from January 1, 2005 to December 31, 2024. If we are unable to generate sufficient taxable income in the future, or carry back losses, as described above, 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 on Equity Method Investments

 

Loss on equity method investments for the year ended December 31, 2004 was $2.9 million, a decrease of $18.3 million from the year ended December 31, 2003. The decrease is primarily due to an impairment charge recorded on one of our equity investments of $19.3 million in 2003.

 

Loss from Discontinued Operations, Net

 

Loss from discontinued operations, net for the year ended December 31, 2004 was $8.3 million, as compared to $60.5 million for the year ended December 31, 2003. In October 2004, we committed to a plan to sell our tower construction services unit, which was subsequently sold in November 2004. In addition, we sold Kline in March 2004. Accordingly, the loss from discontinued operations, net, for the year ended December 31, 2004 includes $7.7 million related to the results of these operations through the date of sale. In addition, the loss from discontinued operations, net, for the year ended December 31, 2004 includes a net loss on disposal of our tower construction services unit of $1.7 million and a $1.1 million net gain related to a contractual obligation that was settled for less than its original estimate.

 

During 2003, we disposed of two of our wholly owned subsidiaries, Galaxy and Flash, two office buildings and Verestar’s MTN subsidiary. Accordingly, the loss from discontinued operations, net, for the year ended December 31, 2003 includes $12.0 million related to the results of these operations, our tower construction services unit, Kline and the remaining operations of Verestar through the date of its bankruptcy filing in December 2003. In addition to the above, loss from discontinued operations, net, for the year ended December 31, 2003 includes the following net losses on disposal: (a) an impairment charge of $26.5 million to reduce the carrying amount of our investment in Verestar to zero and to record our estimate of costs that we may incur under certain contractual obligations; (b) an impairment charge of $14.6 million to reduce the carrying value of Kline’s net assets to the estimated proceeds expected upon disposal; (c) a $2.4 million net loss on the disposal of Galaxy; (d) a $3.7 million net loss on the disposal of the office buildings; and (e) a $0.1 million net gain on the sale of Flash.

 

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Years Ended December 31, 2003 and 2002

 

    

Year Ended

December 31,


    Amount of
Increase
(Decrease)


    Percent
Increase
(Decrease)


 
     2003

    2002

     
     (In thousands)  

REVENUES:

                              

Rental and management

   $ 619,697     $ 544,906     $ 74,791     14 %

Network development services

     12,796       32,888       (20,092 )   (61 )
    


 


 


     

Total revenues

     632,493       577,794       54,699     9  
    


 


 


     

OPERATING EXPENSES:

                              

Rental and management

     236,680       242,801       (6,121 )   (3 )

Network development services

     9,493       29,214       (19,721 )   (68 )

Depreciation, amortization and accretion

     330,414       327,665       2,749     1  

Corporate general, administrative and development expense

     26,867       30,229       (3,362 )   (11 )

Impairments, net loss on sale of long-lived assets and restructuring expense

     31,656       101,372       (69,716 )   (69 )
    


 


 


     

Total operating expenses

     635,110       731,281       (96,171 )   (13 )
    


 


 


     

OTHER INCOME (EXPENSE):

                              

Interest income, TV Azteca, net of interest expense $1,496 and $1,494

     14,222       13,938       284     2  

Interest income

     5,255       3,496       1,759     50  

Interest expense

     (279,783 )     (254,345 )     25,438     10  

Loss on retirement of long-term obligations

     (46,197 )     (8,869 )     37,328     421  

Other expense

     (8,598 )     (7,004 )     1,594     23  

Income tax benefit

     77,796       81,141       (3,345 )   (4 )

Minority interest in net earnings of subsidiaries

     (3,703 )     (2,118 )     1,585     75  

Loss on equity method investments

     (21,221 )     (18,555 )     2,666     14  

Loss from discontinued operations, net

     (60,475 )     (255,119 )     (194,644 )   (76 )

Cumulative effect of change in accounting principle, net

             (562,618 )     (562,618 )   (100 )
    


 


 


     

Net loss

   $ (325,321 )   $ (1,163,540 )   $ (838,219 )   (72 )%
    


 


 


     

 

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Total Revenues

 

Total revenues for the year ended December 31, 2003 were $632.5 million, an increase of $54.7 million from the year ended December 31, 2002. The increase resulted from an increase in rental and management revenues of $74.8 million, offset by a decrease in network development services revenue of $20.1 million.

 

Rental and Management Revenue

 

Rental and management revenue for the year ended December 31, 2003 was $619.7 million, an increase of $74.8 million from the year ended December 31, 2002. The increase resulted primarily from adding additional broadband tenants to towers that existed as of January 1, 2002 and, to a lesser extent, from revenue generated on the approximately 1,200 towers acquired and/or constructed subsequent to January 1, 2002.

 

Network Development Services Revenue

 

Network development services revenue for the year ended December 31, 2003 was $12.8 million, a decrease of $20.1 million from the year ended December 31, 2002. The decline in revenues during 2003 resulted primarily from decreases in revenue related to the reduced demand for non-construction services in the wireless telecommunications industry.

 

Total Operating Expenses

 

Total operating expenses for the year ended December 31, 2003 were $635.1 million, a decrease of $96.2 million from the year ended December 31, 2002. The principal component of the decrease was attributable to a decrease in impairments, net loss on sale of long-lived assets and restructuring expense of $69.7 million. The remaining components of the decrease were attributable to decreases in expenses within our network development services segment of $19.7 million, our rental and management segment of $6.1 million and a decrease in corporate general, administrative and development expense of $3.4 million. Such decreases were offset by an increase in depreciation, amortization and accretion of approximately $2.7 million.

 

Rental and Management Expense/Segment Profit

 

Rental and management expense for the year ended December 31, 2003 was $236.7 million, a decrease of $6.1 million from the year ended December 31, 2002. The decrease resulted primarily from a decrease in certain rental and management segment overhead costs, partially offset by an increase in tower expenses related to the 1,200 towers we have acquired/constructed since January 1, 2002 due to their inclusion in our results for a full year in 2003.

 

Rental and management segment profit for the year ended December 31, 2003 was $397.2 million, an increase of $81.2 million from the year ended December 31, 2002. The increase resulted primarily from incremental revenues and operating profit from adding additional broadband tenants to existing towers and newly acquired and/or constructed towers, coupled with a net reduction in tower expenses, as discussed above.

 

Network Development Services Expense/Segment Profit

 

Network development services expense for the year ended December 31, 2003 was $9.5 million, a decrease of $19.7 million from the year ended December 31, 2002. The majority of the decrease was due to an overall decline in demand for the services performed by this segment, as discussed above, partially offset by decreases in overhead and related infrastructure costs.

 

Network development services segment profit for the year ended December 31, 2003 was $3.3 million, a decrease of $0.4 million from the year ended December 31, 2002. The decrease resulted primarily from a decline in revenue, as discussed above.

 

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Corporate General, Administrative and Development Expense

 

Corporate general, administrative and development expense for the year ended December 31, 2003 was $26.9 million, a decrease of $3.4 million from the year ended December 31, 2002. The decrease resulted primarily from a decrease in development expense as a result of our curtailed acquisition and development related activities.

 

Impairments, Net Loss on Sale of Long-Lived Assets and Restructuring Expense

 

Impairments, net loss on sale of long-lived assets and restructuring expense was $31.7 million for the year ended December 31, 2003. During the year ended December 31, 2003, we sold approximately 300 non-core towers and certain other non-core assets and recorded impairment charges to write-down certain other non-core towers and assets. As a result, we recorded impairment charges and net loss on sale of long-lived assets of approximately $19.1 million. We also wrote-off approximately $9.2 million of construction-in-progress costs, primarily associated with sites we no longer planned to build. Lastly, we incurred employee separation costs (primarily associated with the reorganization of certain functions in our rental and management segment) and facility closing costs aggregating $3.4 million.

 

Impairments, net loss on sale of long-lived assets and restructuring expense was $101.4 million for the year ended December 31, 2002. During the year-ended December 31, 2002, we sold approximately 720 non-core towers and recorded impairment charges to write-down certain other non-core towers, which resulted in aggregate impairment charges and net losses of approximately $46.8 million. In September 2002, we reduced the scope of our new tower construction and build plans for the remainder of 2002 and 2003 and, as a result, we wrote-off approximately $40.2 million of construction-in-progress costs for the year ended December 31, 2002 associated with sites we no longer planned to build. Additionally, in the latter stages of 2001 and the first quarter of 2002, we announced a restructuring of our organization to include the centralization of certain operational and administrative functions. As a result of these initiatives, 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.

 

Interest Income

 

Interest income for the year ended December 31, 2003 was $5.3 million, an increase of $1.8 million from the year ended December 31, 2002. The increase resulted primarily from an increase in interest earned on restricted cash and investments, resulting principally from our 12.25% senior subordinated discount notes offering in January 2003 and, to a lesser extent, our August 2003 equity offering.

 

Interest Expense

 

Interest expense for the year ended December 31, 2003 was $279.8 million, an increase of $25.4 million from the year ended December 31, 2002. The increase resulted primarily from the following: interest expense on the ATI 12.25% senior subordinated discount notes, issued in January 2003; our 3.25% convertible notes, issued in August 2003; and the ATI 7.25% senior subordinated notes, issued in November 2003. The increase was partially offset by a net decrease in interest expense on our credit facilities as a result of repayments made during 2003 and, to a lesser extent, lower interest rates. The increase was also partially offset by a decrease in interest expense on our 2.25% and 5.0% convertible notes as a result of repurchases made during 2003 (as discussed below).

 

Loss on Retirement of Long-Term Obligations

 

During the year ended December 31, 2003, we amended our credit facility and made certain prepayments and unscheduled principal payments on the term loans thereunder, which collectively reduced the borrowing capacity under our credit facility. As a result, we recorded an aggregate charge of approximately $11.9 million related to the write-off of deferred financing fees associated with the reduction in our overall borrowing capacity.

 

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We also repurchased a portion of our 2.25% convertible and 5.0% convertible notes (inclusive of the cash tender offer for our 2.25% convertible notes that expired in October 2003) throughout the year. As a result, we incurred an aggregate charge of approximately $34.3 million, which primarily represented the fair market value of the shares of stock issued to our 2.25% convertible note holders in excess of the shares originally issuable upon conversion of the notes, offset by a net gain on the repurchases of our 5.0% convertible notes. The total of these charges, $46.2 million, represents our loss on retirement of long-term obligations for the year ended December 31, 2003.

 

In February 2002, we repaid $95.0 million outstanding under our Mexican credit facility with borrowings under our credit facility. As a result of such repayment, for the year ended December 31, 2002, we recorded a charge of approximately $1.7 million related to the write-off of related deferred financing fees. In addition, in January 2002, we terminated the $250.0 million multi-draw term loan C component of our credit facility and recorded a non-cash charge of approximately $7.2 million related to the write-off of related deferred financing fees. The total of these charges, $8.9 million, represents our loss on retirement of long-term obligations for the year ended December 31, 2002.

 

Other Expense

 

Other expense for the year ended December 31, 2003 was $8.6 million, an increase of $1.6 million from the year ended December 31, 2002. The increase resulted primarily from fees and expenses incurred in 2003 in connection with a financing transaction that we did not consummate as a result of the ATI 12.25% senior subordinated discount notes offering. This increase was primarily offset by decreased foreign currency transaction losses.

 

Income Tax Benefit

 

The income tax benefit for the year ended December 31, 2003 was $77.8 million, a decrease of $3.3 million from the year ended December 31, 2002. The effective tax rate was 24.5% for the year ended December 31, 2003, as compared to 20.0% for the year ended December 31, 2002. The primary reason for the increase in the effective tax rate is a result of a $27.5 million valuation allowance that we recorded in 2002 in connection with our tax planning strategy to carry back approximately $380.0 million of federal net operating losses generated prior to 2003. This strategy resulted in the filing of tax refund claims with the IRS in 2003. In June 2003, we filed an income tax refund claim with the IRS relating to carrying back net operating losses that we generated in 1998, 1999 and 2001. We filed a similar claim in October 2003, with respect to net operating losses generated in 2002. We anticipate receiving a refund of approximately $90.0 million as a result of these claims, which will monetize a portion of our deferred tax asset. We estimate recovery of these amounts within two to three years of the dates the claims were filed with the IRS. There can be no assurances, however, with respect to the specific amount and timing of the refund. The valuation allowance represents the estimated lost tax benefit and costs incurred in connection with implementing this strategy. This increase was offset in part by an increase in the valuation allowance in 2003 for capital losses and non-deductible losses on retirements of our debt.

 

The effective tax rate on loss from continuing operations for the year ended December 31, 2003 differs from the federal statutory rate due primarily to valuation allowances related to our capital losses, foreign items and non-deductible losses on retirement of our debt. The effective tax rate on loss from continuing operations for the year ended December 31, 2002 differs from the federal statutory rate due primarily to valuation allowances related to our capital losses, foreign items and the valuation allowance recorded in connection with our tax planning strategy discussed above.

 

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, 2003, we have provided a valuation allowance of approximately $162.8 million primarily related to net state deferred tax assets, capital loss carryforwards and the lost tax benefit and costs associated with the tax refund claims. We have not provided a valuation allowance for the remaining deferred tax assets, primarily our tax refund claims and our federal net operating loss carryforwards, as management believes that we will be

 

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successful with our tax refund claims and will have sufficient time to realize these federal net operating loss carryforwards during the twenty-year tax carryforward period.

 

We intend to recover a portion of our deferred tax asset through our tax refund claims discussed above. 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, 2003 will be dependent upon our ability to generate approximately $1.1 billion in taxable income from January 1, 2004 to December 31, 2023. If we are unable to generate sufficient taxable income in the future, or carry back losses, as described below, 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 on Equity Method Investments

 

Loss on equity method investments for the year ended December 31, 2003 was $21.2 million, an increase of $2.7 million from the year ended December 31, 2002. The increase is related to an increase in impairment charges on our equity investments of $9.8 million, offset by a decrease in losses on our equity investments of $7.1 million.

 

Loss from Discontinued Operations, Net

 

Loss from discontinued operations, net, for the year ended December 31, 2003 was $60.5 million, as compared to $255.1 million for the year ended December 31, 2002. During 2003, we consummated the sale of two of our wholly owned subsidiaries, Galaxy and Flash, two office buildings and Verestar’s MTN subsidiary. Accordingly, the loss from discontinued operations, net, for the year ended December 31, 2003 includes $12.0 million related to the results of these operations, our tower construction services unit, Kline and the remaining operations of Verestar through the date of its bankruptcy filing in December 2003. In addition to the above, loss from discontinued operations, net, for the year ended December 31, 2003 includes the following net losses on disposal: (a) an impairment charge of $26.5 million to reduce the carrying amount of our investment in Verestar to zero and to record our estimate of costs that we may incur under certain contractual obligations; (b) an impairment charge of $14.6 million to reduce the carrying value of Kline’s net assets to the estimated proceeds expected upon disposal; (c) a $2.4 million net loss on the disposal of Galaxy; (d) a $3.7 million net loss on the disposal of the office buildings; and (e) a $0.1 million net gain on the sale of Flash.

 

During 2002, we consummated the sale of our wholly owned subsidiary MTS Components and an office building. Accordingly, the loss from discontinued operations, net, for the year ended December 31, 2002 includes $241.6 million related to the results of these operations through the date of sale. In addition, 2002 also includes the results of operations of Galaxy, Flash, two other office buildings, our tower construction services unit, Kline and Verestar. In addition to the above, the loss from discontinued operations, net, for the year ended December 31, 2002 includes a net loss on our disposition of MTS Components of approximately $16.0 million, a net gain on our sale of the office building of $5.7 million and an impairment charge of $3.2 million related to another office building sold in 2003.

 

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 former satellite and fiber network access services

 

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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.

 

Liquidity and Capital Resources

 

Overview

 

During the year ended December 31, 2004, we took several actions to increase our financial flexibility, extend the maturity dates of our indebtedness and reduce interest expense. In May 2004, we entered into a new $1.1 billion senior secured credit facility. In 2004, we also completed four note offerings through institutional private placements in an aggregate principal amount of $1.1 billion. We used the net proceeds of the borrowings under the credit facility and the note offerings, as well as cash on hand, to refinance or repurchase approximately $2.0 billion of our outstanding debt. For information about our financing activities, see “—Financing Activities” below.

 

As of December 31, 2004, we had total outstanding indebtedness of approximately $3.3 billion. We incurred substantially all of this indebtedness to refinance indebtedness incurred prior to 2002 to fund the acquisition of communications sites and services businesses (expenditures for such acquisitions for the years ended December 31, 2000 and 2001 were $1.4 billion and $812.8 million, respectively), and capital expenditures related to the construction of new communications sites (capital expenditures for the years ended December 31, 2000 and 2001 were $541.3 million and $568.2 million, respectively).

 

Beginning in 2002, we significantly reduced our acquisitions and new tower construction activities, and began to focus on reducing our overall indebtedness. In 2003 and 2004, we continued this effort by reducing our net total indebtedness and improving our financial flexibility by refinancing indebtedness to extend maturity dates. We plan to continue to reduce our overall indebtedness in 2005 with cash flow from operations, and may opportunistically further reduce indebtedness and interest expense through future capital market or strategic transactions.

 

In 2004, we generated sufficient cash flow from operations to fund our capital expenditures and cash interest obligations. We believe our cash generated from operations for the year ending December 31, 2005 also will be sufficient to fund our capital expenditures and our cash debt service (interest and principal repayments) obligations for 2005. For information about our outstanding indebtedness, see “—Contractual Obligations” below.

 

We expect our 2005 cash needs to consist primarily of the following: debt service, including cash interest of approximately $173.0 million, the redemption of approximately $133.0 million of 9 3/8% senior notes, the repayment of approximately $4.0 million of term loans under the credit facility and capital lease payments and other notes payable of approximately $4.5 million; and capital expenditures of between $55.0 and $65.0 million, principally related to new tower construction and improvements to existing towers. We expect to meet these cash needs through a combination of cash on hand and cash generated by operations. Due to the risk factors outlined in “Business—Factors That May Affect Future Results,” however, there can be no assurance that we will be able to meet our cash needs without additional borrowings under our credit facility.

 

Uses of Cash

 

Tower Acquisitions, Construction and Improvements. Historically, we have used available cash, including cash obtained from our credit facility, proceeds from the sale of our debt and equity securities and proceeds from non-core asset sales, to fund the acquisition, construction and improvement of tower assets. In 2002, we began to reduce our capital expenditures on new tower development. As a result, our capital expenditures in 2003 and 2004 were $61.6 million and $42.2 million, respectively, significantly below historical levels.

 

   

Construction and Improvements. Payments for purchases of property and equipment and construction activities during the year ended December 31, 2004 totaled $42.2 million, including capital expenditures

 

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incurred in connection with the construction of 61 towers. We anticipate that we will build between 125 and 150 new towers through the end of 2005, and expect our 2005 total capital expenditures for construction, improvements and corporate purposes to be between approximately $55.0 million and $65.0 million.

 

    Acquisitions. During the year ended December 31, 2004, we acquired a total of 214 towers for approximately $33.4 million, including 25 towers in Brazil and 18 towers in Mexico from NII Holdings for an aggregate of $7.6 million, 97 towers in Mexico from Iusacell Celular for an aggregate of $20.8 million, and 74 towers in the United States from various sellers for an aggregate of $4.3 million. As of December 31, 2004, we were obligated to acquire up to an additional $2.5 million of tower assets.

 

We plan to continue to allocate our available capital among investment alternatives that can provide the highest potential returns in light of existing market conditions. Accordingly, we may continue to acquire tower sites, build new tower sites and redevelop or improve existing tower sites when the expected returns on such investments meet our investment criteria.

 

Refinancing and Repurchases of Debt. In order to extend the maturity dates of our indebtedness and reduce interest expense, we use our cash to refinance and repurchase our outstanding debt securities. During 2004, we refinanced or repurchased approximately $2.0 billion of our outstanding debt. For more information about our financing activities, see “—Financing Activities” below.

 

Contractual Obligations. Our contractual obligations relate primarily to borrowings under the credit facility and our outstanding notes. The following table sets forth information relating to our contractual obligations payable in cash as of December 31, 2004 (in thousands):

 

     Payments Due by Period

Contractual Obligations


   2005

   2006

   2007

   2008

   2009

   Thereafter

   Total

Credit facility term loan A (1)(2)

          $ 22,500    $ 52,500    $ 60,000    $ 60,000    $ 105,000    $ 300,000

Credit facility term loan B (1)(2)

   $ 4,000      4,000      4,000      4,000      4,000      378,000      398,000

12.25% senior subordinated discount notes (3)

                          498,251                    498,251

7.25% senior subordinated notes

                                        400,000      400,000

9 3/8% senior notes (4)

     133,000                           141,884             274,884

7.50% senior notes

                                        225,000      225,000

7.125% senior notes

                                        500,000      500,000

5.0% convertible notes (5)

                   275,688                           275,688

3.25% convertible notes

                                        210,000      210,000

3.00% convertible notes

                                        345,000      345,000

2.25% convertible notes

     46                                         46
    

  

  

  

  

  

  

Long-term obligations, excluding capital leases and other notes payable

     137,046      26,500      332,188      562,251      205,884      2,163,000      3,426,869
    

  

  

  

  

  

  

Cash interest expense (1)(2)(3)

     173,000      171,000      158,000      153,000      125,000      275,000      1,055,000

Capital lease payments (including interest) and other notes payable

     4,484      19,691      3,732      3,290      3,250      208,587      243,034

Operating lease payments (6)

     106,116      106,319      106,095      106,191      106,214      1,570,111      2,101,046

Purchase obligations for acquisitions

     2,500                                         2,500

Other long-term liabilities (7)

     210      996      223      223      223      24,909      26,784
    

  

  

  

  

  

  

Total

   $ 423,356    $ 324,506    $ 600,238    $ 824,955    $ 440,571    $ 4,241,607    $ 6,855,233
    

  

  

  

  

  

  


A description of our contractual debt obligations is included in Item 7A. “Quantitative and Qualitative Disclosures about Market Risk,” as well as in note 6 to our consolidated financial statements.

 

(1) The maturity date for our term loan A and any outstanding revolving loans will be accelerated to August 15, 2008, and the maturity date for our term loan B will be accelerated to October 31, 2008, if (1) on or prior to August 1, 2008, our 9 3/8% senior notes have not been (a) refinanced with parent company indebtedness having a maturity date of February 28, 2012 or later or with loans under the credit facility, or (b) repaid, prepaid, redeemed, repurchased or otherwise retired; and (2) our consolidated leverage ratio (total parent company debt to annualized operating cash flow) at June 30, 2008 exceeds 4.50 to 1.00. If this were to occur, the payments due in 2008 for term loan A and term loan B would be $225.0 million and $386.0 million, respectively.

 

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(2) Interest under our credit facility 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 weighted average interest rate in effect at December 31, 2004 for the credit facility was 4.35%. For projections of our cash interest expense related to the credit facility, we have assumed the LIBOR rate before the margin as defined in our credit facility agreement, is 2.6% through August 31, 2011.
(3) The 12.25% senior subordinated discount notes were originally issued as part of an offering of 808,000 units, each unit consisting of one 12.25% senior subordinated discount note having a principal amount of $1,000 at maturity and one warrant to purchase 14.0953 shares of our Class A common stock at $0.01 per share. The 12.25% senior subordinated discount notes accrue no cash interest. Instead, the accreted value of each note increases between the date of original issuance and maturity (August 1, 2008) at a rate of 12.25% per annum. As of December 31, 2004, the remaining outstanding debt under the 12.25% senior subordinated discount notes was $325.4 million accreted value ($303.8 million, net of the allocated fair value of the warrants of $21.6 million).
(4) On December 6, 2004, we issued a notice for the partial redemption on January 5, 2005 of $133.0 million principal amount of our 9 3/8% senior notes due 2009. Pursuant to the indenture for the 9 3/8% senior notes, once a notice to redeem is issued, notes called for redemption become irrevocably due and payable on the redemption date. Following this redemption, $141.9 million principal amount of 9 3/8% senior notes remained outstanding.
(5) The holders of our 5.0% convertible notes have the right to require us to repurchase their notes on specified dates prior to their maturity date in 2010, but we may pay the purchase price by issuing shares of our Class A common stock, subject to certain conditions. The obligation with respect to the right of the holders to put the 5.0% convertible notes on February 20, 2007, has been classified as a cash obligation for 2007.
(6) Operating lease payments include payments to be made under non-cancelable initial terms, as well as payments for certain renewal periods at our option because failure to renew could result in a loss of the applicable tower site and related revenues from tenant leases, thereby making it reasonably assured that we will renew the lease.
(7) Excludes certain other long-term liabilities included in our consolidated balance sheet, primarily our deferred rent liability for which cash payments are included in operating lease payments and unearned revenue that is not payable in cash.

 

The above table does not include certain commitments relating to the construction of tower sites under existing build to suit agreements as of December 31, 2004, as we cannot currently estimate the timing and amounts of such payments. (See note 8 to our consolidated financial statements.)

 

Sources of Cash

 

Total Liquidity at December 31, 2004. As of December 31, 2004, we had approximately $596.3 million of total liquidity, comprised of approximately $215.6 million in cash and cash equivalents and the ability to draw approximately $380.7 million of the revolving loan under our credit facility. Of the approximately $215.6 million in cash and cash equivalents, we used approximately $145.1 million to redeem on January 5, 2005 a portion of our outstanding 9 3/8% senior notes.

 

Cash Generated by Operations. For the years ended December 31, 2004, 2003 and 2002, our cash provided by operating activities was $216.7 million, $156.4 million and $105.1 million, respectively. Each of our rental and management and network development services segments are expected to generate cash flows from operations during 2005 in excess of their cash needs for operations and capital expenditures for tower construction, improvements and acquisitions. We expect to use the excess cash generated by operations principally to service our debt.

 

Credit Facility. As of December 31, 2004, we had approximately $380.7 million of unused capacity under our revolving loan commitments, the only loan under our credit facility that is not fully drawn. We have not borrowed any amounts under our credit facility since refinancing it in May 2004.

 

Proceeds from the New Credit Facility and Sales of Debt Securities. In May 2004, we refinanced our previous credit facility with a new $1.1 billion senior secured credit facility. In 2004, we also completed four note offerings in institutional private placements through which we raised aggregate net proceeds of approximately $1.1 billion. See “Financing Activities.”

 

Divestiture Proceeds. During 2004, we continued to execute our strategy of divesting non-core assets and reinvesting the proceeds of such divestitures in higher return tower assets. We received aggregate net proceeds of approximately $32.0 million related to the sale of Kline, our tower construction services unit, and non-core towers and related assets. Proceeds from these and any future transactions have and will be used, to the extent permitted under our credit facilities and mortgages, to acquire additional tower assets and to service debt.

 

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Proceeds from the Sale of Equity Securities. From time to time, we raise funds through public offerings of our equity securities. In addition, we receive proceeds from sales of our equity securities pursuant to our stock option and stock purchase plans. For the year ended December 31, 2004, we received approximately $40.6 million in proceeds from sales of shares of our Class A common stock and the common stock of ATC Mexico pursuant to our stock option and stock purchase plans.

 

Financing Activities

 

During the year ended December 31, 2004, we took several actions to increase our financial flexibility and reduce our interest costs.

 

New Credit Facility. In May 2004, we refinanced our previous credit facility with a new $1.1 billion senior secured credit facility. At closing, we received $685.5 million of net proceeds from the borrowings under the new facility, after deducting related expenses and fees, approximately $670.0 million of which we used to repay principal and interest under the previous credit facility. We used the remaining net proceeds of $15.5 million for general corporate purposes, including the repurchase of other outstanding debt securities.

 

The new credit facility consists of the following:

 

    $400.0 million in undrawn revolving loan commitments, against which approximately $19.3 million of undrawn letters of credit were outstanding at December 31, 2004, maturing on February 28, 2011;

 

    a $300.0 million term loan A, which is fully drawn, maturing on February 28, 2011; and

 

    a $398.0 million term loan B, which is fully drawn, maturing on August 31, 2011.

 

The new credit facility extends the previous credit facility maturity dates from 2007 to 2011 for a majority of the borrowings outstanding, subject to earlier maturity upon the occurrence of certain events described below, and allows us to use credit facility borrowings and internally generated funds to repurchase other indebtedness without additional lender approval. The new credit facility is guaranteed by us and is secured by a pledge of substantially all of our assets.

 

The maturity date for term loan A and any outstanding revolving loans will be accelerated to August 15, 2008, and the maturity date for term loan B will be accelerated to October 31, 2008, if (1) on or prior to August 1, 2008, our 9 3/8% senior notes have not been (a) refinanced with parent company indebtedness having a maturity date of February 28, 2012 or later or with loans under the new credit facility, or (b) repaid, prepaid, redeemed, repurchased or otherwise retired, and (2) our consolidated leverage ratio (total parent company debt to annualized operating cash flow) at June 30, 2008 is greater than 4.50 to 1.00. If this were to occur, the payments due in 2008 for term loan A and term loan B would be $225.0 million and $386.0 million, respectively.

 

Note Offerings. During 2004, we raised approximately $1.1 billion in net proceeds from the sale of debt securities through institutional private placements as follows (in millions):

 

Debt Security


   Date of Offering

   Principal
Amount


   Approximate
Net Proceeds


7.50% Senior Notes due 2012

   February 2004    $ 225.0    $ 221.7

3.00% Convertible Notes due August 15, 2012

   August 2004      345.0      335.9

7.125% Senior Notes due 2012

   October 2004      300.0      292.8

7.125% Senior Notes due 2012

   December 2004      200.0      199.8
         

  

Total

        $ 1,070.0    $ 1,050.2
         

  

 

   

7.50% Senior Notes Offering. In February 2004, we sold $225.0 million principal amount of our 7.50% senior notes due 2012 through an institutional private placement. The 7.50% senior notes mature on May 1, 2012, and interest is payable semiannually in arrears on May 1 and November 1 of each year.

 

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We may redeem the 7.50% senior notes after May 1, 2008. The initial redemption price is 103.750% of the principal amount, subject to a ratable decline after May 1 of the following year to 100% of the principal amount in 2010 and thereafter. The 7.50% senior notes rank equally with our 5.0% convertible notes, our 3.00% convertible notes, our 3.25% convertible notes, our 7.125% senior notes and our 9 3/8% senior notes and are structurally and effectively junior to indebtedness outstanding under our credit facility, our 12.25% senior subordinated discount notes and our 7.25% senior subordinated notes. The indenture for the 7.50% senior notes contains certain covenants that restrict our ability to incur more debt; guarantee indebtedness; issue preferred stock; pay dividends; make certain investments; merge, consolidate or sell assets; enter into transactions with affiliates; and enter into sale leaseback transactions.

 

    3.00% Convertible Notes Offering. In August 2004, we sold $345.0 million principal amount of 3.00% convertible notes due August 15, 2012 through an institutional private placement. The 3.00% convertible notes mature on August 15, 2012, and interest is payable semi-annually in arrears on February 15 and August 15 of each year. The 3.00% convertible notes are convertible at any time prior to maturity, subject to their prior redemption or repurchase, into shares of our Class A common stock at a conversion price of approximately $20.50 per share, subject to adjustment in certain events. Upon a fundamental change of control as defined in the notes indenture, the holders of the 3.00% convertible notes may require us to repurchase all or part of the 3.00% convertible notes for a cash purchase price equal to 100% of the principal amount. In addition, upon a fundamental change in control, the holders may elect to convert their notes based on a conversion rate adjustment that entitles the holders to receive additional shares of the Company’s Class A common stock upon conversion depending on the terms and timing of the change of control. We may redeem the 3.00% convertible notes on or after August 20, 2009 at an initial redemption price of 101.125% of the principal amount, subject to a ratable decline after August 15 of the following year to 100% of the principal amount in 2012. The 3.00% convertible notes rank equally with our other convertible notes, our 7.125% senior notes, our 7.50% senior notes and our 9 3/8% senior notes and are structurally and effectively junior to indebtedness outstanding under our credit facility, our ATI 12.25% senior subordinated discount notes and our ATI 7.25% senior subordinated notes.

 

    7.125% Senior Notes Offerings. In October 2004, we sold $300.0 million principal amount of 7.125% senior notes due 2012 through an institutional private placement at a purchase price equal to 100% of face amount. In December 2004, we sold an additional $200.0 million principal amount of 7.125% senior notes due 2012 through an institutional private placement at a purchase price equal to 101.25% of face amount. The 7.125% senior notes mature on October 15, 2012, and interest is payable semi-annually in arrears on April 15 and October 15 of each year, beginning April 15, 2005. We may redeem the 7.125% senior notes on or after October 15, 2008 at an initial redemption price of 103.563% of the principal amount, subject to a ratable decline after October 15 of the following year to 100% of the principal amount in 2010 and thereafter. The 7.125% senior notes rank equally with our convertible notes, our 7.50% senior notes and our 9 3/8% senior notes and are structurally and effectively junior to indebtedness outstanding under our credit facility, our ATI 12.25% senior subordinated discount notes and our ATI 7.25% senior subordinated notes. The indenture for the 7.125% senior notes contains certain covenants that restrict our ability to incur more debt; guarantee indebtedness; issue preferred stock; pay dividends; make certain investments; merge, consolidate or sell assets; enter into transactions with affiliates; and enter into sale leaseback transactions.

 

 

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Note Redemptions and Repurchases. During 2004, we repurchased and redeemed approximately $1.5 billion in debt securities as follows (in millions):

 

Debt Security


   Date

   Principal
Amount


   Aggregate
Price


Redemptions

                  

6.25% Convertible Notes due 2009

   February 2004    $ 212.7    $ 217.2

9 3/8% Senior Notes due 2009

   September 2004      337.0      360.8

9 3/8% Senior Notes due 2009

   November 2004      276.0      293.2

9 3/8% Senior Notes due 2009 (1)

   January 2005      133.0      139.8

Repurchases

                  

ATI 12.25% Senior Subordinated Discount Notes due 2008 (2)

          309.7      230.9

9 3/8% Senior Notes due 2009

          112.1      118.9

5.0% Convertible Notes due 2010

          73.7      73.3
         

  

Total

        $ 1,454.2    $ 1,434.1
         

  


(1) On December 6, 2004, we issued a notice for the partial redemption on January 5, 2005 of our 9 3/8% senior notes due 2009. Pursuant to the indenture for the 9 3/8% senior notes, once a notice to redeem is issued, notes called for redemption become irrevocably due and payable on the redemption date.
(2) The repurchased amount of $309.7 million represents the face amount at maturity in 2008. On the date of repurchase, such amount had an accreted value of $179.4 million, net of $14.7 million fair value allocated to warrants.

 

    6.25% Convertible Notes Redemption. In February 2004, we used a portion of the net proceeds from our 7.50% senior notes offering to redeem all of our outstanding $212.7 million principal amount of 6.25% convertible notes. We redeemed these notes pursuant to the terms of the indenture at a purchase price equal to 102.083% of the principal amount, plus accrued and unpaid interest. We redeemed these notes for $217.2 million, plus $4.8 million in accrued interest.

 

    9 3/8% Senior Notes Redemptions. In September 2004, November 2004 and January 2005, we completed the redemption of an aggregate of $746.0 million principal amount of our outstanding 9 3/8% senior notes due 2009, as follows. On September 20, 2004, we redeemed $337.0 million principal amount of our outstanding 9 3/8% senior notes using the net proceeds from our 3.00% convertible notes offering, plus additional cash on hand. We redeemed these notes pursuant to the terms of the indenture at a purchase price equal to 107.07% of the principal amount, for $360.8 million, plus $4.3 million in accrued interest. On November 4, 2004, we redeemed $276.0 million principal amount of our outstanding 9 3/8% senior notes using the net proceeds from our October 2004 7.125% senior notes offering, plus additional cash on hand. We redeemed these notes pursuant to the terms of the indenture at a purchase price equal to 106.23% of the principal amount, for $293.2 million, plus $6.7 million in accrued interest. On January 5, 2005, we redeemed $133.0 million principal amount of our outstanding 9 3/8% senior notes using a portion of net proceeds from our December 2004 7.125% senior notes offering, plus additional cash on hand. We redeemed these notes pursuant to the terms of the indenture at a purchase price equal to 105.11% of the principal amount, for $139.8 million, plus $5.3 million in accrued interest.

 

    Other Debt Repurchases. During the year ended December 31, 2004, in addition to the redemptions discussed above, we repurchased, in privately negotiated transactions, primarily using cash on hand (i) an aggregate of $309.7 million face amount of our ATI 12.25% senior subordinated discount notes ($179.4 million accreted value, net of $14.7 million fair value allocated to warrants) for approximately $230.9 million in cash; (ii) $112.1 million principal amount of our 9 3/8% senior notes for $118.9 million in cash; and (iii) $73.7 million principal amount of our 5.0% convertible notes for approximately $73.3 million in cash. From December 31, 2004 to March 25, 2005, we repurchased an aggregate of $37.0 million face amount of our ATI 12.25% senior subordinated discount notes ($22.6 million accreted value, net of $1.6 million fair value allocated to warrants) for approximately $27.9 million in cash.

 

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Factors Affecting Sources of Liquidity

 

Internally Generated Funds. Because the majority of our tenant leases are multi-year contracts, a significant majority of the revenues generated by our rental and management segment as of the end of 2004 is recurring revenue that we should continue to receive in future periods. Accordingly, a key factor affecting our ability to generate cash flow from operating activities is to maintain this recurring revenue and to convert it to operating profit by minimizing operating costs and fully achieving our operating efficiencies. In addition, our ability to increase cash flow from operating activities is dependent upon the demand for antenna space on wireless and broadcast communications towers and for related services and our ability to maximize the utilization of our existing towers.

 

Restrictions Under New Credit Facility. The new credit facility with our borrower subsidiaries contains certain financial ratios and operating covenants and other restrictions (including limitations on additional debt, guarantees, use of proceeds from asset sales, dividends and other distributions, investments and liens) with which our borrower subsidiaries and restricted subsidiaries must comply.

 

The credit facility contains four financial tests with which we must comply:

 

    a total borrower leverage ratio (Total Debt to Annualized Operating Cash Flow). We are required to maintain a ratio of not greater than 5.50 to 1.00, decreasing to 5.25 to 1.00 at July 1, 2005, to 5.00 to 1.00 at January 1, 2006, to 4.75 to 1.00 at April 1, 2006, to 4.50 to 1.00 at July 1, 2006, and to 4.00 to 1.00 at January 1, 2007 and thereafter;

 

    a senior leverage ratio (Senior Debt to Annualized Operating Cash Flow). We are required to maintain a ratio of not greater than 4.00 to 1.00, decreasing to 3.75 to 1.00 at January 1, 2006, to 3.50 to 1.00 at July 1, 2006, and to 3.00 to 1.00 at January 1, 2007 and thereafter;

 

    an interest coverage ratio (Annualized Operating Cash Flow to Interest Expense). We are required to maintain a ratio of not less than 2.50 to 1.00; and

 

    a fixed charge coverage ratio (Annualized Operating Cash Flow to Fixed Charges). We are required to maintain a ratio of not less than 1.00 to 1.00.

 

As of December 31, 2004, we were in compliance with all of the foregoing financial tests.

 

Any failure to comply with these covenants would not only prevent us from being able to borrow additional funds under our revolving loan, but would also constitute a default. These covenants also restrict our ability, as the parent company, to incur any debt other than that currently outstanding and refinancings of that debt. The credit facility also limits our revolving loan drawdowns based on our cash on hand.

 

In addition to the credit facility, the indentures governing the terms of the ATI 12.25% senior subordinated discount notes and the ATI 7.25% senior subordinated notes contain certain restrictive covenants with which ATI, the sister guarantors and its and their subsidiaries must comply. These include restrictions on their ability to incur additional debt, guarantee debt, pay dividends and make other distributions, make certain investments and, as in the credit facility, use the proceeds from asset sales. Any failure to comply with these covenants would constitute a default. Specifically, the indentures restrict ATI, each of the sister guarantors and its and their restricted subsidiaries from incurring additional debt or issuing certain types of preferred stock. ATI, the sister guarantors and its and their subsidiaries are permitted, however, to incur debt under our credit facility, or renewals, refundings, replacements or refinancings of them, up to $1.6 billion.

 

The indentures governing the terms of our 9 3/8% senior notes, 7.50% senior notes and 7.125% senior notes also contain certain restrictive covenants with which we and our restricted 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

 

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failure to comply with these covenants would constitute a default. Specifically, the senior note indentures restrict us from incurring additional debt or issuing certain types of preferred stock unless our consolidated debt is not greater than 7.5 times our adjusted consolidated cash flow. We are permitted, however, to incur debt under our credit facility even if we are not in compliance with this ratio, or renewals, refundings, replacements or refinancings of our credit facility.

 

If a default occurred under our credit facility or any of our other debt securities, the maturity dates for our outstanding debt could be accelerated, and we likely would be prohibited from making additional borrowings under the credit facility until we cured the default. If this were to occur, we would not have sufficient cash on hand to repay such indebtedness. The key factors affecting our ability to comply with the debt covenants described above are our financial performance relative to the financial ratios defined in the credit facility agreement and our ability to fund our debt service obligations. Based upon our current expectations, we believe our operating results will be sufficient to comply with these covenants.

 

As outlined above, as of December 31, 2004, our annual consolidated cash debt service obligations (principal and interest) for each of the next five years and thereafter are approximately: $314.5 million, $217.2 million, $493.9 million, $718.5 million, $334.1 million and $2.6 billion, respectively. If we are unable to refinance our subsidiary debt or renegotiate the terms of such debt, we may not be able to meet our debt service requirements in the future. In addition, as a holding company, we depend on distributions or dividends from our subsidiaries, or funds raised through debt and equity offerings, to fund our debt obligations. Although the agreements governing the terms of our credit facility and senior subordinated notes permit our subsidiaries to make distributions to us to permit us to meet our debt service obligations, such terms also significantly limit their ability to distribute cash to us under certain circumstances. Accordingly, if we do not receive sufficient funds from our subsidiaries to meet our debt service obligations, we may be required to refinance or renegotiate the terms of our debt, and there is no assurance we will succeed in such efforts.

 

Our ability to make scheduled payments of principal and interest on our debt obligations, and our ability to refinance such debt obligations, will depend on our future financial performance, which is subject to many factors beyond our control, as outlined above under “Factors That May Affect Future Results.” In addition, our ability to refinance any of our debt in the future may depend on our credit ratings from commercial rating agencies, which are dependent on our expected financial performance, the liquidity factors discussed above, and the rating agencies’ outlook for our industry. We expect that we will need to refinance a substantial portion of our debt on or prior to its scheduled maturity in the future. There can be no assurance that we will be able to secure such refinancings or, if such refinancings are obtained, that the terms will be commercially reasonable.

 

Capital Markets. Our ability to raise additional funds in the capital markets depends on, among other things, general economic conditions, conditions of the wireless industry, our financial performance and the state of the capital markets. In April 2004, the SEC declared effective our “universal” shelf registration statement for possible future offerings of an aggregate of up to $1.0 billion of debt and/or equity securities, including the offering of shares of our Class A common stock pursuant to a direct stock purchase plan, with respect to which our Board of Directors has approved offerings of up to $150.0 million.

 

Critical Accounting Policies and Estimates

 

Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, as well as related disclosures of contingent assets and liabilities. We evaluate our policies and estimates on an ongoing basis, including those related to income taxes, impairment of assets, allowances for accounts receivable, investment impairment charges and revenue recognition under the percentage of completion method. Management bases its

 

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estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

We have identified the following policies as critical to an understanding of our results of operations and financial condition. This is not a comprehensive list of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. For a discussion of our other accounting policies, see note 1 to the consolidated financial statements in this annual report on Form 10-K, beginning on page F-7.

 

    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, 2004, we provided a valuation allowance of approximately $173.1 million primarily related to our net state deferred tax assets and capital loss carryforwards. In addition, we also recorded a valuation allowance in 2002 related to a tax planning strategy related to the carry back of certain federal net operating losses. The valuation allowance represents the estimated lost tax benefit and costs associated with such strategy. We have not provided a valuation allowance for the remaining deferred tax assets, primarily our tax refund claims and our federal net operating loss carryforwards, as we believe that we will be successful with our tax refund claims and have sufficient time to realize these federal net operating loss carryforwards during the twenty-year tax carryforward period.

 

We intend to recover a portion of our net deferred tax asset through our tax refund claims related to certain federal net operating losses, filed during 2003 as part of a tax planning strategy implemented in 2002. 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 $1.4 billion in taxable income from January 1, 2005 to December 31, 2024. If we are unable to generate sufficient taxable income in the future or carry back losses as described above, 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.

 

Depending on the resolution of the Verestar bankruptcy proceedings described in notes 2 and 8 to the consolidated financial statements, we may be entitled to a worthless stock or bad debt deduction for our investment in Verestar. No income tax benefit has been provided for these potential deductions due to the uncertainty surrounding the bankruptcy proceedings.

 

    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.

 

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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 on 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. These tests compared 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. We completed our transitional impairment testing in the second quarter of 2002 and concluded that all of the goodwill related to our Verestar subsidiary was impaired and that the majority of the goodwill in our network development 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. Fair value estimates were determined based on independent third party appraisals for our rental and management segment and Verestar and future discounted cash flows and market information in our network development services segment.

 

In December 2004, 2003 and 2002, we completed our annual impairment testing related to the goodwill of our rental and management segment (incorporating an independent third party appraisal in 2003 and 2002) and, in all cases, determined that goodwill was not impaired. Fair value estimates are based on our historical and projected operating results and market information, changes to which could affect those fair value estimates. Our December 2002 annual impairment testing also included the remaining goodwill of our Kline subsidiary (the only services business with remaining goodwill) and, based on available market information, we determined that goodwill was not impaired. In June 2003, we committed to a plan to sell Kline, reclassified its net assets to assets held for sale and recorded an impairment charge (inclusive of Kline’s remaining $10.3 million of goodwill) that reduced Kline’s net assets to the estimated fair value expected upon disposal.

 

We perform our annual goodwill impairment test on December 1st of each year and when events or circumstances indicate that the asset might be impaired.

 

    Allowances for Accounts Receivable. We maintain allowances for accounts receivable for estimated losses resulting from the inability to collect amounts billed to our customers. Such amounts approximated $14.0 million as of December 31, 2004. When evaluating the adequacy of the allowances for accounts receivable, we specifically analyze accounts receivable and historical bad debts, customer concentrations, current economic trends, changes in our customers’ payment terms, reasons why customer accounts remain unpaid and the age of the receivables. If the basis for our estimates and financial condition of our customers were to change, adjustments to the allowances may be required.

 

    Investment Impairment Charges. Investments in those entities where we own less than twenty percent of the voting securities 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 securities 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. As of December 31, 2004, our only investment was an equity investment with a carrying value of approximately $10.2 million.

 

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    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.

 

Recent Accounting Pronouncements

 

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment” (SFAS No. 123R). This Statement is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The statement requires entities to recognize stock compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards (with limited exceptions). SFAS No. 123R is effective for the first interim or annual reporting period that begins after June 15, 2005. We are in the process of evaluating the two methods of adoption allowed by SFAS 123R; the modified-prospective transition method and the modified-retrospective transition method.

 

Information Presented Pursuant to the Indentures of Our 9 3/8% Notes, 7.50% Notes, 7.125% Notes, ATI 12.25% Notes and ATI 7.25% 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 9 3/8% senior notes, 7.50% senior notes and 7.125% senior notes, and our ATI 12.25% senior subordinated discount notes and ATI 7.25% senior subordinated notes. The information contained in note 19 to our consolidated financial statements is also presented to address certain reporting requirements contained in the indentures for our ATI 12.25% senior subordinated discount notes and ATI 7.25% senior subordinated notes.

 

The following table presents Tower Cash Flow, Adjusted Consolidated Cash Flow and Non-Tower Cash Flow for the Company and its restricted subsidiaries, as defined in the indentures for the applicable notes (in thousands):

 

     9 3/8% Notes

    ATI 12.25% Notes,
ATI 7.25% Notes,
7.50% Notes and
7.125% Notes


 

Tower Cash Flow, for the three months ended December 31, 2004

   $ 120,575     $ 119,218  
    


 


Consolidated Cash Flow, for the twelve months ended December 31, 2004

   $ 441,547     $ 435,528  

Less: Tower Cash Flow, for the twelve months ended December 31, 2004

     (461,426 )     (455,420 )

Plus: four times Tower Cash Flow, for the three months ended December 31, 2004

     482,300       476,872  
    


 


Adjusted Consolidated Cash Flow, for the twelve months ended December 31, 2004

   $ 462,421     $ 456,980  
    


 


Non-Tower Cash Flow, for the twelve months ended December 31, 2004

   $ (26,279 )   $ (26,292 )
    


 


 

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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. All derivative financial instruments are for purposes other than trading. For the year ended December 31, 2004, we repaid or refinanced approximately $2.0 billion of principal on our outstanding debt, including the refinancing of our previous credit facility of $665.8 million with a new $1.1 billion senior secured credit facility; $40.9 million of principal payments under our credit facility; the redemption of $212.7 million principal amount of our 6.25% convertible notes; the partial redemption and repurchase of $725.1 million principal amount of our 9  3/8% senior notes; and the repurchase of $383.4 million face amount of our other debt securities. In February 2004 and August 2004, we issued $225.0 million principal amount of 7.50% senior notes due May 1, 2012 and $345.0 million principal amount of 3.0% convertible notes due August 15, 2012. We also issued $500.0 million principal amount of 7.125% senior notes due October 15, 2012 in October and December 2004. In June 2004 and July 2004, we entered into two cap agreements with an aggregate notional amount of $250.0 million and $100.0 million, respectively, and during the year ended December 31, 2003, we had four caps expire with aggregate notional amounts totaling $500.0 million.

 

The following tables provide information as of December 31, 2004 and 2003 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, the tables present notional principal amounts and weighted-average interest rates by contractual maturity dates.

 

As of December 31, 2004

Principal Payments and Interest Rate Detail by Contractual Maturity Dates

(In thousands, except percentages)

 

Long-Term Debt


  2005

    2006

    2007

    2008

    2009

    Thereafter

    Total

  Fair Value

Fixed Rate Debt(a)

  $ 134,386     $ 15,999     $ 275,742     $ 497,849     $ 141,402     $ 1,723,477     $ 2,788,855   $ 2,907,189

Average Interest Rate(a)

    7.23 %     7.39 %     7.78 %     7.35 %     5.92 %     6.09 %            

Variable Rate Debt(a)

  $ 4,000     $ 26,500     $ 56,500     $ 64,000     $ 64,000     $ 483,000     $ 698,000   $ 704,228

Average Interest Rate(a)

                                                           

Aggregate Notional Amounts Associated with Interest Rate Caps in Place

As of December 31, 2004 and Interest Rate Detail by Contractual Maturity Dates

(In thousands, except percentages)

Interest Rate CAPS


  2005

    2006

                                 

Notional Amount(b)

  $ 350,000     $ 350,000                                              

Cap Rate(c)

    6.00 %     6.00 %                                            

As of December 31, 2003

Principal Payments and Interest Rate Detail by Contractual Maturity Dates

(In thousands, except percentages)

Long-Term Debt


  2004

    2005

    2006

    2007

    2008

    Thereafter

    Total

  Fair Value

Fixed Rate Debt(a)

  $ 1,869     $ 1,288     $ 228,776     $ 349,621     $ 808,043     $ 1,650,760     $ 3,040,357   $ 2,885,194

Average Interest Rate(a)

    8.69 %     8.85 %     9.07 %     9.99 %     9.54 %     6.68 %            

Variable Rate Debt(a)

  $ 75,753     $ 114,156     $ 136,275     $ 378,532                     $ 704,716   $ 703,781

Average Interest Rate(a)

                                                           

 

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Aggregate Notional Amounts Associated with Interest Rate Caps in Place

As of December 31, 2003 and Interest Rate Detail by Contractual Maturity Dates

(In thousands, except percentages)

Interest Rate CAPS


  2004

                             

Notional Amount(d)

  $ 500,000                              

Cap Rate(c)

    5.00 %                            

(a) As of December 31, 2004, variable rate debt consists of our credit facility ($698.0 million) and fixed rate debt consists of: the 2.25% Notes ($0.1 million); the 7.125% Notes ($500.0 million principal amount due at maturity; the balance as of December 31, 2004 is $501.9 million); the 5.0% Notes ($275.7 million); the 3.25% Notes ($210.0 million); the 7.50% Notes ($225.0 million); the ATI 7.25% Notes ($400.0 million); the ATI 12.25% Notes ($498.3 million principal amount due at maturity; the balance as of December 31, 2004 is $303.8 million accreted value, net of the allocated fair value of the related warrants of $21.6 million); the 9 3/8% Notes ($274.9 million); the 3.00% Notes ($345.0 million principal amount due at maturity; the balance as of December 31, 2004 is $344.3 million accreted value) and other debt of $60.0 million. Interest on the credit facility 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 weighted average interest rate in effect at December 31, 2004 for the credit facility was 4.35%. For the year ended December 31, 2004, the weighted average interest rate under the credit facility was 3.81%. The 7.125% Notes bear interest at 7.125% per annum, which is payable semiannually on April 15 and October 15 of each year, beginning April 15, 2005. The 5.0% Notes bear interest at 5.0% per annum, which is payable semiannually on February 15 and August 15 of each year. The ATI 12.25% Notes bear interest (after giving effect to the accretion of the original discount and the accretion of the fair value of the warrants) at 14.7% per annum, payable upon maturity. The 2.25% Notes bear interest (after giving effect to the accretion of the original discount) at 6.25% per annum, which is payable semiannually on April 15 and October 15 of each year. The 9 3/8% Notes bear interest at 9 3/8% per annum, which is payable semiannually on February 1 and August 1 of each year. The 3.25% Notes bear interest at 3.25% per annum, which is payable semiannually on February 1 and August 1 of each year. The ATI 7.25% Notes bear interest at 7.25% per annum, which is payable semiannually on June 1 and December 1 of each year. The 7.50% Notes bear interest at 7.50% per annum, which is payable semiannually on May 1 and November 1 of each year. The 3.00% Notes bear interest at 3.00% per annum, which is payable semiannually on February 15 and August 15 of each year. Other debt consists of notes payable, capital leases and other obligations bearing interest at rates ranging from 7.9% to 12.0%, payable monthly.

 

    As of December 31, 2003, variable rate debt consists of our credit facilities ($704.7 million) and fixed rate debt consists of: the 2.25% Notes ($0.1 million); the 6.25% Notes ($212.7 million); the 5.0% Notes ($349.4 million); the 3.25% Notes ($210.0 million); the ATI 7.25% Notes ($400.0 million); the ATI 12.25% Notes ($808.0 million principal amount due at maturity; the balance as of December 31, 2003 is $424.2 million accreted value, net of the allocated fair value of the related warrants of $44.2 million); the 9 3/8% Notes ($1.0 billion); and other debt of $58.7 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 weighted average interest rate in effect at December 31, 2003 for the credit facilities was 4.25%. For the year ended December 31, 2003, the weighted average interest rate under the credit facilities was 3.85%. The 2.25% and 6.25% Notes each bear interest (after giving effect to the accretion of the original discount on the 2.25% Notes) at 6.25% per annum, which is payable semiannually on April 15 and October 15 of each year. The 5.0% Notes bear interest at 5.0% per annum, which is payable semiannually on February 15 and August 15 of each year. The ATI 12.25% Notes bear interest (after giving effect to the accretion of the original discount and the accretion of the warrants) at 14.7% per annum, payable upon maturity. The 9 3/8% Notes bear interest at 9 3/8% per annum, which is payable semiannually on February 1 and August 1 of each year. The 3.25% Notes bear interest at 3.25% per annum, which is payable semiannually on February 1 and August 1 of each year. The ATI 7.25% Notes bear interest at 7.25% per annum, which is payable semiannually on June 1 and December 1 of each year. Other debt consists of notes payable, capital leases and other obligations bearing interest at rates ranging from 7.9% to 12.0%, payable monthly. In January 2004, we refinanced our $267.0 million term loan B under our credit facilities, with a new term loan C due December 31, 2007. The new term loan C has substantially the same terms as term loan B, except that the interest rate spreads for the LIBOR and base rate loans were reduced from 3.5% above LIBOR to 2.25% and from 2.5% above the base rate to 1.25%, respectively. In February 2004, we sold $225.0 million principal amount of 7.50% senior notes due 2012 through an institutional private placement. The net proceeds of the offering were approximately $221.7 million and were used to redeem all of our outstanding 6.25% Notes and to repurchase $4.5 million of our outstanding 5.0% Notes.

 

(b) Includes notional amounts of $250,000 and $100,000 that will expire in June and July 2006, respectively.

 

(c) 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.

 

(d) Includes notional amounts of $125,000, $250,000 and $125,000 that expired in May, June and July 2004, respectively.

 

Our foreign operations include rental and management segment divisions in Mexico and Brazil. The remeasurement losses for the years ended December 31, 2004, 2003, and 2002 approximated $146,000, $1,142,000, and $3,713,000, respectively.

 

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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. However, changes in interest rates can cause interest charges to fluctuate on our variable rate debt, comprised of $698.0 million under our credit facility as of December 31, 2004. A 10% increase, or approximately 44 basis points, in current interest rates would cause an additional pre-tax charge to our net loss of $3.0 million for the year ended December 31, 2004. In addition, changes in interest rates can also cause our cash flows to fluctuate relative to interest payments on variable rate debt. As described above, an increase of 10%, or approximately 44 basis points, in current interest rates would cause our cash outflows to increase by $3.0 million for the year ended December 31, 2004.

 

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

See Item 15(a).

 

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A.    CONTROLS AND PROCEDURES

 

Disclosure 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.

 

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this annual report on Form 10-K. Based on this evaluation, our principal executive officer and principal financial officer concluded that these disclosure controls and procedures are effective and designed to ensure that the information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the requisite time periods.

 

In February 2005, subsequent to the period covered by this report, our management determined that our previously issued financial statements for periods ending on or prior to September 30, 2004 should be restated to correct our accounting practices for ground leases underlying our tower sites. We undertook a review of our lease accounting practices as a result of changes in lease accounting announced by other public companies in January and February of 2005 and guidance provided by the Securities and Exchange Commission in its February 7, 2005 letter to the accounting industry. As a result of this review, our management determined that we should change the periods used to calculate depreciation and amortization expense and straight-line rent expense relating to certain of our tower assets and underlying ground leases. Accordingly, we restated our consolidated financial statements included in our annual report on Form 10-K/A for the fiscal year ended December 31, 2003 and in our quarterly reports on Form 10-Q/A for the first three fiscal quarters of 2004.

 

In connection with this determination, our management, with the participation of our principal executive officer and principal financial officer, re-evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective, as of the end of the period covered by this Form 10-K, in ensuring that material information relating to American Tower Corporation, required to be disclosed in reports that it files or submits under the Securities Exchange Act of 1934, is recorded,

 

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processed, summarized and reported within the requisite time periods. The evaluation did not reveal any fraud, intentional misconduct or concealment on the part of our personnel. We have remediated the ineffectiveness of our disclosure controls and procedures by conducting a review of our lease accounting practices and correcting our accounting practices for depreciation and amortization expense and straight-line rent expense relating to certain of our tower assets and underlying ground leases.

 

Management’s Annual Report on Internal Control Over Financial Reporting

 

Our management, with the participation of our principal executive officer and principal financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control system is designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements.

 

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2004. In making its assessment of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission in Internal Control—Integrated Framework. In performing this assessment and in response to the changes in lease accounting announced by other public companies in January and February of 2005 and guidance provided by the Securities and Exchange Commission in its February 7, 2005 letter to the accounting industry, our management undertook a review of our lease accounting practices, as discussed above, and determined that we should change the periods used to calculate depreciation and amortization expense and straight-line rent expense relating to certain of our tower assets and underlying ground leases. As a result, we restated our consolidated financial statements included in our annual report on Form 10-K/A for the fiscal year ended December 31, 2003 and in our quarterly reports on Form 10-Q/A for the first three fiscal quarters of 2004.

 

Our management evaluated the impact of this restatement on our assessment of our system of internal control over financial reporting. Based on the definition of “material weakness” in the Public Company Accounting Oversight Board (“PCAOB”) Auditing Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction With an Audit of Financial Statements, restatement of financial statements in prior filings with the Securities and Exchange Commission is a strong indicator of the existence of a “material weakness” in the design or operation of internal control over financial reporting. Based on this interpretation, our management concluded that a material weakness existed in our internal control over financial reporting relating to the selection, application and monitoring of our accounting practices for depreciation and amortization expense and straight-line rent expense relating to certain of our tower assets and underlying ground leases. Our management disclosed this to the Audit Committee of our Board and to our independent registered public accountants. As a result of this material weakness in our internal control over financial reporting, our management has concluded that, as of December 31, 2004, our internal control over financial reporting was not effective based on the criteria set forth by the COSO of the Treadway Commission in Internal Control—Integrated Framework. To remediate this material weakness in our internal control over financial reporting, we conducted a review of our lease accounting practices and corrected our accounting practices for depreciation and amortization expense and straight-line rent expense relating to certain of our tower assets and underlying ground leases in the first quarter of 2005.

 

Our independent registered public accounting firm has issued an attestation report on management’s assessment of our internal control over financial reporting. This attestation report is set forth below.

 

Changes in Internal Controls over Financial Reporting

 

There was no change in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended, identified in connection with the evaluation of our internal control performed during the fiscal quarter ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. However, as described above, in the first quarter of 2005 we conducted a review of our lease accounting practices and corrected our accounting practices for depreciation and amortization expense and straight-line rent expense relating to certain of our tower assets and underlying ground leases.

 

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Attestation Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders of

American Tower Corporation

 

We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting, that American Tower Corporation and subsidiaries (the “Company”) did not maintain effective internal control over financial reporting as of December 31, 2004, because of the effect of the material weakness identified in management’s assessment based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness has been identified and included in management’s assessment: In its assessment as of December 31, 2004, management identified as a material weakness that the Company did not maintain effective controls relating to the selection, application and monitoring of its accounting practices for depreciation and amortization expense and straight-line rent expense relating to certain of its tower assets and underlying ground leases. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended December 31, 2004, of the Company and this report does not affect our report on such financial statements.

 

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In our opinion, management’s assessment that the Company did not maintain effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2004, of the Company and our report dated March 29, 2005 expressed an unqualified opinion on those financial statements and included an explanatory paragraph relating to the adoption of Statement or Financial Accounting Standard No. 142 “Goodwill and Other Intangible Assets”.

 

/s/ DELOITTE & TOUCHE LLP

 

Boston, Massachusetts

March 29, 2005

 

ITEM 9B.    OTHER INFORMATION

 

None.

 

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PART III

 

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 

Our executive officers and their respective ages and positions as of March 20, 2005 are set forth below:

James D. Taiclet, Jr.

   44    Chairman, President and Chief Executive Officer

J. Michael Gearon, Jr.

   40    Vice Chairman and President, American Tower International

Bradley E. Singer

   38    Chief Financial Officer and Treasurer

Steven J. Moskowitz

   41    Executive Vice President and President, U.S. Tower Division

William H. Hess

   42    Executive Vice President and General Counsel

Timothy F. Allen

   36    Senior Vice President, Finance and Corporate Controller

 

James D. Taiclet, Jr. is our Chairman, President and Chief Executive Officer. Mr. Taiclet joined us in September 2001 as President and Chief Operating Officer, was named our Chief Executive Officer in October 2003, was elected as a director in November 2003, and was named our Chairman in February 2004. Prior to joining us, 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. Mr. Taiclet received a Masters in Public Affairs from Princeton University, where he was a Wilson Fellow, and is a distinguished graduate of the United States Air Force Academy.

 

J. Michael Gearon, Jr. is our Vice Chairman and President, American Tower International, and was a director from the time of our acquisition of Gearon Communications in January 1998 until May 2003. 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. Mr. Gearon is a graduate of Georgia State University.

 

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 appointed 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. Mr. Singer received an M.B.A. degree from Harvard University, and is a graduate of the University of Virginia.

 

Steven J. Moskowitz is our Executive Vice President and President, U.S. 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 Executive Vice President, U.S. Tower Division in January 2002 and named President of the U.S. Tower Division in October 2003. 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. Mr. Moskowitz received his undergraduate degree from Temple University.

 

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. Mr. Hess received a J.D. degree from Vanderbilt University Law School, and is a graduate of Harding University.

 

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Timothy F. Allen is our Senior Vice President, Finance and Corporate Controller. Mr. Allen joined us in February 1999 as Manager of Financial Reporting and was appointed Vice President of Finance in February 2002. Mr. Allen became our corporate controller in April 2003, and was appointed Senior Vice President, Finance in May 2004. Prior to joining us, Mr. Allen was a senior manager with the accounting firm of KPMG LLP. Mr. Allen is a graduate of Providence College.

 

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. Information required by this item pursuant to Item 401(h) and 401(i) of Regulation S-K relating to our audit committee financial experts and identification of the audit committee of our board of directors is contained in the Definitive Proxy Statement under “Corporate Governance” and is incorporated herein by reference.

 

Information regarding our code of ethics applicable to our principal executive officer, our principal financial officer, our controller and other senior financial officers appears in Item 1 of this report. See “Business—Available Information.”

 

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.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The information under “Independent Auditor Fees and Other Matters” from the Definitive Proxy Statement is hereby incorporated by reference herein.

 

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PART IV

 

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a) The following documents are filed as a part of this report:

 

1. Financial Statements. See Index to Consolidated Financial Statements, which appears on page F-1 hereof. The financial statements listed in the accompanying Index to Consolidated Financial Statements are filed herewith in response to this Item.

 

2. Financial Statement Schedules. All schedules are omitted because they are not applicable or because the required information is contained in the consolidated financial statements or notes included in this annual report on Form 10-K.

 

3. Exhibits. See Index to Exhibits. The exhibits listed in the Index to Exhibits immediately preceding the exhibits are filed herewith in response to this Item.

 

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SIGNATURES

 

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 29th day of March 2005.

 

AMERICAN TOWER CORPORATION
By:   /s/    JAMES D. TAICLET, JR.        
   

James D. Taiclet, Jr.

Chairman, President and Chief Executive Officer

 

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/    JAMES D. TAICLET, JR.        


James D. Taiclet, Jr.

  

Chairman, President and Chief Executive Officer (Principal Executive Officer)

  March 29, 2005

/s/    BRADLEY E. SINGER        


Bradley E. Singer

  

Chief Financial Officer and Treasurer (Principal Financial Officer)

  March 29, 2005

/s/    TIMOTHY F. ALLEN        


Timothy F. Allen

  

Senior Vice President, Finance and Controller (Principal Accounting Officer)

  March 29, 2005

/s/    RAYMOND P. DOLAN        


Raymond P. Dolan

  

Director

  March 29, 2005

/s/    CAROLYN F. KATZ        


Carolyn F. Katz

  

Director

  March 29, 2005

/s/    GUSTAVO LARA CANTU        


Gustavo Lara Cantu

  

Director

  March 29, 2005

/s/    FRED R. LUMMIS        


Fred R. Lummis

  

Director

  March 29, 2005

/s/    PAMELA D. A. REEVE        


Pamela D. A. Reeve

  

Director

  March 29, 2005

 

 

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AMERICAN TOWER CORPORATION

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page

Report of Independent Registered Public Accounting Firm

   F-2

Consolidated Balance Sheets as of December 31, 2004 and 2003

   F-3

Consolidated Statements of Operations for the Years Ended December 31, 2004, 2003 and 2002

   F-4

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2004,
2003 and 2002

   F-5

Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002

   F-6

Notes to Consolidated Financial Statements

   F-7

 

F-1


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REPORT OF INDEPENDENT REGISTERE D PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

American Tower Corporation

 

We have audited the accompanying consolidated balance sheets of American Tower Corporation and subsidiaries (the “Company”) as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). 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 American Tower Corporation and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

 

As discussed in notes 1 and 4 to the consolidated financial statements, in 2002 the Company adopted Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets.”

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 29, 2005 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of a material weakness.

 

/s/ DELOITTE & TOUCHE LLP

 

Boston, Massachusetts

March 29, 2005

 

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Table of Contents

AMERICAN TOWER CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

December 31, 2004 and 2003

(In thousands, except share data)

 

    2004

    2003

 

ASSETS

               

CURRENT ASSETS:

               

Cash and cash equivalents

  $ 215,557     $ 105,465  

Restricted cash and investments

            170,036  

Accounts receivable, net of allowances

    38,634       57,735  

Prepaid and other current assets

    45,367       51,644  

Deferred income taxes

    6,090       14,122  

Assets held for sale

    3,389       17,651  
   


 


Total current assets

    309,037       416,653  
   


 


PROPERTY AND EQUIPMENT, net

    2,273,356       2,483,324  

OTHER INTANGIBLE ASSETS, net

    985,303       1,019,749  

GOODWILL

    592,683       592,683  

DEFERRED INCOME TAXES

    633,814       502,737  

NOTES RECEIVABLE AND OTHER LONG-TERM ASSETS

    291,779       275,508  
   


 


TOTAL

  $ 5,085,972     $ 5,290,654  
   


 


LIABILITIES AND STOCKHOLDERS’ EQUITY

               

CURRENT LIABILITIES:

               

Accounts payable and accrued expenses

  $ 121,672     $ 107,557  

Accrued interest

    39,466       59,734  

Current portion of long-term obligations

    138,386       76,627  

Unearned revenue

    32,681       41,449  

Liabilities held for sale

            9,910  
   


 


Total current liabilities

    332,205       295,277  
   


 


LONG-TERM OBLIGATIONS

    3,155,228       3,283,104  

OTHER LONG-TERM LIABILITIES

    121,505       83,496  
   


 


Total liabilities

    3,608,938       3,661,877  
   


 


COMMITMENTS AND CONTINGENCIES

               

MINORITY INTEREST IN SUBSIDIARIES

    6,081       18,599  

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; 229,745,116 and 211,855,658 shares issued, 229,599,895 and 211,710,437 shares outstanding, respectively

    2,297       2,119  

Class B Common Stock: $.01 par value; 0 and 50,000,000 shares authorized, respectively; 0 and 6,969,529 shares issued and outstanding, respectively

            70  

Class C Common Stock: $.01 par value; 10,000,000 shares authorized; 0 and 1,224,914 shares issued and outstanding, respectively

            12  

Additional paid-in capital

    4,012,425       3,910,879  

Accumulated deficit

    (2,539,403 )     (2,291,816 )

Note receivable

            (6,720 )

Treasury stock (145,221 shares at cost)

    (4,366 )     (4,366 )
   


 


Total stockholders’ equity

    1,470,953       1,610,178  
   


 


TOTAL

  $ 5,085,972     $ 5,290,654  
   


 


 

See notes to consolidated financial statements.

 

F-3


Table of Contents

AMERICAN TOWER CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2004, 2003, and 2002

(In thousands, except per share data)

 

     2004

    2003

    2002

 

REVENUES:

                        

Rental and management

   $ 684,422     $ 619,697     $ 544,906  

Network development services

     22,238       12,796       32,888  
    


 


 


Total operating revenues

     706,660       632,493       577,794  
    


 


 


OPERATING EXPENSES:

                        

Rental and management

     237,312       236,680       242,801  

Network development services

     18,801       9,493       29,214  

Depreciation, amortization and accretion

     329,449       330,414       327,665  

Corporate general, administrative and development expense

     27,468       26,867       30,229  

Impairments, net loss on sale of long-lived assets and restructuring expense

     23,876       31,656       101,372  
    


 


 


Total operating expenses

     636,906       635,110       731,281  
    


 


 


OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS

     69,754       (2,617 )     (153,487 )
    


 


 


OTHER INCOME (EXPENSE):

                        

Interest income, TV Azteca, net of interest expense of $1,497, $1,496 and $1,494, respectively

     14,316       14,222       13,938  

Interest income

     4,844       5,255       3,496  

Interest expense

     (262,237 )     (279,783 )     (254,345 )

Loss on retirement of long-term obligations

     (138,016 )     (46,197 )     (8,869 )

Other expense

     (2,798 )     (8,598 )     (7,004 )
    


 


 


Total other expense

     (383,891 )     (315,101 )     (252,784 )
    


 


 


LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES, MINORITY INTEREST AND LOSS ON EQUITY METHOD INVESTMENTS

     (314,137 )     (317,718 )     (406,271 )

Income tax benefit

     80,176       77,796       81,141  

Minority interest in net earnings of subsidiaries

     (2,366 )     (3,703 )     (2,118 )

Loss on equity method investments

     (2,915 )     (21,221 )     (18,555 )
    


 


 


LOSS FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE

     (239,242 )     (264,846 )     (345,803 )

LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAX BENEFIT OF $4,438, $11,747 AND $28,363, RESPECTIVELY

     (8,345 )     (60,475 )     (255,119 )
    


 


 


LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE

     (247,587 )     (325,321 )     (600,922 )
    


 


 


CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF INCOME TAX BENEFIT OF $14,438

                     (562,618 )
    


 


 


NET LOSS

   $ (247,587 )   $ (325,321 )   $ (1,163,540 )
    


 


 


BASIC AND DILUTED LOSS PER COMMON SHARE AMOUNTS:

                        

Loss from continuing operations before cumulative effect of change in accounting principle

   $ (1.07 )   $ (1.27 )   $ (1.77 )

Loss from discontinued operations

     (0.03 )     (0.29 )     (1.30 )

Cumulative effect of change in accounting principle

                     (2.88 )
    


 


 


NET LOSS PER COMMON SHARE

   $ (1.10 )   $ (1.56 )   $ (5.95 )
    


 


 


WEIGHTED AVERAGE COMMON SHARES OUTSTANDING

     224,336       208,098       195,454  
    


 


 


 

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, 2004, 2003, and 2002

(In thousands, except share data)

 

    Common Stock

  Common Stock

    Common Stock

                                               
    Class A

  Class B

    Class C

    Treasury Stock

    Note
Receivable


    Additional
Paid-in
Capital


  Accumulated
Other Compre-
hensive Income


    Accumulated
Deficit


    Total
Stockholders’
Equity


    Total
Comprehensive
Loss


 
    Issued
Shares


   Amount

  Issued
Shares


    Amount

    Issued
Shares


    Amount

    Shares

    Amount

             

BALANCE, JANUARY 1, 2002

  185,162,631    $ 1,851   8,001,769     $ 80     2,267,813     $ 23     (144,597 )   $ (4,340 )   $ (6,720 )   $ 3,639,510   $ (16,057 )   $ (802,955 )   $ 2,811,392          

Issuance of common stock - Employee Stock Purchase Plan

  396,295      4                                                       2,509                     2,513          

Share Class Exchanges

  84,699      1   (84,699 )     (1 )                                                                          

Net change in fair value of cash flow hedges, net of tax

                                                                       (9,138 )             (9,138 )   $ (9,138 )

Reclassification adjustment for realized losses on derivative instruments, net of tax

                                                                       19,527               19,527       19,527  

Foreign currency translation adjustment

                                                                       104               104       104  

Net loss

                                                                               (1,163,540 )     (1,163,540 )     (1,163,540 )
                                                                                              


Total comprehensive loss

                                                                                             $ (1,153,047 )
   
  

 

 


 

 


 

 


 


 

 


 


 


 


BALANCE, DECEMBER 31, 2002

  185,643,625    $ 1,856   7,917,070     $ 79     2,267,813     $ 23     (144,597 )   $ (4,340 )   $ (6,720 )   $ 3,642,019   $ (5,564 )   $ (1,966,495 )   $ 1,660,858          
   
  

 

 


 

 


 

 


 


 

 


 


 


       

Issuance of common stock - August offering

  14,260,000      143                                                       120,200                     120,343          

2.25% convertible notes exchanged for common stock

  8,415,984      84                                                       86,045                     86,129          

12.25% Senior Subordinated Notes - Warrants

                                                                 52,525                     52,525          

Issuance of common stock - Employee Stock Purchase Plan

  200,287      2                                                       959                     961          

Share Class Exchanges

  1,990,440      20   (947,541 )     (9 )   (1,042,899 )     (11 )                                                            

Stock option activity

  1,345,322      14                                                       7,859                     7,873          

Treasury stock transaction

                                         (624 )     (26 )                                   (26 )        

Net change in fair value of cash flow hedges, net of tax

                                                                       (329 )             (329 )   $ (329 )

Reclassification adjustment for realized losses on derivative instruments, net of tax

                                                                       5,893               5,893       5,893  

Tax benefit of stock options

                                                                 1,272                     1,272          

Net loss

                                                                               (325,321 )     (325,321 )    

(325,321

)

Total comprehensive loss

                                                                                             $ (319,757 )
   
  

 

 


 

 


 

 


 


 

 


 


 


 


BALANCE, DECEMBER 31, 2003

  211,855,658    $ 2,119   6,969,529     $ 70     1,224,914     $ 12     (145,221 )   $ (4,366 )   $ (6,720 )   $ 3,910,879           $ (2,291,816 )   $ 1,610,178          
   
  

 

 


 

 


 

 


 


 

 


 


 


       

Share Class Exchanges

  8,194,443      82   (6,969,529 )     (70 )   (1,224,914 )     (12 )                                                            

Stock option activity

  6,249,324      62                                                       43,004                     43,066          

Issuance of common stock - Stock Purchase Plans

  86,045                                                              854                     854          

ATC Mexico activity

  3,359,646      34                                               6,720       41,421                     48,175          

ATC South America activity

                                                                 67                     67          

Tax benefit of stock options

                                                                 16,200                     16,200          

Net loss

                                                                               (247,587 )     (247,587 )    

(247,587

)

Total comprehensive loss

                                                                                             $ (247,587 )
   
  

 

 


 

 


 

 


 


 

 


 


 


 


BALANCE, DECEMBER 31, 2004

  229,745,116    $ 2,297                               (145,221 )   $ (4,366 )           $ 4,012,425           $ (2,539,403 )   $ 1,470,953          
   
  

 

 


 

 


 

 


 


 

 


 


 


       

 

See notes to consolidated financial statements.

 

F-5


Table of Contents

AMERICAN TOWER CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2004, 2003, and 2002

(In thousands)

 

     2004

    2003

    2002

 

CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:

                        

Net loss

   $ (247,587 )   $ (325,321 )   $ (1,163,540 )

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

                        

Cumulative effect of change in accounting principle, net

                     562,618  

Depreciation, amortization and accretion

     329,449       330,414       327,665  

Non-cash items reported in discontinued operations (primarily depreciation, asset impairments and net losses on dispositions)

     3,725       53,043       266,817  

Minority interest in net earnings of subsidiaries

     2,366       3,703       2,118  

Loss on investments and other non-cash expense

     4,295       20,525       20,286  

Impairments, net loss on sale of long-lived assets and non-cash restructuring expense

     23,130       29,400       90,734  

Loss on retirement of long-term obligations

     138,016       46,197       8,869  

Amortization of deferred financing costs, debt discounts and other non-cash interest

     72,857       75,595       18,166  

Provision for losses on accounts receivable

     17,440       21,940       15,654  

Deferred income taxes

     (92,443 )     (77,796 )     (84,288 )

Changes in assets and liabilities, net of acquisitions:

                        

Accounts receivable

     1,335       (3,649 )     23,621  

Prepaid and other assets

     (18,665 )     (11,908 )     28,989  

Accounts payable and accrued expenses

     (3,247 )     312       (26,124 )

Accrued interest

     (20,268 )     (4,363 )     4,647  

Unearned revenue

     (10,990 )     (3,139 )     (5,684 )

Other long-term liabilities

     17,287       1,433       14,601  
    


 


 


Cash provided by operating activities

     216,700       156,386       105,149  
    


 


 


CASH FLOWS USED FOR INVESTING ACTIVITIES:

                        

Payments for purchase of property and equipment and construction activities

     (42,181 )     (61,608 )     (180,497 )

Payments for acquisitions, net of cash acquired

     (33,403 )     (95,077 )     (56,361 )

Payments for acquisition of Mexico minority interest

     (3,947 )                

Proceeds from (advances of) notes receivable, net

             6,946       5,068  

Proceeds from sales of businesses and other long-term assets

     31,987       110,753       109,353  

Distributions to minority interest

     (456 )     (671 )     (488 )

Deposits and investments

     2,784       (16,353 )     7,668  
    


 


 


Cash used for investing activities

     (45,216 )     (56,010 )     (115,257 )
    


 


 


CASH FLOWS (USED FOR) PROVIDED BY FINANCING ACTIVITIES:

                        

Proceeds from issuance of debt securities and notes payable

     1,072,500       1,032,384          

Net proceeds from equity offerings, stock options and stock purchase plans

     40,556       126,847       1,305  

Borrowings under credit facility

     700,000               160,000  

Repayment of notes payable, credit facility and capital leases

     (2,003,401 )     (1,071,956 )     (148,270 )

Restricted cash

     170,036       (170,036 )     94,071  

Deferred financing costs and other financing activities

     (41,083 )     (39,442 )     (5,664 )
    


 


 


Cash (used for) provided by financing activities

     (61,392 )     (122,203 )     101,442  
    


 


 


NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     110,092       (21,827 )     91,334  

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

     105,465       127,292       35,958  
    


 


 


CASH AND CASH EQUIVALENTS, END OF YEAR

   $ 215,557     $ 105,465     $ 127,292  
    


 


 


 

See notes to consolidated financial statements.

 

F-6


Table of Contents

AMERICAN TOWER CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.    BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Business—American Tower Corporation and subsidiaries (collectively, ATC or the Company), is an independent owner, operator and developer of wireless and broadcast communications sites in the United States, Mexico and Brazil. The Company’s primary business, as discussed in note 16, is the leasing of antenna space on multi-tenant communications towers to wireless service providers and radio and television broadcast companies. The Company also provides limited network development services that support its rental and management operations and the addition of new tenants on its towers. During 2004 and 2003, the Company sold or committed to sell certain non-core businesses, which have been reported as discontinued operations. (See note 2.)

 

Principles of Consolidation and Basis of Presentation—The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. The Company consolidates those entities in which it owns greater than fifty percent of the entity’s voting stock, with the exception of Verestar, Inc. (Verestar), as discussed in note 2.

 

Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates, and such differences could be material to the accompanying consolidated financial statements. The significant estimates in the accompanying consolidated financial statements include revenue recognition under the percentage completion method, impairment of cost and equity investments, impairment of long-lived assets (including goodwill), allowances for accounts receivable and valuation allowances related to deferred tax assets.

 

Revenue Recognition—Rental and management revenues are recognized on a monthly basis under lease or management agreements when earned. Fixed escalation clauses present in non-cancelable lease agreements, excluding those tied to the Consumer Price Index (CPI) or other inflation-based indices, and other incentives present in lease agreements with the Company’s customers are recognized on a straight-line basis over the terms of the applicable leases. Straight-line revenues for the years ended December 31, 2004, 2003 and 2002 approximated $24,762,000, $22,944,000 and $25,725,000, respectively. Amounts billed up-front for certain services provided in connection with the execution of lease agreements are initially deferred and recognized as revenue over the terms of the applicable leases. Amounts billed or received prior to being earned are deferred and reflected in unearned revenue in the accompanying consolidated balance sheets until such time as the earnings process is complete.

 

Network development service revenues, the majority of which are included in discontinued operations, are derived under contracts or arrangements with customers that provide for billings on a time and materials, cost plus profit or fixed price basis. Revenues are recognized as services are performed with respect to the time and materials and cost plus profit contracts. Revenues are recognized using the percentage-of-completion method for fixed price contracts. Under the percentage-of-completion methodology, revenues are recognized in accordance with the percentage of contract costs incurred to date compared to estimated total contract costs. Changes to total estimated contract costs or losses, if any, are recognized in the period in which they are determined. (See note 2.)

 

Rent Expense—Many of the leases underlying the Company’s tower sites have fixed rent escalators, which provide for periodic increases in the amount of ground rent payable by the Company over time. The Company calculates straight-line ground rent expense for these leases based on the term of the underlying ground lease, the applicable tower’s useful life, and the term of the tenant lease on the applicable tower. Typically, the Company enters into tenant leases, which contain multiple renewal options, with its customers for antenna space on its towers. Certain of these tenant leases require the Company to exercise all available renewal options pursuant to the underlying ground lease, if the tenant exercises its renewal option. For towers with these types of tenant

 

F-7


Table of Contents

AMERICAN TOWER CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

leases at the inception of the ground lease, the Company calculates its straight-line ground rent over the lesser of the remaining ground lease life (including all renewal options) or the life of the tenant lease (including all renewal options). In instances where the Company’s tenant leases do not require the Company to exercise all available renewal options pursuant to the underlying ground lease, the Company calculates its straight-line ground rent over the lesser of the ground lease life (including all renewal options) or a period equal to or greater than the 15-year period over which the Company depreciates its tower assets.

 

Straight-line ground rent expense approximated $12,101,000, $14,687,000 and $16,685,000, respectively, for the years ended December 31, 2004, 2003 and 2002, respectively. The Company’s deferred rent liability of approximately $81.2 million and $69.1 million is included in other long-term liabilities in the accompanying consolidated balance sheets as of December 31, 2004 and 2003, respectively.

 

Corporate General, Administrative and Development Expense—Corporate general and administrative expense consists of corporate overhead costs not specifically allocable to any of the Company’s individual business segments. Development expense consists of uncapitalized acquisition costs, costs to integrate acquisitions, costs associated with new business initiatives and abandoned acquisition costs.

 

Loss on Retirement of Long-Term Obligations—Loss on retirement of long-term obligations primarily includes cash paid to retire debt in excess of its carrying value and non-cash charges related to the write-off of deferred financing fees. In addition, it also includes non-cash charges related to the fair value of incremental stock issued to induce convertible noteholders to convert their holdings prior to the scheduled redemption date. Such amounts are expensed as incurred in accordance with Statement of Financial Accounting Standard (SFAS) No. 84 “Induced Conversions of Convertible Debt.” (See note 6.) Loss on retirement of long-term obligations also includes gains from repurchasing certain of the Company’s debt obligations.

 

Discount and Premium on Notes—The Company amortizes the discount on its convertible, senior and senior subordinated discount notes (including the allocated fair value of the related warrants) and the premium on its senior notes using the effective interest method over the term of the obligation. Such amortization is recorded as interest expense in the accompanying consolidated statements of operations. (See note 6.)

 

Concentrations of Credit Risk—Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash and cash equivalents, restricted cash and investments, notes receivable, trade receivables and derivative instruments. The Company mitigates its risk with respect to cash and cash equivalents, restricted cash and investments and derivative instruments by maintaining its deposits and contracts at high quality financial institutions and monitoring the credit ratings of those institutions.

 

The Company mitigates its concentrations of credit risk with respect to notes and trade receivables by actively monitoring the credit worthiness of its borrowers and customers. Accounts receivable are reported net of allowances of $13,968,000, $17,445,000 and $16,041,000 as of December 31, 2004, 2003 and 2002, respectively. Amounts charged against allowances, net of recoveries, for the years ended December 31, 2004, 2003 and 2002 approximated $20,917,000, $20,536,000, and $17,111,000, respectively. The effect of reclassifications to discontinued operations impacted the comparability of the allowances for the year ended December 31, 2002 by $(6,306,000).

 

Derivative Financial Instruments—The Company complies with the provisions of SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities,” as amended and is exposed to interest rate risk relating to variable interest rates on its credit facilities described in note 6. During the years ended December 31, 2004, 2003 and 2002, as part of its overall strategy to manage the level of exposure to the risk of interest rate fluctuations

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

under its variable rate credit facilities, the Company used interest rate swaps, caps and collars. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is initially reported as a component of other comprehensive loss and subsequently reclassified into the statement of operations when the hedged transaction affects operations. The ineffective portion of the gain or loss on the derivative instrument is immediately recognized in the statement of operations. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in the statement of operations in the period of change. The Company does not hold derivative financial instruments for trading purposes. As of December 31, 2004 and 2003, the Company did not have any derivative instruments designated as cash flow hedges and managed its interest rate risk solely with interest rate caps. (See note 7.)

 

Foreign Currency Translation—The functional currency of the Company’s foreign subsidiaries in Mexico and Brazil is the U.S. dollar. Monetary assets and liabilities related to the Company’s Mexican and Brazilian operations are remeasured from the local currency into U.S. dollars at the rate of currency exchange at the end of the applicable fiscal period. Non-monetary assets and liabilities are remeasured at historical exchange rates. Revenues and expenses are remeasured at average monthly exchange rates. All remeasurement gains and losses are included in the Company’s consolidated statement of operations within the caption other expense. The net remeasurement losses for the years ended December 31, 2004, 2003 and 2002 approximated $146,000, $1,142,000, and $3,713,000, respectively.

 

Cash and Cash Equivalents—Cash and cash equivalents include cash on hand, demand deposits and short-term investments with remaining maturities (when purchased) of three months or less.

 

Restricted Cash and Investments—As of December 31, 2004, the Company was not required to hold any of its cash and investments in restricted accounts. As of December 31, 2003, restricted cash and investments represented amounts required to be held in escrow to pay, repurchase, redeem or retire certain of the Company’s outstanding debt or to be transferred to the borrower subsidiaries under the credit facilities. (See notes 6 and 13.)

 

Property and Equipment—Property and equipment are recorded at cost or at estimated fair value (in the case of acquired properties). Cost for self-constructed towers includes direct materials and labor, indirect costs associated with construction and capitalized interest. Approximately $226,000, $672,000, and $5,835,000 of interest was capitalized for the years ended December 31, 2004, 2003 and 2002, respectively.

 

Depreciation is recorded using the straight-line method over the assets’ estimated useful lives. Property and equipment acquired through capital leases are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the asset. Towers on leased land are depreciated over the shorter of the term of the ground lease (including renewal options) or the estimated useful life of the tower (15 years). Asset useful lives are as follows:

 

Equipment

   3-15 years

Buildings

   32 years

Building and land improvements

   15-32 years

Towers

   up to 15 years

 

Expenditures for repairs and maintenance are expensed as incurred. Betterments and improvements that extend an asset’s useful life or enhance capacity are capitalized.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Goodwill and Other Intangible Assets—The Company complies with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142) which was adopted effective January 1, 2002. SFAS No. 142 requires that goodwill and intangible assets with indefinite lives no longer be amortized, but reviewed for impairment at least annually or whenever events or circumstances indicate the carrying value of an asset may not be recoverable in accordance with SFAS No. 142. Intangible assets that are deemed to have a definite life continue to be amortized over their useful lives. (See note 4.)

 

Income Taxes—The consolidated financial statements reflect provisions for federal, state, local and foreign income taxes. The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as operating loss and tax credit carryforwards. The Company measures deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company provides valuation allowances if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. (See note 12.)

 

Sales of Subsidiary Stock—During the year ended December 31, 2004, certain option holders exercised options to purchase a 3.2% interest in the subsidiary that conducts the Company’s Mexico operations and an executive officer purchased an approximate 1.6% interest in the subsidiary that conducts the Company’s Brazil operations. As a result, the Company adopted the provisions of SEC Staff Accounting Bulletin (SAB) No. 51, “Accounting for Sales of Stock by a Subsidiary” (SAB No. 51) and recorded the difference between the Company’s carrying value of the interest in the subsidiary’s equity that was sold over the proceeds received for that interest to additional paid-in-capital. The Company records any gains or losses resulting from the sale of stock by a subsidiary as a component of stockholders’ equity. (See note 10.)

 

Loss per Common Share—Basic and diluted net loss per common share has been computed by dividing the Company’s net loss by the weighted average number of common shares outstanding during the period. For the years ended December 31, 2004, 2003 and 2002, potential common shares, including options, warrants and shares issuable upon conversion of the Company’s convertible notes, have been excluded from the computation of diluted loss per common share, as their effect is anti-dilutive. Potential common shares excluded from the calculation of net loss per share were approximately 68.8 million, 65.6 million, and 50.6 million for the years ended December 31, 2004, 2003 and 2002, respectively.

 

Impairments, Net Loss on Sale of Long-Lived Asset and Discontinued Operations—The Company reviews long-lived assets, including intangibles with definite lives, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company assesses recoverability by determining whether the net book value of the related assets will be recovered, either through projected undiscounted future cash flows (with respect to operating assets), or anticipated proceeds from sales (with respect to non-core assets that are designated for sale). If the Company determines that the carrying value of an asset may not be recoverable, it measures any impairment based on the projected future discounted cash flows to be provided from the asset or the estimated sale proceeds, as compared to the asset’s carrying value. The Company also complies with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (SFAS No. 144) regarding impairment assessments and decisions concerning discontinued operations. The Company records impairment losses in the period in which it identifies such impairments. (See notes 2 and 11.)

 

Notes Receivable and Other Long-Term Assets—Other long-term assets primarily represent the Company’s notes receivable described in note 5, deferred rent asset associated with the straight-lining of non-cancelable tenant

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

leases that contain fixed escalation clauses over the terms of the applicable leases, as well an equity investment and long-term deposits.

 

Investments in those entities where the Company owns less than twenty percent of the voting stock of the individual entity and does not exercise significant influence over operating and financial policies of the entity are accounted for using the cost method. Investments in entities where the Company owns less than twenty percent but has the ability to exercise significant influence over operating and financial policies of the entity, or where the Company owns 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. As of December 31, 2004 and 2003, the Company’s investments were in companies that are not publicly traded, and, therefore, no established market for their securities exists. The Company has a policy in place to review the fair value of its investments on a regular basis to evaluate the carrying value of the investments in these companies. If the Company believes that the carrying value of an investment is in excess of fair market value, it is the Company’s policy to record an impairment charge to adjust the carrying value to fair market value. The Company’s only investment was an equity investment with a carrying value of $10.2 million and $13.1 million as of December 31, 2004 and 2003, respectively.

 

During the years ended December 31, 2003 and 2002, the Company recorded impairment charges on its cost and equity investments of approximately $19.3 million, and $11.3 million, respectively. In addition, during the years ended December 31, 2004, 2003 and 2002, the Company recorded losses on equity method investments of approximately $2.9 million, $1.9 million, and $9.0 million, respectively. Losses on equity method investments are recorded in accordance with Emerging Issues Task Force No. 99-10 “Percentage Used to Determine the Amount of Equity Method Losses.”

 

Asset Retirement Obligations—The Company complies with the provisions of SFAS No. 143, “Accounting for Asset Retirement Obligations” (SFAS No. 143) which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the related asset retirement costs. The fair value of a liability for asset retirement obligations is to be recognized in the period in which it is incurred and can be reasonably estimated. Such asset retirement costs are capitalized as part of the carrying amount of the related long-lived asset and depreciated over the asset’s estimated useful life. Fair value estimates of liabilities for asset retirement obligations generally involve discounted future cash flows. Periodic accretion of such liabilities due to the passage of time is recorded as an operating expense. The Company has certain legal obligations related to tower assets which fall within the scope of SFAS No. 143 and include obligations to remediate leased land on which the Company’s tower assets are located. The significant assumptions used in estimating the Company’s aggregate asset retirement obligation are: timing of tower removals; timing and number of land lease renewals; expected inflation rates that are consistent with historical inflation rates; and credit-adjusted risk-free rates that approximate the Company’s incremental borrowing rate.

 

The provisions of SFAS No. 143 were effective for the Company as of January 1, 2003. The Company recognized the cumulative effect of adopting SFAS No. 143 of $1.3 million in other expense in its consolidated statement of operations for the year ended December 31, 2003. During 2004, the Company revised certain assumptions used in estimating its aggregate retirement obligation, resulting in an increase in depreciation amortization and accretion expense of $4.5 million, an increase in tower assets of $12.0 million, and an increase in other long term liabilities of approximately $16.5 million. The Company’s accretion expense of $5.3 million and $0.2 million for the years ended December 31, 2004 and 2003, respectively, is recorded in depreciation, amortization and accretion expense in the accompanying consolidated statement of operations. The Company’s asset retirement obligation approximates $23.5 million and $4.1 million as of as of December 31, 2004 and 2003, respectively, and is included in other long-term liabilities in the accompanying consolidated balance sheets. The Company did not settle any material liabilities related to this obligation during the years ended December 31, 2004 and 2003.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Stock-Based Compensation—The Company complies with the provisions of 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. The Company continues to use Accounting Principles Board Opinion No. 25 (APB No. 25), “Accounting for Stock Issued to Employees,” to account for equity grants and awards to employees, officers and directors and has adopted the disclosure-only provisions of SFAS No. 148. In accordance with APB No. 25, the Company recognizes compensation expense based on the excess, if any, of the quoted stock price at the grant date of the award or other measurement date over the amount an employee must pay to acquire the stock. The Company’s stock option plans are more fully described in note 13. In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment” (SFAS No. 123R), described below.

 

The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 (as amended) to stock-based compensation. The estimated fair value of each option is calculated using the Black-Scholes option-pricing model (in thousands, except per share amounts):

 

     2004

    2003

    2002

 

Net loss as reported

   $ (247,587 )   $ (325,321 )   $ (1,163,540 )

Add: Stock-based employee compensation expense associated with modifications, net of related tax effect, included in net loss as reported

     2,297       2,077          

Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effect

     (23,906 )     (31,156 )     (38,126 )
    


 


 


Pro-forma net loss

   $ (269,196 )   $ (354,400 )   $ (1,201,666 )
    


 


 


Basic and diluted net loss per share—as reported

   $ (1.10 )   $ (1.56 )   $ (5.95 )

Basic and diluted net loss per share pro-forma

   $ (1.20 )   $ (1.70 )   $ (6.15 )

 

During the year ended December 31, 2004 and 2003, the Company modified certain option awards to accelerate vesting and recorded charges of $3.0 million and $2.3 million, respectively, and corresponding increases to additional paid in capital in the accompanying consolidated financial statements.

 

Fair Value of Financial Instruments—The carrying values of the Company’s financial instruments, with the exception of long-term obligations, including current portion, reasonably approximate the related fair values as of December 31, 2004 and 2003. As of December 31, 2004, the carrying amount and fair value of long-term obligations, including current portion, were $3.3 billion and $3.6 billion, respectively. As of December 31, 2003, the carrying amount and fair value of long-term obligations, including current portion, were $3.4 billion and $3.6 billion, respectively. Fair values are based primarily on quoted market prices for those or similar instruments.

 

Retirement Plan—The Company has a 401(k) plan covering substantially all employees who meet certain age and employment requirements. Under the plan, the Company matching contribution for periods prior to June 30, 2004 was 35% up to a maximum 5% of a participant’s contributions. Effective July 1, 2004, the plan was amended to increase the Company match to 50% up to a maximum 6% of a participant’s contributions. The Company contributed approximately $533,000, $825,000 and $979,000 to the plan for the years ended December 31, 2004, 2003 and 2002, respectively.

 

Recent Accounting Pronouncements—In December 2004, the FASB issued SFAS No. 123R, which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB No. 25, Accounting for

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Stock Issued to Employees, and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123R requires entities to recognize stock compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards (with limited exceptions). SFAS No. 123R is effective for the first interim or annual reporting period that begins after June 15, 2005. The Company is in the process of evaluating the two methods of adoption allowed by SFAS No. 123R; the modified-prospective transition method and the modified-retrospective transition method.

 

Reclassifications—Certain reclassifications have been made to the 2003 and 2002 financial statements and related notes to conform with the 2004 presentation.

 

2.    DISCONTINUED OPERATIONS

 

In 2004, 2003 and 2002, in connection with the Company’s plan to focus on its core tower business, the Company sold or committed to sell several non-core businesses. In accordance with SFAS No. 144, the Company classified the operating results of these businesses as discontinued operations in the accompanying consolidated statements of operations. In addition, the assets and liabilities of the discontinued operations not disposed of as of December 31, 2004 and 2003 have been reflected as assets held for sale and liabilities held for sale in the accompanying consolidated balance sheets.

 

The following businesses have been reflected as discontinued operations in the accompanying consolidated statements of operations for all periods presented. Impairment charges and gains/losses are presented net of taxes.

 

Tower Construction Services Unit—In August 2004, the Company announced that it was considering strategic alternatives for its tower construction services unit (previously included in the network development services segment), including a potential sale of all of its tower construction service capabilities. In October 2004, the Company committed to a plan of disposal by entering into an agreement to sell its tower construction services unit and reported this unit as a discontinued operation commencing in the fourth quarter of 2004. In November 2004, the Company consummated the sale of its tower construction services unit, including $3.9 million of inventory and $5.2 million of net property and equipment. Total consideration was approximately $9.1 million, including $6.8 million of cash proceeds, subject to adjustment, and the buyer’s assumption of $2.3 million of capital lease obligations. Pursuant to this transaction, the Company recorded a net loss on disposal of approximately $1.7 million, which is reflected in loss from discontinued operations, net, in the accompanying consolidated statement of operations for the year ended December 31, 2004.

 

The Company’s network development services segment will continue to provide complementary non-construction services to the rental and management segment including site acquisition, zoning, permitting and structural analysis.

 

Kline—In June 2003, the Company committed to a plan to sell its steel fabrication and tall tower construction service subsidiary, Kline Iron & Steel Co., Inc. (Kline), which was previously included in the Company’s network development services segment. During 2003, the Company recognized an aggregate non-cash charge of approximately $14.6 million (including $10.3 million of goodwill) related to the impairment of Kline’s net assets to reduce their carrying value to the estimated proceeds expected upon disposal. This charge is reflected in loss from discontinued operations, net, in the accompanying consolidated statement of operations for the year ended December 31, 2003. In March 2004, the Company

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

sold substantially all the assets of Kline for approximately $4.0 million in cash and up to an additional $2.0 million in cash payable in 2006 based on future revenues generated by Kline. The Company expects to sell the remaining assets of Kline, primarily real estate, by September 30, 2005.

 

Verestar—In December 2002, the Company committed to a plan to sell Verestar by December 31, 2003. Pursuant to that plan, in February 2003, Verestar consummated the sale of Maritime Telecommunications Network (MTN), a subsidiary of Verestar, for approximately $25.5 million. In December 2003, Verestar filed for protection under Chapter 11 of the federal bankruptcy laws. Under generally accepted accounting principles, consolidation is generally required for investments of more than 50% of the outstanding voting stock of an investee, except when control is not held by the majority owner. Under these rules, legal reorganization or bankruptcy represent conditions which can preclude consolidation in instances where control rests with the bankruptcy court, rather than the majority owner. Accordingly, due to the bankruptcy filing, the Company ceased to consolidate Verestar’s financial results beginning December 22, 2003. The operations of Verestar are included in loss from discontinued operations, net, in the accompanying consolidated statements of operations through the date of the bankruptcy filing.

 

The Company recognized aggregate impairment charges related to its investment in Verestar of approximately $26.5 million and $187.8 million for the years ended December 31, 2003 and 2002, respectively. These charges reduced the carrying value of the Company’s investment in Verestar to zero as of December 31, 2003. These charges are included in loss from discontinued operations, net, in the accompanying consolidated statements of operations for the years ended December 31, 2003 and 2002.

 

The Company is primarily and secondarily liable as a guarantor for certain contractual obligations associated with Verestar. If Verestar fails to honor certain of its contractual obligations because of its bankruptcy filing or otherwise, claims may be made against the Company for breaches by Verestar on those contracts. As of December 31, 2003, the Company recorded a $10.0 million liability for its estimate of costs that it may incur under these contracts and adjusted such estimate to reflect actual payments made and changes in estimates during 2004. The remaining liability of $3.2 million as of December 31, 2004 is included in accounts payable and accrued expenses in the accompanying consolidated balance sheet. (See note 8.)

 

Other Transactions—In August 2003, the Company consummated the sale of Galaxy Engineering (Galaxy), a radio frequency engineering, network design and tower-related consulting business previously included in the network development services segment. The purchase price of approximately $3.5 million included $2.0 million in cash, which the Company received at closing, and an additional $1.5 million payable on January 15, 2008, or at an earlier date based on the future revenues of Galaxy. The Company received $0.5 million of this amount in January 2005. Pursuant to this transaction, the Company recorded a net loss on disposal of approximately $2.4 million in the accompanying consolidated statement of operations for the year ended December 31, 2003.

 

In May 2003, the Company consummated the sale of an office building in Westwood, Massachusetts (previously held primarily as rental property and reported in the rental and management segment) for a purchase price of approximately $18.5 million, including $2.4 million of cash proceeds and the buyer’s assumption of $16.1 million of related mortgage notes. Pursuant to this transaction, the Company recorded a net loss on disposal of approximately $3.6 million in the accompanying consolidated statement of operations for the year ended December 31, 2003.

 

In January 2003, the Company consummated the sale of Flash Technologies, its remaining components business (previously included in the network development services segment) for approximately $35.5 million in cash and has recorded a net gain on disposal of approximately $0.1 million in the accompanying consolidated statement of operations for the year ended December 31, 2003.

 

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AMERICAN TOWER CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

In December 2002, the Company committed to a plan to sell an office building in Schaumburg, Illinois (previously held primarily as rental property and reported in the rental and management segment) and recorded an estimated net loss on disposal of $3.2 million in the accompanying consolidated statement of operations for the year ended December 31, 2002. In March 2003, the Company consummated the sale of this building for net proceeds of approximately $10.3 million in cash and recorded a net loss on disposal of $0.1 million in the accompanying consolidated statement of operations for the year ended December 31, 2003.

 

In December 2002, the Company consummated the sale of the building where it maintained its corporate headquarters (previously held primarily as rental property and reported in the rental and management segment) for approximately $68.0 million and recorded a net gain on disposal of approximately $5.7 million for the year ended December 31, 2002. Approximately $38.5 million of the net proceeds were used to retire the building’s existing mortgage. As the Company maintains its corporate offices within the building, it also entered into a lease agreement for a portion of the building’s total office space. The lease has been classified as an operating lease and approximately $5.9 million of additional gain was deferred in accordance with SFAS No. 13, “Accounting for Leases,” as amended.

 

In July 2002, the Company consummated the sale of MTS Components (previously included in the network development services segment) and incurred a net loss on disposal of approximately $16.0 million for the year ended December 31, 2002. Proceeds from the sale were approximately $32.0 million and consisted of approximately $20.0 million in cash and $12.0 million of notes receivable, which were repaid during 2002 and 2003.

 

The following table presents summary operating results of the discontinued operations (in thousands):

 

     2004

    2003

    2002

 

Revenue

   $ 71,993     $ 283,124     $ 509,341  
    


 


 


Loss from discontinued operations

     (11,821 )     (13,604 )     (262,406 )

Income tax benefit on loss from discontinued operations

     4,101       1,587       20,797  

Loss on disposal of discontinued operations, net of tax benefit of $337, $10,160 and $7,566 respectively

     (625 )     (48,458 )     (13,510 )
    


 


 


Loss from discontinued operations, net

   $ (8,345 )   $ (60,475 )   $ (255,119 )
    


 


 


 

The Company had assets held for sale and liabilities held for sale comprised of the following as of December 31, (in thousands):

 

     2004

   2003

Accounts receivable, net

          $ 2,982

Prepaids and other current assets

            3,948

Property and equipment, net

   $ 3,389      10,558

Other long-term assets

            163
    

  

Assets held for sale

   $ 3,389    $ 17,651
    

  

Accounts payable, accrued expenses and other current liabilities

          $ 8,416

Capital lease obligations

            1,494
    

  

Liabilities held for sale

          $ 9,910
    

  

 

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AMERICAN TOWER CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

3.    PROPERTY AND EQUIPMENT

 

Property and equipment (including assets held under capital leases) consist of the following as of December 31, (in thousands):

 

     2004

    2003

 

Towers

   $ 2,788,162     $ 2,784,564  

Equipment

     115,244       108,296  

Buildings and improvements

     162,120       165,877  

Land and improvements

     176,937       173,619  

Construction-in-progress

     27,866       38,683  
    


 


Total

     3,270,329       3,271,039  

Less accumulated depreciation and amortization

     (996,973 )     (787,715 )
    


 


Property and equipment, net

   $ 2,273,356     $ 2,483,324  
    


 


 

4.    GOODWILL AND OTHER INTANGIBLE ASSETS

 

The Company’s net carrying amount of goodwill as of December 31, 2004 and 2003 was approximately $592.7 million, all of which related to its rental and management segment.

 

The Company has selected December 1st as the date to perform its annual impairment test. In performing its 2004 testing, the Company completed an internal appraisal and estimated the fair value of the rental and management reporting unit that contains goodwill utilizing future discounted cash flows and market information. The Company obtained an independent third party appraisal of its rental and management reporting unit that contains goodwill for 2003 and 2002. Based on the appraisals performed as of December 2004, 2003, and 2002, the Company determined that goodwill in its rental and management segment was not impaired. The Company’s annual impairment testing at December 1, 2002 also included the remaining goodwill of Kline. Based on the available market information, the Company determined that the Kline goodwill was not impaired. As described in note 2, the Company committed to a plan to sell Kline in June 2003, reclassified its net assets to assets held for sale and recorded an impairment charge that included the remaining $10.3 million of Kline’s goodwill.

 

SFAS No. 142 also required that, as of January 1, 2002, the Company assess whether its goodwill was impaired by performing a transitional impairment test. This impairment test was comprised of two steps. The initial step was designed to identify potential goodwill impairment by comparing an estimate of the fair value of the applicable reporting unit to its carrying value, including goodwill. If the carrying value exceeded fair value, a second step was performed, which compared the implied fair value of the applicable reporting unit’s goodwill with the carrying amount of that goodwill, to measure the amount of goodwill impairment, if any. The Company completed its transitional impairment testing in the second quarter of 2002 and concluded that all of the goodwill related to Verestar and the majority of the goodwill in the network development services segment was impaired. As a result, the Company recognized a $562.6 million non-cash charge, net of tax, related to the write-down of goodwill to its fair value. In accordance with the provisions of SFAS No. 142, the charge is included in the results of operations for the year ended December 31, 2002 as the cumulative effect of a change in accounting principle. With the adoption of SFAS No. 142, the Company also reassessed the useful lives and residual values of all acquired intangible assets. Based on those assessments, no adjustments were made to the amortization periods or residual values of the Company’s remaining intangible assets.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

A description of the Company’s reporting units and the results of the related transitional impairment testing are as follows:

 

Verestar—Verestar was a single segment and reporting unit until December 2002, when the Company committed to a plan to dispose of Verestar. The Company recorded an impairment charge of $189.3 million relating to the impairment of goodwill in this reporting unit. The fair value of this reporting unit was determined based on an independent third party appraisal.

 

Network Development Services—As of January 1, 2002, the reporting units in the Company’s network development services segment included Kline, Specialty Constructors, Galaxy, MTS Components and Flash Technologies. The Company estimated the fair value of these reporting units utilizing future discounted cash flows and market information as to the value of each reporting unit on January 1, 2002. The Company recorded an impairment charge of $387.8 million for the year ended December 31, 2002 related to the impairment of goodwill within these reporting units. Such charge included full impairment for all of the goodwill within the reporting units except Kline, for which only a partial impairment was recorded. As discussed in note 2, the assets of all of these reporting units were sold as of December 31, 2003, except for those of Kline and our tower construction services unit, which were sold in March and November 2004, respectively.

 

Rental and Management—The Company obtained an independent third party appraisal of the rental and management reporting unit that contains goodwill and determined that goodwill was not impaired.

 

The Company’s other intangible assets subject to amortization consist of the following as of December 31, (in thousands):

 

     2004

    2003

 

Acquired customer base and network location intangibles

   $ 1,369,607     $ 1,299,521  

Deferred financing costs

     89,736       111,484  

Acquired licenses and other intangibles

     43,404       43,125  
    


 


Total

     1,502,747       1,454,130  

Less accumulated amortization

     (517,444 )     (434,381 )
    


 


Other intangible assets, net

   $ 985,303     $ 1,019,749  
    


 


 

The Company amortizes its intangible assets over periods ranging from three to fifteen years. Amortization of intangible assets for the years ended December 31, 2004 and 2003 aggregated approximately $97.8 million and $94.6 million, respectively (excluding amortization of deferred financing costs, which is included in interest expense). The Company expects to record amortization expense of approximately $97.8 million, $95.9 million, $92.0 million, $90.5 million and $88.8 million, respectively, for the years ended December 31, 2005, 2006, 2007, 2008 and 2009, respectively.

 

5.    NOTES RECEIVABLE

 

In 2000, the Company loaned TV Azteca, S.A. de C.V. (TV Azteca), the owner of a major national television network in Mexico, $119.8 million. The loan, which initially bore interest at 12.87%, payable quarterly, was discounted by the Company, as the fair value interest rate at the date of the loan was determined to be 14.25%. The loan was amended effective January 1, 2003 to increase the original interest rate to 13.11%. As of December 31, 2004, and 2003, approximately $119.8 million undiscounted ($108.2 million discounted) under the loan was outstanding and included in notes receivable and other long-term assets in the accompanying consolidated balance sheets. The term of the loan is seventy years; however, the loan may be prepaid by TV

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Azteca without penalty during the last fifty years of the agreement. The discount on the loan is being amortized to interest income—TV Azteca, net, using the effective interest method over the seventy-year term of the loan.

 

Simultaneous with the signing of the loan agreement, the Company also entered into a seventy year Economic Rights Agreement with TV Azteca regarding space not used by TV Azteca on approximately 190 of its broadcast towers. In exchange for the issuance of the below market interest rate loan discussed above and the annual payment of $1.5 million to TV Azteca (under the Economic Rights Agreement), the Company has the right to market and lease the unused tower space on the broadcast towers (the Economic Rights). TV Azteca retains title to these towers and is responsible for their operation and maintenance. The Company is entitled to 100% of the revenues generated from leases with tenants on the unused space and is responsible for any incremental operating expenses associated with those tenants.

 

The term of the Economic Rights Agreement is seventy years; however, TV Azteca has the right to purchase, at fair market value, the Economic Rights from the Company at any time during the last fifty years of the agreement. Should TV Azteca elect to purchase the Economic Rights (in whole or in part), it would also be obligated to repay a proportional amount of the loan discussed above at the time of such election. The Company’s obligation to pay TV Azteca $1.5 million annually would also be reduced proportionally.

 

The Company has accounted for the annual payment of $1.5 million as a capital lease (initially recording an asset and a corresponding liability of approximately $18.6 million). The capital lease asset and the discount on the note, which aggregate approximately $30.2 million, represent the cost to acquire the Economic Rights and are being amortized over the seventy-year life of the Economic Rights agreement.

 

On a quarterly basis, the Company assesses the recoverability of its note receivable from TV Azteca. As of December 31, 2004, the Company has assessed the recoverability of the note receivable from TV Azteca and concluded that no adjustment to its carrying value is required.

 

An executive officer and former director of the Company became a director of TV Azteca in December 1999.

 

As of December 31, 2004 and 2003, the Company also had other long-term notes receivable outstanding of approximately $11.2 million and $13.4 million, respectively.

 

6.    FINANCING ARRANGEMENTS

 

Outstanding amounts under the Company’s long-term financing arrangements consisted of the following as of December 31, (in thousands):

 

     2004

    2003

 

Credit facility

   $ 698,000     $ 704,716  

Senior subordinated notes

     400,000       400,000  

Senior subordinated discount notes, net of discount and warrant valuation

     303,755       424,152  

Senior notes, net

     1,001,817       1,000,000  

Convertible notes, net of discount

     830,056       772,199  

Notes payable and capital leases

     59,986       58,664  
    


 


Total

     3,293,614       3,359,731  
    


 


Less:

                

Current portion of other long-term obligations

     (138,386 )     (76,627 )
    


 


Long-term debt

   $ 3,155,228     $ 3,283,104  
    


 


 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following is a description of the Company’s outstanding debt as of December 31, 2004:

 

New Credit Facility—In May 2004, the Company refinanced its previous credit facility with a new $1.1 billion senior secured credit facility. At closing, the Company received $685.5 million of net proceeds from the borrowings under the new facility, after deducting related expenses and fees. Approximately $670.0 million of the net proceeds were used to repay principal and interest on the previous credit facility. The Company used the remaining net proceeds of $15.5 million for general corporate purposes, including the repurchase of other outstanding debt securities. The Company recorded a charge of $11.7 million related to the write-off of deferred financing fees associated with its previous credit facility, which is reflected in loss on retirement of long-term obligations in the accompanying condensed consolidated statement of operations for the year ended December 31, 2004.

 

As of December 31, 2004, the new credit facility consists of the following:

 

    $400.0 million in undrawn revolving loan commitments, against which approximately $19.3 million of undrawn letters of credit were outstanding at December 31, 2004, maturing on February 28, 2011;

 

    a $300.0 million term loan A, which was fully drawn, maturing on February 28, 2011; and

 

    a $398.0 million term loan B, which was fully drawn, maturing on August 31, 2011.

 

Principal payments under the credit facility amortize quarterly through their maturity dates based on defined percentages of outstanding commitment and principal balances. Any amounts repaid under the term loan A and the term loan B will reduce future borrowing capacity under these loans to the extent of the amount repaid. The new credit facility also permits the Company to use borrowings under the new credit facility and internally generated funds to repurchase other indebtedness without additional lender approval.

 

The maturity date for term loan A and any outstanding revolving loans will be accelerated to August 15, 2008 and the maturity date for term loan B will be accelerated to October 31, 2008 if (1) on or prior to August 1, 2008, the Company’s 9 3/8% senior notes have not been (a) refinanced with parent company indebtedness having a maturity date of February 28, 2012 or later or with loans under the new credit facility, or (b) repaid, prepaid, redeemed, repurchased or otherwise retired; and (2) the Company’s consolidated leverage ratio (total parent company debt to annualized operating cash flow) at June 30, 2008 is greater than 4.50 to 1.00. If this were to occur, the payments due in 2008 for term loan A and term loan B would be $225.0 million and $386.0 million, respectively.

 

Interest rates for the revolving credit facility and the term loan A are determined at the option of the Company (at a margin based on leverage) at either 1.50% to 2.50% above the LIBOR rate or 0.50% to 1.50% above the defined base rate. Interest rates for the term loan B are determined at the option of the Company (at a margin based on leverage) at either 2.00% to 2.25% above the LIBOR rate or 1.00% to 1.25% above the defined base rate. The Company is required to pay quarterly commitment fees on the undrawn portion of the facility, ranging from 0.50% to 0.75% per annum, depending on the level of facility usage. In addition, the credit facility requires compliance with financial ratios that measure annualized operating cash flow against total debt, senior debt, interest expense, and fixed charges as defined in the credit facility. In addition, the credit facility also contains financial and operational covenants and other restrictions which the Company, the borrowers and their restricted subsidiaries must comply with, whether or not there are borrowings outstanding. Such covenants and restrictions include restrictions on certain types of acquisitions, indebtedness, investments, liens, capital expenditures, and the ability of the borrowers to pay dividends and make other distributions. The borrowers under the credit facility include the Company’s principal domestic operating subsidiaries. The Company and the restricted subsidiaries (as defined in the credit facility) have guaranteed all of the loans under the credit facility. These loans are secured

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

by liens on substantially all assets of the Company, the borrowers and the restricted subsidiaries. The credit facility also restricts the borrowers’ and the restricted subsidiaries’ abilities to transfer funds to the Company. As of December 31, 2004, substantially all assets of the Company, with the exception of its deferred tax assets, are held by the borrowers and the restricted subsidiaries.

 

Previous Credit Facility—In January 2004, the Company amended its previous credit facility primarily to facilitate the 7.50% senior notes offering described below. The amendment permitted the Company, among other things, to complete the offering provided that the net proceeds were used to prepay obligations under its convertible notes. The Company also refinanced its $267.0 million term loan B under its previous credit facility with a new term loan C due December 31, 2007. The new term loan C had substantially the same terms as the previous term loan B, except that the interest rate spreads for the LIBOR and base rate loans were reduced from 3.5% above LIBOR to 2.25% and from 2.5% above the base rate to 1.25%, respectively. The amendment also removed the requirement that any remaining proceeds from the August 2003 equity offering held as restricted cash and investments on August 4, 2004 be contributed to the borrower subsidiaries.

 

During 2003, the Company reduced the borrowing capacity under its previous credit facility through certain amendments and related prepayments of $938.8 million and principal payments of $61.5 million. The Company amended its previous credit facility in February, July and November 2003, primarily to facilitate the notes offerings described below and the August 2003 equity offering described in note 13. The November 2003 amendment facilitated the 7.25% senior subordinated notes offering and the Company utilized the net proceeds of $389.3 million to prepay $208.0 million of term loan A, $140.3 million of term loan B and $41.0 million of the revolving loan, resulting in a permanent reduction of the term loans and revolving loan commitment. The July 2003 amendment facilitated the 3.25% convertible notes offering and concurrent equity offering and the Company utilized $100.0