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, 2006

 

¨ 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 if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act:    Yes  x  No  ¨

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act:    Yes  ¨  No  x

 

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 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):

 

Large accelerated filer  x   Accelerated filer  ¨   Non-accelerated filer  ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act):    Yes  ¨  No  x

 

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of June 30, 2006 was approximately $13.2 billion, 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 February 22, 2007, there were 419,988,395 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 2007 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, 2006

 

     Page

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

Business

   1
    

Overview

   1
    

Strategy

   1
    

The Company

   3
    

Products and Services

   4
    

Recent Transactions

   6
    

Regulatory Matters

   9
    

Competition and Customer Demand

   10
    

Employees

   11
    

Available Information

   11
ITEM 1A.   

Risk Factors

   12
ITEM 1B.   

Unresolved Staff Comments

   18
ITEM 2.   

Properties

   19
ITEM 3.   

Legal Proceedings

   20
ITEM 4.   

Submission of Matters to a Vote of Security Holders

   21
PART II          
ITEM 5.   

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

   22
    

Dividends

   22
    

Performance Graph

   23
    

Recent Sales of Unregistered Securities

   24
    

Issuer Purchases of Equity Securities

   25
ITEM 6.   

Selected Financial Data

   26
ITEM 7.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   28
    

Executive Overview

   28
    

Results of Operations: Years Ended December 31, 2006 and 2005

   30
    

Results of Operations: Years Ended December 31, 2005 and 2004

   34
    

Stock Option Review and Related Matters

   37
    

Liquidity and Capital Resources

   39
    

Critical Accounting Policies and Estimates

   46
    

Recent Accounting Pronouncements

   51
    

Information Presented Pursuant to the Indentures of our 7.50% Notes, 7.125% Notes and ATI 7.25% Notes

   52
ITEM 7A.   

Quantitative and Qualitative Disclosures About Market Risk

   53
ITEM 8.   

Financial Statements and Supplementary Data

   55
ITEM 9.   

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   55

 

i


Table of Contents

AMERICAN TOWER CORPORATION

 

TABLE OF CONTENTS—(Continued)

 

FORM 10-K ANNUAL REPORT

FISCAL YEAR ENDED DECEMBER 31, 2006

 

     Page

ITEM 9A.   

Controls and Procedures

   55
    

Disclosure Controls and Procedures

   55
    

Management’s Annual Report on Internal Control over Financial Reporting

   55
    

Changes in Internal Control over Financial Reporting

   56
    

Report of Independent Registered Public Accounting Firm

   57
ITEM 9B.   

Other Information

   58
PART III          
ITEM 10.   

Directors, Executive Officers and Corporate Governance

   59
ITEM 11.   

Executive Compensation

   60
ITEM 12.   

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

   60
ITEM 13.   

Certain Relationships and Related Transactions, and Director Independence

   60
ITEM 14.   

Principal Accounting Fees and Services

   60
PART IV          
ITEM 15.   

Exhibits, Financial Statement Schedules

   61

Signatures

   62

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 communications site leasing industry, the level of future expenditures by companies in this industry and other trends in this industry, the effects of consolidation among companies in our industry and among our customers, our ability to maintain or increase our market share, our future operating results, our future purchases under our stock repurchase program, our future capital expenditure levels, our future financing transactions 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 captions “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, including those set forth in Item 1A of this annual report under the caption “Risk Factors,” may cause actual results to differ materially from those indicated by our forward-looking statements. We have no duty to, and do not intend to, update or revise the forward-looking statements made by us in 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.

 

ii


Table of Contents

PART I

 

ITEM 1.   BUSINESS

 

Overview

 

We are a leading wireless and broadcast communications infrastructure company with a portfolio of over 22,000 communications sites. Our portfolio consists of towers that we own and towers that we operate pursuant to long-term lease arrangements, including approximately 20,000 tower sites in the United States and over 2,800 in Mexico and Brazil. In addition to these tower sites, we also offer access to over 10,000 rooftop and tower sites in the United States that we manage for third parties. We also operate in-building distributed antenna systems in malls and casino/hotel resorts. Our primary business, which we refer to as our rental and management segment, is leasing antenna space on multi-tenant communications sites to wireless service providers and radio and television broadcast companies. This segment accounted for approximately 98.2% and 98.4% of our total revenues for the years ended December 31, 2006 and 2005, respectively.

 

Our communications site 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 sites. Our broad network of communications sites enables us to address the needs of national, regional, local and emerging wireless service providers. Through our network development services segment, we also offer limited services that directly support our site leasing operations and the addition of new tenants and equipment on our sites. We intend to capitalize on the continuing increase in the use of wireless communications services by actively marketing space available for leasing on our existing sites and selectively developing or acquiring new sites that meet our return on investment criteria.

 

In August 2005, we expanded our communications site portfolio and our rental and management segment operations through our merger with SpectraSite, Inc., an owner and operator of approximately 7,800 wireless and broadcast towers and in-building systems in the United States. The merger has enabled us to improve our return on investment by creating a significantly larger revenue base over which to spread our relatively fixed overhead costs, therefore further capitalizing on the significant operating leverage inherent in the tower business model. For more information about our merger with SpectraSite, Inc., see note 3 to our consolidated financial statements included in this annual report.

 

We believe 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.

 

   

Operating expenses are largely fixed. Incremental operating costs associated with adding wireless tenants to a communications site are minimal. Therefore, as additional tenants are added to a site, the substantial majority of incremental revenue flows through to operating profit.

 

   

Low maintenance capital expenditures. On average, a communications site requires low annual capital investments to maintain.

 

   

High lease renewal rates. Wireless carriers tend to renew leases because suitable alternative sites may not exist or be available and repositioning a site in a carrier’s network is expensive and may adversely affect network quality.

 

Strategy

 

Our strategy is to capitalize on the continuing growth in the use of wireless communications services and the infrastructure requirements necessary to deploy current and future generations of wireless communications technologies.

 

   

In the United States, the number of wireless service subscribers increased from 158.7 million to 219.4 million between December 2003 and June 2006, representing an increase of approximately 38%

 

1


Table of Contents
 

and market penetration of approximately 73%. During the same period, the number of cell sites (i.e., the number of antennas and related equipment in commercial operation, not the number of towers on which that equipment is located) increased approximately 21% from approximately 163,000 cell sites to approximately 197,600. In addition, wireless minutes of use, an indicator of demand for wireless services, reached approximately 1.6 trillion in the United States for 2005, an increase of over 36% from the prior year, and the industry is on pace to report strong growth for 2006.

 

   

In Mexico, the number of wireless service subscribers increased from 30.1 million to 52.9 million between December 2003 and September 2006, representing an increase of approximately 76% and market penetration of approximately 50%. In Brazil, the number of wireless service subscribers increased from 46.5 million to 99.9 million between December 2003 and December 2006, representing an increase of approximately 115% and market penetration of approximately 53%.

 

We believe the continuing growth in the number of wireless service subscribers and the minutes of use per subscriber will require wireless carriers to add new cell sites, and new equipment to existing 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 may require wireless carriers to further increase the cell density of their existing networks, may require new technology and 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 communications site infrastructure needs as a means of accelerating access to their markets and more efficiently deploying their capital, rather than constructing and operating their own communications sites and maintaining their own communications sites service and development capabilities.

 

We believe that our existing portfolio of communications sites, 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 Existing Site Capacity. We believe that our highest returns will be achieved by leasing additional space on our existing communications sites. We anticipate that our rental and management revenues and segment operating profit will continue to grow because many of our communications sites are attractively located for wireless service providers and have capacity available for additional antenna space that we can offer to customers at low incremental costs to us. Because the costs of operating a site 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 communications sites.

 

   

Grow Our Operations Using Selective Criteria for Acquisitions and New Development. Given the relatively fixed cost structure of our site leasing business, we believe that adding new communications sites to our portfolio in existing markets will allow us to grow revenues with only modest increases in administrative operating expenses. We seek to acquire, construct and redevelop towers and install in-building systems when our initial and long-term return on investment criteria are met. To achieve our expected returns for a new site, we typically secure leases from customers in advance of construction or installation, ensure reasonable estimated construction or installation costs and, for new tower sites, obtain the land on which to build the tower, whether by purchase or ground lease, on reasonable terms. We similarly evaluate expansion opportunities into new international markets. In evaluating new international markets for expansion, we consider countries that have a relatively stable political climate, an expanding macro economic environment, a growing, competitive wireless communications industry, and multiple wireless carriers that are willing to outsource their communications site infrastructure to us.

 

2


Table of Contents
   

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, for example, by reducing cycle times for key functions, such as lease processing and tower structural analysis. We are also continuing our efforts to improve customer access to information regarding our communications sites to allow faster and easier site selection and qualification by our customers. We believe that by improving our speed, accuracy and quality, we will be able to increase revenue generation.

 

   

Build On Our Customer Relationships. 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 site development projects. We are building on our relationships with our major wireless carrier customers to gain more familiarity with their evolving network plans so we can identify opportunities where our nationwide portfolio of sites and experienced personnel can be used to satisfy their needs. We are also working with smaller and emerging wireless carriers and network operators as they define their coverage and network needs and expand into new markets. In addition, we are also seeking opportunities to build relationships with new market participants who obtained advanced wireless services licenses in the September 2006 auction of wireless spectrum in Auction 66. We believe we are well positioned to be a preferred partner to our customers because of the size, scope and location of our portfolio of communications sites and our proven operating experience.

 

   

Participate in Industry Consolidation. We continue to 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 communications technologies. We believe that our merger with SpectraSite, Inc. resulted in improved cost structure efficiencies and that combining with one or more other tower companies should yield similar results. 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.

 

The Company

 

American Tower Corporation was created as a subsidiary of American Radio Systems Corporation in 1995 to own, manage, develop and lease communications and broadcast tower sites, and was spun off into a free-standing public company in 1998. Since inception, we have grown our communications site portfolio through acquisitions, long-term lease arrangements, development and construction, and through mergers with and acquisitions of other tower operators, increasing the size of our communications site portfolio to over 22,000 sites.

 

American Tower Corporation is a holding company, and we conduct our operations in the United States, Mexico and Brazil through operating subsidiaries. Our principal United States operating subsidiaries are American Towers, Inc. (ATI) and SpectraSite Communications, Inc. (SpectraSite). Our principal international operating subsidiary is American Tower International, Inc., which conducts operations in Mexico through its subsidiary ATC Mexico Holding Corp. (ATC Mexico) and in Brazil through its subsidiary ATC South America Holding Corp. (ATC South America).

 

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 Item 7 of this annual report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and note 15 to our consolidated financial statements included in this annual report.

 

3


Table of Contents

Products and Services

 

Rental and Management

 

We conduct our site leasing business through our rental and management segment. Our primary business is leasing antenna space on multi-tenant communications sites to wireless service providers and radio and television broadcast companies. Our portfolio consists of towers that we own and towers that we operate pursuant to long-term lease arrangements, including approximately 20,000 tower sites in the United States and over 2,800 in Mexico and Brazil. In addition to these tower sites, we also offer access to over 10,000 rooftop and tower sites in the United States that we manage for third parties. Through our rental and management segment, we also operate in-building distributed antenna systems in malls and casino/hotel resorts.

 

Wireless Communications Towers. We are a leading owner and operator of wireless communications towers in the United States, Mexico and Brazil, based on number of towers and revenue. Our network in the United States includes approximately 19,200 wireless communications towers and spans 49 states and the District of Columbia. In addition, 87% of our U.S. network provides coverage in the top 100 markets or core areas such as high traffic interstate corridors. Our network in Mexico includes over 2,000 wireless communications towers in highly populated areas, including Mexico City, Monterrey, Guadalajara and Acapulco. Our network in Brazil consists of over 600 wireless communications towers, which are concentrated in southern Brazil in major metropolitan areas, including Sao Paulo, Rio de Janeiro, Brasilia and Curitiba. For the year ended December 31, 2006, approximately 91% of our rental and management segment revenue was attributable to our wireless communications towers in the United States, Mexico and Brazil. In addition, we market and manage wireless tower sites for third parties in the United States, Mexico and in Brazil. For the year ended December 31, 2006, less than 1% of our rental and management segment revenue was attributable to our managed wireless communications towers in the United States, Mexico and Brazil.

 

We lease antenna space on our wireless communications towers to customers in a diverse range of wireless industries, including personal communications services, cellular, enhanced specialized mobile radio, paging and fixed microwave. Our major domestic wireless customers include ALLTEL, Cingular Wireless, Sprint Nextel, T-Mobile USA and Verizon Wireless. 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. For the year ended December 31, 2006, we had three customers that each accounted for 10% or more of our total revenues. Sprint Nextel (including Sprint Nextel partners and affiliates), Cingular Wireless and Verizon Wireless accounted for approximately 21%, 20% and 10%, respectively, of our 2006 total revenues. Approximately 64% of our total revenues for the year ended December 31, 2006 were derived from five customers. See Item 1A of this annual report under the caption “Risk Factors—A substantial portion of our revenue 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 antennas 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.

 

Our leases with wireless communications providers in the United States generally have initial terms of five-to-ten years. In Mexico and Brazil, our typical tenant lease has an initial term of ten years. In most cases, our tenant leases have multiple renewal terms at the option of the tenant. Wireless carriers generally renew their leases with us because suitable alternative sites may not exist or be available and repositioning a site in an existing carrier’s network is expensive and often requires reconfiguring several other sites in the carrier’s

 

4


Table of Contents

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 escalation provisions that periodically increase the rent due under the lease. These automatic increases are typically annual and are based on a fixed percentage, inflation or a fixed percentage plus inflation.

 

Annual rental payments vary considerably depending upon:

 

   

tower location;

 

   

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

 

   

ground space necessary to store customer’s electronic and other equipment related to the antennas;

 

   

existing tower capacity;

 

   

type of tower structure (e.g., stealth tower);

 

   

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

 

   

type and amount of frequency transmitted by the customer.

 

Broadcast Communications Towers. We are one of the largest independent owners and operators of broadcast towers in the United States and Mexico. We own approximately 200 broadcast towers in the United States and have exclusive rights to approximately 200 in Mexico. Broadcast towers generally are taller and structurally more complex than wireless communications towers, require unique engineering skills and are more costly to build. We lease antenna space on our broadcast towers primarily to radio and television broadcast companies. In leasing antenna space, we generally receive monthly fees from customers, with initial lease periods ranging from ten-to-twenty years. For the year ended December 31, 2006, approximately 7% of our rental and management segment revenue was attributable to our broadcast communications towers in the United States and Mexico.

 

In-Building Neutral Host Distributed Antenna Systems. We are a leading provider in the United States of in-building neutral host distributed antenna systems, with over 125 in-building systems in operation in retail shopping malls and casino/hotel resorts. We obtain rights to install and operate in-building systems by entering into leases with property owners, and we grant rights to wireless service providers to attach their equipment to our in-building system for a fee under licenses that typically have an initial non-cancelable term of at least ten years. For the year ended December 31, 2006, less than 1% of our rental and management segment revenue was attributable to our in-building neutral host distributed antenna systems.

 

Rooftop Management. We also provide rooftop management services to property owners in the United States. We market over 10,000 rooftop sites to our customers in the United States that we manage for third parties, including approximately 900 rooftop sites that were revenue-producing as of December 31, 2006. We obtain rights to manage a rooftop by entering into contracts with property owners pursuant to which we receive a percentage of occupancy or license fees paid by the wireless carriers. For the year ended December 31, 2006, approximately 1% of our rental and management segment revenue was attributable to our managed rooftop sites.

 

Network Development Services

 

We offer tower-related services through our network development services segment. We historically offered extensive tower-related services to support our site leasing business. During the last several years, as we continued to focus our operations on our rental and management segment, we sold services businesses that did not provide incremental value to our site leasing business. With the sale of our tower construction services unit in November 2004, we substantially completed our strategic transition to a focused site leasing company. Our network development services segment continues to provide site acquisition, zoning and permitting services and structural analysis services that support our site leasing operations and the addition of new tenants and equipment on our sites.

 

5


Table of Contents

Site Acquisition, Zoning and Permitting Services. We engage in site acquisition services for our own account in connection with our tower development projects, as well as for our customers. We typically work with our customers’ engineers to determine the geographic areas where the customer needs to construct a new tower site to address its coverage objectives. Once a new site is identified, we acquire the rights to the land or structure on which the site will be constructed, and we 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 in connection with the installation of communications equipment on towers. 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 an installation decision. In January 2007, we acquired a structural analysis engineering firm to increase our structural analysis capabilities. We believe that this acquisition will enable us to provide higher quality service to our existing customers by, among other things, reducing cycle times related to tower structural analysis, as well as provide opportunities to offer structural analysis services to third parties.

 

Recent Transactions

 

Acquisitions

 

From January 1, 2005 through December 31, 2006, we increased the size of our communications site portfolio by approximately 8,000 towers. Significant acquisitions included the following:

 

SpectraSite, Inc. In May 2005, we entered into an agreement and plan of merger with SpectraSite, Inc., an owner and operator of approximately 7,800 wireless and broadcast towers and in-building systems in the United States. We completed the merger in August 2005. Under the terms of the merger agreement, SpectraSite, Inc. merged with and into a wholly owned subsidiary that we formed for purposes of the merger. Each share of SpectraSite, Inc. common stock converted into the right to receive 3.575 shares of our Class A common stock. We issued approximately 169.5 million shares of Class A common stock with respect to shares of SpectraSite, Inc. common stock outstanding as of the closing of the merger and reserved for issuance approximately 16.7 million shares of Class A common stock issuable pursuant to SpectraSite, Inc. options and warrants assumed in the merger. For more information about our merger with SpectraSite, Inc., see note 3 to our consolidated financial statements included in this annual report.

 

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. During the year ended December 31, 2005, we acquired six towers from Iusacell in Mexico for approximately $1.3 million, and as of December 31, 2006 and 2005, had acquired an aggregate of 137 towers for a total purchase price of $30.6 million.

 

NII Holdings, Inc. In December 2002, we agreed to acquire over 500 communications sites, predominantly in Mexico, from NII Holdings, Inc. (NII) 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. During the year ended December 31, 2006, we acquired 83 towers from NII in Mexico and Brazil for approximately $8.8 million, and as of December 31, 2006, had acquired an aggregate of 811 towers for a total purchase price of approximately $131.0 million. We have the option to purchase additional tower sites from NII in Mexico and Brazil through 2007.

 

Dispositions

 

From January 1, 2005 through December 31, 2006, we received approximately $42.3 million of proceeds from selling non-core assets, including approximately $21.4 million from sales of tower assets, approximately $16.0 million from sales of buildings and approximately $4.9 million from sales of investments.

 

6


Table of Contents

Financing Transactions

 

During the year ended December 31, 2006, we improved our financial position by refinancing and repurchasing a portion of our outstanding indebtedness, which increased our flexibility and our ability to return value to our stockholders. Significant transactions included those set forth below. For more information about our financing transactions, see Item 7 of this annual report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and note 7 to our consolidated financial statements included in this annual report.

 

Repurchases, Redemptions and Conversions of Debt Securities. During the year ended December 31, 2006, consistent with our strategy of improving our financial flexibility, we redeemed, converted or repurchased approximately $371.1 million face amount of our outstanding debt securities, including the redemption of $227.7 million face amount ($162.1 million accreted value, net of $7.0 million fair value allocated to warrants) of the ATI 12.25% senior subordinated discount notes due 2008 (ATI 12.25% Notes), the conversion of $45.0 million principal amount of our 3.25% convertible notes due August 15, 2012 (3.25% Notes), the repurchase of $23.5 million principal amount of our 5.0% convertible notes due 2010 (5.0% Notes) and the repurchase of $74.9 million principal amount of the ATI 7.25% senior subordinated notes due 2011 (ATI 7.25% Notes). Subsequent to the year ended December 31, 2006, we have continued these efforts by repurchasing $192.5 million principal amount of our outstanding 5.0% Notes pursuant to a tender offer completed in February 2007 and through the conversion of an additional $44.4 million principal amount of our 3.25% Notes.

 

Stock Repurchase Program. In November 2005, we announced that our Board of Directors had approved a stock repurchase program to repurchase up to $750.0 million of our Class A common stock through December 2006. On May 23, 2006, we announced that we were temporarily suspending repurchases under our stock repurchase program in light of the uncertainty surrounding the pending review of our stock option granting practices and the related governmental proceedings, as described in Item 3 of this annual report under the caption “Legal Proceedings” and note 9 to our consolidated financial statements included in this annual report. Prior to the suspension of the stock repurchase program, we had repurchased approximately 11.8 million shares of our Class A common stock for an aggregate of $358.3 million. On December 20, 2006, we announced that we were resuming repurchases of our Class A common stock, and that we would seek to repurchase the remaining $391.7 million under this program through the end of February 2007. As of December 31, 2006, we had repurchased approximately 12.9 million shares of Class A common stock for an aggregate of $398.4 million under this program. Between January 1, 2007 and February 20, 2007, we repurchased an additional 7.2 million shares of Class A common stock for an aggregate of $287.1 million. In February 2007, our Board of Directors approved a new stock repurchase program pursuant to which we intend to repurchase up to $1.5 billion of our Class A common stock through February 2008.

 

ATC International Transactions

 

ATC South America Holding Corp. During the year ended December 31, 2006, we purchased a 9.3% minority interest in ATC South America, and as a result, we now own 100% of ATC South America. We purchased this interest in ATC South America from certain employees, including J. Michael Gearon, Jr. and William H. Hess, executive officers of the Company, who initially acquired their interests through investment in ATC South America and pursuant to stock options granted under the ATC South America Stock Option Plan. Following the repurchase of these interests, no options remained outstanding pursuant to the ATC South America Stock Option Plan, and in February 2007, we terminated the plan.

 

In March 2004, we entered into an agreement with Mr. Gearon pursuant to which he purchased an approximate 1.6% equity interest in ATC South America for approximately $1.2 million in cash. Pursuant to the terms of the agreement, in October 2005, Mr. Gearon exercised his right to require us to repurchase this interest for its then fair market value. In April 2006, we completed the purchase of Mr. Gearon’s interest in ATC South America and paid Mr. Gearon $3.8 million in cash, including interest, which was the fair market value of his

 

7


Table of Contents

interest on the date of exercise of his repurchase right, as determined by our Board of Directors with the assistance of an independent financial advisor.

 

In the first quarter of 2004, in connection with Mr. Gearon’s investment, options to purchase 6,024 shares of ATC South America common stock, representing an approximate 10.3% equity interest, were granted under the ATC South America Stock Option Plan to officers and employees, including Messrs. Gearon and Hess, who received options to purchase 3,924 and 911 shares, respectively. In October 2005, in connection with the exercise by Mr. Gearon of his right to require us to purchase his interest in ATC South America, these options vested in full and were exercised. Upon exercise of these options, the holders received 4,428 shares of ATC South America, net of 1,596 shares retained by us to satisfy employee tax withholding obligations. The holders had the right to require us to purchase their shares of ATC South America at their then fair market value six months and one day following their issuance. In April 2006, this repurchase right was exercised, and we paid these holders an aggregate of $18.9 million in cash, which was the fair market value of their interests on the date of exercise of their repurchase right, as determined by the Company’s Board of Directors with the assistance of an independent financial advisor. For more information about our transactions involving ATC South America, see note 11 to our consolidated financial statements included in this annual report.

 

ATC Mexico Holding Corp. During the year ended December 31, 2004, we purchased a 12.0% minority interest in ATC Mexico, and as a result, we now own 100% of ATC Mexico. We purchased this interest in ATC Mexico from certain employees, including Messrs. Gearon and Hess, who had initially acquired their interests through investment in ATC Mexico and pursuant to stock options granted under the ATC Mexico Stock Option Plan. Following these repurchases, no options remained outstanding pursuant to the ATC Mexico Stock Option Plan, and in February 2007, we terminated the plan.

 

In October 2001, we entered into an agreement with Mr. Gearon pursuant to which he purchased an approximate 8.8% equity interest in ATC Mexico for approximately $8.4 million, consisting of cash and a secured note. Pursuant to the terms of the agreement, in the first quarter of 2004, Mr. Gearon exercised his right to require us to repurchase this interest for its then fair market value. In April 2004, 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 in ATC Mexico. 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 May 2002, in connection with Mr. Gearon’s investment, options to purchase 318 shares of ATC Mexico common stock, representing an approximate 3.2% equity interest, were granted under the ATC Mexico Stock Option Plan to certain employees, including Mr. Hess, who received an option to purchase 144 shares. In the first quarter of 2004, in connection with the exercise by Mr. Gearon of his right to require us to purchase his interest in ATC Mexico, these options vested in full and were exercised. The holders had the right to require us to purchase their shares of ATC Mexico at their then fair market value six months and one day following their issuance. In October 2004, this repurchase right was exercised, and 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. 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 shares of our Class A common stock with an aggregate market value of $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. For more information about our transactions involving ATC Mexico, see note 11 to our consolidated financial statements included in this annual report.

 

8


Table of Contents

Regulatory Matters

 

Towers and Antennas. 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 may require pre-approval 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 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 considers the construction of a new tower or the addition of a new antenna to an existing site (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 adding a new antenna to a site. If a tower or new antenna may have a significant impact on the environment, FCC approval of the tower or antenna 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 the addition of a new antenna to an existing tower. Local zoning authorities and community residents often are opposed to construction in their communities, which can delay or prevent new tower construction, new antenna installation 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 the addition of new antennas to a site. Existing regulatory policies may adversely affect the associated timing or cost of such projects and additional regulations may be adopted which increase delays or result in additional costs to us. These factors could adversely affect our construction activities and operations.

 

Our tower operations in Mexico and Brazil are also subject to regulation. If we pursue additional international opportunities, we will be subject to regulations in additional foreign jurisdictions. In addition, our customers, both domestic and foreign, also may be subject to new regulatory policies that may adversely affect the demand for communications sites.

 

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

 

9


Table of Contents

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, comply with 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 expired in 2006 related to certain alleged environmental permitting and filing violations in the County of Santa Clara, California.

 

In November 2005, we entered into a Facilities Audit Agreement with the United States Environmental Protection Agency (EPA) pursuant to the EPA’s voluntary audit and disclosure policy. Pursuant to the Facilities Audit Agreement, we audited the tower sites in our portfolio as of July 2005 (i.e., legacy American Tower sites, but not SpectraSite 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. The Facilities 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. We do not expect that the aggregate penalties payable under the Facilities Audit Agreement will be material to our financial condition or results of operations.

 

Health and Safety. 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 (OSHA) and equivalent state agencies concerning health and safety matters.

 

Competition and Customer Demand

 

Rental and Management

 

Our rental and management segment competes with other national and regional tower companies, such as Crown Castle International Corp. and SBA Communications Corporation, as well as 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-communications tower sites, including rooftops, utility towers, water towers and other alternative structures. We believe that site 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.

 

Customer demand for our rental and management segment is also affected by the emergence and growth of new technologies. Technologies that make it possible for wireless carriers to expand their use of existing infrastructure could reduce customer demand for our communications sites. The increased use of spectrally efficient air-link technologies, such as lower-rate vocoders, which potentially can relieve some network capacity problems, could reduce the demand for tower-based antenna space.

 

In addition, any increase in the use of network sharing or roaming or resale arrangements by wireless service providers also could adversely affect customer 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

 

10


Table of Contents

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 August 2005 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.

 

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, structural engineering 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, 2006, we employed 995 full-time individuals and consider our employee relations to be satisfactory.

 

Available Information

 

Our Internet website address is www.americantower.com. Information contained on our website is not incorporated by reference into this annual report, and you should not consider information contained on 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 (Exchange Act), 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 (SEC).

 

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 the audit, compensation, and nominating and corporate governance committees of our Board of Directors, 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.

 

11


Table of Contents

ITEM 1A.    RISK FACTORS

 

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 adversely affect our operating results. Those factors include:

 

   

a decrease in consumer demand for wireless services due to general economic conditions or other factors;

 

   

the financial condition of wireless service providers;

 

   

the ability and willingness of wireless service providers to maintain or increase 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, roaming or 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 higher costs to the consumer. In addition, our broadcast tower division could be affected adversely as a result of the transition from analog-based transmissions to digital-based transmissions, which is scheduled to be completed by February 2009.

 

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 may result in reduced capital expenditures in the aggregate because the existing networks of many wireless carriers overlap, as do their expansion plans. For example, as a result of the recently completed mergers between Cingular Wireless and AT&T Wireless and between Sprint PCS and Nextel, both Cingular Wireless and Sprint Nextel are exploring ways of rationalizing portions of their combined, yet technologically separate, wireless networks in the United States. In addition, in September 2006, Iusacell Celular and Unefon became affiliates and announced plans to combine their wireless networks in Mexico. Certain parts of their merged networks may be deemed to be duplicative and these customers may attempt to eliminate these duplications. Our future results may be negatively impacted if a significant number of these contracts are eliminated from our ongoing contractual revenues. Similar consequences might occur if wireless service providers engage in extensive sharing, roaming or resale arrangements as an alternative to leasing our antenna space.

 

Substantial leverage and debt service obligations may adversely affect us.

 

We have a substantial amount of indebtedness. As of December 31, 2006, we had approximately $3.5 billion of consolidated debt. Our substantial level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay the principal, interest, or other amounts when due. Subject to certain

 

12


Table of Contents

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 may 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 ratio covenants contained in our debt agreements or to generate cash sufficient to pay interest or principal, which events could result in an acceleration of some or all of our outstanding debt in the event that a uncured default occurs;

 

   

increasing our vulnerability to general adverse economic and industry conditions;

 

   

limiting our ability to obtain additional debt or equity financing;

 

   

requiring the dedication of a substantial portion of our cash flow from operations to service our debt, thereby reducing the amount of our cash flow available for other purposes, including capital expenditures;

 

   

requiring us to sell debt or equity securities or to sell some of our core assets, possibly on unfavorable terms, to meet payment obligations;

 

   

limiting our flexibility in planning for, or reacting to, changes in our business and the industries in which we compete; and

 

   

placing us at a possible competitive disadvantage with less leveraged competitors and competitors that may have better access to capital resources.

 

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

 

Our credit facilities and the indentures governing the terms of our debt securities contain restrictive covenants. Our credit facilities also contain requirements that the borrowers under each facility comply with certain leverage and other financial covenants. These covenants and requirements limit our ability to take various actions, including incurring additional debt, guaranteeing indebtedness, engaging in various types of transactions, including mergers, acquisitions and sales of assets, and paying dividends and making distributions or other restricted payments. These covenants could place us at a disadvantage compared to some of our competitors which may have fewer restrictive covenants and may not be required to operate under these restrictions. Further, these covenants could have an adverse effect on our business by limiting our ability to take advantage of financing, new tower development, merger and acquisitions or other opportunities.

 

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. In the past, we have had customers that 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 significant customers experience financial difficulties, it could result in uncollectible accounts receivable and our loss of significant customers and anticipated lease revenues.

 

13


Table of Contents

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, 2006, approximately 13% 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;

 

   

expropriation and governmental regulation restricting foreign ownership;

 

   

difficulty in recruiting trained personnel; and

 

   

language and cultural differences.

 

In addition, we face risks associated with changes in foreign currency exchange rates. While most of the contracts for our operations in Mexico are denominated in the U.S. dollar, some are denominated in the Mexican Peso, and our contracts for our operations in Brazil are denominated in 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 adverse changes in currency exchange rates.

 

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

 

A substantial portion of our total operating revenues is derived from a small number of customers. For the year ended December 31, 2006:

 

   

Five customers accounted for approximately 64% of our revenues;

 

   

Sprint Nextel (including Sprint Nextel partners and affiliates) accounted for approximately 21% of our revenues;

 

   

Cingular Wireless accounted for approximately 20% of our revenues; and

 

   

Verizon Wireless accounted for approximately 10% of our revenues.

 

Our largest international customer is Iusacell Celular, which accounted for approximately 3% of our total revenues for the year ended December 31, 2006. Iusacell is under common control with Unefon and TV Azteca. Unefon is our second largest customer in Mexico and accounted for approximately 2% of our total revenues for the year ended December 31, 2006. In addition, for the year ended December 31, 2006, we received $14.2 million in interest income, net, from TV Azteca.

 

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, in the future 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 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 business, results of operations and financial condition.

 

14


Table of Contents

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 3% of our total revenues for the year ended December 31, 2006. Iusacell has been in default under certain of its debt obligations and involved in litigation with certain of its creditors. Iusacell reported in January 2006 that it had reached an agreement in principle with its creditors to restructure its debt obligations. In February 2007, Iusacell submitted the credit agreement to the court and announced that approximately 97% of its recognized creditors supported the agreement. However, if the restructuring is not completed, or if the Iusacell bankruptcy or 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 leasing business 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 tower 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 many thousands of real estate sites underlying our towers, 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. Many of these laws and regulations contain information reporting and record keeping requirements. 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 (including amounts we expect to pay the EPA pursuant to the Facilities Audit Agreement) 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 OSHA. Both the FCC and the FAA regulate towers used for wireless communications and radio and television antennas 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

 

15


Table of Contents

increase the cost of new tower construction, modifications, additions of new antennas to a site, or site upgrades, thereby limiting our ability to respond to customer demands and requirements. Existing regulatory policies may adversely affect the associated timing or cost of such projects and additional regulations may be adopted which increase delays or result in additional costs to us, or that prevent such projects 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 a weaker financial condition or may have a lower return on investment criteria than we do.

 

Our competition includes:

 

   

national and regional 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).

 

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.

 

If we are unable to protect our rights to the land under our towers, it could adversely affect 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 communications sites. Further, we may not be able to renew ground leases on commercially viable terms. Approximately 85% of the communications sites in our portfolio as of December 31, 2006 are located on leased land. Approximately 85% of the land leases for these sites have a final expiration date of 2016 and beyond. Our inability to protect our rights to the land under our towers may have a material adverse affect on us.

 

If we are unable or choose not to exercise our rights to purchase towers that are subject to lease and sublease agreements at the end of the applicable period, our cash flows derived from such towers would be eliminated.

 

Our communications site portfolio includes towers that we operate pursuant to lease and sublease agreements that include a purchase option at the end of each lease period. If we are unable or choose not to exercise our rights to purchase towers under these agreements at the end of the applicable period, our cash flows derived from such towers would be eliminated. For example, our SpectraSite subsidiary has entered into lease or sublease agreements with affiliates of SBC Communications (SBC) with respect to approximately 2,500 towers pursuant to which SpectraSite has the option to purchase the sites upon the expiration of the lease or sublease beginning in 2013. The aggregate purchase option price for the SBC towers was approximately $310.1 million as of December 31, 2006, and will accrete at a rate of 10% per year to the applicable expiration of the lease or sublease of a site. In addition, we have entered into a similar agreement with ALLTEL Communications, Inc.

 

16


Table of Contents

(ALLTEL) with respect to approximately 1,800 towers, for which we have an option to purchase the sites upon the expiration of the lease or sublease beginning in 2016. The aggregate purchase option price for the ALLTEL towers was approximately $57.9 million as of December 31, 2006, and will accrete at a rate of 3% per annum through the expiration of the lease or sublease period. We may not have the required available capital to exercise our right to purchase these or other lease or subleased towers at the end of the applicable period. Even if we do have available capital, we may choose not to exercise our right to purchase such towers for business or other reasons. In the event that we do not exercise these purchase rights, or are otherwise unable to acquire an interest that would allow us to continue to operate these towers after the applicable period, we will lose the cash flows derived from such towers, which may have a material adverse effect on our business. In the event that we decide to exercise these purchase rights, the benefits of the acquisitions of such towers may not exceed the associated acquisition, compliance and integration costs, and our financial results could be adversely affected.

 

Our towers may be affected by natural disasters and other unforeseen damage for which our insurance may not provide adequate coverage.

 

Our towers are subject to risks associated with natural disasters, such as ice and wind storms, tornadoes, floods, hurricanes and earthquakes, as well as other unforeseen damage. Any damage or destruction to our towers as a result of these or other risks would impact our ability to provide services to our customers and could impact our results of operation and financial condition. For example, as a result of the severe hurricane activity in 2005, approximately 25 of our broadcast and wireless communications sites in the southeastern United States and Mexico suffered material damage and many more suffered lesser damage. While we maintain insurance, including business interruption insurance, for our towers against these risks, we may not have adequate insurance to cover the associated costs of repair or reconstruction. Further, such business interruption insurance may not adequately cover all of our lost revenues, including potential revenues from new tenants that could have been added to our towers but for the damage. If we are unable to provide services to our customers as a result of damages to our towers, it could lead to customer loss, resulting in a corresponding adverse effect on our business, results of operations and financial condition.

 

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, and numerous health-related lawsuits have been filed against wireless carriers and wireless device manufacturers. If a scientific study or court decision resulted in a finding that radio frequency emissions posed health risks to consumers, it could negatively impact the market for wireless services, as well as our wireless carrier customers, which would adversely effect our operations, costs and revenues. We do not maintain any significant insurance with respect to these matters.

 

Our stock option granting practices are subject to ongoing governmental proceedings, which could result in fines, penalties or other liability.

 

In May 2006, we announced that our Board of Directors had established a special committee of independent directors to conduct a review of our stock option granting practices and related accounting. Subsequent to the formation of the special committee, we received an informal letter of inquiry from the Securities and Exchange Commission, a subpoena from the office of the United States Attorney for the Eastern District of New York and an information document request from the Internal Revenue Service, each requesting documents and information related to our stock option grants and practices. We are cooperating with these governmental authorities to provide the requested documents and information. These governmental proceedings are ongoing, and the time

 

17


Table of Contents

period necessary to resolve these proceedings is uncertain and could require significant additional management and financial resources. Significant legal and accounting expenses related to these matters have been incurred to date and significant expenditures will continue to be incurred in the future. In addition, depending on the outcomes of these proceedings, we could be subject to regulatory fines, penalties or other liability, which could have a material adverse impact on our financial condition and results of operations.

 

Pending civil litigation relating to our stock option granting practices exposes us to risks and uncertainties.

 

We and our directors and officers are defendants in a purported federal securities class action and several shareholder derivative actions relating to our stock option granting practices. These actions are in preliminary stages and we cannot predict their outcomes with certainty. If these actions are successful, however, they could have a material adverse impact on our financial position, results of operations and liquidity. These matters and any other related lawsuits could also result in substantial costs to us and a diversion of our management’s attention and resources, which could have a negative impact on our financial condition and results of operations. For more information regarding the litigation related to our stock option granting practices, please see note 9 to our consolidated financial statements included in this annual report.

 

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 in December 2003. 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 we do not expect to exceed $3.2 million). In addition, in July 2005, the Official Committee of Unsecured Creditors appointed in the bankruptcy proceeding (the Committee) filed a complaint in the U.S. District Court for the Southern District of New York against us and certain of our and Verestar’s current and former officers, directors and advisors, and also filed a complaint in the Bankruptcy Court against us. (The case initially filed in the District Court has since been transferred to the Bankruptcy Court, and both cases are now pending as a single, consolidated case before the same Bankruptcy judge.) Pursuant to the complaints, the Committee is seeking unspecified compensatory damages of not less than $150.0 million, punitive damages and various costs and fees. The outcome of this complex litigation cannot be predicted by us with certainty, is dependent upon many factors beyond our control, and could take several years to resolve. If any such claims are successful, however, they could have a material adverse impact on our financial position and results of operations. For more information regarding the Verestar bankruptcy and related litigation, please see Item 3 of this annual report under the caption “Legal Proceedings” and note 9 to our consolidated financial statements included in this annual report.

 

ITEM 1B.    UNRESOLVED STAFF COMMENTS

 

None.

 

18


Table of Contents
ITEM 2.   PROPERTIES

 

Our principal offices are located in Boston, Southborough and Woburn, Massachusetts; Atlanta, Georgia; Cary, North Carolina; 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, Site Leasing Management and Broadcast Division Headquarters    42,300    Owned(1)

Atlanta, GA

  

US Tower Division, Accounting Services Headquarters

 

American Tower International Headquarters

   21,400

 

2,700

   Leased

 

Leased

Cary, North Carolina

   US Tower Division, New Site Development, Site Operations and Structural Engineering Services Headquarters    27,400    Leased

Mexico City, Mexico

   Mexico Headquarters    11,000    Leased

Sao Paulo, Brazil

   Brazil Headquarters    5,200    Leased

(1) The facility in Woburn contains a total of 163,000 square feet of space. Approximately 42,300 square feet of space is occupied by our lease administration office and our broadcast division, and we lease the remaining space to unaffiliated tenants.

 

In addition to the principal offices set forth above, we maintain 14 regional 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 communications 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. 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. A typical tower site consists of a compound enclosing the tower site, a tower structure, and an equipment shelter that houses a variety of transmitting, receiving and switching equipment. There are three principal types of towers: guyed, self-supporting lattice, and monopole.

 

   

A guyed tower includes a series of cables attaching separate levels of the tower to anchor foundations in the ground. A guyed tower can reach heights of up to 2,000 feet. A guyed tower site for a typical broadcast tower can consist of a tract of land of up to 20 acres.

 

   

A lattice tower is typically tapered from the bottom up and usually has three or four legs. A lattice tower can reach heights of up to 1,000 feet. Depending on the height of the tower, a lattice tower site for a wireless communications tower can consist of a tract of land of 10,000 square feet for a rural site or less than 2,500 square feet for a metropolitan site.

 

   

A monopole is a tubular structure that is used primarily to address space constraints or aesthetic concerns. Monopoles typically have heights ranging from 50 to 200 feet. A monopole tower site of the kind typically used in metropolitan areas for a wireless communications tower can consist of a tract of land of less than 2,500 square feet.

 

Of the approximately 22,000 communications sites in our portfolio as of December 31, 2006, approximately 85% are located on leased land. Ground leases for land underlying our towers generally have an initial term of

 

19


Table of Contents

five years with three or four additional automatic renewal periods of five years, for a total of twenty to twenty-five years. As a result, approximately 85% of the land leases for our sites have a final expiration date of 2016 and beyond.

 

ITEM 3.   LEGAL PROCEEDINGS

 

As previously reported, our wholly owned subsidiary, Verestar, Inc., filed for protection under Chapter 11 of the federal bankruptcy laws on December 22, 2003 in the U.S. Bankruptcy Court for the Southern District of New York (Bankruptcy Court). In June 2004, the Bankruptcy Court approved a stipulation between Verestar and the Official Committee of Unsecured Creditors appointed in the bankruptcy proceeding (the Committee) that permits the Committee to file claims against us and/or our affiliates on behalf of Verestar. In connection therewith, in July 2005, the Committee filed a complaint in the U.S. District Court for the Southern District of New York (District Court) against us and certain of our and Verestar’s current and former officers, directors and advisors, and also filed a complaint in the Bankruptcy Court against us. We may be obligated or may agree to indemnify certain of the defendants named in the litigation. The complaint originally filed in the District Court asserts various causes of action against the defendants, including declaratory judgment for alter ego, breach of fiduciary duty, conversion, conspiracy, tortious interference with contract and business relations, deepening insolvency, and avoidance and recovery of fraudulent transfers and preferential transfers. In connection with those claims, the Committee is seeking unspecified compensatory damages of not less than $150.0 million, punitive damages and various costs and fees. During 2005, we, together with the individual defendants, filed motions to dismiss certain claims asserted in the complaints. In June 2006, the Bankruptcy Court dismissed all counts involving certain defendants, including our Chairman and Chief Executive Officer, James D. Taiclet, Jr. The Bankruptcy Court dismissed most other claims against the remaining individual defendants, leaving only claims of breach of the duty of loyalty and conversion. The Bankruptcy Court also dismissed certain claims against us, although several causes of action against us, including declaratory judgment for alter ego, remain. In August 2006, the Committee and the individual defendants agreed to mediation with us as an attempt to resolve the case. In September 2006, the Bankruptcy Court approved the decision to mediate and stayed all aspects of the case pending the completion of mediation. The parties must negotiate in good faith for a minimum of 60 days, but may continue mediation for as long as the parties believe that the mediation is effective. The mediation is expected to occur within the next two to three months. For more information regarding the Verestar bankruptcy and related litigation, please see note 9 to our consolidated financial statements included in this annual report.

 

On May 18, 2006, we received a letter of informal inquiry from the SEC Division of Enforcement requesting documents related to our stock option grants and stock option practices. The inquiry is focused on stock options granted to senior management and members of our Board of Directors during the period 1997 to the present. We continue to cooperate with the SEC to provide the requested information and documents.

 

On May 19, 2006, we received a subpoena from the United States Attorney’s Office for the Eastern District of New York for records and information relating to our stock option granting practices. The subpoena requests materials related to certain stock options granted between 1995 and the present. We continue to cooperate with the U.S. Attorney’s Office to provide the requested information and documents.

 

On May 26, 2006, a securities class action was filed in United States District Court for the District of Massachusetts against us and certain of our current officers by John S. Greenebaum for monetary relief. Specifically, the complaint names us, James D. Taiclet, Jr. and Bradley E. Singer as defendants and alleges that the defendants violated federal securities laws in connection with public statements made relating to our stock option practices and related accounting. The complaint asserts claims under Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5. In December 2006, the court appointed the Steamship Trade Association-International Longshoreman’s Association Pension Fund as the lead plaintiff.

 

On May 24, 2006 and June 14, 2006, two shareholder derivative lawsuits were filed in Suffolk County Superior Court in Massachusetts by Eric Johnston and Robert L. Garber, respectively. The lawsuits were filed

 

20


Table of Contents

against certain of our current and former officers and directors for alleged breaches of fiduciary duties and unjust enrichment in connection with our stock option granting practices. The lawsuits also name us as a nominal defendant. The lawsuits seek to recover the damages sustained by us and disgorgement of all profits received with respect to the alleged backdated stock options. In October 2006, these two lawsuits were consolidated and transferred to the court’s Business Litigation Session.

 

On June 13, 2006, June 22, 2006 and August 23, 2006, three shareholder derivative lawsuits were filed in United States District Court for the District of Massachusetts by New South Wales Treasury Corporation, as Trustee for the Alpha International Managers Trust, Frank C. Kalil and Don Holland, and Leslie Cramer, respectively. The lawsuits were filed against certain of our current and former officers and directors for alleged breaches of fiduciary duties, waste of corporate assets, gross mismanagement and unjust enrichment in connection with our stock option granting practices. The lawsuits also name us as a nominal defendant. In December 2006, the court consolidated these three lawsuits and appointed New South Wales Treasury Corporation as the lead plaintiff. On February 9, 2007, the plaintiffs filed a consolidated complaint for alleged breaches of fiduciary duty, corporate waste, gross mismanagement, unjust enrichment, abuse of control, insider selling and misappropriation of information. The consolidated complaint asserts claims under Sections 14(a), 10(b) and 20(a) of the Exchange Act and SEC Rules 14a-9 and 10b-5. The plaintiffs seek to recover the damages sustained by us, disgorgement of all profits received with respect to the alleged backdated stock options, corporate governance changes and punitive damages.

 

On June 8, 2006, we received a letter addressed to our Board of Directors from a law firm purporting to represent one of our current stockholders requesting that we investigate and institute proceedings pursuant to Section 16(b) of the Exchange Act against certain of our current and former officers and directors to recover short-swing profits earned in connection with purchases and sales of our equity securities. Our Board of Directors has concluded that there are no grounds on which to pursue the claims raised by the letter, and accordingly, has responded that it will not institute proceedings.

 

On August 31, 2006, we received an Information Document Request from the Internal Revenue Service (IRS) for documents and information relating to our stock option granting practices and related accounting. The Information Document Request requests materials related to certain stock options granted between 1998 and 2005.

 

We periodically become involved in various claims and lawsuits that are incidental to our business. In the opinion of management, after consultation with counsel, other than the litigation discussed above and in note 9 to our consolidated financial statements included in this annual report related to the Verestar bankruptcy and our stock option granting practices, there are no matters currently pending that 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.

 

21


Table of Contents

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 2006 and 2005.

 

2006


   High

   Low

Quarter ended March 31

   $ 32.68    $ 26.66

Quarter ended June 30

     35.75      27.35

Quarter ended September 30

     36.92      29.98

Quarter ended December 31

     38.74      35.21

2005


   High

   Low

Quarter ended March 31

   $ 19.28    $ 17.30

Quarter ended June 30

     21.16      16.28

Quarter ended September 30

     25.20      20.70

Quarter ended December 31

     28.33      22.73

 

On February 22, 2007, the closing price of our Class A common stock was $40.38 per share as reported on the NYSE. As of February 22, 2007, we had 419,988,395 outstanding shares of Class A common stock and 623 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. 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. In August 2005, we amended and restated our charter to, among other things, eliminate our Class B common stock and Class C common stock.

 

Dividends

 

We have never paid a dividend on any class of our 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 7.50% senior notes due 2012 (7.50% Notes) and our 7.125% senior notes due 2012 (7.125% Notes) may prohibit us from paying dividends to our stockholders unless we satisfy certain financial covenants.

 

Our credit facilities and the indentures governing the terms of our debt securities contain covenants that may restrict the ability of our subsidiaries 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. Under our credit facilities, the borrower subsidiaries may pay cash dividends or make other distributions to us in accordance with the applicable credit facility only if no default exists or would be created thereby. The indenture governing the terms of the ATI 7.25% Notes 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 financial covenants are satisfied. The indentures governing the terms of our 7.50% Notes and 7.125% Notes also contain certain restrictive covenants, which prohibit the restricted subsidiaries under these indentures from paying dividends and making other payments or distributions to us unless certain financial covenants are satisfied. For more information about the restrictions under our credit facilities and our notes indentures, see Item 7 of this annual report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Factors Affecting Sources of Liquidity” and note 7 to our consolidated financial statements included in this annual report.

 

22


Table of Contents

Performance Graph

 

This performance graph is furnished and shall not be deemed “filed” with the SEC or subject to Section 18 of the Exchange Act, nor shall it be deemed incorporated by reference in any of our filings under the Securities Act of 1933, as amended.

 

The following graph compares the cumulative total stockholder return on our Class A common stock with the cumulative total return of the Russell Midcap Index (Broad Market index), the Dow Jones US Telecommunications Equipment Index (Industry Index), and the group of companies selected as our peers in the communications site industry in our proxy statement for 2006 (Peer Group). Our Peer Group consists of Crown Castle International Corp. and SBA Communications Corporation. We have historically included in our proxy statements a peer group consisting of companies in the communications site leasing industry. As a result of consolidation within the industry, our peer group has grown smaller over time. We believe that comparing our returns to those of the Dow Jones US Telecommunications Equipment Index, a broader industry index, will provide investors with a more meaningful view of our performance relative to our industry. Accordingly, going forward, we will cease providing comparative returns for our Peer Group and instead provide returns for the Dow Jones US Telecommunications Equipment Index, which consists of over 40 companies that provide infrastructure, equipment and related services to the telecommunications industry, and includes American Tower and both of the companies in our Peer Group. The performance graph assumes that on December 31, 2001, $100 was invested in each of our Class A common stock, the Russell Midcap Index, the Dow Jones US Telecommunications Equipment Index and the Peer Group. The cumulative return shown in the graph assumes reinvestment of all dividends. The performance of our Class A common stock reflected below is not necessarily indicative of future performance.

 

23


Table of Contents

Comparison of Cumulative Total Return Among American Tower Corporation,

Russell Midcap Index, Dow Jones US Telecommunications Equipment Index and Peer Group

 

LOGO

 

     Cumulative Total Returns

     12/31/2001

   12/31/2002

   12/31/2003

   12/31/2004

   12/30/2005

   12/29/2006

American Tower Corporation

   $ 100.00    $ 37.28    $ 114.26    $ 194.30    $ 286.17    $ 393.66

Russell MidCap Index

     100.00      83.81      117.39      141.12      158.98      183.24

Dow Jones US Telecommunications Equipment Index

     100.00      59.26      106.77      110.85      112.39      130.89

Peer Group

     100.00      28.93      89.16      140.50      233.25      296.44

 

Recent Sales of Unregistered Securities

 

During the three months ended December 31, 2006, we issued an aggregate of 5,326 shares of our Class A common stock upon the exercise of 757 warrants assumed in our merger with SpectraSite, Inc. In August 2005, in connection with the merger, we assumed approximately 1.0 million warrants to purchase shares of SpectraSite, Inc. common stock. Upon completion of the merger, each warrant to purchase shares of SpectraSite, Inc. common stock automatically converted into a warrant to purchase 7.15 shares of Class A common stock at an exercise price of $32 per warrant. Net proceeds from these warrant exercises were approximately $21,024. The shares were issued to warrantholders in reliance on the exemption from registration set forth in Sections 3(a)(9) and 3(a)(10) of the Securities Act of 1933, as amended, and Section 1145 of the United States Code. No underwriters were engaged in connection with such issuances. Subsequent to December 31, 2006, we issued unregistered shares of our Class A common stock pursuant to warrant exercises and conversions of convertible notes, as set forth in Item 9B of this annual report under the caption “Other Information.”

 

24


Table of Contents

Issuer Purchases of Equity Securities

 

In November 2005, we announced that our Board of Directors had approved a stock repurchase program for the repurchase of up to $750.0 million of our Class A common stock through December 2006. On May 23, 2006, we announced that we were temporarily suspending repurchases under our stock repurchase program in light of the uncertainty surrounding the pending review of our stock option granting practices and the related governmental proceedings, as described in note 9 to our consolidated financial statements included in this annual report. Prior to the suspension of the stock repurchase program, we had repurchased approximately 11.8 million shares of our Class A common stock for an aggregate of $358.4 million. On December 20, 2006, we announced that we were resuming repurchases of our Class A common stock, and that we would seek to repurchase the remaining $391.7 million under this program through the end of February 2007.

 

As of December 31, 2006, we had repurchased approximately 12.9 million shares of Class A common stock for an aggregate of $398.4 million under this program. During the three months ended December 31, 2006, we repurchased 1,098,279 shares of our Class A common stock for an aggregate of $40.1 million pursuant to our stock repurchase program, as follows:

 

Period


   Total Number
of Shares
Purchased(1)


   Average
Price Paid
per Share


   Total Number of Shares
Purchased as Part of Publicly
Announced Plans or Programs(1)


   Approximate Dollar Value of Shares
that May Yet be Purchased Under
the Plans or Programs


                    (In millions)

October 2006(2)

   —        —      —      $ 391.7

November 2006(2)

   —        —      —      $ 391.7

December 2006

   1,098,279    $ 36.55    1,098,279    $ 351.6
    
         
      

Total Fourth Quarter

   1,098,279           1,098,279    $ 351.6
    
         
      

(1) All issuer repurchases were made pursuant to the stock repurchase program publicly announced in November 2005 for the repurchase of up to $750.0 million of our Class A common stock during the period November 2005 through December 2006. As set forth above, we temporarily suspended repurchases under this program in May 2006. In December 2006, we announced that we were resuming repurchases of our Class A common stock, and that we would seek to repurchase the remaining amounts authorized under this program through the end of February 2007. Under the program, our management is authorized to purchase shares from time to time in open market purchases or privately negotiated transactions at prevailing prices as permitted by securities laws and other legal requirements, and subject to market conditions and other factors. To facilitate repurchases, we entered into a trading plan under Rule 10b5-1 of the Exchange Act, which allows us to repurchase shares during periods when we otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods.

 

(2) As a result of the suspension of our stock repurchase program discussed above, we did not repurchase any shares of our Class A common stock pursuant to our stock repurchase program during October or November 2006.

 

25


Table of Contents
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.

 

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 16 to our consolidated financial statements included in this annual report).

 

Year-to-year comparisons are significantly affected by our acquisitions, dispositions and, to a lesser extent, construction of towers. Our merger with SpectraSite, Inc., which closed in August 2005, significantly impacts the comparability of reported results between periods. Our principal acquisitions and dispositions are described in “Business—Recent Transactions” and in the notes to our consolidated financial statements included in this annual report.

 

     Year Ended December 31,

 
     2006

    2005

    2004

    2003

    2002

 
     (In thousands, except per share data)  

Statements of Operations Data:

                                        

Revenues:

                                        

Rental and management

   $ 1,294,068     $ 929,762     $ 684,422     $ 619,697     $ 544,906  

Network development services

     23,317       15,024       22,238       12,796       32,888  
    


 


 


 


 


Total operating revenues

     1,317,385       944,786       706,660       632,493       577,794  
    


 


 


 


 


Operating expenses:

                                        

Costs of operations (exclusive of items shown separately below)

                                        

Rental and management

     332,246       247,781       195,242       192,380       187,694  

Network development services

     11,291       8,346       16,220       7,419       27,195  

Depreciation, amortization and accretion

     528,051       411,254       329,449       330,414       327,665  

Selling, general, administrative and development expense

     159,324       108,059       83,094       83,492       94,664  

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

     2,572       34,232       23,876       31,656       101,372  
    


 


 


 


 


Total operating expenses

     1,033,484       809,672       647,881       645,361       738,590  
    


 


 


 


 


Operating income (loss)

     283,901       135,114       58,779       (12,868 )     (160,796 )

Interest income, TV Azteca, net

     14,208       14,232       14,316       14,222       13,938  

Interest income

     9,002       4,402       4,844       5,255       3,496  

Interest expense

     (215,643 )     (222,419 )     (262,237 )     (279,783 )     (254,345 )

Loss on retirement of long-term obligations

     (27,223 )     (67,110 )     (138,016 )     (46,197 )     (8,869 )

Other income (expense)

     6,619       227       (2,798 )     (8,598 )     (7,004 )
    


 


 


 


 


Income (loss) before income taxes, minority interest and income (loss) on equity method investments

     70,864       (135,554 )     (325,112 )     (327,969 )     (413,580 )

Income tax (provision) benefit

     (41,768 )     (5,714 )     83,338       85,567       92,609  

Minority interest in net earnings of subsidiaries

     (784 )     (575 )     (2,366 )     (3,703 )     (2,118 )

Income (loss) on equity method investments

     26       (2,078 )     (2,915 )     (21,221 )     (18,555 )
    


 


 


 


 


Income (loss) from continuing operations before cumulative effect of change in accounting principle

   $ 28,338     $ (143,921 )   $ (247,055 )   $ (267,326 )   $ (341,644 )
    


 


 


 


 


Basic and diluted income (loss) per common share from continuing operations before cumulative effect of change in accounting principle(1)

   $ 0.06     $ (0.47 )   $ (1.10 )   $ (1.28 )   $ (1.75 )
    


 


 


 


 


Weighted average common shares outstanding(1)

                                        

Basic

     424,525       302,510       224,336       208,098       195,454  
    


 


 


 


 


Diluted

     436,217       302,510       224,336       208,098       195,454  
    


 


 


 


 


Other Operating Data:

                                        

Ratio of earnings to fixed charges(2)

     1.25 x     .51 x     —         —         —    

 

26


Table of Contents
     As of December 31,

     2006

   2005

   2004

   2003

   2002

     (In thousands)

Balance Sheet Data:

                                  

Cash and cash equivalents (including restricted cash and investments)(3)

   $ 281,264    $ 112,701    $ 215,557    $ 275,501    $ 127,292

Property and equipment, net

     3,218,124      3,460,526      2,273,356      2,483,324      2,650,490

Total assets

     8,613,219      8,786,854      5,107,696      5,310,906      5,643,691

Long-term obligations, including current portion

     3,543,016      3,613,429      3,293,614      3,359,731      3,448,514

Total stockholders’ equity

     4,384,916      4,541,821      1,490,767      1,629,621      1,675,592

(1) Basic income per common share amounts for the year ended December 31, 2006 represents income divided by the weighted average number of common shares outstanding during the period. Diluted income per share amounts for the year ended December 31, 2006 represents income divided by the weighted average number of common shares outstanding during the period and any dilutive common share equivalents, including shares issuable upon exercise of stock options and warrants, as determined under the treasury stock method, and upon conversion of our convertible notes, as determined under the if-converted method. Basic and diluted loss per common share amounts for periods prior to 2006 have excluded shares issuable upon exercise of stock options and warrants and upon conversion of our convertible notes, as their effect is anti-dilutive.

 

(2) For the purpose of this calculation, “earnings” consists of income (loss) from continuing operations before income taxes, minority interest in net earnings of subsidiaries, income (loss) on equity method investments and fixed charges (excluding interest capitalized and amortization of interest capitalized. “Fixed charges” consist of interest expense, including amounts 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 an excess (deficiency) in earnings to fixed charges in each period as follows (in thousands): 2006–$72,813; 2005–$(133,464); 2004–$(322,806); 2003–$(326,154); and 2002–$(417,123).

 

(3) As of December 31, 2005 and 2004, amounts include cash and cash equivalents only as no escrows are required under the terms of the credit facilities. 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.

 

27


Table of Contents
ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The discussion and analysis of our financial condition and results of operations that follows are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and the related 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 caption “Critical Accounting Policies and Estimates” on page 46.

 

Our continuing operations are reported in two business segments: rental and management and network development services. Management focuses on segment gross margin and segment operating profit (loss) as a means to measure operating performance in these business segments. We define segment gross margin as segment revenue less segment operating expenses excluding depreciation, amortization and accretion; selling, general, administrative and development expense; and impairments, net loss on sale of long-lived assets, restructuring and merger related expense. We define segment operating profit as segment gross margin less selling, general, administrative and development expense attributable to the segment, excluding stock-based compensation expense and corporate expenses. Segment gross margin and segment operating profit (loss) for the rental and management segment include interest income, TV Azteca, net (see note 15 to our consolidated financial statements included herein).

 

Executive Overview

 

Our principal operating segment is our rental and management segment, which accounted for approximately 98.2% and 98.4% of our total revenues and approximately 99.2% and 99.5% of our segment operating profit for the years ended December 31, 2006 and 2005, 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 increase due to 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 customers providing wireless broadband-services.

 

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, nearly all of the revenue generated by our rental and management segment as of the end of December 2006 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. Revenue generated by rate increases based on fixed escalation clauses is recognized on a straight-line basis over the non-cancelable term of the applicable agreement.

 

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 only upon payment of a termination fee. Accordingly, lease cancellations historically have not had a material adverse effect on the revenues generated by our rental and management segment. During 2006, tenant leases representing less than 2% of our total revenues were cancelled.

 

A significant majority of our revenue growth in 2006 was attributable to revenue generated from leasing space on the towers and in-building systems acquired in connection with our merger with SpectraSite, Inc. In August 2005, we completed our merger with SpectraSite, Inc., an owner and operator of approximately 7,800

 

28


Table of Contents

wireless and broadcast towers and in-building systems in the United States. The merger was approved by our and SpectraSite’s stockholders on August 3, 2005, and the results of operations of SpectraSite have been included in our consolidated results of operations since that date. During the year ended December 31, 2006 and during the period August 3, 2005 through December 31, 2005, SpectraSite contributed total revenues of $445.4 million and $171.2 million, respectively, and segment operating profit of $294.2 million and $106.8 million, respectively, to our rental and management segment.

 

Our revenue growth in 2006 was also attributable to incremental revenue generated by our existing communications sites. During 2006, incremental revenue attributable to those sites that existed during the entire period between January 1, 2005 and December 31, 2006, was approximately $79.1 million, which reflects revenue increases from adding new tenants to those sites, existing tenants adding more equipment to those sites, the effects of straight-line accounting treatment of contractual escalators in our tenant leases and favorable currency exchange rate changes, offset by lease cancellations.

 

Our ability to lease additional space on our sites 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 sites. 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 sites, including the sites acquired in connection with our merger with SpectraSite, Inc., will contribute the substantial majority of our year-over-year revenue growth in 2007.

 

We also generate revenues by building and acquiring new communications sites. In addition to the approximately 7,800 towers and in-building systems acquired in connection with our merger with SpectraSite, Inc., we constructed or acquired 325 and 289 sites in 2006 and 2005, respectively. Because of the nature of our recurring revenues described above, our results of operations only reflect revenues generated on these sites following the respective dates of their construction or acquisition, which affects year-over-year comparisons. During 2006, incremental revenue attributable to these 614 sites that were built or acquired between January 1, 2005 and December 31, 2006, was approximately $11.0 million.

 

Our rental and management segment operating expenses include our direct tower level expenses and consist primarily of ground rent, property taxes, repairs and maintenance and utilities. These segment level expenses exclude all segment and corporate, selling, general, administrative and development expenses, which are aggregated into one line item entitled selling, general, administrative and development expense. Our segment level selling, general and administrative expenses consist of expenses to support our rental and management and network development services segments, such as sales and property management functions. In general, our segment level selling, general and administrative expenses do not significantly increase as a result of adding incremental customers to our sites and increase only modestly year over year. As a result, 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.

 

29


Table of Contents

Results of Operations

 

Years Ended December 31, 2006 and 2005

 

    

Year Ended

December 31,


    Amount of
Increase
(Decrease)


    Percent
Increase
(Decrease)


 
     2006

    2005

     
     (In thousands)  

REVENUES:

        

Rental and management

   $ 1,294,068     $ 929,762     $ 364,306     39 %

Network development services

     23,317       15,024       8,293     55  
    


 


 


     

Total revenues

     1,317,385       944,786       372,599     39  
    


 


 


     

OPERATING EXPENSES:

                              

Costs of operations (exclusive of items shown separately below)

                              

Rental and management

     332,246       247,781       84,465     34  

Network development services

     11,291       8,346       2,945     35  

Depreciation, amortization and accretion

     528,051       411,254       116,797     28  

Selling, general, administrative and development expense (including $39,502 and $6,597 of stock-based compensation expense, respectively)

     159,324       108,059       51,265     47  

Impairments, net loss on sale of long-lived assets, restructuring and merger related expense (including $9,333 of stock-based compensation expense in 2005)

     2,572       34,232       (31,660 )   (92 )
    


 


 


     

Total operating expenses

     1,033,484       809,672       223,812     28  
    


 


 


     

OTHER INCOME (EXPENSE):

                              

Interest income, TV Azteca, net of interest expense $1,491 and $1,492

     14,208       14,232       (24 )   (0 )

Interest income

     9,002       4,402       4,600     104  

Interest expense

     (215,643 )     (222,419 )     (6,776 )   (3 )

Loss on retirement of long-term obligations

     (27,223 )     (67,110 )     (39,887 )   (59 )

Other income

     6,619       227       6,392     2,816  

Income tax provision

     (41,768 )     (5,714 )     36,054     631  

Minority interest in net earnings of subsidiaries

     (784 )     (575 )     209     36  

Income (loss) on equity method investments

     26       (2,078 )     2,104     101  

Loss from discontinued operations, net

     (854 )     (1,913 )     (1,059 )   (55 )

Cumulative effect of change in accounting principle, net

             (35,525 )     (35,525 )   N/A  
    


 


 


     

Net income (loss)

   $ 27,484     $ (181,359 )   $ 208,843     115 %
    


 


 


     

 

Total Revenues

 

Total revenues for the year ended December 31, 2006 were $1,317.4 million, an increase of $372.6 million from the year ended December 31, 2005. Approximately $274.6 million of the increase was attributable to revenues generated by SpectraSite. The balance of the increase resulted from an increase in other rental and management revenue of $90.1 and an increase in other network development services revenue of $7.9 million.

 

Rental and Management Revenue

 

Rental and management revenue for the year ended December 31, 2006 was $1,294.1 million, an increase of $364.3 million from the year ended December 31, 2005. Approximately $274.2 million of the increase was

 

30


Table of Contents

attributable to revenues generated by SpectraSite. Approximately $79.1 million of the increase resulted from incremental revenue generated by communications sites that existed during the entire period between January 1, 2005 and December 31, 2006, which reflects revenue increases from adding new tenants to those sites, existing tenants adding more equipment to those sites, the effects of straight-line accounting treatment of contractual escalators in our tenant leases and favorable currency exchange rates, offset by lease cancellations. Approximately $11.0 million of the increase resulted from revenue generated by the approximately 614 communications sites acquired and/or constructed subsequent to January 1, 2005, other than in connection with the SpectraSite merger. We believe that our rental and management revenue will increase as we continue to utilize existing site capacity. We anticipate that the majority of our new leasing activity will continue to come from wireless and broadcast service providers.

 

Network Development Services Revenue

 

Network development services revenue for the year ended December 31, 2006 was $23.3 million, an increase of $8.3 million from year ended December 31, 2005. The increase was primarily attributable to revenues generated by our structural analysis services due to the increased business associated with our significantly larger communications site portfolio, primarily as a result of sites acquired from SpectraSite. As we continue to focus on and grow our site leasing business, we anticipate that our network development services revenue will continue to represent a small percentage of our total revenues.

 

Total Operating Expenses

 

Total operating expenses for the year ended December 31, 2006 were $1,033.5 million, an increase of $223.8 million from the year ended December 31, 2005. The increase was attributable to an increase in depreciation, amortization and accretion expense of $116.8 million, an increase in expenses within our rental and management segment of $84.5 million, an increase in selling, general, administrative and development expense of $51.3 million and an increase in expenses within our network development services segment of $2.9 million. These increases were offset by a decrease in impairments, net loss of sale on long-lived assets, restructuring and merger related expense of $31.7 million.

 

Rental and Management Expense/Segment Gross Margin/Segment Operating Profit

 

Rental and management expense for the year ended December 31, 2006 was $332.2 million, an increase of $84.5 million from the year ended December 31, 2005. Approximately $78.8 million of the increase was attributable to expenses incurred by SpectraSite. Approximately $2.8 million of the increase was related to approximately 614 sites acquired and/or constructed subsequent to January 1, 2005, other than sites acquired from SpectraSite. The remaining $2.9 million of the increase was attributable to communications sites which existed during the period between January 1, 2005 and December 31, 2006, primarily related to increases in ground rent expense.

 

Rental and management segment gross margin for the year ended December 31, 2006 was $976.0 million, an increase of $279.8 million from the year ended December 31, 2005. Approximately $195.5 million of the increase resulted from communications sites acquired from SpectraSite. The balance of the increase resulted from the additional rental and management revenue, net of related expenses, described above.

 

Rental and management segment operating profit for the year ended December 31, 2006 was $914.9 million, an increase of $277.1 million from the year ended December 31, 2005. The increase was comprised of the $279.8 million increase in rental and management segment gross margin described above, net of a $2.7 million increase in selling, general, administrative and development expenses related to the rental and management segment.

 

Network Development Services Expense

 

Network development services expense for the year ended December 31, 2006 was $11.3 million, an increase of $2.9 million from the year ended December 31, 2005. The majority of the increase correlates directly to the increase in services performed as noted above.

 

31


Table of Contents

Depreciation, Amortization and Accretion

 

Depreciation, amortization and accretion expense for the year ended December 31, 2006 was $528.1 million, an increase of $116.8 million from the year ended December 31, 2005. Approximately $116.2 million of the increase was attributable to depreciation, amortization and accretion expense related to long-lived assets acquired in connection with the SpectraSite merger.

 

Selling, General, Administrative and Development Expense

 

Selling, general, administrative and development expense for the year ended December 31, 2006 was $159.3 million, an increase of $51.3 million from the year ended December 31, 2005. The increase was primarily attributable to an increase of $32.9 million in stock-based compensation expense and $16.2 million in costs associated with the review of our stock option granting practices and related legal and governmental proceedings, and other related costs. See “—Stock Option Review and Related Matters” below. The remaining net increase was primarily the result of the inclusion of SpectraSite expenses for the full year ended December 31, 2006, as compared to the five months post-merger for the year ended December 31, 2005.

 

Impairments, Net Loss on Sale of Long-lived Assets, Restructuring and Merger Related Expense

 

Impairments, net loss on sale of long-lived assets, restructuring and merger related expense for the year ended December 31, 2006 was $2.6 million, a decrease of $31.7 million from the year ended December 31, 2005. The decrease was primarily due to a $16.1 million decrease in impairments and net loss on sale of long-lived assets, an $11.3 million decrease in stock-based compensation expense and related payroll taxes associated with restructuring and merger activities and a $3.1 million decrease in severance, retention and other employee expenses associated with the 2005 SpectraSite merger. The net decrease of $16.1 million in impairments and net loss on sale of long-lived assets was primarily comprised of a $9.2 million reduction in impairments related to towers with no current tenant leases and gains from asset sales totaling $5.1 million. The gains from asset sales included the sale of 27 towers in one transaction and sales of other non-core assets.

 

Interest Expense

 

Interest expense for the year ended December 31, 2006 was $215.6 million, a decrease of $6.8 million from the year ended December 31, 2005. The decrease resulted primarily from a reduction in interest expense of approximately $49.8 million as a result of redemptions and repurchases of outstanding debt securities, offset by additional interest incurred related to the SpectraSite credit facility and higher borrowing levels on the American Tower credit facility totaling approximately $45.3 million.

 

Loss on Retirement of Long-Term Obligations

 

During the year ended December 31, 2006, approximately $45.0 million principal amount of 3.25% Notes were converted into shares of our Class A common stock, and we repurchased approximately $74.9 million principal amount of ATI 7.25% Notes and $23.5 million principal amount of 5.0% Notes. In connection with these transactions, we paid the noteholders an aggregate of $104.0 million in cash, including accrued interest. In addition, on February 1, 2006, we redeemed $227.7 million aggregate principal amount ($162.1 million accreted value, net of $7.0 million fair value discount allocated to warrants) of ATI 12.25% Notes in accordance with the indenture at 106.125% of their accreted value for an aggregate of $179.5 million. As a result of these transactions, we recorded a charge of $27.2 million related to amounts paid in excess of the carrying value and the write-off of related deferred financing fees.

 

During the year ended December 31, 2005, we redeemed $274.9 million principal amount of our 9 3/8% senior notes due 2009 (9 3/8% Notes), repurchased $177.8 million accreted value of our ATI 12.25% Notes and converted $57.1 million principal amount of our 3.25% Notes. In addition, we refinanced the American Tower

 

32


Table of Contents

and SpectraSite credit facilities. As a result of these transactions, we recorded a $67.1 million charge primarily related to the write-off of deferred financing fees and amounts paid in excess of the carrying value. For more information regarding our financing activities, see “—Liquidity and Capital Resources—Refinancing Activities and Repurchases of Debt” below.

 

Other Income

 

Other income for the year ended December 31, 2006 was $6.6 million, an increase of $6.4 million from the year ended December 31, 2005. The increase was primarily attributable to a $5.4 million gain realized during the quarter ended December 31, 2006 from the sale of 1.6 million shares of FiberTower Corporation, an investment we had previously accounted for under the cost method. We plan to sell all or a portion of our remaining holdings of 3.9 million shares of FiberTower during 2007. Accordingly, as of December 31, 2006 we have recorded these shares as available-for-sale securities within the current assets of our consolidated balance sheet, with an unrealized gain of $10.4 million, net of tax, recorded within other comprehensive income.

 

Income Tax Provision

 

The income tax provision for the year ended December 31, 2006 was $41.8 million, as compared to $5.7 million for the year ended December 31, 2005, representing an increase of $36.1 million from the prior year period. The effective tax rate was 58.9% for the year ended December 31, 2006, as compared to 4.2% for the year ended December 31, 2005. The provision for the year ended December 31, 2005 reflects a $29.5 million charge as a result of a reduction in management’s estimate of the net realizable value of our federal income tax refund claims based upon the current status of the claims, as described below.

 

The effective tax rate on loss from continuing operations for the year ended December 31, 2006 differs from the federal statutory rate due primarily to foreign items, IRS audit adjustments and state taxes. The effective tax rate on loss from continuing operations for the year ended December 31, 2005 differs from the federal statutory rate due primarily to adjustments to our refund claims as more fully described below, foreign items, IRS audit adjustments and state taxes.

 

We intend to recover a portion of our deferred tax asset through our federal income tax refund claims related to the carry back of certain federal net operating losses. In June 2003 and October 2003, we filed federal income tax refund claims with the IRS relating to the carry back of $380.0 million of net operating losses generated prior to 2003, of which we initially anticipated receiving approximately $90.0 million. Based on preliminary discussions with tax authorities, we revised our estimate of the net realizable value of our federal income tax refund claims during the year ended December 31, 2005, and anticipate receiving a refund of approximately $65.0 million, plus interest. We expect settlement of this matter in the first half of 2007, however, there can be no assurances with respect to the timing of any refund. Because of the uncertainty associated with the claim, we have not recognized any amounts related to interest.

 

Loss from Discontinued Operations, Net

 

Loss from discontinued operations, net for the year ended December 31, 2006 was $0.8 million, as compared to $1.9 million for the year ended December 31, 2005. The loss from discontinued operations for each of the years ended December 31, 2006 and 2005 primarily represents the legal costs incurred in connection with our involvement in the Verestar bankruptcy proceedings. We also expect to incur additional costs in connection with these proceedings.

 

33


Table of Contents

Years Ended December 31, 2005 and 2004

 

    

Year Ended

December 31,


    Amount of
Increase
(Decrease)


    Percent
Increase
(Decrease)


 
     2005

    2004

     
     (In thousands)  

REVENUES:

                              

Rental and management

   $ 929,762     $ 684,422     $ 245,340     36 %

Network development services

     15,024       22,238       (7,214 )   (32 )
    


 


 


     

Total revenues

     944,786       706,660       238,126     34  
    


 


 


     

OPERATING EXPENSES:

                              

Costs of operations (exclusive of items shown separately below)

                              

Rental and management

     247,781       195,242       52,539     27  

Network development services

     8,346       16,220       (7,874 )   (49 )

Depreciation, amortization and accretion

     411,254       329,449       81,805     25  

Selling, general, administrative and development expense (including $6,597 and $9,874 of stock-based compensation expense, respectively)

     108,059       83,094       24,965     30  

Impairments, net loss on sale of long-lived assets, restructuring and merger related expense (including $9,333 and $876 of stock-based compensation expense, respectively)

     34,232       23,876       10,356     43  
    


 


 


     

Total operating expenses

     809,672       647,881       161,791     25  
    


 


 


     

OTHER INCOME (EXPENSE):

                              

Interest income, TV Azteca, net of interest expense $1,492 and $1,497

     14,232       14,316       (84 )   (1 )

Interest income

     4,402       4,844       (442 )   (9 )

Interest expense

     (222,419 )     (262,237 )     (39,818 )   (15 )

Loss on retirement of long-term obligations

     (67,110 )     (138,016 )     (70,906 )   (51 )

Other income (expense)

     227       (2,798 )     (3,025 )   (108 )

Income tax (provision) benefit

     (5,714 )     83,338       (89,052 )   (107 )

Minority interest in net earnings of subsidiaries

     (575 )     (2,366 )     (1,791 )   (76 )

Loss on equity method investments

     (2,078 )     (2,915 )     (837 )   (29 )

Loss from discontinued operations, net

     (1,913 )     (8,409 )     (6,496 )   (77 )

Cumulative effect of change in accounting principle, net

     (35,525 )             35,525     N/A  
    


 


 


     

Net loss

   $ (181,359 )   $ (255,464 )   $ (74,105 )   (29 )%
    


 


 


     

 

Total Revenues

 

Total revenues for the year ended December 31, 2005 were $944.8 million, an increase of $238.1 million from the year ended December 31, 2004. Approximately $171.2 million of the increase was attributable to revenues generated by SpectraSite. The balance of the increase resulted from an increase in other rental and management revenue of $74.1 million, partially offset by a decrease in network development services revenue of $7.2 million.

 

Rental and Management Revenue

 

Rental and management revenue for the year ended December 31, 2005 was $929.8 million, an increase of $245.3 million from the year ended December 31, 2004. Approximately $171.2 million of the increase was attributable to revenues generated by SpectraSite. Approximately $63.3 million of the increase resulted from

 

34


Table of Contents

incremental revenue generated by communications sites that existed during the entire period between January 1, 2004 and December 31, 2005, which reflects revenue increases from adding new tenants to those sites, existing tenants adding more equipment to those sites, contractual escalators net of straight-line accounting treatment and favorable currency exchange rates, offset by lease cancellations. Approximately $10.8 million of the increase resulted from revenue generated by the approximately 560 communications sites acquired and/or constructed subsequent to January 1, 2004, other than in connection with the SpectraSite merger.

 

Network Development Services Revenue

 

Network development services revenue for the year ended December 31, 2005 was $15.0 million, a decrease of $7.2 million from year ended December 31, 2004. The decrease in revenue was attributable to a decline in revenues generated by our site acquisition, zoning and permitting services, primarily as a result of our strategic focus on our core site leasing business. This decrease was partially offset by an increase in revenues generated by our structural analysis services, as a result of the increased business associated with our significantly larger site portfolio following our merger with SpectraSite, Inc.

 

Total Operating Expenses

 

Total operating expenses for the year ended December 31, 2005 were $809.7 million, an increase of $161.8 million from the year ended December 31, 2004. The increase was attributable to an increase in depreciation, amortization and accretion expense of $81.8 million, an increase in expenses within our rental and management segment of $52.5 million, an increase in selling, general, administrative and development expense of $25.0 million, and an increase in impairments, net loss on sale of long-lived assets, restructuring and merger related expense of $10.4 million. These increases were offset by a decrease in expenses within our network development services segment of $7.9 million.

 

Rental and Management Expense/Segment Operating Profit

 

Rental and management expense for the year ended December 31, 2005 was $247.8 million, an increase of $52.5 million from the year ended December 31, 2004. Approximately $53.1 million of the increase was attributable to expenses incurred by SpectraSite. Excluding the impact of expenses incurred by SpectraSite, rental and management expense did not change materially as compared to the year ended December 31, 2004.

 

Rental and management segment operating profit for the year ended December 31, 2005 was $696.2 million, an increase of $192.7 million from the year ended December 31, 2004. Approximately $118.1 million of the increase was attributable to rental and management segment operating profit generated by SpectraSite. The balance of the increase resulted primarily from additional revenue from adding tenants to communications sites that existed as of January 1, 2004 and revenue generated on the approximately 560 communications sites acquired and/or constructed subsequent to January 1, 2004 other than in connection with the SpectraSite merger, and the impact of favorable currency exchange rates.

 

Network Development Services Expense

 

Network development services expense for the year ended December 31, 2005 was $8.4 million, a decrease of $7.9 million from the year ended December 31, 2004. The majority of the decrease correlates directly to the decline in services performed as noted above.

 

Depreciation, Amortization and Accretion

 

Depreciation, amortization and accretion expense for the year ended December 31, 2005 was $411.3 million, an increase of $81.8 million from the year ended December 31, 2004. The increase was attributable to approximately $78.0 million of depreciation, amortization and accretion expense related to long-lived assets acquired in connection with the SpectraSite merger and approximately $3.8 million related to other newly acquired or constructed towers and other long-lived assets.

 

35


Table of Contents

Selling, General, Administrative and Development Expense

 

Selling, general, administrative and development expense for the year ended December 31, 2005 was $108.1 million, an increase of $25.0 million from the year ended December 31, 2004. Approximately $18.6 million of the increase was attributable to general and administrative expense incurred by SpectraSite. The balance of the increase was primarily attributable to employee bonuses, including amounts paid in connection with the closing of the SpectraSite merger, offset by a decrease of $3.3 million in stock-based compensation expense, which aggregated $6.6 million and $9.9 million for the years ended December 31, 2005 and 2004, respectively.

 

Impairments, Net Loss on Sale of Long-lived Assets, Restructuring and Merger Related Expense

 

Impairments, net loss on sale of long-lived assets, restructuring and merger related expense for the year ended December 31, 2005 was $34.2 million, an increase of $10.4 million from the year ended December 31, 2004. The increase was due primarily to merger related expense of $9.0 million incurred in connection with the SpectraSite merger, including employee separation costs of $3.1 million, amortization of unearned compensation relating to unvested stock options assumed of $2.4 million and other employee stock option charges of $3.5 million. Restructuring expense and stock-based compensation expense also increased by $4.6 million related to modified option awards, which was partially offset by a decline of $3.2 million in impairments and net losses on sales of long-lived non-core assets.

 

Interest Expense

 

Interest expense for the year ended December 31, 2005 was $222.4 million, a decrease of $39.8 million from the year ended December 31, 2004. The decrease resulted primarily as a result of the redemption of all of our outstanding 9 3/8% Notes, repurchases of our ATI 12.25% Notes, conversions of our 3.25% Notes and the refinancing of the American Tower credit facility at lower interest rates. This decrease was partially offset by a full year of interest payable on our 7.50% Notes, 3.00% convertible notes due August 15, 2012 (3.00% Notes) and 7.125% Notes issued in February, August and September of 2004, respectively, and approximately $15.2 million of interest expense incurred on the debt assumed in the SpectraSite merger.

 

Loss on Retirement of Long-Term Obligations

 

During the year ended December 31, 2005, we redeemed $274.9 million principal amount of our 9 3/8% Notes, repurchased $177.8 million accreted value of our ATI 12.25% Notes and converted $57.1 million principal amount of our 3.25% Notes. In addition, we refinanced the American Tower and SpectraSite credit facilities. As a result of these transactions, we recorded a $67.1 million charge primarily related to the write-off of deferred financing fees and amounts paid in excess of the carrying value. For more information regarding our financing activities, see “—Liquidity and Capital Resources—Refinancing Activities and Repurchases of Debt” below.

 

During the year ended December 31, 2004, we redeemed all of our outstanding 6.25% convertible notes, redeemed and repurchased portions of our outstanding 9 3/8% Notes, ATI 12.25% Notes and 5.0% Notes, and refinanced of our credit facility. As a result of these transactions, we recorded a $138.0 million charge related to the write-off of deferred financing fees and amounts paid in excess of the carrying value.

 

Other Income

 

Other income for the year ended December 31, 2005 was $0.2 million, a decrease of $3.0 million from other expense of $2.8 million for the year ended December 31, 2004. The decrease was primarily attributable to approximately $2.9 million of other income generated on interest rate swap agreements assumed in the SpectraSite merger.

 

Income Tax (Provision) Benefit

 

The income tax provision for the year ended December 31, 2005 was $5.7 million, as compared to an $83.3 million tax benefit for the year ended December 31, 2004, representing a decrease of $89.1 million from

 

36


Table of Contents

the prior year period. The effective tax rate was 4.2% for the year ended December 31, 2005, as compared to 25.6% for the year ended December 31, 2004. The provision for the year ended December 31, 2005 reflects a $29.5 million charge as a result of a reduction in management’s estimate of the net realizable value of our federal income tax refund claims based upon the current status of the claims, as described below.

 

The effective tax rate on loss from continuing operations for the year ended December 31, 2005 differs from the federal statutory rate due primarily to adjustments to our refund claims and foreign items. 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.

 

Minority Interest in Net Earnings of Subsidiaries

 

Minority interest in net earnings of subsidiaries for the year ended December 31, 2005 was $0.6 million, a decrease of $1.8 million from the year ended December 31, 2004. The decrease is primarily a result of the Company’s purchase during 2004 of the remaining 12.0% interest in ATC Mexico that it did not own.

 

Loss from Discontinued Operations, Net

 

Loss from discontinued operations, net for the year ended December 31, 2005 was $1.9 million, as compared to $8.4 million for the year ended December 31, 2004. The loss from discontinued operations for the year ended December 31, 2005 primarily represents the legal costs incurred in connection with our involvement in the Verestar bankruptcy proceedings. The loss from discontinued operations for the year ended December 31, 2004 includes $7.8 million related to the results of operations through the date of sale of our tower construction services unit and Kline, as well as 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.

 

Cumulative Effect of Change in Accounting Principle, Net

 

As of December 31, 2005, we adopted the provisions of Financial Accounting Standards Board Interpretation No. 47 “Accounting for Conditional Asset Retirement Obligations” (FIN No. 47). As a result, we recognized a $35.5 million charge (net of an $11.7 million tax benefit) as a cumulative effect of a change in accounting principle in the consolidated statement of operations for the year ended December 31, 2005. The adoption of FIN No. 47 primarily resulted in the acceleration of settlement date assumptions regarding our asset retirement obligations, as FIN No. 47 precludes us from considering non contractual lease renewal periods in determining our settlement date assumptions. The acceleration of our settlement date assumptions also resulted in an increase to the tower assets included in property and equipment, net of $66.9 million and an increase in the asset retirement obligations included in other long-term obligations of $114.0 million.

 

Stock Option Review and Related Matters

 

During the year ended December 31, 2006, we conducted a review of our stock option granting practices and related accounting. In May 2006, we reported that our Board of Directors had established a special committee of independent directors to conduct a review of our stock option granting practices and related accounting with the assistance of independent legal counsel and forensic auditors. In November 2006, the special committee reported to the Board of Directors regarding its findings, including that, for certain stock option grants, the legal grant dates when all necessary corporate action had been taken differed from the dates previously recorded for financial accounting and tax purposes. As a result of the special committee’s findings, we restated our historical financial statements to, among other things, record charges for stock-based compensation expense related to certain option grants and to account for the tax-related consequences. In November 2006, we filed an Amendment No. 1 to our annual report on Form 10-K/A for the year ended December 31, 2005, an

 

37


Table of Contents

Amendment No. 1 to our quarterly report on Form 10-Q/A for the quarter ended March 31, 2006, and quarterly reports on Form 10-Q for the quarters ended June 30, 2006 and September 30, 2006 to reflect the impact of the restatement on our historical financial statements. In addition, in February 2007, in response to additional SEC guidance, we filed an Amendment No. 2 to our annual report on Form 10-K/A for the year ended December 31, 2005.

 

In connection with its review of our stock option granting practices, the special committee recommended a remediation plan to the Board of Directors to address the issues raised by its findings. In December 2006, we reported that the Board of Directors approved the remediation plan, which included, among other things, the elimination of any excess benefit received by our current officers and members of the Board of Directors from options having been granted to them with exercise prices below the fair market value of our Class A common stock on the legal grant date, as determined by the special committee. For outstanding options, this was accomplished by amending each option to increase the exercise price to the fair market value on the legal grant date, without any compensation to the optionholder. In December 2006, eight of our senior officers and Directors amended the exercise prices of options to purchase an aggregate of 985,511 shares, thereby eliminating an aggregate excess benefit of approximately $6.5 million. For options that had been exercised, this was accomplished by compensating the Company for the amount of the excess benefit received upon exercise, after reduction for any taxes paid by the individual. In January 2007, five of the Company’s senior officers surrendered vested in-the-money options to purchase an aggregate of 23,269 shares, thereby surrendering an aggregate excess benefit of approximately $0.6 million (net of approximately $0.4 million in taxes paid by such individuals). In addition, we took similar steps to eliminate any excess benefit received by certain former officers from the grant to them of options with exercise prices below fair market value. In December 2006 and January 2007, two former officers amended the exercise prices of options to purchase an aggregate of 423,333 shares, thereby eliminating an aggregate excess benefit of approximately $1.0 million, and surrendered vested in-the-money options to purchase an aggregate of 3,028 shares, thereby surrendering an aggregate excess benefit of approximately $0.1 million (net of taxes paid by such individuals).

 

As a result of the review of our stock option granting practices, we determined that a number of stock options were granted with exercise prices below the quoted market price of our Class A common stock on the date of grant. Under Section 409A of the Internal Revenue Code (Section 409A), part of recently enacted tax legislation, options that were granted with exercise prices below the quoted market price of the underlying stock on the date of grant and that vest after December 31, 2004 will likely be subject to unfavorable tax consequences that did not apply at the time of grant. In order to compensate our non-executive employees who previously exercised affected options and already incurred taxes and penalties under Section 409A, we made cash payments on behalf of such individuals for these taxes in January 2007 for an aggregate of approximately $0.8 million. In order to remedy the unfavorable personal tax consequences of Section 409A on holders of outstanding options, we conducted a tender offer in December 2006 for the affected options, pursuant to which we offered to amend the affected options to increase the option exercise price to the quoted market price on the revised grant date, and to give the option holders (excluding officers and Directors) a cash payment for the difference in option exercise price between the amended option and the original price. Following completion of the tender offer, in January 2007, we paid an aggregate of approximately $3.9 million in cash to holders of options that were amended in the tender offer.

 

As discussed above in Item 3 of this annual report under the caption “Legal Proceedings,” we have received a letter of informal inquiry from the SEC, a subpoena from the office of the United States Attorney for the Eastern District of New York and an information document request from the IRS, each requesting documents and information related to our stock option granting practices. In addition, we and certain of our current and former officers and directors are defendants in lawsuits related to our stock option granting practices. In connection with the review of our stock option granting practices, the restatement of our historical financial statements and the related legal and governmental proceedings, we have incurred significant legal, accounting and auditing expenses, and we expect that significant legal expenditures will continue to be incurred in the future.

 

38


Table of Contents

Liquidity and Capital Resources

 

Overview

 

During the years ended December 31, 2006 and 2005, we improved our financial position by refinancing and repurchasing a portion of our outstanding indebtedness, which increased our flexibility and our ability to return value to our stockholders. Our significant 2006 transactions included the following:

 

   

The redemption, conversion or repurchase of approximately $371.1 million face amount of our outstanding debt securities using cash on hand and borrowings under our credit facilities and with respect to conversions of convertible notes, shares of our Class A common stock.

 

   

The repurchase of approximately 10.1 million shares of Class A common stock for an aggregate of $321.8 million under our stock repurchase program. As of December 31, 2006, we had repurchased approximately 12.9 million shares of Class A common stock for an aggregate of $398.4 million under this program.

 

As of December 31, 2006, we had total outstanding indebtedness of approximately $3.5 billion. Prior to 2002, we incurred indebtedness to fund the acquisition of tower sites and construction of new tower sites, and to fund acquisitions of businesses related to our services and satellite segments. Beginning in 2002, we significantly reduced our acquisitions and new tower construction activities, and began to focus on reducing our overall indebtedness. Since then, we have sold businesses and assets that did not provide incremental value to our site leasing business, and we have taken steps to refinance our indebtedness, extend maturity dates, lower our cost of debt and improve our financial flexibility. In addition, since 2004, we have used cash flow from operations to redeem and repurchase outstanding debt.

 

In 2006, we generated sufficient cash flow from operations to fund our capital expenditures and cash interest obligations. We believe our cash generated by operations for the year ending December 31, 2007 also will be sufficient to fund our capital expenditures and our cash debt service (interest and principal repayments) obligations for 2007. For information about our outstanding indebtedness, see “—Contractual Obligations” below.

 

Our debt service obligations as of December 31, 2006 are set forth under “—Uses of Cash—Contractual Obligations” below, which reflects an aggregate of $446.2 million of cash payments to be made in 2007. This amount includes $252.2 million related to the repurchase obligations for our 5.0% Notes, due to the noteholders’ rights to require us to purchase their notes on February 20, 2007. In February 2007, we conducted a tender offer for our outstanding 5.0% Notes, pursuant to which we repurchased an aggregate of $192.5 principal amount of notes for an aggregate of $192.6 million. Upon completion of this tender offer, $59.7 million principal amount of our 5.0% Notes remained outstanding. Accordingly, giving effect to the completion of the tender offer, our remaining debt service obligations for 2007 aggregate $194.0 million.

 

In 2007, we expect to fund capital expenditures of between $130.0 and $150.0 million, principally related to new tower construction, improvements to existing towers and installation of new in-building systems. In addition, we expect to continue to fund our current $750 million stock repurchase program, which is expected to be completed by the end of February 2007, as well as our new stock repurchase program, pursuant to which we intend to purchase up to an additional $1.5 billion of our Class A common stock through February 2008. We also may fund additional purchases of our Class A common stock, either pursuant to, or supplemental to, our stock repurchase program. We expect to meet these cash needs through a combination of cash on hand, cash generated by operations, borrowings under our credit facilities and future financing transactions.

 

During 2007, we expect that we will raise additional capital to fund stock repurchases, repurchase existing debt and for other general corporate purposes. As set forth below under “—Sources of Cash—Credit Facilities,” in February 2007, we secured an additional $550.0 million of revolving loan commitments under our credit facilities. During the first half of 2007, we also anticipate raising additional capital through a securitization of the majority of the towers in our SpectraSite portfolio.

 

39


Table of Contents

Uses of Cash

 

Stock Repurchase Program. In November 2005, we announced that our Board of Directors had approved a stock repurchase program for the repurchase of up to $750.0 million of our Class A common stock through December 2006. On May 23, 2006, we announced that we were temporarily suspending repurchases under the stock repurchase program in light of the uncertainty surrounding the pending review of our stock option granting practices and the related governmental proceedings. On December 20, 2006, we announced that we were resuming repurchases of our Class A common stock. During the year ended December 31, 2006, we repurchased 10.1 million shares of our Class A common stock for an aggregate of $321.8 million. As of December 31, 2006, we had repurchased an aggregate of 12.9 million shares of our Class A common stock for an aggregate of $398.4 million pursuant to our stock repurchase program. Between January 1, 2007 and February 20, 2007, we repurchased an additional 7.2 million shares of our Class A common stock for an aggregate of $287.1 million pursuant to our stock repurchase program.

 

In February 2007, our Board of Directors approved a new stock repurchase program pursuant to which we intend to repurchase up to $1.5 billion of our Class A common stock through February 2008. We expect to utilize cash on hand, cash from operations, borrowings under our credit facilities, and borrowings from potential future financings to fund the repurchase program. Under the program, our management is authorized to purchase shares from time to time in open market purchases or privately negotiated transactions at prevailing prices as permitted by securities laws and other legal requirements, and subject to market conditions and other factors. To facilitate repurchases, we plan to make purchases pursuant to a trading plan under Rule 10b5-1 of the Exchange Act, which allows us to repurchase shares during periods when we otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods.

 

Tower Maintenance and Improvements, Tower Construction and In-Building System Installation, and Tower and Land Acquisition. During the year ended December 31, 2006, payments for purchases of property and equipment and construction activities totaled $127.1 million, including $60.5 million of capital expenditures related to the maintenance, improvement and augmentation of our existing communication sites, $44.9 million spent in connection with the construction of 213 towers and the installation of 22 in-building systems, $12.3 million spent to acquire land under our towers that was subject to ground leases, and $9.4 million spent on non-site specific capital expenditures. In addition, during the year ended December 31, 2006, we spent $14.3 million to acquire 84 towers and 6 in-building systems. We plan to continue to allocate our available capital among investment alternatives that meet our return criteria. Accordingly, we may continue to acquire communications sites, acquire land under our towers, build or install new communications sites and redevelop or improve existing communications sites when the expected returns on such investments meet our investment criteria. We anticipate that in 2007 we will build approximately 200 new towers and install approximately 25 new in-building systems. We expect that our 2007 capital expenditures will be between approximately $130.0 million and $150.0 million, including approximately $30.0 million for land purchases.

 

Refinancing and Repurchases of Debt. In order to extend the maturity dates of our indebtedness, lower our cost of debt and improve our financial flexibility, we use our available liquidity to refinance and repurchase our outstanding indebtedness. During the year ended December 31, 2006, we redeemed, converted or repurchased approximately $371.1 million face amount of our outstanding debt securities using cash on hand and borrowings under our credit facilities and with respect to conversions of convertible notes, shares of our Class A common stock. These refinancing and repurchase activities included the redemption of $227.7 million face amount ($162.1 million accreted value, net of $7.0 million fair value allocated to warrants) of the ATI 12.25% Notes, the conversion of $45.0 million principal amount of our 3.25% Notes, the repurchase of $23.5 million principal amount of our 5.0% Notes and the repurchase of $74.9 million principal amount of the ATI 7.25% Notes. In February 2007, we conducted a cash tender offer for our outstanding 5.0% Notes, pursuant to which we repurchased an aggregate of $192.5 million principal amount of notes for an aggregate of $192.6 million. For more information about our financing activities, see “—Refinancing Activities and Repurchases of Debt” below.

 

ATC South America. During the year ended December 31, 2006, we used cash from operations to fund the repurchase of the remaining 9.3% minority interest in ATC South America not owned by us. In April 2006, we

 

40


Table of Contents

paid a total of $22.9 million in connection with the repurchase of these interests from stockholders of ATC South America, including J. Michael Gearon, Jr. and William H. Hess, executive officers of the Company. Giving effect to these repurchases, we now own 100% of ATC South America (see note 11 to our consolidated financial statements included in this annual report).

 

Expenses Related to Stock Option Review and Related Matters. In connection with the review of our stock option granting practices, the restatement of our historical financial statements and the related legal and governmental proceedings, we have incurred significant legal, accounting and auditing expenses, and we expect that significant legal expenditures will continue to be incurred in the future. For more information regarding the review of our stock option granting practices and the related proceedings, please see “—Stock Option Review and Related Matters” above and note 9 to our consolidated financial statements included in this annual report. During the year ended December 31, 2006, we incurred approximately $16.2 million in costs associated with the review of our stock option granting practices, the related legal and governmental proceedings, and other related costs. In addition, depending on the outcomes of these proceedings, we could be subject to regulatory fines, penalties or other liability.

 

We also incurred costs associated with the tender offer for stock options that were determined to have been granted with exercise prices below the quoted market price of our Class A common stock on the date of grant. As discussed above in “—Stock Option Review and Related Matters”, we conducted a tender offer in December 2006 and in January 2007, we paid an aggregate of approximately $3.9 million in cash to holders of options that were amended in the tender offer.

 

Contractual Obligations. Our contractual obligations relate primarily to borrowings under the credit facilities and our outstanding notes. The following table sets forth information relating to our contractual obligations payable in cash as of December 31, 2006 (in thousands):

 

    Payments Due by Period

Contractual Obligations


  2007

  2008

  2009

  2010

  2011

  Thereafter

  Total

American Tower credit facility(1)

                                         

Revolving credit facility

                                         

Term Loan A

                    $ 750,000               $ 750,000

Delayed Draw Term Loan

                      250,000                 250,000

SpectraSite credit facility(1)

                                         

Revolving credit facility

                                         

Term Loan A

                      700,000                 700,000

Delayed Draw Term Loan

                      25,000                 25,000

7.25% senior subordinated notes

                          $ 325,075           325,075

7.50% senior notes

                                $ 225,000     225,000

7.125% senior notes

                                  500,000     500,000

5.0% convertible notes(2)

  $ 252,188                                   252,188

3.25% convertible notes

                      107,869                 107,869

3.00% convertible notes

                                  344,999     344,999

2.25% convertible notes

    40                                   40
   

 

 

 

 

 

 

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

  $ 252,228               $ 1,832,869   $ 325,075   $ 1,069,999   $ 3,480,171
   

 

 

 

 

 

 

Cash interest expense(1)

    189,000     187,000     187,000     172,000     85,000     41,000     861,000

Capital lease payments (including interest) and other notes payable

    4,965     4,507     3,880     3,788     16,802     195,880     229,822
   

 

 

 

 

 

 

Total debt service obligations

  $ 446,193   $ 191,507   $ 190,880   $ 2,008,657   $ 426,877   $ 1,306,879   $ 4,570,993
   

 

 

 

 

 

 

Operating lease payments(3)

    208,257     202,212     199,286     192,487     184,406     2,529,484     3,516,132

Other long-term liabilities(4)

    155     1,852     167     176     253     178,254     180,857
   

 

 

 

 

 

 

Total

  $ 654,605   $ 395,571   $ 390,333   $ 2,201,320   $ 611,536   $ 4,014,617   $ 8,267,982
   

 

 

 

 

 

 

 

41


Table of Contents

(1) For more information regarding the American Tower and SpectraSite credit facilities, see “—Sources of Cash” below. Interest rates for the revolving loan and the term loan components of each of the credit facilities are determined at the option of the borrowers under the facility and range between 0.50% and 1.25% above the applicable London Interbank Offering Rate (LIBOR) for LIBOR based borrowings or between 0.0% and 0.25% above the defined base rate for base rate borrowings, in each case based on the applicable borrowers’ debt ratings. A quarterly commitment fee on the undrawn portion of each credit facility is required, ranging from 0.10% to 0.375% per annum, based on the applicable borrowers’ debt ratings. As discussed in Item 7A. “Quantitative and Qualitative Disclosures About Market Risk,” we have entered into swap agreements to manage exposure to variable rate interest obligations under the credit facilities. As a result of these swap agreements, the effective weighted average interest rate in effect at December 31, 2006 for the credit facilities was 5.30%. For projections of our cash interest expense related to the credit facilities, we have assumed the LIBOR rate before the margin, as defined in our credit facilities agreements, is 5.37% through their maturity on October 27, 2010.

 

(2) 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. In February 2007, we conducted a cash tender offer for our outstanding 5.0% Notes, pursuant to which we repurchased $192.5 million principal amount of notes for an aggregate of $192.6 million.

 

(3) 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.

 

(4) Primarily represents our asset retirement obligations and excludes certain other long-term liabilities included in our consolidated balance sheet, primarily our straight-line 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, 2006, as we cannot currently estimate the timing and amounts of such payments. (See note 9 to our consolidated financial statements included herein.)

 

Off-Balance Sheet Arrangements. We have no material off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

 

Sources of Cash

 

American Tower Corporation is a holding company, and our cash flows are derived primarily from distributions from our operating subsidiaries. Our principal United States operating subsidiaries are ATI and SpectraSite. Our principal international operating subsidiary is American Tower International, Inc. Under the American Tower credit facility and the indentures for our senior notes and the ATI notes, ATI and American Tower International are subject to restrictions on the amount of cash that they can distribute to us. SpectraSite is subject to restrictions on the amount of cash that it can distribute to us under the SpectraSite credit facility, but as a result of its designation as an unrestricted subsidiary, it is not subject to such restrictions under the indentures for our senior notes and the ATI notes.

 

Total Liquidity at December 31, 2006. As of December 31, 2006, we had approximately $808.9 million of total liquidity, comprised of approximately $281.3 million in cash and cash equivalents and the ability to borrow approximately $282.2 million under the American Tower credit facility and approximately $245.4 million under the SpectraSite credit facility. In February 2007, we entered into two incremental revolving loan commitments under our credit facilities, consisting of a $300.0 million revolving loan under the American Tower credit facility and a $250.0 million revolving loan under the SpectraSite credit facility, both of which remained undrawn at closing. In addition, in February 2007, we drew down $250.0 million of the existing revolving loans under the American Tower credit facility to fund the cash tender offer for our 5.0% Notes. As of February 22, 2007, our available liquidity under the American Tower credit facility was approximately $331.9 million and our available liquidity under the SpectraSite credit facility was approximately $495.4 million.

 

 

42


Table of Contents

Cash Generated by Operations. For the years ended December 31, 2006, 2005 and 2004, our cash provided by operating activities was $620.7 million, $397.2 million and $216.7 million, respectively. Our rental and management and network development services segments are expected to generate cash flows from operations during 2007 in excess of their cash needs for operations and expenditures for tower construction, improvements and acquisitions. (See “—Results of Operations” above.) We expect to use the excess cash generated by operations principally to service our debt and to fund capital expenditures and repurchases of our Class A common stock.

 

Credit Facilities. In October 2005, we refinanced the two existing credit facilities of our principal operating subsidiaries. We replaced the existing American Tower $1.1 billion senior secured credit facility with a new $1.3 billion senior secured credit facility and replaced the existing SpectraSite $900.0 million senior secured credit facility with a new $1.15 billion senior secured credit facility. For more information regarding our credit facilities, please see note 7 to our consolidated financial statements included in this annual report.

 

During the year ended December 31, 2006, we drew down $207.0 million of the Delayed Draw Term Loan component of the American Tower credit facility to finance debt redemptions and repurchases. As of December 31, 2006, the American Tower credit facility consists of a $300.0 million revolving credit facility (against which approximately $17.8 million of undrawn letters of credit are outstanding at December 31, 2006), maturing on October 27, 2010; a $750.0 million Term Loan A, which is fully drawn, maturing on October 27, 2010; and a $250.0 million Delayed Draw Term Loan, which is fully drawn, maturing on October 27, 2010.

 

During the year ended December 31, 2006, we drew down $25.0 million of the Delayed Draw Term Loan component of the SpectraSite credit facility to finance debt redemptions and repurchases. In addition, on October 27, 2006, the remaining $175.0 million undrawn portion of the Delayed Draw Term Loan component of the SpectraSite credit facility was canceled pursuant to its terms. As of December 31, 2006, the SpectraSite credit facility consists of a $250.0 million revolving credit facility (against which approximately $4.6 million of undrawn letters of credit were outstanding at December 31, 2006), maturing on October 27, 2010; a $700.0 million Term Loan A, which is fully drawn, maturing on October 27, 2010; and a $25.0 million Delayed Draw Term Loan, which is fully drawn.

 

In February 2007, we entered into two incremental revolving loan commitments under our credit facilities, consisting of a $300.0 million revolving loan under the American Tower credit facility and a $250.0 million revolving loan under the SpectraSite credit facility. These revolving loans have terms that are consistent with those of the American Tower credit facility and the SpectraSite credit facility, and they mature on October 27, 2010. All amounts will be due and payable in full at maturity. The credit facilities and the new revolving loans do not require amortization of payments and may be paid prior to maturity in whole or in part at the borrowers’ option without penalty or premium.

 

The borrowers under the American Tower credit facility include American Tower L.P., ATI, American Tower International and American Tower LLC. We and the borrowers’ restricted subsidiaries (as defined in the loan agreement) have guaranteed all of the loans under the credit facility. These loans are secured by liens on and security interests in substantially all assets of the borrowers and the restricted subsidiaries. Following the closing of the new incremental revolving loan commitments, the American Tower credit facility consists of a $300.0 million revolving credit facility, a $300.0 million incremental revolving credit facility, a $750.0 million Term Loan A and a $250.0 million Delayed Draw Term Loan.

 

The borrower under the SpectraSite credit facility is SpectraSite Communications. SpectraSite Communications, its parent company (SpectraSite LLC), and its restricted subsidiaries (as defined in the loan agreement) have guaranteed all of the loans under the credit facility. These loans are secured by liens on and security interests in substantially all assets of the borrower and the restricted subsidiaries. Following the closing of the new incremental revolving loan commitments, the SpectraSite credit facility consists of a $250.0 million revolving credit facility, a $250.0 incremental revolving credit facility, a $700.0 million Term Loan A and a $25.0 million Delayed Draw Term Loan.

 

43


Table of Contents

Proceeds from the Sale of Equity Securities. We receive proceeds from sales of our equity securities pursuant to our stock option and stock purchase plans and upon exercise of warrants to purchase our equity securities. For the year ended December 31, 2006, we received approximately $0.3 million in proceeds from exercises of warrants to purchase shares of our Class A common stock and an aggregate of approximately $40.6 million in proceeds from exercises of options to purchase shares of our Class A common stock pursuant to our stock option plans and sales of shares pursuant to our employee stock purchase plan.

 

Proceeds from the Sale of Assets. During the year ended December 31, 2006, we received $35.4 million in aggregate net proceeds related to sales of non-core assets, including $30.5 million from sales of tower assets and buildings and $4.9 million from sales of investments.

 

Refinancing Activities and Repurchases of Debt

 

3.25% Convertible Notes Conversions. During the year ended December 31, 2006, we issued an aggregate of 3,684,794 shares of Class A common stock upon conversion of approximately $45.0 million principal amount of 3.25% Notes. Pursuant to the terms of the indenture, the holders of the 3.25% Notes are entitled to receive 81.808 shares of Class A common stock for every $1,000 principal amount of notes converted. In connection with the conversion, we paid such holders an aggregate of approximately $3.3 million, calculated based on the accrued and unpaid interest on the notes as of the date of conversion and the discounted value of the future interest payments on the notes. As of December 31, 2006, $107.9 million principal amount of 3.25% Notes remained outstanding. In February 2007, holders of an additional $44.4 million principal amount of 3.25% Notes converted their notes. In connection with these conversions, we issued an aggregate of 3,635,220 shares of Class A common stock and we paid such holders an aggregate of approximately $2.0 million.

 

5.0% Convertible Notes Repurchases. During the year ended December 31, 2006, we repurchased in privately negotiated transactions $23.5 million of 5.0% Notes for $23.4 million in cash. As of December 31, 2006, $252.2 million principal amount of 5.0% Notes remained outstanding. In February 2007, we conducted a cash tender offer for our outstanding 5.0% Notes. Pursuant to the tender offer we repurchased an aggregate of $192.5 million principal amount of notes for an aggregate of $192.6 million. Upon completion of this tender offer, $59.7 million principal amount of our 5.0% Notes remained outstanding.

 

ATI 7.25% Notes Repurchases. During the year ended December 31, 2006, we repurchased in privately negotiated transactions $74.9 million principal amount of ATI 7.25% Notes for $77.3 million in cash. As of December 31, 2006, $325.1 million principal amount of ATI 7.25% Notes remained outstanding.

 

ATI 12.25% Notes Redemption. In December 2005, we issued a notice for the redemption on February 1, 2006 of all outstanding ATI 12.25% Notes. On February 1, 2006, we redeemed $227.7 million face amount ($162.1 million accreted value, net of $7.0 million fair value allocated to warrants) of ATI 12.25% Notes in accordance with the indenture at 106.125% of their accreted value for an aggregate of $179.5 million. We used $0.5 million in cash on hand and $179.0 million in borrowings under the Delayed Draw Term Loan component of the American Tower credit facility to fund the redemption. Upon completion of this redemption, no ATI 12.25% Notes remained outstanding.

 

Interest Rate Swap Agreements. During the year ended December 31, 2006, we entered into four interest rate swap agreements to manage exposure to variability in cash flows relating to forecasted interest payments in connection with the likely issuance of new fixed rate debt, which we expect to be issued on or before July 31, 2007. The swaps have an aggregate notional amount of $900.0 million and fixed rates ranging from 4.73% to 5.10%, and will be terminated upon issuance of new fixed rate debt. We have designated these forward starting interest rate swap agreements as cash flow hedges. We are exposed to market risk for decreases in interest rates until termination of the swap and if we fail to issue such new fixed rate debt on or before such date. As of December 31, 2006, we expect to receive the fair value of these swap agreements of approximately $3.8 million. As of December 31, 2006, we would be required to pay approximately $19.1 million in cash upon settlement of

 

44


Table of Contents

the swaps if a decline of 10%, or approximately 50 basis points, in interest rates were to occur from the fixed rate of the swaps between the issuance date and the settlement date of the swaps. In February 2007, we also entered into two similar forward starting interest rate swap agreements with an aggregate notional amount of $200.0 million and a weighted average fixed rate of 5.06%.

 

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 2006 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 increase the utilization of our existing towers.

 

Restrictions Under Credit Facilities. The American Tower and SpectraSite credit facilities contain certain financial ratios and operating covenants and other restrictions (including limitations on additional debt, distributions and dividends, guaranties, sales of assets and liens) with which the borrowers and their restricted subsidiaries must comply. Each credit facility contains the following two financial maintenance tests with which the borrowers under the applicable credit facility must comply:

 

   

a leverage ratio (Total Debt to Adjusted EBITDA) of not greater than 5.50 to 1.00 for the borrowers and their restricted subsidiaries; and

 

   

an interest coverage ratio (Adjusted EBITDA to Interest Expense) of not less than 2.50 to 1.00 for the borrowers and their restricted subsidiaries.

 

As of December 31, 2006, we were in compliance with both of the foregoing financial tests.

 

Any failure to comply with the financial and operating covenants of the American Tower credit facility or the SpectraSite credit facility would not only prevent us from being able to borrow additional funds under the revolving loans, but would constitute a default, resulting in, among other things, the amounts outstanding, including all accrued interest and unpaid fees, becoming immediately due and payable. The credit facilities allow us to use borrowings for general corporate purposes and, provided certain conditions are met, permit the use of borrowings under the credit facilities and internally generated funds to repurchase our equity securities and repurchase and refinance other indebtedness without additional lender approval.

 

Restrictions Under Notes Indentures. The indenture governing the terms of the ATI 7.25% Notes contains certain covenants which further restrict ATI, the sister guarantors (as defined) and its and their subsidiaries in addition to the restrictions set forth in the American Tower credit facility. These include restrictions on their ability to incur additional debt, guarantee debt, pay dividends and make other distributions and make certain investments. SpectraSite and its subsidiaries are unrestricted subsidiaries under the indenture for the ATI 7.25% Notes and are not subject to such restrictions. Any failure to comply with these covenants would constitute a default. Specifically, the indenture restricts ATI, the sister guarantors and its and their restricted subsidiaries from incurring additional debt or issuing certain types of preferred stock, other than debt under the American Tower credit facility, or renewals, refundings, replacements or refinancings, up to $1.6 billion.

 

The indentures governing the terms of our 7.50% Notes and 7.125% Notes also contain certain restrictive covenants with which we and the restricted subsidiaries under these indentures must comply. These include restrictions on our ability to incur additional debt, guarantee debt, pay dividends and make other distributions and make certain investments. SpectraSite and its subsidiaries are unrestricted subsidiaries under the indentures for our 7.50% Notes and 7.125% Notes and are not subject to such restrictions. Any failure to comply with these covenants would constitute a default. Specifically, these indentures restrict us from incurring additional debt or

 

45


Table of Contents

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 facilities even if we are not in compliance with this ratio, or renewals, refundings, replacements or refinancings of our credit facilities.

 

If a default occurred under any of our credit facilities or 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 facilities 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 facilities agreements 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 of December 31, 2006, our annual consolidated cash debt service obligations (principal and interest) for each of the next five years and thereafter are approximately: $446.2 million, $191.5 million, $190.9 million, $2.0 billion, $426.9 million and $1.3 billion, respectively. 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 facilities and the indenture for the ATI 7.25% 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 in Item 1A of this annual report under the caption “Risk Factors.” 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. There can be no assurance that we will be able to complete such refinancings or, if such refinancings are completed, 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. As of December 31, 2006, we had not conducted any offerings pursuant to this registration statement.

 

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, purchase price allocation, asset retirement obligations, stock-based compensation, impairment of assets and revenue recognition. Management bases its 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

 

46


Table of Contents

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 our consolidated financial statements included in this annual report, beginning on page F-7.

 

   

Income Taxes. SFAS No. 109 “Accounting For Income Taxes,” requires that companies 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.” 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, 2006, we have provided a valuation allowance of approximately $308.2 million, including approximately $153.6 million attributable to SpectraSite, primarily related to certain net operating loss and capital loss carryforwards assumed as of the acquisition date. The balance of the valuation allowance primarily relates to net state deferred tax assets. We have not provided a valuation allowance for the remaining deferred tax assets, primarily our federal net operating loss carryforwards, as we believe that we will have sufficient time to realize these federal net operating loss carryforwards during the twenty-year tax carryforward period. Valuation allowances may be reversed if related deferred tax assets are deemed realizable based on changes in facts and circumstances relevant to the assets recoverability. Approximately $148.3 million of the SpectraSite valuation allowances as of December 31, 2006 will be recorded as a reduction to goodwill if the underlying deferred tax assets are utilized.

 

We intend to recover a portion of our deferred tax asset through our federal income tax refund claims related to the carry back of certain federal net operating losses. In June 2003 and October 2003, we filed federal income tax refund claims with the IRS relating to the carry back of $380.0 million of net operating losses generated prior to 2003, of which we initially anticipated receiving approximately $90.0 million. Based on preliminary discussions with tax authorities, we revised our estimate of the net realizable value of our federal income tax refund claims during the year ended December 31, 2005, and anticipate receiving a refund of approximately $65.0 million, plus interest. We expect settlement of this matter in the first half of 2007, however, there can be no assurances with respect to the timing of any refund. Because of the uncertainty associated with the claim, we have not recognized any amounts related to interest.

 

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 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. 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, 2007 to December 31, 2026. 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.

 

From time to time, we are subject to examination by various tax authorities in jurisdictions in which we have significant business operations, and we regularly assess the likelihood of additional assessments in each of the tax jurisdictions resulting from these examinations. During the year ended December 31, 2005, we recorded a $29.5 million income tax provision to reflect a reduction in management’s estimate of the net realizable value of our pending federal tax refund claims as described above. We believe that adequate provisions have been made for income taxes for all periods through December 31, 2006.

 

Depending on the resolution of the Verestar bankruptcy proceedings described in notes 9 and 16 to our consolidated financial statements included in this annual report, we may be entitled to a worthless stock or bad debt deduction for our investment in Verestar. Prior to commencement of the

 

47


Table of Contents

bankruptcy proceedings, we had advanced over $522.0 million to fund Verestar’s operations. No income tax benefit has been provided for these potential deductions due to the uncertainty surrounding the bankruptcy proceedings.

 

   

Purchase Price Allocation. We account for our acquisitions under the purchase method of accounting in accordance with SFAS No. 141 “Business Combinations” (SFAS No. 141), which provides that purchase prices be allocated to the net assets acquired and the liabilities assumed based on their estimated fair values at the date of acquisition. In the case of tower assets acquired through the purchase of a business, such as our merger with SpectraSite, Inc., we allocate the purchase price to the assets acquired and liabilities assumed at their estimated fair values as of the date of acquisition, and the excess of the purchase price paid over the estimated fair value of net assets acquired is recorded as residual goodwill. We completed our merger with SpectraSite, Inc. in August 2005 for a total preliminary purchase price of approximately $3.1 billion, including the fair value of shares of Class A common stock issued, the fair value of options and warrants assumed and estimated transaction costs. As of December 31, 2005 we were in the process of finalizing a third-party valuation of SpectraSite’s property and equipment, intangible assets and certain other assets and liabilities. Given the size of the SpectraSite transaction, the values of certain assets and liabilities were based on preliminary valuations that were subject to adjustment as additional information on management’s estimates and assumptions were obtained and the third-party valuation was finalized.

 

We completed our third-party valuation and an analysis of the acquired tenant and ground leases in June 2006, which formed the basis for determining the cash flows used to value the customer intangible assets acquired and the estimated useful lives of the acquired assets. The final allocation of the purchase price resulted in changes to the fair values of certain assets and liabilities disclosed in our Annual Report on Form 10-K/A for the year ended December 31, 2005, as follows: a decrease of $80.0 million in total intangible assets, a decrease of $9.2 million in total tangible assets, a decrease of $33.3 million in the net deferred income tax liability, an increase of $1.4 million in other liabilities, and a corresponding increase of $54.5 million in goodwill. We accounted for the difference between the depreciation and amortization expense recorded in connection with the preliminary and final allocation of the purchase price as a change in accounting estimate under SFAS No. 154, “Accounting Changes and Error Corrections.” The impact of this change in estimate was accounted for prospectively and was not material to our consolidated financial statements for the year ended December 31, 2006, nor will it be material to future periods.

 

   

Asset Retirement Obligations. We comply with the provisions of SFAS No. 143, “Accounting for Asset Retirement Obligations” (SFAS No. 143) and the provisions of FIN No. 47. Both pronouncements address the financial accounting and reporting requirements for conditional obligations associated with our legal obligation to retire tangible long-lived assets and the related asset retirement costs, principally obligations to remediate leased land on which certain of our tower assets are located. Under these accounting principles, we recognize asset retirement obligations in the period in which they are incurred, if a reasonable estimate of a fair value can be made, and we accrete such liability through the obligation’s estimated settlement date. The associated retirement costs are capitalized as part of the carrying amount of the related tower fixed assets and depreciated over their estimated useful life.

 

As of December 31, 2006 and 2005, we updated our assumptions used in estimating the Company’s aggregate asset retirement obligation which resulted in a net (decrease) increase in the estimated obligation of $(0.7) million and $2.6 million, respectively. As of December 31, 2005, we also adopted the provisions of FIN No. 47 and recognized a $35.5 million charge (net of an $11.7 million tax benefit) as a cumulative effect of a change in accounting principle in the consolidated statement of operations for the year ended December 31, 2005. This adoption also increased our aggregate asset retirement obligation by approximately $114.0 million to $162.4 million as of December 31, 2005 and resulted in an increase to tower assets included in property and equipment, net of $66.9 million. The adoption of FIN No. 47 primarily resulted in the acceleration of our settlement date assumptions, as FIN No. 47 precludes us from considering non contractual lease renewal periods in determining our

 

48


Table of Contents

settlement date assumptions. Fair value estimates of liabilities for asset retirement obligations generally involve discounted future cash flows, and periodic accretion of such liabilities due to the passage of time is recorded as an operating expense. The significant assumptions used in estimating the Company’s aggregate asset retirement obligation are: timing of tower removals; cost of tower removals; timing and number of land lease renewals; expected inflation rates; and credit-adjusted risk-free interest rates that approximate our incremental borrowing rate. While we feel the assumptions are appropriate, there can be no assurances that actual costs and the probability of incurring obligations will not differ from these estimates. We will continue to review these assumptions periodically and we may need to adjust them as necessary.

 

   

Stock-Based Compensation. On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (SFAS No. 123R), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including stock options and employee stock purchases under employee stock purchase plans. SFAS No. 123R supersedes the Company’s previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25). Under SFAS No. 123R, we are no longer permitted to account for share-based compensation transactions using the intrinsic value method in accordance with APB No. 25 described below. Instead, we are required to account for such transactions using a fair value method and recognize the related expense associated with share-based payments in the statement of operations. We adopted SFAS No. 123R under the modified prospective method, pursuant to which compensation expense for all share-based payments granted or modified after the effective date is recognized based upon the requirements of SFAS No. 123R. Accordingly, prior period amounts have not been restated related to the adoption of SFAS No. 123R. SFAS No. 123R primarily resulted in a change in our method of measuring and recognizing the fair value of option awards and estimating forfeitures for all unvested awards. SFAS No. 123R requires companies to recognize stock-based compensation awards granted to employees as compensation expense on a fair value method. Under the fair value recognition provisions of SFAS No. 123R, stock-based compensation cost is measured at the accounting measurement date based on the fair value of the award and is recognized as expense over the service period, which generally represents the vesting period. The expense recognized over the service period is required to include an estimate of the awards that will be forfeited. Under SFAS No. 123R, the fair value of the stock option is determined using an Black-Scholes option-pricing model that takes into account the stock price at the accounting measurement date, the exercise price, the expected life of the option, the volatility of the underlying stock and its expected dividends, and the risk-free interest rate over the expected life of the option. These assumptions are highly subjective and changes in them could significantly impact the value of the option and hence the pro forma compensation expense. Under SFAS No. 123R, the fair value of the stock option is determined in the same manner as the pro forma compensation cost under SFAS No. 123 described below and adjusted for estimated forfeitures. Under APB No. 25, the Company previously recorded the impact of forfeitures as they occurred.

 

In November 2005, the FASB issued FASB Staff Position (FSP) FAS 123R-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards” (FAS 123R-3). Effective upon issuance, this FSP describes an alternative transition method for calculating the tax effects of stock-based compensation to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and the statement of cash flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS No.123R. During the year ended December 31, 2006, we elected the “Long” method, as defined in the FAS 123R-3. In addition, in accordance with SFAS No. 123R, SFAS No. 109 and EITF Topic D-32, “Intraperiod Tax Allocation of the Tax Effect of Pretax Income from Continuing Operations”, we have elected to recognize excess income tax benefits from stock option exercises in additional paid-in capital only if an incremental income tax benefit would be realized after considering all other tax attributes presently

 

49


Table of Contents

available to us. We measure the tax benefit associated with excess tax deductions related to stock-based compensation expense by multiplying the excess tax deductions by the statutory tax rates.

 

Prior to January 1, 2006, we measured compensation expense for our stock-based employee compensation plans using the intrinsic value method prescribed by APB No. 25. Under the intrinsic value method, compensation expense associated with fixed awards is the excess, if any, of the quoted market price of the stock at the accounting measurement date over the amount an employee must pay to acquire the stock. Under APB No. 25, compensation expense is measured as of the date an award has received approval by relevant authority, the number of shares and exercise price are fixed and allocation to specific individuals has occurred. Generally, this occurs on the date the grant is approved by the compensation committee of our Board of Directors, or, if grant authority has been delegated to management, when the shares are allocated to specific individuals. The stock-based compensation expense for an award is recognized over the vesting period using the ratable method, whereby an equal amount of expense is recognized for each year of vesting. The actual accounting measurement dates determined in the course of our recent review of our stock option granting practices are based on a review of supporting approval documentation and other extrinsic evidence of awards. While our financial statements for the years ended December 31, 2005 and 2004 have used the above measure, SFAS No. 123 also historically required that we present in the footnotes to our consolidated financial statements pro forma financial results as if a fair value method of accounting for an employee stock option or similar equity instrument were applied. Under SFAS No. 123, the fair value of the stock option is determined using the Black-Scholes option-pricing model that takes into account the stock price at the accounting measurement date, the exercise price, the expected life of the option, the volatility of the underlying stock and its expected dividends, and the risk-free interest rate over the expected life of the option. These assumptions are highly subjective and changes in them could significantly impact the value of the option and hence the disclosure of pro forma compensation expense.

 

During the year ended December 31, 2005, we re-evaluated the assumptions used to estimate the fair value of stock options issued to employees and related disclosure of pro forma expense. As a result, we lowered our expected volatility assumption for options granted after July 1, 2005 to approximately 30% and increased the expected life of option grants to 6.25 years using the simplified method permitted by SEC Staff Accounting Bulletin (SAB) No. 107, “Share-Based Payment” (SAB No. 107). We made this change based on a number of factors, including our execution of our strategic plans to sell non-core businesses, reduce leverage and our merger with SpectraSite. We had previously based our volatility assumptions on historical volatility since inception, which included periods when our capital structure was more highly leveraged than current levels and expected levels for the foreseeable future. Our estimate of future volatility is based on our consideration of all available information, including historical volatility, implied volatility of publicly traded options, our current capital structure and our publicly announced future business plans.

 

   

Impairment of Assets.

 

Assets Subject to Depreciation and Amortization and Non-Core Long-Lived Assets Held for Sale: We review long-lived assets, including intangibles, for impairment whenever events, changes in circumstances or our review of our tower portfolio indicate that the carrying amount of an asset may not be recoverable. Our tower portfolio review includes sites for which we have no current tenant leases. We assess recoverability by determining whether the net book value of the related assets will be recovered through projected undiscounted cash flows, or anticipated proceeds from sales of the assets. If we determine that the carrying value of an asset may not be recoverable, we will measure any impairment based on the projected future discounted cash flows to be provided from the asset or available market information relative to the asset’s fair market value as compared to its carrying value. We record any related impairment losses in the period in which we identify such impairment. We also review the carrying value of assets held for sale for impairment based on management’s best estimate

 

50


Table of Contents

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: We perform our annual goodwill impairment test on December 1 of each year and when events or circumstances indicate that the asset might be impaired. In December 2006, 2005 and 2004, we completed our annual impairment testing related to the goodwill of our rental and management segment and 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 2005 and 2006 annual impairment testing included approximately $1.6 billion of goodwill acquired in our merger with SpectraSite, Inc.

 

   

Revenue Recognition. Rental and management revenues are recognized on a monthly basis under lease or management agreements when earned, regardless of whether the payments from the customer are received in equal monthly amounts. 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 our customers are recognized on a straight-line basis over the terms of the applicable leases. Straight-line revenues for the years ended December 31, 2006, 2005 and 2004 approximated $58.3 million, $30.3 million and $24.8 million, 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 consolidated balance sheets until such time as the earnings process is complete.

 

Recent Accounting Pronouncements

 

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes, an Interpretation of SFAS No. 109” (FIN 48). This interpretation clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109 “Accounting for Income Taxes” and prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for us as of January 1, 2007, and the cumulative effect of applying the provisions of FIN 48 will be recorded as an adjustment to the opening balance of accumulated deficit. We are in the process of evaluating the impact that FIN 48 will have on our consolidated financial statements.

 

In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements” (SFAS No. 157). This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is effective for us as of January 1, 2008. We are in the process of evaluating the impact that SFAS No. 157 will have on our consolidated financial statements.

 

In September 2006, the SEC issued SAB No. 108 “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB No. 108). SAB No. 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff has indicated that registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB No. 108 is effective for companies with fiscal years ending on or after November 15, 2006. We adopted SAB No. 108 during 2006, and the impact on our consolidated financial position, results of operations or liquidity was not material.

 

51


Table of Contents

In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Liabilities—Including an amendment of FASB Statement No. 115” (SFAS No. 159). This statement provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for us as of January 1, 2008. We are in the process of evaluating the impact that SFAS No. 159 will have on our consolidated financial statements.

 

Information Presented Pursuant to the Indentures of our 7.50% Notes, 7.125% 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 7.50% Notes, 7.125% Notes and ATI 7.25% Notes (collectively, the Notes). The information contained in note 20 to our consolidated financial statements is also presented to address certain reporting requirements contained in the indenture for our ATI 7.25% Notes.

 

The indentures governing the Notes contain restrictive covenants with which we and certain subsidiaries under these indentures must comply. These include restrictions on our ability to incur additional debt, guarantee debt, pay dividends and make other distributions and make certain investments. Any failure to comply with these covenants would constitute a default, which could result in the acceleration of the principal amount and accrued and unpaid interest on all the outstanding Notes. In order for the holders of the Notes to assess our compliance with certain of these covenants, the indentures require us to disclose in the periodic reports we file with the SEC our Tower Cash Flow, Adjusted Consolidated Cash Flow and Non-Tower Cash Flow (each as defined in the indentures). Under the indentures, our ability to make certain types of restricted payments is limited by the amount of Adjusted Consolidated Cash Flow that we generate, which is determined based on our Tower Cash Flow and Non-Tower Cash Flow. In addition, the indentures for the Notes restrict us from incurring additional debt or issuing certain types of preferred stock if on a pro forma basis the issuance of such debt and preferred stock would cause our consolidated debt to be greater than 7.5 times our Adjusted Consolidated Cash Flow. As of December 31, 2006, the ratio of our consolidated debt to Adjusted Consolidated Cash Flow was approximately 4.6. For more information about the restrictions under our notes indentures, see note 7 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—Liquidity and Capital Resources—Factors Affecting Sources of Liquidity.”

 

Tower Cash Flow, Adjusted Consolidated Cash Flow and Non-Tower Cash Flow are considered non-GAAP financial measures. We are required to provide these financial metrics by the indentures for the Notes, and we have included them below because we consider the indentures for the Notes to be material agreements, the covenants related to Tower Cash Flow, Adjusted Consolidated Cash Flow and Non-Tower Cash Flow to be material terms of the indentures, and information about compliance with such covenants to be material to an investor’s understanding of our financial results and the impact of those results on our liquidity. These financial metrics do not include the results of SpectraSite or its subsidiaries because such entities are unrestricted subsidiaries under the indentures for the 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):

 

Tower Cash Flow, for the three months ended December 31, 2006

   $ 157,311  
    


Consolidated Cash Flow, for the twelve months ended December 31, 2006

   $ 591, 050  

Less: Tower Cash Flow, for the twelve months ended December 31, 2006

     (612,366 )

Plus: four times Tower Cash Flow, for the three months ended December 31, 2006

     629,244  
    


Adjusted Consolidated Cash Flow, for the twelve months ended December 31, 2006

   $ 607,928  
    


Non-Tower Cash Flow, for the twelve months ended December 31, 2006

   $ (22,614 )
    


 

52


Table of Contents

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 swaps and caps. All derivative financial instruments were entered into for purposes other than trading. During the year ended December 31, 2006, we repurchased, redeemed and converted $371.1 million face amount of outstanding debt securities for $283.5 million in cash, including the redemption of $227.7 million face amount ($162.1 million accreted value, net of $7.0 million fair value allocated to warrants) of the ATI 12.25% Notes, the conversion of $45.0 million principal amount of our 3.25% Notes, the repurchase of $23.5 million principal amount of our 5.0% Notes and the repurchase of $74.9 million principal amount of the ATI 7.25% Notes. During the year ended December 31, 2006, we also drew down an aggregate of $232.0 million under the Delayed Draw Term Loan components of our American Tower and SpectraSite credit facilities to finance debt redemptions and repurchases.

 

The following tables provide information as of December 31, 2006 and 2005 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 and swaps, the tables present notional principal amounts and weighted-average interest rates by contractual maturity dates.

 

As of December 31, 2006

Principal Payments and Interest Rate Detail by Contractual Maturity Dates

(In thousands, except percentages)

 

Long-Term Debt


  2007

    2008

    2009

    2010

    2011

    Thereafter

    Total

  Fair Value

Fixed Rate Debt(a)

  $ 253,907     $ 1,278     $ 654     $ 108,416     $ 338,501     $ 1,112,253     $ 1,815,009   $ 2,381,824

Average Interest Rate(a)

    5.02 %     8.30 %     7.08 %     3.27 %     7.21 %     5.99 %            

Variable Rate Debt(a)

                          $ 1,725,000                     $ 1,725,000   $ 1,718,531

Aggregate Notional Amounts Associated with Interest Rate Caps and Swaps in Place

As of December 31, 2006 and Interest Rate Detail by Contractual Maturity Dates

(In thousands, except percentages)

Interest Rate CAPS


  2007

    2008

    2009

    2010

    2011

    Thereafter

    Total

  Fair Value

Notional Amount

  $ 25,000 (b)                                           $ 25,000   $ 0

Cap Rate(c)

    8.00 %                                                    

Interest Rate SWAPS


  2007

    2008

    2009

    2010

    2011

    Thereafter

    Total

  Fair Value

Notional Amount

                  $ 300,000 (d)                           $ 300,000   $ 9,471

Fixed Rate(c)

                    3.88 %                                    

Notional Amount

                          $ 550,000 (e)                   $ 550,000   $ 4,356

Fixed Rate(c)

                            4.78 %                            

Notional Amount

                                          $ 900,000 (f)   $ 900,000   $ 3,752

Fixed Rate(c)

                                            4.97 %            

As of December 31, 2005

Principal Payments and Interest Rate Detail by Contractual Maturity Dates

(In thousands, except percentages)

Long-Term Debt


  2006

    2007

    2008

    2009

    2010

    Thereafter

    Total

  Fair Value

Fixed Rate Debt(a)

  $ 229,570     $ 276,967     $ 873     $ 521     $ 153,458     $ 1,525,291     $ 2,186,680   $ 2,525,886

Average Interest Rate(a)

    6.64 %     6.89 %     6.94 %     6.04 %     6.08 %     6.20 %            

Variable Rate Debt(a)

                                  $ 1,493,000             $ 1,493,000   $ 1,494,813

 

53


Table of Contents

Aggregate Notional Amounts Associated with Interest Rate Caps and Swaps in Place

As of December 31, 2005 and Interest Rate Detail by Contractual Maturity Dates

(In thousands, except percentages)

 

 

 

 

Interest Rate CAPS


   2006

    2007

    2008

   2009

    2010

    Thereafter

  Total

  Fair Value

 

Notional Amount

   $ 175,000 (g)   $ 25,000 (b)                            $ 200,000   $ 0  

Cap Rate(c)

     7.00 %     8.00 %                                       

Notional Amount

   $ 350,000 (h)                                    $ 350,000   $ 0  

Cap Rate (c)

     6.00 %                                               

Interest Rate SWAPS


   2006

    2007

    2008

   2009

    2010

    Thereafter

  Total

  Fair Value

 

Notional Amount

                        $ 300,000 (d)               $ 300,000   $ 9,679  

Fixed Rate(c)

                          3.88 %                          

Notional Amount

                                $ 450,000 (i)       $ 450,000   $ (860 )

Fixed Rate(c)

                                  4.81 %                  

(a) As of December 31, 2006, variable rate debt consists of the American Tower and SpectraSite credit facilities ($1,725.0 million) and fixed rate debt consists of: the 2.25% convertible notes due 2009 (2.25% Notes) ($0.04 million); the 7.125% Notes ($500.0 million principal amount due at maturity; the balance as of December 31, 2006 is $503.5 million); the 5.0% Notes ($252.2 million); the 3.25% Notes ($107.9 million); the 7.50% Notes ($225.0 million); the ATI 7.25% Notes ($325.1 million); the 3.00% Notes ($345.0 million principal amount due at maturity; the balance as of December 31, 2006 is $344.5 million accreted value) and other debt of $59.8 million. Interest on our 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, 2006 for our credit facilities was 5.30%. For the year ended December 31, 2006, the weighted average interest rate under our credit facilities was 5.92%.

 

     As of December 31, 2005, variable rate debt consists of the new American Tower and SpectraSite credit facilities ($1,493.0 million) that were refinanced on October 27, 2005, which are included above based on their October 27, 2010 maturity dates. As of December 31, 2005, fixed rate debt consists of: the 2.25% convertible notes due 2009 (2.25% Notes) ($0.1 million); the 7.125% Notes ($500.0 million principal amount due at maturity; the balance as of December 31, 2005 is $501.9 million); the 5.0% Notes ($275.7 million); the 3.25% Notes ($152.9 million); the 7.50% Notes ($225.0 million); the ATI 7.25% Notes ($400.0 million); the ATI 12.25% Notes ($227.7 million principal amount due at maturity; the balance as of December 31, 2005 is $160.3 million accreted value, net of the allocated fair value of the related warrants of $7.2 million); the 3.00% Notes ($345.0 million principal amount due at maturity; the balance as of December 31, 2005 is $344.4 million accreted value) and other debt of $60.4 million. Interest on our 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, 2005 for our credit facilities was 4.71%. For the year ended December 31, 2005, the weighted average interest rate under our credit facilities was 5.03%.

 

(b) Includes notional amount of $25,000 that expires in September 2007.

 

(c) Represents the weighted-average fixed rate or range of interest based on contractual notional amount as a percentage of total notional amounts in a given year.

 

(d) Includes notional amounts of $300,000 that expire in December 2009.

 

(e) Includes notional amounts of $550,000 that expire in October 2010.

 

(f) Includes notional amounts of $900,000 for forward starting swaps that expire in July 2012.

 

(g) Includes notional amount of $175,000 that expired in February 2006.

 

(h) Includes notional amounts of $250,000 and $100,000 that expired in June and July 2006, respectively.

 

(i) Includes notional amounts of $450,000 that expire in October 2010.

 

Our foreign operations include rental and management segment divisions in Mexico and Brazil. The remeasurement gains (losses) for the years ended December 31, 2006, 2005 and 2004 were $1,304,000, and $396,000 and $(146,000), respectively.

 

Changes in interest rates can cause interest charges to fluctuate on our variable rate debt. Variable rate debt under our credit facilities, after giving effect to our interest rate swap agreements (excluding $900.0 million of forward starting interest rate swaps designated as a cash flow hedge as of December 31, 2006, against a future fixed rate debt obligation), is comprised of $875.0 million and $743.0 million as of December 31, 2006 and 2005, respectively. A 10% increase, or approximately 53 and 47 basis point increase in interest rates for the years

 

54


Table of Contents

ended December 31, 2006 and 2005, respectively, would have caused an additional pre-tax charge in our net income (loss) and an increase in our cash outflows of $4.6 million and $3.5 million for the years ended December 31, 2006 and 2005, respectively.

 

As of December 31, 2006, we maintain four interest rate swap agreements to manage exposure to variability in cash flows relating to forecasted interest payments in connection with the likely issuance of new fixed rate debt, which we expect to be issued on or before July 31, 2007. The swaps have an aggregate notional amount of $900.0 million and a weighted average fixed rate of approximately 4.97%, and will be terminated upon issuance of new fixed rate debt. We are exposed to market risk for decreases in interest rates until termination of the swaps and if we fail to issue such new fixed rate debt on or before such date. As of December 31, 2006, we expected to receive the fair value of these swap agreements of approximately $3.8 million. As of December 31, 2006, we would be required to pay approximately $19.1 million in cash upon settlement of the swaps if a 10% decline, or approximately 50 basis points, in interest rates were to occur from the fixed rate of the swaps between the issuance date and the settlement date of the swaps. In February 2007, we also entered into two similar forward starting interest rate swap agreements with an aggregate notional amount of $200.0 million and a weighted average fixed rate of 5.06%.

 

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 Exchange Act) 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 were effective.

 

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 Exchange Act. 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, 2006. In making its assessment of internal control over financial reporting, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework. Based on this assessment, management concluded that, as of December 31, 2006, our internal control over financial reporting is effective.

 

55


Table of Contents

Deloitte & Touche LLP, an independent registered public accounting firm that audited our financial statements included in this annual report, has issued an attestation report on management’s assessment of our internal control over financial reporting. Such attestation, which expresses unqualified opinions on management’s assessment and on the effectiveness of our internal control over financial reporting as of December 31, 2006, is included in this Item 9A under the caption “Report of Independent Registered Public Accounting Firm.”

 

Changes in Internal Control 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 Exchange Act, identified in connection with the evaluation of our internal control that occurred during the fiscal quarter ended December 31, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

56


Table of Contents

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders of

American Tower Corporation

Boston, Massachusetts

 

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”) maintained effective internal control over financial reporting as of December 31, 2006 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.

 

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, 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, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, 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 of the Company as of and for the year ended December 31, 2006, and our report dated February 28, 2007 expressed an unqualified opinion on those financial statements and includes an explanatory paragraph relating to the Company’s adoption of SFAS No. 123(R) “Shared-Based Payment,” effective January 1, 2006.

 

/s/ DELOITTE & TOUCHE LLP

 

Boston, Massachusetts

February 28, 2007

 

57


Table of Contents

ITEM 9B.    OTHER INFORMATION

 

Departure of a Named Executive Officer

 

On February 14, 2007, J. Michael Gearon, Jr., our Vice Chairman and President of American Tower International, notified the Company of his intention to leave the Company to devote more time to his personal endeavors and other interests. On February 27, 2007, the Company and Mr. Gearon finalized the terms of Mr. Gearon’s separation from the Company, and effective as of such date, Mr. Gearon ceased to be an employee of the Company. Under the terms of Mr. Gearon’s existing letter agreement with the Company, dated February 12, 2004, Mr. Gearon had the right to participate in the Company’s stock option plan for the duration of the vesting period of his options, provided that such continued participation was accomplished through a mutually acceptable arrangement. In connection with his separation from the Company, Mr. Gearon and the Company agreed to modify the terms of the letter agreement to accelerate the vesting of Mr. Gearon’s unvested stock options to purchase 281,250 shares of the Company’s Class A common stock so that such options are immediately exercisable. The parties also agreed that all of Mr. Gearon’s options would be governed by the terms of the Company’s stock option plan, and accordingly, Mr. Gearon will have a period of three months following his separation from the Company to exercise any outstanding options prior to their expiration. In connection with the vesting acceleration, the Company expects to record stock-based compensation expense associated with this modification of approximately $5.0 million in the first quarter of 2007.

 

Unregistered Sales of Equity Securities

 

During the period January 1, 2007 through February 23, 2007, we issued an aggregate of 11,627 shares of our Class A common stock upon the exercise of 1,626 warrants assumed in our merger with SpectraSite, Inc. In August 2005, in connection with our merger with SpectraSite, Inc., we assumed approximately 1.0 million warrants to purchase shares of SpectraSite, Inc. common stock. Upon completion of the merger, each warrant to purchase shares of SpectraSite, Inc. common stock automatically converted into a warrant to purchase 7.15 shares of Class A common stock at an exercise price of $32 per warrant. Net proceeds from these warrant exercises were approximately $52,000. The shares were issued to warrantholders in reliance on the exemption from registration set forth in Sections 3(a)(9) and 3(a)(10) of the Securities Act of 1933, as amended, and Section 1145 of the United States Code. No underwriters were engaged in connection with such issuances.

 

During the period January 1, 2006 through February 23, 2007, we issued an aggregate of 3,635,220 shares of our Class A common stock upon conversion of $44.4 million principal amount of our 3.25% Notes. Pursuant to the terms of the indenture, the holders of the 3.25% Notes received 81.808 shares of Class A common stock for every $1,000 principal amount of notes converted. The shares were issued to the noteholders in reliance on the exemption from registration set forth in Section 3(a)(9) of the Securities Act of 1933, as amended. No underwriters were engaged in connection with such issuances. In connection with the conversion, we paid such holders an aggregate of approximately $2.0 million, calculated based on the accrued and unpaid interest on the notes as of the date of conversion and the discounted value of the future interest payments on the notes.

 

58


Table of Contents

PART III

 

ITEM 10.    DIRECTORS,   EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Our executive officers and their respective ages and positions as of February 27, 2007 are set forth below:

 

James D. Taiclet, Jr.

   46    Chairman, President and Chief Executive Officer

Bradley E. Singer

   40    Chief Financial Officer and Treasurer

Steven J. Moskowitz

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

William H. Hess

   43    Executive Vice President, International Operations and General Counsel

Jean A. Bua

   48    Executive 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 and was named our Chief Executive Officer in October 2003. Mr. Taiclet was elected to our Board of Directors 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. From March 1996 until March 1999, Mr. Taiclet served as Vice President, Engine Services at Pratt & Whitney, a unit of United Technologies Corporation. Mr. Taiclet was also previously a consultant at McKinsey & Company, specializing in telecommunications and aerospace. 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.

 

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. Mr. Singer was appointed Executive Vice President, Finance in July 2001 and was 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 with distinction 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, Sales & Marketing, and Vice President and General Manager of our Northeast Region in March 1999. Mr. Moskowitz was named Executive Vice President of the U.S. Tower Division in January 2002 and named President in October 2003. Prior to joining us, Mr. Moskowitz had served as a Vice President, General Manager of Eastman Radio Sales, a national leader in media sales, since 1992. From 1985 to 1992, Mr. Moskowitz held various Vice President positions at Katz Media Group, the leading broadcast media representation firm in the United States. Mr. Moskowitz received his undergraduate degree from Temple University.

 

William H. Hess is our Executive Vice President, International Operations and General Counsel. Mr. Hess joined us in March 2001 as Chief Financial Officer of American Tower International and was appointed Executive Vice President in June 2001. Mr. Hess was appointed Executive Vice President, General Counsel in September 2002, and in February 2007, Mr. Hess was also appointed Executive Vice President, International Operations. Prior to joining us, Mr. Hess had been a partner in the corporate and finance practice group of the law firm of King & Spalding LLP, which he joined in 1990. Prior to attending law school, Mr. Hess practiced as a Certified Public Accountant with Arthur Young & Co. Mr. Hess received his J.D. degree from Vanderbilt University Law School and is a graduate of Harding University.

 

Jean A. Bua is our Executive Vice President, Finance and Corporate Controller. Ms. Bua joined us in August 2005 as Senior Vice President, Finance and Corporate Controller and in February 2007, was named Executive Vice President, Finance and Corporate Controller. Prior to joining us, since 1996, Ms. Bua was with

 

59


Table of Contents

Iron Mountain, Inc., a global records management and data protection services company, where she most recently served as Senior Vice President, Chief Accounting Officer and Worldwide Controller. From 1993 to 1996, Ms. Bua was Corporate Controller for Duracraft Corporation, an international consumer products manufacturer. Prior to joining Duracraft, Ms. Bua was Assistant Controller for Keithley Instruments, a high-tech hardware and software company, from 1991 to 1993. Ms. Bua was also previously a management consultant for Ernst & Young and an auditor for KPMG. Ms. Bua is a Certified Public Accountant and holds an M.B.A. degree from the University of Rhode Island.

 

The information under “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” from the Definitive Proxy Statement is incorporated herein by reference. Information required by this item pursuant to Item 407(c)(3) of SEC Regulation S-K relating to our procedures by which security holders may recommend nominees to our Board of Directors, and pursuant to Item 407(d)(4) and 407(d)(5) of SEC 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 conduct applicable to our principal executive officer, our principal financial officer, our controller and other senior financial officers appears in Item 1 of this report under the caption “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 incorporated herein by reference.

 

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

The information under “Certain Relationships and Related Transactions” from the Definitive Proxy Statement is incorporated herein by reference.

 

Information required by this item pursuant to Item 407(a) of SEC Regulation S-K relating to director independence is contained in the Definitive Proxy Statement under “Corporate Governance” and is incorporated herein by reference.

 

ITEM 14.   PRINCIPAL ACCOUNTING FEES AND SERVICES

 

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

 

60


Table of Contents

PART IV

 

ITEM 15.   EXHIBITS, 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.

 

61


Table of Contents

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 28th day of February, 2007.

 

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)

  February 28, 2007

/s/    BRADLEY E. SINGER        


Bradley E. Singer

  

Chief Financial Officer and Treasurer (Principal Financial Officer)

  February 28, 2007

/s/    JEAN A. BUA        


Jean A. Bua

  

Executive Vice President, Finance and Corporate Controller (Principal Accounting Officer)

  February 28, 2007

/s/    RAYMOND P. DOLAN        


Raymond P. Dolan

  

Director

  February 28, 2007

/s/    CAROLYN F. KATZ        


Carolyn F. Katz

  

Director

  February 28, 2007

/s/    GUSTAVO LARA CANTU        


Gustavo Lara Cantu

  

Director

  February 28, 2007

/s/    FRED R. LUMMIS        


Fred R. Lummis

  

Director

  February 28, 2007

/s/    PAMELA D. A. REEVE        


Pamela D. A. Reeve

  

Director

  February 28, 2007

/s/    DAVID E. SHARBUTT        


David E. Sharbutt

  

Director

  February 28, 2007

/s/    SAMME L. THOMPSON        


Samme L. Thompson

  

Director

  February 28, 2007

 

62


Table of Contents

AMERICAN TOWER CORPORATION AND SUBSIDIARIES

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page

Report of Independent Registered Public Accounting Firm

   F-2

Consolidated Balance Sheets as of December 31, 2006 and 2005

   F-3

Consolidated Statements of Operations for the Years Ended December 31, 2006, 2005 and 2004

   F-4

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2006, 2005 and 2004

  

F-5

Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004

   F-6

Notes to Consolidated Financial Statements

   F-7

 

F-1


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

American Tower Corporation

Boston, Massachusetts

 

We have audited the accompanying consolidated balance sheets of American Tower Corporation and subsidiaries (the “Company”) as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the 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 the Company as of December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

 

As discussed in Note 1 to consolidated financial statements, in 2006 the Company adopted the provisions of Financial Accounting Standards Board (FASB) No. 123R “Share-Based Payment,” effective January 1, 2006 and in 2005, the Company adopted FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations-an interpretation of FASB Statement No. 143,” effective December 31, 2005.

 

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, 2006, 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 February 28, 2007 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

/S/ DELOITTE & TOUCHE LLP

 

Boston, Massachusetts

February 28, 2007

 

F-2


Table of Contents

AMERICAN TOWER CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

     December 31,

 
     2006

    2005

 

ASSETS

                

CURRENT ASSETS:

                

Cash and cash equivalents

   $ 281,264     $ 112,701  

Available-for-sale securities

     22,986          

Accounts receivable, net of allowances

     29,368       36,995  

Prepaid and other current assets

     63,919       44,823  

Deferred income taxes

     88,485       31,359  
    


 


Total current assets

     486,022       225,878  
    


 


PROPERTY AND EQUIPMENT, net

     3,218,124       3,460,526  

GOODWILL

     2,189,767       2,142,551  

OTHER INTANGIBLE ASSETS, net

     1,820,876       2,077,312  

DEFERRED INCOME TAXES

     482,710       523,293  

NOTES RECEIVABLE AND OTHER LONG-TERM ASSETS

     415,720       357,294  
    


 


TOTAL

   $ 8,613,219     $ 8,786,854  
    


 


LIABILITIES AND STOCKHOLDERS’ EQUITY

                

CURRENT LIABILITIES:

                

Accounts payable and accrued expenses

   $ 187,634     $ 178,951  

Accrued interest

     41,319       37,850  

Current portion of long-term obligations

     253,907       162,153  

Unearned revenue

     86,769       77,655  
    


 


Total current liabilities

     569,629       456,609  
    


 


LONG-TERM OBLIGATIONS

     3,289,109       3,451,276  

OTHER LONG-TERM LIABILITIES

     365,974       327,354  
    


 


Total liabilities

     4,224,712       4,235,239  
    


 


COMMITMENTS AND CONTINGENCIES

                

MINORITY INTEREST IN SUBSIDIARIES

     3,591       9,794  

STOCKHOLDERS’ EQUITY:

                

Preferred Stock: $.01 par value; 20,000,000 shares authorized; no shares issued or outstanding

                

Class A Common Stock: $.01 par value; 1,000,000,000 shares authorized, 437,792,629 and 415,636,595 shares issued, and 424,672,267 and 412,654,855 shares outstanding, respectively

     4,378       4,156  

Additional paid-in capital

     7,502,472       7,383,320  

Accumulated deficit

     (2,733,920 )     (2,761,404 )

Unearned compensation

             (2,497 )

Accumulated other comprehensive income (loss)

     16,079       (803 )

Treasury stock (13,120,362 and 2,981,740 shares at cost, respectively)

     (404,093 )     (80,951 )
    


 


Total stockholders’ equity

     4,384,916       4,541,821  
    


 


TOTAL

   $ 8,613,219     $ 8,786,854  
    


 


 

See notes to consolidated financial statements.

 

F-3


Table of Contents

AMERICAN TOWER CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

 

    Year Ended December 31,

 
    2006

    2005

    2004

 

REVENUES:

                       

Rental and management

  $ 1,294,068     $ 929,762     $ 684,422  

Network development services

    23,317       15,024       22,238  
   


 


 


Total operating revenues

    1,317,385       944,786       706,660  
   


 


 


OPERATING EXPENSES:

                       

Costs of operations (exclusive of items shown separately below)

                       

Rental and management

    332,246       247,781       195,242  

Network development services

    11,291       8,346       16,220  

Depreciation, amortization and accretion

    528,051       411,254       329,449  

Selling, general, administrative and development expense (including stock-based compensation expense of $39,502, $6,597 and $9,874, respectively)

    159,324       108,059       83,094  

Impairments, net loss on sale of long-lived assets, restructuring and merger related expense (including stock-based compensation expense of $9,333 and $876 in 2005 and 2004, respectively)

    2,572       34,232       23,876  
   


 


 


Total operating expenses

    1,033,484       809,672       647,881  
   


 


 


OPERATING INCOME

    283,901       135,114       58,779  
   


 


 


OTHER INCOME (EXPENSE):

                       

Interest income, TV Azteca, net of interest expense of $1,491, $1,492 and $1,497, respectively

    14,208       14,232       14,316  

Interest income

    9,002       4,402       4,844  

Interest expense

    (215,643 )     (222,419 )     (262,237 )

Loss on retirement of long-term obligations

    (27,223 )     (67,110 )     (138,016 )

Other income (expense)

    6,619       227       (2,798 )
   


 


 


Total other expense

    (213,037 )     (270,668 )     (383,891 )
   


 


 


INCOME (LOSS) BEFORE INCOME TAXES, MINORITY INTEREST AND INCOME (LOSS) ON EQUITY METHOD INVESTMENTS

    70,864       (135,554 )     (325,112 )

Income tax (provision) benefit

    (41,768 )     (5,714 )     83,338  

Minority interest in net earnings of subsidiaries

    (784 )     (575 )     (2,366 )

Income (loss) on equity method investments

    26       (2,078 )     (2,915 )
   


 


 


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

    28,338       (143,921 )     (247,055 )

LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAX BENEFIT OF $444, $1,030 AND $4,447, RESPECTIVELY

    (854 )     (1,913 )     (8,409 )
   


 


 


INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE

    27,484       (145,834 )     (255,464 )

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF INCOME TAX BENEFIT OF $11,697

            (35,525 )        
   


 


 


NET INCOME (LOSS)

  $ 27,484     $ (181,359 )   $ (255,464 )
   


 


 


BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE AMOUNTS:

                       

Income (loss) from continuing operations

  $ 0.06     $ (0.47 )   $ (1.10 )

Loss from discontinued operations

            (0.01 )     (0.04 )

Cumulative effect of change in accounting principle, net

            (0.12 )        
   


 


 


Net income (loss)

  $ 0.06     $ (0.60 )   $ (1.14 )
   


 


 


WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:

                       

BASIC

    424,525       302,510       224,336  
   


 


 


DILUTED

    436,217       302,510       224,336  
   


 


 


 

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, 2006, 2005, and 2004

(In thousands, except share data)

 

    Common Stock

  Common Stock

    Common Stock

    Treasury Stock

    Note
Receivable


    Additional
Paid-in
Capital


    Unearned
Compensation


   

Accumulated

Other
Comprehensive

Income(Loss)


    Accumulated
Deficit


    Total
Stockholders’
Equity


    Total
Comprehensive
Income (Loss)


 
    Class A

  Class B

    Class C

                 
    Issued
Shares


  Amount

  Issued
Shares


    Amount

    Issued
Shares


    Amount

    Shares

    Amount

               

BALANCE, DECEMBER 31, 2003

  211,855,658   $ 2,119   6,969,529     $ 70     1,224,914     $ 12     (145,221 )   $ (4,366 )   $ (6,720 )   $ 3,963,087                     $ (2,324,581 )   $ 1,629,621          
   
 

 

 


 

 


 

 


 


 


 


 


 


 


 


Share Class Exchanges

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

Stock option activity

  6,249,324     62                                                       52,951                               53,013          

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 from disposition of stock options

                                                                14,501                               14,501          

Net loss

                                                                                        (255,464 )     (255,464 )     (255,464 )
                                                                                                       


Total comprehensive loss

                                                                                                      $ (255,464 )
   
 

 

 


 

 


 

 


 


 


 


 


 


 


 


BALANCE, DECEMBER 31, 2004

  229,745,116   $ 2,297                               (145,221 )   $ (4,366 )           $ 4,072,881                     $ (2,580,045 )   $ 1,490,767          
   
 

 

 


 

 


 

 


 


 


 


 


 


 


       

Issuance of common stock and assumption of options and warrants– SpectraSite merger Plan

  169,506,083     1,695                                                       3,104,377                               3,106,072          

Stock option activity

  11,106,693     111                                                       76,810                               76,921          

Issuance of common stock upon exercise of warrants

  398,412     4                                                       1,778                               1,782          

Issuance of common stock –Stock Purchase Plans

  50,119     1                                                       767                               768          

Treasury stock activity

                                        (2,836,519 )     (76,585 )                                             (76,585 )        

Unearned compensation – SpectraSite merger

                                                                      $ (4,861 )                     (4,861 )        

Unearned compensation amortization– SpectraSite merger

                                                                        2,364                       2,364          

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

                                                                              $ (803 )             (803 )     (803 )

3.25% convertible notes exchanged for common stock

  4,670,336     46                                                       55,659                               55,705          

ATC Mexico activity

  159,836     2                                                       2,829                               2,831          

ATC South America activity

                                                                2,026                               2,026          

Tax benefit from disposition of stock options

                                                                66,193                               66,193          

Net loss

                                                                                        (181,359 )     (181,359 )     (181,359 )
                                                                                                       


Total comprehensive loss

                                                                                                      $ (182,162 )
   
 

 

 


 

 


 

 


 


 


 


 


 


 


 


BALANCE, DECEMBER 31, 2005

  415,636,595   $ 4,156                               (2,981,740 )   $ (80,951 )           $ 7,383,320     $ (2,497 )   $ (803 )   $ (2,761,404 )   $ 4,541,821          
   
 

 

 


 

 


 

 


 


 


 


 


 


 


       

Stock option activity

  3,884,812     39                                                       78,610                               78,649          

Issuance of common stock upon exercise of warrants

  14,532,874     145                                                       220                               365          

Issuance of common stock - Stock Purchase Plan

  53,210     1                                                       1,329                               1,330          

Treasury stock activity

                                        (10,138,622 )     (323,142 )                                             (323,142 )        

Unearned compensation - SpectraSite merger

                                                                (2,497 )     2,497                                  

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

                                                                                6,457               6,457       6,457  

Net unrealized gain on available-for-sale securities

                                                                                13,945               13,945       13,945  

Net realized gain on available- for sale securities

                                                                                (3,520 )             (3,520 )     (3,520 )

Convertible notes exchanged for common stock

  3,685,138     37                                                       44,039                               44,076          

Tax benefit from disposition of stock options

                                                                1,359                               1,359          

Stock option tender offer accrual for cash payments

                                                                (3,908 )                             (3,908 )        

Net income

                                                                                        27,484       27,484       27,484  
                                                                                                       


Total comprehensive income

                                                                                                      $ 44,366  
   
 

 

 


 

 


 

 


 


 


 


 


 


 


 


BALANCE, DECEMBER 31, 2006

  437,792,629   $ 4,378                               (13,120,362 )   $ (404,093 )           $ 7,502,472             $ 16,079     $ (2,733,920 )   $ 4,384,916          
   
 

 

 


 

 


 

 


 


 


 


 


 


 


       

 

See notes to consolidated financial statements.

 

F-5


Table of Contents

AMERICAN TOWER CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

     Year Ended December 31,

 
     2006

    2005

    2004

 

CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:

                        

Net income (loss)

   $ 27,484     $ (181,359 )   $ (255,464 )

Cumulative effect of change in accounting principle, net

             35,525          

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

                        

Depreciation, amortization and accretion

     528,051       411,254       329,449  

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

     (444 )     (2,145 )     3,798  

Non-cash stock-based compensation expense

     39,502       15,930       10,750  

Minority interest in net earnings of subsidiaries

     784       575       2,366  

(Gain) loss on investments and other non-cash (income) expense

     (5,453 )     2,078       4,295  

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

     2,958       19,096       22,254  

Loss on retirement of long-term obligations

     27,223       67,110       138,016  

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

     9,719       45,214       72,857  

Provision for losses on accounts receivable

     5,175       8,492       17,440  

Deferred income taxes

     17,535       (11,029 )     (95,614 )

Changes in assets and liabilities, net of acquisitions:

                        

Accounts receivable

     (182 )     7,570       1,335  

Prepaid and other assets

     (67,815 )     (10,331 )     (18,665 )

Accounts payable and accrued expenses

     (10,620 )     (35,120 )     (2,146 )

Accrued interest

     3,844       (5,641 )     (20,268 )

Unearned revenue

     9,114       5,179       (10,990 )

Other long-term liabilities

     33,863       24,806       17,287  
    


 


 


Cash provided by operating activities

     620,738       397,204       216,700  
    


 


 


CASH FLOWS (USED FOR) PROVIDED BY INVESTING ACTIVITIES:

                        

Payments for purchase of property and equipment and construction activities

     (127,098 )     (88,637 )     (42,181 )

Payments for acquisitions, net of cash acquired

     (14,337 )     (7,479 )     (33,403 )

Payments for acquisition of minority interests

     (22,944 )     (7,270 )     (3,947 )

Cash acquired from SpectraSite merger, net of transaction costs paid

             16,696          

Proceeds from sales of businesses, investments and other long-term assets

     35,387       6,881       31,987  

Restricted cash and investments

                     170,036  

Deposits and investments and other

     (120 )     (725 )     2,328  
    


 


 


Cash (used for) provided by investing activities

     (129,112 )     (80,534 )     124,820  
    


 


 


CASH FLOWS USED FOR FINANCING ACTIVITIES:

                        

Proceeds from issuance of debt securities and notes payable

                     1,072,500  

Proceeds from stock options, warrants and stock purchase plans

     40,940       65,357       40,556  

Borrowings under credit facilities

     242,000       1,543,000       700,000  

Repayment of notes payable, credit facilities and capital leases

     (295,760 )     (1,949,444 )     (2,003,401 )

Purchases of Class A common stock

     (306,856 )     (68,927 )        

Deferred financing costs and other financing activities

     (3,387 )     (9,512 )     (41,083 )
    


 


 


Cash used for financing activities

     (323,063 )     (419,526 )     (231,428 )
    


 


 


NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     168,563       (102,856