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Crown Castle International 10-K 2008 Documents found in this filing:
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-K
For the fiscal year ended December 31, 2007 or
For the transition period from to Commission File Number 001-16441
CROWN CASTLE INTERNATIONAL CORP. (Exact name of registrant as specified in its charter)
(713) 570-3000 (Registrant’s telephone number, including area code)
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 Role 405 of the Securities Act. Yes x No ¨ Indicated 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 this Form 10-K or any amendment to this Form 10-K. ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act). 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 equity held by non-affiliates of the registrant was approximately $8.7 billion as of June 29, 2007, the last business day of the registrant’s most recently completed second fiscal quarter, based on the New York Stock Exchange closing price on that day of $36.27 per share. Applicable Only to Corporate Registrants As of February 19, 2008, there were 281,407,332 shares of Common Stock outstanding. Documents Incorporated by Reference The information required to be furnished pursuant to Part III of this Form 10-K will be set forth in, and incorporated by reference from, the registrant’s definitive proxy statement for the annual meeting of stockholders (the “2008 Proxy Statement”), which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year ended December 31, 2007.
Table of ContentsIndex to Financial StatementsCROWN CASTLE INTERNATIONAL CORP. TABLE OF CONTENTS
Cautionary Language Regarding Forward-Looking Statements This Annual Report on Form 10-K contains forward-looking statements that are based on our management’s expectations as of the filing date of this report with the Securities and Exchange Commission (“SEC”). Statements that are not historical facts are hereby identified as forward-looking statements. In addition, words such as “estimate,” “anticipate,” “project,” “plan,” “intend,” “believe,” “expect,” and similar expressions are intended to identify forward-looking statements. Such statements include plans, projections and estimates contained in “Item 1. Business,” “Item 3. Legal Proceedings,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” herein. Such forward-looking statements are subject to certain risks, uncertainties and assumptions, including prevailing market conditions, the risk factors described under “Item 1A. Risk Factors” herein and other factors. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those expected.
Table of ContentsIndex to Financial StatementsUnless this Form 10-K indicates otherwise or the context otherwise requires, the terms, “we,” “our,” “our company,” “the company” or “us” as used in this Form 10-K refer to Crown Castle International Corp. (“CCIC”), a Delaware corporation organized on April 20, 1995, and its subsidiaries, including Global Signal Inc. and its former subsidiaries following the completion of the merger of the Global Signal Inc. into a subsidiary of ours in January 2007 (“Global Signal Merger”). Unless this Form 10-K indicates otherwise or the context otherwise requires, “Global Signal” refers to the former Global Signal Inc. and its subsidiaries which merged into a subsidiary of ours in the Global Signal Merger. Unless this Form 10-K indicates otherwise or the context otherwise requires, the terms “CCUSA” and “in the U.S.” refer to our CCUSA segment. Item 1. Business Overview We own, operate and lease towers and other communication structures, including certain rooftop installations (collectively, “towers”), for wireless communications. Our core business is renting space on our towers via long-term contracts in various forms, including license, sublease and lease agreements. Generally, our towers can accommodate multiple customers (“co-location”) for antennas and other equipment necessary for the transmission of wireless signals for mobile telephones and other devices. Revenues derived from this site rental business represented 93% of our 2007 consolidated revenues. Information concerning our tower portfolio as of December 31, 2007 is as follows:
Our site rental revenues typically result from long-term contracts with (1) initial terms of five to ten years, (2) multiple renewal periods at the option of the tenant of five to ten years each, and (3) contractual escalators of the rental price. As a result, the vast majority of our site rental revenues is of a recurring nature and has been contracted for in a prior year. We seek to increase our site rental revenues by adding more tenants on our existing towers, which should result in significant incremental cash flow due to our relatively fixed tower operating costs. To a much lesser extent, we also provide certain network services relating to our towers, including antenna installations and subsequent augmentation, network design and site selection, site acquisition, site development and other services.
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Table of ContentsIndex to Financial StatementsStrategy Our strategy is to increase long-term shareholder value by translating anticipated future growth in our core site rental business into growth of our results of operations on a per share basis. We believe our strategy is consistent with our mission to deliver the highest level of service to our customers at all times – striving to be their critical partner as we assist them in growing efficient, ubiquitous wireless networks. The key elements of our strategy are to:
Our strategy is based on our belief that opportunities will be created by the expected continuation of growth in the wireless communications industry, which depends on the demand for wireless telephony and data services by consumers. The following is a discussion of certain growth trends in the wireless communications industry:
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Table of ContentsIndex to Financial Statements2007 Highlights and Recent Developments During 2007, we engaged in a number of significant activities consistent with our strategy, including (1) the Global Signal Merger and the related $1.8 billion of mortgage loans, (2) purchases of our common stock, and (3) the lease of our 1670-1675 MHz U.S. nationwide spectrum license (“Spectrum”) previously utilized by our Modeo business. The Global Signal Merger, which nearly doubled our tower portfolio, is discussed below under “Item 1. The Company—CCUSA.” See “Item 7. MD&A” and our consolidated financial statements for a further discussion of these and other activities occurring in 2007 and the beginning of 2008. The Company We operate our business primarily in the U.S. (including Puerto Rico) and Australia, with nominal operations in Canada and the United Kingdom (“U.K.”). We conduct our operations principally through subsidiaries of Crown Castle Operating Company (“CCOC”), including (1) certain subsidiaries which operate our tower portfolios in the U.S., Puerto Rico and Canada (collectively referred to as “CCUSA”) and (2) a 77.6% owned subsidiary that operates our Australia tower portfolio (referred to as “CCAL”). For more information about our operating segments, including the reclassification of the Corporate Office and Other segment and the Emerging Businesses segment into our CCUSA segment, as well as financial information about the geographic areas in which we operate, see note 18 to our consolidated financial statements and “Item 7. MD&A.” CCUSA Overview. The core business of CCUSA is the renting of antenna space on our towers to a variety of tenants under long-term contracts. Supporting our competitive position in the site rental business, we offer our tenants certain network services relating to our towers, including antenna installations and other services. At December 31, 2007, CCUSA owned, leased or managed approximately 22,400 towers, including rooftop installations. Although we own, lease or manage approximately 250 towers located in Puerto Rico and Canada that are included in CCUSA, our towers are predominately located in the U.S., with concentrations in the 50 and 100 largest BTAs. Most of our CCUSA towers were acquired through transactions consummated within the past eight years, including through the transactions summarized below:
On October 5, 2006, we entered into a definitive agreement which contemplated the merger of Global Signal into a wholly-owned subsidiary of ours. Pursuant to the merger agreement, on January 12, 2007, Global Signal was merged with and into a wholly-owned subsidiary of ours, in a stock and cash transaction valued at approximately $4.0 billion, exclusive of debt of approximately $1.8 billion (having a structure similar to our tower revenue notes) that remained outstanding as obligations following the Global Signal Merger. See note 7 to our consolidated
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Table of ContentsIndex to Financial Statementsfinancial statements. As a result of the completion of Global Signal Merger, we issued approximately 98.1 million shares of common stock and paid the maximum $550.0 million in cash (“GS $550M Consideration”) to the stockholders of Global Signal and reserved for issuance approximately 0.6 million shares of common stock issuable pursuant to Global Signal warrants. See “Item 7. MD&A—General Overview—Acquisition of Global Signal” and note 2 to our consolidated financial statements. As a result of the Global Signal Merger, we acquired 10,749 additional towers which are located predominately in the U.S. Of such 10,749 towers, 6,553 towers (“Sprint Towers”) are leased (including managed) for a period of 32 years (through May 2037) under master leases and subleases (“Sprint Master Leases”) with Sprint Corporation (a predecessor of Sprint Nextel) and certain subsidiaries of Sprint Corporation entered into in May 2005. Global Signal prepaid the rent owed under the Sprint Master Leases in May 2005. During the period commencing one year prior to the expiration of the Sprint Master Leases and ending 120 days prior to expiration, we have the option to purchase all (but not less than all) of the Sprint Towers then leased for approximately $2.3 billion. We are entitled to all revenue from the Sprint Towers during the term of the Sprint Master Leases, including amounts payable under existing leases with third parties. In addition, under the Sprint Master Leases, certain Sprint Corporation subsidiaries have agreed to sublease space on substantially all of the Sprint Towers for an initial period through May 2015. The Sprint Master Leases remain effective as our assets and commitments following the closing of the Global Signal Merger. Site Rental. CCUSA rents space on its towers for antennas and other equipment necessary for the transmission of wireless signals to a variety of carriers operating cellular, personal communications services (“PCS”), enhanced specialized mobile radio, 3G, wireless data, paging, fixed point-to-point radio, and point to multipoint broadcasting (such as radio and television broadcasting). We generally receive monthly rental payments from tenants, payable under site leases. Recently, our new leases at CCUSA typically have original terms of seven to ten years (with three or four optional renewal periods of five years each) and provide for annual price increases based upon a consumer price index, a fixed percentage or a combination thereof. The lease agreements with our tenants relating to tower network acquisitions generally have an original term of ten years, with multiple renewal options at the option of the tenant, each typically ranging from five to ten years. We have existing master lease agreements with most major wireless carriers, including Sprint Nextel, AT&T, Verizon Wireless, and T-Mobile, which provide certain terms (including economic terms) that govern leases on our towers entered into by such parties during the term of their master lease agreements. The average monthly rental payment of a new tenant added to a tower varies among the different regions in the U.S. and the type of service being provided by the tenant, with broadband tenants (such as PCS) paying more than narrowband tenants (such as paging), primarily as a result of the physical size of the antenna installation. We also routinely receive rental payment increases in connection with lease amendments which authorize carriers to add additional antennas or other equipment to towers on which they already have equipment pursuant to pre-existing lease agreements. The majority of the operating costs of our site rental business consists of ground lease expense, property taxes, repairs and maintenance, utilities, insurance and salaries, which tend to escalate at approximately the rate of inflation. As a result of the relative fixed nature of these costs, the co-location of additional tenants is achieved at a low incremental cost resulting in high incremental cash flows. Network Services. We also provide network services, on a limited basis, primarily relating to our towers for our tenants. Our service offerings consist of antenna installations and subsequent augmentation, network design and site selection, site acquisition, site development and other services. We have the capability and expertise to install, with the assistance of our network of subcontractors, equipment and antenna systems for our customers. These activities are typically non-recurring and highly competitive, with a number of local competitors in most markets. We typically bill for our antenna installation services on a fixed price basis. Network services revenues are received primarily from wireless communications companies or their agents.
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Table of ContentsIndex to Financial StatementsCustomers. In both the site rental and network services businesses, we work with a number of customers. We work extensively with large national wireless carriers such as Sprint Nextel, AT&T, Verizon Wireless, and T-Mobile. Although emerging and second tier wireless carriers (such as those offering wireless data technologies and flat rate calling plans) represent only a modest portion of our revenues for 2007, we experienced an increase in new tenant additions from emerging and second tier wireless carriers in 2007. The following table summarizes the net revenues from our four largest customers expressed as a percentage of CCUSA’s and our consolidated revenues for 2007. See “Item 1A. Risk Factors.”
Sales and Marketing. The CCUSA sales organization markets our towers within the wireless communications industry with the objective of renting space on existing towers and preselling capacity on our new towers prior to construction. We seek to become the critical partner and preferred independent tower provider for our customers and increase customer satisfaction relative to our peers. We use public and proprietary databases to develop targeted marketing programs focused on carrier network build-outs, modifications, site additions and network services. Information about carriers’ existing location of antenna space, leases, marketing strategies, capital spend plans, deployment status, and actual wireless carrier signal strength measurements taken in the field is analyzed to match specific towers in our portfolios with potential new site demand. We have developed a patented web-based tool that stores key tower information above and beyond normal property management information, including data on actual customer signal strength, demographics, site readiness and competitive structures. In addition, the web-based tool assists us in estimating potential demand for our towers with greater speed and accuracy. Through these and other tools we have developed, we seek to have proactive discussions with our customers regarding their wireless infrastructure deployment plans and the timing and location of their demand for our towers. A team of national account directors maintains our relationships with our largest customers. These directors work to develop new tower leasing opportunities, network services contracts and site management opportunities, as well as to ensure that customers’ tower needs are efficiently translated into new leases on our towers. Sales personnel in our area offices develop and maintain local relationships with carriers that are expanding their networks, entering new markets, bringing new technologies to market or requiring maintenance or add-on business. In addition to our full-time sales and marketing staff, a number of senior managers and officers spend a significant portion of their time on sales and marketing activities and call on existing and prospective customers. Competition. CCUSA competes with (1) other independent tower owners which also provide site rental and network services; (2) wireless carriers which build, own and operate their own tower networks; (3) broadcasters with respect to their broadcast towers; (4) building owners that rent antenna space on rooftop sites; and (5) other potential competitors, such as utilities and outdoor advertisers, some of which actively participate in the site rental industry. Wireless carriers that own and operate their own tower networks generally are substantially larger and have greater financial resources than we have. We believe that tower location and capacity, deployment speed, quality of service and price have been and will continue to be the most significant competitive factors affecting the leasing of a tower. Some of the larger independent tower companies with which CCUSA competes in the U.S. include American Tower Corporation, SBA Communications Corporation and Global Tower Partners. Significant additional site rental competition comes from the renting of rooftops, utility structures and other alternative sites for antennas.
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Table of ContentsIndex to Financial StatementsCompetitors in the network services business include site acquisition consultants, zoning consultants, real estate firms, right-of-way consulting firms, construction companies, tower owners and managers, radio frequency engineering consultants, telecommunications equipment vendors who can provide turnkey site development services through multiple subcontractors, and our customers’ internal staffs. We believe that carriers base their decisions on the outsourcing of network services on criteria such as a company’s experience, track record, local reputation, price and time for completion of a project. CCAL Our primary business in Australia is the renting of antenna space on towers to our customers. CCAL is owned 77.6% by us and 22.4% by Permanent Nominees (Aust) Ltd, acting on behalf of a group of professional and institutional investors led by Jump Capital Limited. CCAL is the largest independent tower operator in Australia. As of December 31, 2007, CCAL had approximately 1,400 towers, with a strategic presence in each of Australia’s major metropolitan areas, including Sydney, Melbourne, Brisbane, Adelaide and Perth. CCAL also provides a range of services including site maintenance and property management services for towers owned by third parties. For the year ended December 31, 2007, CCAL comprised 6% of our consolidated net revenues. CCAL’s principal customers are Optus, Vodafone, Telstra and Hutchison. For the year ended December 31, 2007, these four carriers accounted for approximately 95% of CCAL’s revenues, with Optus and Vodafone accounting for 34% and 30%, respectively. The majority of CCAL’s towers were acquired from Optus (in 2000) and Vodafone (in 2001). In connection with these transactions, Optus agreed to rent space on the former Optus towers for an initial term of 15 years, and Vodafone agreed to rent space on the former Vodafone towers for an initial rent free term of ten years. In Australia, CCAL competes with wireless carriers, which own and operate their own tower networks; service companies that provide site maintenance and property management services; and other site owners, such as broadcasters and building owners. The two other significant tower owners in Australia are Broadcast Australia, an independent operator of broadcast towers, and Telstra, a wireless carrier. We believe that tower location, capacity, quality of service, deployment speed and price within a geographic market are the most significant competitive factors affecting the leasing of a tower. Several 3G networks continue to be developed in Australia by CCAL’s major customers. Each of these 3G networks has already utilized a number of our towers in connection with its deployment, and we expect more of our towers will be utilized by each of these networks in 2008. In addition, broadband wireless networks continue to be deployed including a planned network to serve rural Australia. Employees At February 19, 2008, we employed approximately 1,200 people worldwide. We are not a party to any collective bargaining agreements. We have not experienced any strikes or work stoppages, and management believes that our employee relations are satisfactory. Regulatory Matters To date, we have not incurred any material fines or penalties or experienced any material adverse effects to our business as a result of any domestic or international regulations. The summary below is based on regulations currently in effect, and such regulations are subject to review and modification by the applicable governmental authority from time to time. If we fail to comply with applicable laws and regulations, we may be fined or even lose our rights to conduct some of our business. United States Federal Regulations. Both the FCC and the Federal Aviation Administration (“FAA”) regulate towers used for wireless communications, radio and television broadcasting. Such regulations control the siting, lighting and marking of towers and may, depending on the characteristics of particular towers, require the registration of tower facilities with the FCC and the issuance of determinations confirming no hazard to air traffic. Wireless communications devices operating on towers are separately regulated and independently licensed based upon the particular frequency used. In addition, the FCC and the FAA have developed standards to consider proposals for
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Table of ContentsIndex to Financial Statementsnew or modified tower and antenna structures based upon the height and location, including proximity to airports. Proposals to construct or to modify existing tower and antenna structures above certain heights are reviewed by the FAA to ensure the structure will not present a hazard to aviation, which determination may be conditioned upon compliance with lighting and marking requirements. The FCC requires its licensees to operate communications devices only on towers that comply with FAA rules and are registered with the FCC, if required by its regulations. Where tower lighting is required by FAA regulation, tower owners bear the responsibility of notifying the FAA of any tower lighting outage and ensuring the timely restoration of such outages. Failure to comply with the applicable requirements may lead to civil penalties. Local Regulations. The U.S. Telecommunications Act of 1996 amended the Communications Act of 1934 to preserve state and local zoning authorities’ jurisdiction over the siting of communications towers. The law, however, limits local zoning authority by prohibiting actions by local authorities that discriminate between different service providers of wireless services or ban altogether the provision of wireless services. Additionally, the law prohibits state and local restrictions based on the environmental effects of radio frequency emissions to the extent the facilities comply with FCC regulations. Local regulations include city and other local ordinances (including subdivision and zoning ordinances), approvals for construction, modification and removal of towers, and restrictive covenants imposed by community developers. These regulations vary greatly, but typically require us to obtain approval from local officials prior to tower construction. Local zoning authorities may render decisions that prevent the construction or modification of towers or place conditions on such construction or modifications that are responsive to community residents’ concerns regarding the height, visibility and other characteristics of the towers. Decisions of local zoning authorities may also adversely affect the timing and cost of tower construction and modification. Other Regulations. We hold, through certain of our subsidiaries, certain licenses for radio transmission facilities granted by the FCC, including licenses for common carrier microwave service, commercial and private mobile radio service, specialized mobile radio and paging service, which are subject to additional regulation by the FCC. Our FCC license relating to the Spectrum contains certain conditions related to the services that may be provided thereunder, the technical equipment used in connection therewith and the circumstances under which it may be renewed. We are required to obtain the FCC’s approval prior to assigning or transferring control of our FCC licenses. Australia Federal Regulations. Carrier licenses and nominated carrier declarations issued under the Australian Telecommunications Act 1997 authorize the use of network units for the supply of telecommunications services to the public. The definition of “network units” includes line links and base stations used for wireless telephony services but does not include tower infrastructure. Accordingly, CCAL as a tower owner and operator does not require a carrier license under the Australian Telecommunications Act 1997. Similarly, because CCAL does not own any transmitters or spectrum, it does not currently require any apparatus or spectrum licenses issued under the Australian Radiocommunications Act 1992. Carriers have a statutory obligation to provide other carriers with access to towers, and if there is a dispute (including a pricing dispute), the matter may be referred to the Australian Competition and Consumer Commission for resolution. As a non-carrier, CCAL is not subject to this regime, and our customers negotiate site access on a commercial basis. While the Australian Telecommunications Act 1997 grants certain exemptions from planning laws for the installation of “low impact facilities,” newly constructed towers are expressly excluded from the definition of “low impact facilities.” Accordingly, in connection with the construction of towers, CCAL is subject to state and local planning laws which vary on a site by site basis. Structural enhancements may be undertaken on behalf of a carrier without state and local planning approval under the general “maintenance power” under the Australian Telecommunications Act 1997, although these enhancements may be subject to state and local planning laws if CCAL is unable to obtain carrier co-operation to use that legislative power. For a limited number of towers, CCAL is also required to install aircraft warning lighting in compliance with federal aviation regulations. In Australia, a carrier may arguably be able to utilize the “maintenance power” under the Australian Telecommunications Act of 1997 to remain as a tenant on a tower after the expiration of a site license or sublease; however, CCAL’s customer access agreements generally limit the ability of customers to do this, and, even if a carrier did utilize this power, the
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Table of ContentsIndex to Financial Statementscarrier would be required to pay for CCAL’s financial loss, which would roughly equal the site rental revenues that would have otherwise been payable. Local Regulations. In Australia there are various local, state and territory laws and regulations which relate to, among other things, town planning and zoning restrictions, standards and approvals for the design, construction or alteration of a structure or facility, and environmental regulations. As in the U.S., these laws vary greatly, but typically require tower owners to obtain approval from governmental bodies prior to tower construction and to comply with environmental laws on an ongoing basis. Environmental Matters To date, we have not incurred any material fines or penalties or experienced any material adverse effects to our business as a result of any domestic or international environmental regulations or matters. See “Item 1A. Risk Factors.” The construction of new towers in the U.S. may be subject to environmental review under the National Environmental Policy Act of 1969, as amended (“NEPA”) which requires federal agencies to evaluate the environmental impact of major federal actions. The FCC has promulgated regulations implementing NEPA which require applicants to investigate the potential environmental impact of the proposed tower construction. Should the proposed tower construction present a significant environmental impact, the FCC must prepare an environmental impact statement, subject to public comment. If a proposed tower may have a significant impact on the environment, the FCC’s approval of the construction could be significantly delayed. Our operations are subject to federal, state and local laws and regulations relating to the management, use, storage, disposal, emission, and remediation of, and exposure to, hazardous and non-hazardous substances, materials and wastes. As an owner, lessee or operator of real property, we are subject to certain environmental laws that impose strict, joint-and-several liability for the cleanup of on-site or off-site contamination relating to existing or historical operations; and we could also be subject to personal injury or property damage claims relating to such contamination. We are potentially subject to environmental and cleanup liabilities in the U.S. (including Puerto Rico) and Australia. As licensees and tower owners, we are also subject to regulations and guidelines that impose a variety of operational requirements relating to radio frequency emissions. As employers, we are subject to OSHA (and similar occupational health and safety legislation in Australia) and similar guidelines regarding employee protection from radio frequency exposure. The potential connection between radio frequency emissions and certain negative health effects, including some forms of cancer, has been the subject of substantial study by the scientific community in recent years. We have compliance programs and monitoring projects to help assure that we are in substantial compliance with applicable environmental laws. Nevertheless, there can be no assurance that the costs of compliance with existing or future environmental laws will not have a material adverse effect on us.
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You should carefully consider the risks described below, as well as the other information contained in this document, when evaluating your investment in our securities. Our business depends on the demand for wireless communications and towers, and we may be adversely affected by any slowdown in such demand. Demand for our towers depends on the demand for antenna space from our customers, which, in turn, depends on the demand for wireless telephony and data services by their customers. The willingness of our customers to utilize our infrastructure, or renew existing leases on our towers, is affected by numerous factors, including:
A slowdown in demand for wireless communications or our towers may negatively impact our revenues, result in an impairment of our assets or otherwise have a material adverse effect on us. A substantial portion of our revenues is derived from a small number of customers, and the loss, consolidation or financial instability of, or network sharing among, any of our limited number of customers may materially decrease revenues. For the year ended December 31, 2007, approximately 68% of our consolidated revenue was derived from Sprint Nextel, AT&T, Verizon Wireless and T-Mobile, which represented 25%, 19%, 15% and 9%, respectively, of our consolidated net revenues. The loss of any one of our large customers as a result of bankruptcy, insolvency, consolidation, merger with other customers of ours or otherwise may materially decrease our revenues and have other adverse effects on our business. We cannot guarantee that the leases (including management agreements) with our major wireless carriers will not be terminated or that these carriers will renew such agreements. Wireless carriers frequently enter into agreements with their competitors allowing them to utilize one another’s towers to accommodate customers who are out of range of their home providers’ services. In addition, wireless carriers have also entered into agreements allowing two or more carriers to share a single wireless network or jointly develop a tower portfolio in certain locations. Such agreements may be viewed by wireless carriers as a superior alternative to renting space for their own antennas on our towers. The proliferation of these roaming, network sharing and joint development agreements may have a material adverse effect on us. Consolidation among our customers may result in duplicate or overlapping parts of networks, which may result in a reduction of sites and have a negative effect on revenues and cash flows. Consolidation among our customers will likely result in duplicate or overlapping parts of networks, which may result in a reduction of cell sites and impact revenues from our towers. In the last several years, certain of our larger carrier customers have merged, including Cingular Wireless (now known as AT&T) with AT&T Wireless in October 2004 and Sprint with Nextel in August 2005. Any industry consolidation could decrease the demand for our towers, which in turn may result in a reduction in our revenues and cash flows.
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Table of ContentsIndex to Financial StatementsOur substantial level of indebtedness may adversely affect our ability to react to changes in our business, and we may be limited in our ability to refinance our existing debt or use debt to fund future capital needs. We have a substantial amount of indebtedness (approximately $6.1 billion as of February 19, 2008). As a result of our substantial debt, demands on our cash resources are higher than they otherwise would be, which could negatively impact our business, results of operations and financial condition and the market price of our common stock. As a result of our substantial indebtedness:
We anticipate refinancing the majority, if not all, of our debt and preferred stock within the next five years. If our tower revenue notes are not repaid in full by their anticipated repayment dates (five years from original issuance), then our interest rates substantially increase (by an additional 5% per annum) and monthly principal payments commence. Our mortgage loans have contractual maturities in December 2009 and February 2011. There can be no assurances we will be able to effect this anticipated refinancing on commercially reasonable terms or on terms, including with respect to interest rates, as favorable as our current debt and preferred stock. If we are unable to refinance or renegotiate our debt, our debt service requirements may significantly increase in the future. In early 2007, a crisis began in the sub prime mortgage sector, as a result of rising delinquencies and credit quality deterioration, and has subsequently spread throughout the credit market. In addition to a lack of liquidity in the general credit markets, the current credit crisis has resulted in a widening of credit spreads in the market place in general and for us specifically. There can be no assurances that this credit crisis will not worsen or impact our availability and cost of debt financing including with respect to any refinancings. See “Item 7. MD&A—Liquidity and Capital Resources—Factors Affecting Sources of Liquidity.” A wireless communications industry slowdown may materially and adversely affect our business (including reducing demand for our towers and network services) and the business of our customers. In past years, the wireless communications industry has periodically experienced significant general slowdowns which negatively affected the factors described in these risk factors, influencing demand for tower space and network services. Similar slowdowns in the future may reduce consumer demand for wireless services or negatively impact the debt and equity markets, thereby causing carriers to delay or abandon implementation of new systems and technologies. As a result of competition in our industry, including from some competitors with significantly more resources or less debt than we have, we may find it more difficult to achieve favorable rental rates on our towers. We face competition for site rental customers from various sources, including:
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Table of ContentsIndex to Financial StatementsWireless carriers that own and operate their own tower portfolios are generally substantially larger and have greater financial resources than we have. Competition for tenants on towers may adversely affect rental rates and revenues. New technologies may significantly reduce demand for our towers and negatively impact our revenues. Improvements in the efficiency of wireless networks could reduce the demand for our towers. For example, signal combining technologies that permit one antenna to service multiple frequencies and, thereby, multiple customers, may reduce the need for our towers. In addition, other technologies, such as wireless mesh networks, voice-over-Wi-Fi, femtocells, satellite transmission systems (such as low earth orbiting), and distributed antenna systems, may, in the future, serve as substitutes for or alternatives to leasing that might otherwise be anticipated or expected on our towers had such technologies not existed. Any significant reduction in tower leasing demand resulting from the previously mentioned technologies or other technologies may negatively impact our revenues or otherwise have a material adverse effect on us. New wireless technologies may not deploy or be adopted by customers as rapidly or in the manner projected. There can be no assurances that 3G, wireless data services such as e-mail, internet and mobile video, or other new wireless technologies will be introduced or deployed as rapidly or in the manner projected by the wireless or broadcast industries. In addition, demand and customer adoption rates for such new technologies may be lower or slower than anticipated for numerous reasons. As a result, growth opportunities and demand for our towers as a result of such technologies may not be realized at the times or to the extent anticipated. If we fail to retain rights to the land under our towers, our business may be adversely affected. Our real property interests relating to the land on which our towers reside 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 conduct our business 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 towers. Further, we may not be able to renew ground leases on commercially viable terms. Our ability to retain rights to the land on which our towers reside depends on our ability to renegotiate and extend the terms of the ground leases, subleases and licenses relating to the land on which our towers reside or purchase the land on which such towers reside. Approximately 12% of our towers are on land where our property interests in such land have a final expiration date of less than ten years. Our inability to retain rights to the land on which our towers reside may have a material adverse affect on us. If we are unable to raise capital in the future when needed, we may not be able to fund future growth opportunities. We may need additional sources of debt or equity capital in the future to fund strategic growth opportunities. Additional financing may be unavailable, may be prohibitively expensive, or may be restricted by the terms of our outstanding indebtedness. Additional sales of equity securities would dilute our existing stockholders. If we are unable to raise capital when our needs arise, we may not be able to fund future growth opportunities. FiberTower’s business has certain risk factors different from our core tower business, including an unproven business model, and may produce results that are less than anticipated, resulting in a write-off of all or part of our investment in FiberTower. FiberTower has an unproven business model and operates in the new and largely untested market for facilities-based wireless backhaul services. As such, FiberTower is subject to all of the business risks and uncertainties associated with any new business enterprise and may not be able to operate successfully. FiberTower has generated losses since inception. We anticipate that FiberTower will continue to generate losses for the foreseeable future and may need additional funding to support the development of its business model. Although we believe that there will be demand for backhaul by wireless carriers as the demand for additional wireless minutes of use increases, no assurances can be made that FiberTower will ever generate positive cash flows or that it will produce the results anticipated at the time of our investment. Additional risk factors relating to FiberTower’s business can be found in FiberTower’s filings with the SEC.
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Table of ContentsIndex to Financial StatementsFor the quarter ended September 30, 2007, FiberTower recorded an impairment charge of $61.4 million after concluding that the carrying value of its goodwill was impaired. For the year ended December 31, 2007, we recorded an impairment charge to earnings of $75.6 million related to the write-down of the value of our investment in FiberTower as a result of a decline in value deemed other-than-temporary. FiberTower’s failure to operate successfully, gain market share or accomplish its strategic objectives could negatively impact FiberTower’s per share price and could require us to record additional write-downs of a portion or all of our investment in FiberTower. The potential future write-downs are limited to the carrying value of this investment of $60.1 million as of December 31, 2007. Our lease relating to our Spectrum has certain risk factors different from our core tower business, including that the Spectrum lease may not be renewed or continued, that the option to acquire the Spectrum license may not be exercised, and that the Spectrum may not be deployed, which may result in the revenues derived from the Spectrum being less than those that may otherwise have been anticipated. We entered into a lease as lessor relating to the Spectrum rights we acquired in 2003 pursuant to an FCC license. Our Spectrum lease has an initial term for a $13 million annual lease fee beginning July 23, 2007 until October 1, 2013. Upon the expiration of the initial term of the lease, the lessee will have the right to acquire the Spectrum for $130 million (with a consumer price index adjustment from July 2007) or to renew the lease for a period of up to ten years on the same terms, subject to the annual lease fee increasing to $14.3 million. The lessee’s right to renew the lease or acquire the Spectrum following the initial term is subject to FCC license renewal and approval, which may not be obtained. In the event that the lessee defaults on the Spectrum lease, that the option to acquire the Spectrum license or renew the Spectrum lease is not exercised, or that the Spectrum is not deployed, the revenues derived from the Spectrum may be substantially less than anticipated. If we fail to comply with laws or regulations which regulate our business and which may change at any time, we may be fined or even lose our right to conduct some of our business. A variety of federal, state, local and foreign laws and regulations apply to our business. Failure to comply with applicable requirements may lead to civil penalties or require us to assume indemnification obligations or breach contractual provisions. We cannot guarantee that existing or future laws or regulations, including state and local tax laws, will not adversely affect our business, increase delays or result in additional costs. These factors may have a material adverse effect on us. Sales or issuances of a substantial number of shares of our common stock may adversely affect the market price of our common stock. Future sales of a substantial number of shares of common stock may adversely affect the market price of our common stock. As of February 19, 2008, we had 281.4 million shares of common stock outstanding. In addition, we reserved (1) 17.1 million shares of common stock for future issuance under our various stock compensation plans, (2) 5.9 million shares of common stock for the conversion of our 4% Convertible Senior Notes, and (3) 8.6 million shares of common stock for the conversion of our outstanding convertible preferred stock. A small number of stockholders own a significant percentage of our outstanding common stock. If any one of these stockholders, or any group of our stockholders, sells a large quantity of shares of our common stock, or the public market perceives that existing stockholders might sell a large quantity of shares of our common stock, the market price of our common stock may significantly decline. Our network services business has historically experienced significant volatility in demand, which reduces the predictability of our results. The operating results of our network services business for any particular period may vary significantly and should not necessarily be considered indicative of longer-term results for this activity. In the foreseeable future, network services revenues may decline as a percentage of our total revenues due to our focus on our core rental business, increased competition or other factors.
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Table of ContentsIndex to Financial StatementsIf radio frequency emissions from wireless handsets or equipment on our towers are demonstrated to cause negative health effects, potential future claims could adversely affect our operations, costs and revenues. The potential connection between radio frequency emissions and certain negative health effects, including some forms of cancer, has been the subject of substantial study by the scientific community in recent years. We cannot guarantee that claims relating to radio frequency emissions will not arise in the future or that the results of such studies will not be adverse to us. Public perception of possible health risks associated with cellular and other wireless communications may slow or diminish the growth of wireless companies, which may in turn slow or diminish our growth. In particular, negative public perception of, and regulations regarding, these perceived health risks may slow or diminish the market acceptance of wireless communications services. If a connection between radio emissions and possible negative health effects were established, our operations, costs and revenues may be materially and adversely affected. We currently do not maintain any significant insurance with respect to these matters. Certain provisions of our certificate of incorporation, by-laws and operative agreements and domestic and international competition laws may make it more difficult for a third party to acquire control of us or for us to acquire control of a third party, even if such a change in control would be beneficial to our stockholders. We have a number of anti-takeover devices in place that will hinder takeover attempts and may reduce the market value of our common stock. Our anti-takeover provisions include:
Our by-laws permit special meetings of the stockholders to be called only upon the request of our Chief Executive Officer or a majority of the board of directors, and deny stockholders the ability to call such meetings. Such provisions, as well as the provisions of Section 203 of the Delaware General Corporation Law, may impede a merger, consolidation, takeover or other business combination or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us. In addition, domestic and international competition laws may prevent or discourage us from acquiring towers or tower networks in certain geographical areas or impede a merger, consolidation, takeover or other business combination or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us. We may suffer losses due to exposure to changes in foreign currency exchange rates relating to our operations outside the U.S. We conduct business in Australia, Canada and U.K., which exposes us to fluctuations in foreign currency exchange rates. For the year ended December 31, 2007, approximately 6% of our consolidated net revenues originated outside the U.S., all of which were denominated in currencies other than U.S. dollars, principally Australian dollars. We have not historically engaged in significant hedging activities relating to our non-U.S. dollar operations, and we may suffer future losses as a result of changes in currency exchange rates. Available Information and Certifications We maintain an internet website at www.crowncastle.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K (and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934) are made available, free of charge, through the investor relations section of our internet website at http://investor.crowncastle.com/sec.cfm as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. In addition, our corporate governance guidelines, business practices and ethics policy and the charters of our Audit Committee, Compensation Committee and Nominating & Corporate Governance Committee are available
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Table of ContentsIndex to Financial Statementsthrough the investor relations section of our internet website at http://www.crowncastle.com/investor/corpgoverence.asp, and such information is also available in print to any shareholder who requests it. We submitted the Chief Executive Officer certification required by Section 303A.12(a) of the New York Stock Exchange (“NYSE”) Listed Company Manual, relating to compliance with the NYSE’s corporate governance listing standards, to the NYSE on June 15, 2007 with no qualifications. We have included the certifications of our Chief Executive Officer and Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002 and related rules as Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K.
None.
Our principal CCUSA corporate offices are located in Houston, Texas and Canonsburg, Pennsylvania and are owned. Our principal CCAL corporate office is located in Sydney, Australia and is leased. In the U.S., we also lease and maintain three additional area offices (“Area Offices”) located in (1) Charlotte, North Carolina, (2) Alpharetta, Georgia, and (3) Phoenix, Arizona, which are in addition to the Area Office operated from our Canonsburg, Pennsylvania corporate office. The principal responsibilities of these offices are to manage the renting of tower space on a local basis, maintain the towers already located in the area and service our customers in the area. In addition, we lease additional, smaller district offices, which report to the Area Offices, in locations with high tower concentrations. Towers are vertical metal structures generally ranging in height from 50 to 2,000 feet. In addition, wireless communications equipment may also be placed on building rooftops. Towers are generally located on tracts of land of up to ten acres. These tracts of land support the towers, equipment shelters and, where applicable, guy wires to stabilize the structure. We are actively (1) renegotiating and extending the terms of the ground leases relating to the land on which towers are located and (2) acquiring the land on which such towers reside. For a tabular presentation of the remaining terms to final expiration of the ground leases, subleases, or licenses for the land which we do not own and on which our towers are located as of December 31, 2007, see “Item 7. MD&A—Liquidity and Capital Resources—Contractual Cash Obligations.” As of December 31, 2007, we owned in fee or had perpetual or long-term easements in the land on which approximately 21% of our CCUSA towers reside (up from 18% as of December 31, 2006 after giving effect to the Global Signal Merger), and we leased, subleased or licensed the land on which approximately 76% of our CCUSA towers reside. In addition, as of December 31, 2007, approximately 3% of our CCUSA towers were owned by third parties where we had the right to market space on the tower or where we had sublease arrangements with the tower owner. In Australia, as of December 31, 2007, approximately 99% of the site tenure of the land under our CCAL towers took the form of a lease or license, and we owned the remainder in fee. Our ground leases, subleases and licenses generally have five or ten year initial terms at CCUSA and ten to 15 year initial terms at CCAL, and frequently contain one or more renewal options. Our tower revenue notes issued in 2005 and 2006 are effectively secured by approximately 6,700 of our towers and the cash flows from those towers. Governing documents relating to another approximately 4,900 towers prevent liens from being granted on those towers without approval of a subsidiary of Verizon; however, distributions paid from the entities that own those towers will also service the tower revenue notes. In addition, approximately 9,300 of our towers and the cash flows derived from these towers are effectively pledged as security for the mortgage loans. See note 7 to our consolidated financial statements.
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Table of ContentsIndex to Financial StatementsSubstantially all of our CCUSA towers can accommodate another tenant either as currently constructed or with appropriate modifications to the tower. Additionally, if so inclined as a result of customer demand, we could generally also tear down an existing tower and reconstruct another tower in its place with additional capacity, subject to certain restrictions. As of December 31, 2007, the weighted-average number of tenants per tower is approximately 2.6 on our CCUSA towers. A summary of the number of existing tenants per CCUSA tower as of December 31, 2007, is as follows:
See “Item 1. Business” for a discussion of the location of our towers in the U.S. and Australia, including the percentage of our U.S. towers in the top 50 and 100 BTAs and the primary location of our U.S. towers by acquisition.
We are periodically involved in legal proceedings that arise in the ordinary course of business along with a shareholder derivative lawsuit as described below. Most of these proceedings arising in the ordinary course of business involve disputes with landlords, vendors, collection matters involving bankrupt customers, zoning and variance matters, condemnation or wrongful termination claims. While the outcome of these matters cannot be predicted with certainty, management does not expect any pending matters to have a material adverse effect on us. In February 2007, plaintiffs filed a consolidated petition styled In Re Crown Castle International Corp. Derivative Litigation, Cause No. 2006-49592; in the 234th Judicial District Court, Harris County, Texas which consolidated five shareholder derivative lawsuits filed in 2006. The lawsuit names various of our current and former directors and officers. The lawsuit makes allegations relating to our historic stock option practices and alleges claims for breach of fiduciary duty and other similar matters. Among the forms of relief, the lawsuit seeks alleged monetary damages sustained by CCIC.
None.
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Table of ContentsIndex to Financial StatementsPART II
Price Range of Common Stock Our common stock is listed and traded on the NYSE under the symbol “CCI”. The following table sets forth for the calendar periods indicated the high and low sales prices per share of our common stock as reported by NYSE.
As of February 19, 2008, there were approximately 760 holders of record of our common stock. Dividend Policy We have never declared nor paid any cash dividends on our common stock. It is our current policy to retain our cash provided by operating activities to finance the expansion of our operations, to reduce our debt or to purchase our own stock (either common or preferred). Future declaration and payment of cash dividends, if any, will be determined in light of the then-current conditions, including our earnings, cash flow from operations, capital requirements, financial condition, our relative market capitalization and other factors deemed relevant by the board of directors. In addition, our ability to pay dividends is limited by the terms of our debt instruments under certain circumstances and the terms of our convertible preferred stock. The holders of our 6.25% Convertible Preferred Stock are entitled to receive cumulative dividends at the rate of 6.25% per annum, payable on a quarterly basis. We have the option to pay the dividends on such series of preferred stock in cash or in shares of common stock. The number of shares of common stock required to be issued to pay such dividends is dependent upon the market value of our common stock at the time such dividend is required to be paid. For the years ended December 31, 2006 and 2007, dividends on our 6.25% Convertible Preferred Stock were each paid with approximately $19.9 million in cash. We may choose to continue cash payments of the dividends in the future in order to avoid dilution caused by the issuance of common stock as dividends on our preferred stock. Equity Compensation Plans Certain information with respect to our equity compensation plans is set forth in Item 12 herein.
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Table of ContentsIndex to Financial StatementsPurchases of Equity Securities The following table summarizes information with respect to purchases of our equity securities during the fourth quarter of 2007:
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Table of ContentsIndex to Financial StatementsPerformance Graph The following performance graph is a comparison of the five year cumulative stockholder return on our common stock against the cumulative total return of the NYSE Market Value Index and the SIC Code Index (Communications Services, NEC) for the period commencing December 31, 2002 and ending December 31, 2007. The performance graph assumes an initial investment of $100 in our common stock and in each of the indices. The performance graph and related text are based on historical data and are not necessarily indicative of future performance.
The performance graph above and related text are being furnished solely to accompany this annual report on Form 10-K pursuant to Item 201(e) of Regulation S-K, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of ours, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
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Table of ContentsIndex to Financial Statements
Our selected historical consolidated financial and other data set forth below for each of the five years in the period ended December 31, 2007, and as of December 31, 2003, 2004, 2005, 2006 and 2007 have been derived from our consolidated financial statements. Acquisitions and dispositions can affect the year-to-year comparability of our results. In January 2007, we completed the Global Signal Merger. The results of operations from Global Signal are included in our results from January 12, 2007. The Global Signal Merger significantly increased our tower portfolio and impacted the comparability of our 2007 results to prior periods. Our other significant acquisitions are discussed in “Item 1. Business.” The information set forth below should be read in conjunction with “Item 1. Business,” “Item 7. MD&A” and our consolidated financial statements.
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General Overview Overview We own, operate and lease over 23,000 towers for wireless communications, including the towers acquired in the Global Signal Merger (see “Item 7. MD&A—General Overview—Acquisition of Global Signal”). Revenues generated from our core site rental business represented 93% of our 2007 consolidated revenues. CCUSA, our largest operating segment, accounted for 94% of our 2007 site rental revenues, of which 69% were derived from the four largest wireless carriers in the U.S. The vast majority of our site rental revenues is of a recurring nature and has been contracted for in a prior year. See “Item 1. Business.” The following are certain highlights of our business fundamentals, as further discussed in this Form 10-K, including in “Item 1. Business” and this MD&A:
Our strategy is to increase long-term shareholder value by translating anticipated future growth in our core site rental business into growth in our results of operations on a per share basis. The key elements of our strategy are (see “Item 1. Business” for further discussion):
Our strategy is based on our belief that opportunities will be created by the expected continuation of growth in the wireless communications industry, which depends on the demand for wireless telephony and data services by consumers. As a result of such expected growth in the wireless communications industry, we believe that the demand for our towers will continue and result in organic growth of our revenues due to the co-location of additional tenants on our existing towers. We expect that new tenant additions or modifications of existing installations (collectively referred to as “tenant additions”) on our existing towers should result in significant incremental cash flow due to the relatively fixed costs to operate a tower (which tend to increase at approximately the rate of inflation). The following is a discussion of certain growth trends in the wireless communications industry (see “Item 1. Business” for further discussion):
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Table of ContentsIndex to Financial StatementsThe impact of anticipated increases to site rental revenues from the demand for antenna space on our towers may be tempered somewhat by recent carrier consolidation (including Cingular Wireless [now known as AT&T] merging with AT&T Wireless in 2004 and Sprint merging with Nextel in 2005), which could result in duplicate or overlapping networks. However, we expect that the termination of leases as a result of recent carrier consolidation and related duplicate or overlapping networks will be spread over multiple quarters as existing lease obligations expire. In addition, we believe we are adding more leases from all of our customers than the total number of leases we believe will eventually be terminated as a result of the two mergers noted above. Consequently, we currently do not believe that lease terminations from carrier consolidation will have a material adverse affect on our results. Slow downs in the U.S. economy, including the wireless communication industry, may reduce consumer demand for wireless communications, cause carriers to delay improvements to network quality and coverage and delay or abandon introduction of next generation wireless technologies, which in turn could reduce demand for our towers. Many commentators have expressed uncertainty about the direction and relative strength of the U.S. economy. Currently, we have not experienced a slow down in new leasing of our towers. In addition to consumer demand for wireless services as discussed above, factors affecting the growth in our revenues include: (1) availability and location of our towers and alternative sites, (2) availability and cost of capital to our customers, (3) our customers’ willingness to co-locate, (4) local restrictions on the proliferation of towers, (5) technological changes affecting the number of communications sites needed to provide wireless communication services to a given geographical area, and (6) our ability to efficiently satisfy our customers’ service requirements. Acquisition of Global Signal On January 12, 2007, we completed the Global Signal Merger in a stock and cash transaction valued at approximately $4.0 billion, exclusive of debt of approximately $1.8 billion that remained outstanding as obligations after the Global Signal Merger. As a result of the completion of the Global Signal Merger, we issued approximately 98.1 million shares of common stock and paid the maximum cash consideration of $550 million to the stockholders of Global Signal and reserved for issuance approximately 0.6 million shares of common stock issuable pursuant to Global Signal warrants. We financed the GS $550M Consideration primarily with cash received from the issuance of tower revenue notes in November 2006. We entered into the Global Signal Merger primarily because of anticipated growth opportunities in the Global Signal tower portfolio, including through leveraging our management team and customer service across an enhanced national footprint. We believe such opportunities for growth will be driven by the previously mentioned growth trends in the wireless communications industry. The Global Signal Merger significantly increased our tower portfolio (by 10,749 towers) and significantly impacted the comparability of our results of operations to prior years. Specifically, the Global Signal Merger is primarily responsible for the significant increase between 2006 and 2007 in our site rental revenues, site rental costs of operations, general and administrative expenses, integration costs, depreciation, amortization and accretion and income tax benefits. Global Signal revenues, cost of operations and gross margins for the year ended December 31, 2006 were approximately $496.0 million, $221.2 million and $274.7 million, respectively. Although the Global Signal Merger resulted in an increase in general and administrative expenses in nominal dollars, our general and administrative expenses decreased as a percentage of revenues. We incurred costs of $25.4 million for 2007 related to our integration of Global Signal’s operations and tower portfolio into our policies, procedures, operations and systems. We anticipate the integration of Global Signal’s operations and tower portfolio will be completed by the end of the first quarter of 2008. The change from a provision to a benefit for income taxes between 2006 and 2007 was related to our change from a net deferred tax asset position to a net deferred tax liability position that resulted from the deferred tax liability of $556.6 million recorded as part of the allocation of the purchase price of the Global Signal Merger offset by the reversal of our federal valuation allowance of $259.7 million. See note 2 to our consolidated financial statements for a further discussion of the Global Signal Merger, including (1) the allocation of the purchase price and (2) our unaudited pro forma consolidated results of operations for the years ended December 31, 2006 and 2007 as if the Global Signal Merger were completed as of the beginning of each such period. See also notes 4, 5, 7, 8 and 19 to our consolidated financial statements.
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Table of ContentsIndex to Financial StatementsResults of Operations The following discussion of our results of operations should be read in conjunction with “Item 1. Business,” “Item 7. MD&A—Liquidity and Capital Resources” and our consolidated financial statements. The following discussion of our results of operations is based on consolidated financials statements prepared in accordance with generally accepted accounting principals in the U.S. that require us to make estimates and judgments that affect the reported amounts (see “Item 7. MD&A—Accounting and Reporting Matters—Critical Accounting Policies and Estimates” and note 1 to our consolidated financial statements). The construction and acquisition of towers affects the year-to-year comparability of our results due to the fact that our results only reflect revenues generated from these towers following the date of their construction or acquisition. A large majority of the increase between 2006 and 2007 in our site rental revenues, site rental costs of operations, general and administrative expenses, integration costs, depreciation, amortization and accretion and income tax benefits is attributable to the Global Signal Merger. See “Item 7. MD&A—General Overview—Acquisition of Global Signal.” In addition to the towers acquired in the Global Signal Merger, we built or acquired 483, 487 and 188 towers in 2005, 2006 and 2007, respectively.
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Table of ContentsIndex to Financial StatementsComparison of Consolidated Results The following is a comparison of our 2005, 2006 and 2007 consolidated results of operations:
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Table of ContentsIndex to Financial Statements2006 and 2007. Our consolidated results of operations for 2006 and 2007, respectively, predominately consist of our CCUSA segment, which accounted for (1) 92% and 94% of consolidated net revenues, (2) 92% and 94% of consolidated gross margins, and (3) 97% and 102% of consolidated net loss. Our operating segment results for 2006 and 2007, including CCUSA, are discussed below (see “Item 7. MD&A—Results of Operations—Comparison of Operating Segments”). Net revenues for 2007 increased by $597.3 million, or 76%, from 2006, of which site rental revenues represented 99% of the overall increase. This increase in site rental revenues was driven by (1) the towers acquired in connection with the Global Signal Merger, and to a lesser extent, (2) tenant additions on our pre-Global Signal Merger towers (occurring during or after 2006), and (3) the 474 towers acquired from Mountain Union. Tenant additions were influenced by the previously mentioned growth trends in the wireless communications industry. Site rental gross margins (site rental revenues less site rental costs of operations) for 2007 increased by $358.9 million, or 74%, from 2006. The increase in the site rental gross margins was predominately driven by the previously mentioned increase in site rental revenues. We expect that future increases in site rental revenues resulting from tenant additions on our towers will have a high incremental margin (percentage of revenue growth converted to gross margin) given the relatively fixed nature of the costs to operate our towers. In addition, the Global Signal Merger resulted in (1) an increase in general and administrative expenses in nominal dollars but a decrease in general and administrative expenses as a percentage of net revenues as a result of synergies from operating a larger tower portfolio, (2) the vast majority of the increase in depreciation, amortization and accretion expense, (3) the integration costs for 2007, (4) additional interest expense and amortization of deferred financing costs relating to the $1.8 billion of mortgage loans, and (5) our recording of income tax benefits resulting from the deferred tax liability recorded in purchase accounting that resulted in a change from a net deferred tax asset position to a net deferred tax liability position. Our net loss for 2007 increased by $180.9 million from 2006, predominately due to (1) the net impact of the previously mentioned Global Signal Merger, (2) an impairment charge of $75.6 million relating to our investment in FiberTower, and (3) asset write-down charges ($57.6 million) and restructuring charges ($3.1 million) related to Modeo totaling $60.7 million, offset by (4) growth in our site rental business on pre-Global Signal Merger towers. Pro forma 2006 and 2007. The following is a discussion of our unaudited pro forma consolidated results of operations as if the Global Signal Merger were completed as of January 1 for the years ended December 31, 2006 and 2007. These unaudited pro forma amounts are presented and discussed for illustrative purposes only, are not necessarily indicative of future consolidated results of operations and reflect cost savings from the Global Signal Merger in the period in which such cost savings are achieved. See note 2 to our consolidated financial statements for a presentation of our pro forma condensed consolidated results of operations. Pro forma net revenues for 2007 increased by $103.2 million, or 8%, from 2006. Site rental revenues, which represented 93% of the overall increase in pro forma net revenues, increased by $95.6 million, or 8%, from 2006 primarily due to tenant additions across our combined tower portfolio. The increase in pro forma site rental revenues was driven by tenant additions across our entire tower portfolio and to a lesser extent, the 474 towers acquired from Mountain Union. Pro forma site rental gross margins for 2007 increased by $74.2 million, or 10%, from 2006. The increase in the pro forma site rental gross margins was related to the previously mentioned increase in site rental revenues. Our pro forma loss from continuing operations for 2007 increased by $75.8 million from 2006 predominately due to (1) an increase of $86.0 million in interest expense related to additional borrowings used to fund the GS $550M Consideration and purchases of our common stock, (2) an impairment charge of $75.6 million relating to our investment in FiberTower, and (3) asset write-down charges ($57.6 million) and restructuring charges ($3.1 million) related to Modeo totaling $60.7 million, offset by growth in our site rental business across our combined tower portfolio. In addition, integration costs of $25.4 million for 2007 were offset by a decrease in general and administrative expenses of $26.8 million, or 16%, from 2006 due predominately to cost synergies achieved as a result of operating a larger tower portfolio.
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Table of ContentsIndex to Financial Statements2005 and 2006. Our consolidated results of operations for 2005 and 2006, respectively, predominately consist of our CCUSA segment, which accounted for (1) 92% and 92% of consolidated net revenues, (2) 92% and 92% of consolidated gross margins, and (3) 98% and 97% of consolidated net loss. Our operating segment results for 2005 and 2006, including CCUSA, are discussed below (see “Item 7. MD&A—Results of Operations—Comparison of Operating Segments”). Net revenues for 2006 increased by $111.5 million, or 17%, from 2005. The increase for 2006 resulted from an increase in site rental revenues of $99.6 million, which represents 89% of the overall increase in net revenues. The increase in site rental revenue for 2006 was primarily driven by (1) tenant additions or modifications to existing installations, (2) the leases (as originally acquired) related to the combined 941 towers from Trintel and Mountain Union, and (3) an increase in non-cash straight-line rents primarily relating to the renewal of certain leases. Site rental gross margins (site rental revenues less site rental costs of operations) for 2006 increased by $84.5 million, or 21%, from 2005. The incremental margin is 85% of the related increase in site rental revenues for 2006. The increase in the site rental gross margin percentage and the related high incremental margin percentage was driven by tenant additions on existing towers that did not result in significant incremental tower operating costs due to the relatively fixed nature of the costs to operate our towers. During 2005, we refinanced $1.5 billion of our high yield notes with proceeds from the $1.9 billion tower revenue notes resulting in a reduction in our weighted-average interest rate and simplification of our capital structure. During 2005, we recorded an aggregate loss of $283.8 million on the purchase and redemption of the $1.5 billion high yield notes and a portion of our 4% convertible notes. During 2006, we increased our debt by approximately $1.2 billion or 55% from 2005 primarily by borrowing $1.55 billion of tower revenue notes in November 2006, which in part refinanced $1 billion of outstanding debt under a credit facility. The proceeds of our 2006 borrowings were used to fund purchases of our common stock, the GS $550M Consideration related to the Global Signal Merger, and the acquisition of Mountain Union. The increase in interest expense and amortization of deferred financing costs for 2006 of $28.5 million or 21% from 2005 was driven by the increase in debt partially offset by a reduction in our weighted average interest rates. See “Item 7. MD&A—Liquidity and Capital Resources” and note 7 to our consolidated financial statements for further discussion. Net loss for 2006 improved by $358.0 million from 2005. The improvement in the net loss was primarily driven by (1) the $278.0 million decrease in losses on purchases and redemption of debt related to the refinancing of $1.6 billion of debt during 2005, (2) the $97.2 million increase in operating income resulting primarily from tenant additions on our towers, offset by (3) the $28.5 million increase in interest expense and amortization of deferred financing costs as a result of an increase in our debt, partially reduced by the decrease in our weighted average interest rates. The dividends on preferred stock in 2006 of $20.8 million are related to our 6.25% convertible preferred stock. The decrease in the preferred stock dividends of $28.6 million from 2005 relates to the redemption of the 8 1 /4% convertible preferred stock in December 2005. See note 10 to our consolidated financial statements. Comparison of Operating Segments Our reportable operating segments for 2007 are (1) CCUSA, primarily consisting of our U.S. (including Puerto Rico) tower operations, and (2) CCAL, our Australian tower operations. Our financial results are reported to management and the board of directors in this manner. We have reclassified the Corporate Office and Other segment into the CCUSA segment, reflecting the significance of the CCUSA segment to our consolidated business following the Global Signal Merger. We have reclassified the Emerging Businesses segment, consisting of our Modeo business, into the CCUSA segment following the lease of the Spectrum and write-off of substantially all of the Modeo assets other than the Spectrum (see note 17 to our consolidated financial statements). Segment information for all periods has been reclassified to reflect these changes in reportable segments. See note 18 to our consolidated financial statements for segment results and a reconciliation of net income (loss) to Adjusted EBITDA (defined below). Our measurement of profit or loss currently used to evaluate our operating performance and operating segments is earnings before interest, taxes, depreciation, amortization and accretion, as adjusted (“Adjusted EBITDA”). Our measure of Adjusted EBITDA may not be comparable to similarly titled measures of other companies, including
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Table of ContentsIndex to Financial Statementscompanies in the tower sector, and is not a measure of performance calculated in accordance with U.S. generally accepted accounting principles (“GAAP”). We define Adjusted EBITDA as net income (loss) plus restructuring charges (credits), asset write-down charges, integration costs, depreciation, amortization and accretion, losses on purchases and redemptions of debt, interest and other income (expense), interest expense and amortization of deferred financing costs, impairment of available-for-sale securities, benefit (provision) for income taxes, minority interests, cumulative effect of a change in accounting principle, income (loss) from discontinued operations and stock-based compensation expense (see note 12 to our consolidated financial statements). The calculation of Adjusted EBITDA for our operating segments is set forth in note 18 to our consolidated financial statements. Adjusted EBITDA is not intended as an alternative measure of operating results or cash flow from operations as determined in accordance with GAAP, and Adjusted EBITDA may not be comparable to similarly titled measures of other companies. Adjusted EBITDA is discussed further under “Item 7. MD&A—Accounting and Reporting Matters—Non-GAAP Financial Measures.” CCUSA—2006 and 2007. Net revenues for 2007 increased by $576.3 million, or 79%, from 2006. This increase in net revenues resulted from an increase in site rental revenues of $570.9 million, or 89%, for the same periods. This increase in site rental revenues was driven by (1) the towers acquired in connection with the Global Signal Merger, and to a lesser extent, (2) new tenant additions, and (3) the 474 towers acquired from Mountain Union. Tenant additions were influenced by the previously mentioned growth in the wireless communications industry. Although we continue to derive a large portion of our site rental revenues from the four largest carriers in the U.S., we have experienced an increase in tenant additions during 2007 from emerging wireless carriers and second tier carriers, such as those offering wireless data technologies and flat rate calling plans. Network services and other revenues for 2007 increased by $5.4 million, or 6%, from 2006. The increase in network services and other revenues was as a result of performing services on a larger portfolio of towers due to the Global Signal Merger. Global Signal did not operate a network services business, so the network services and other revenues performed on the Global Signal towers increased during each quarter of 2007 as we began marketing services for those towers. Exclusive of network services and other revenues derived from the Global Signal towers, network services and other revenues declined modestly from 2006 to 2007. The network services business is typically non-recurring, and the volume of activity can vary significantly from period to period in relation to tenant additions on our towers. Site rental gross margins for 2007 increased by $345.6 million, or 77%, from 2006. The increase in the site rental gross margins was related to the previously mentioned 89% increase in site rental revenues primarily driven by the towers acquired in connection with the Global Signal Merger and, to a lesser extent, from tenant additions. Site rental gross margins as a percentage of site rental revenues for 2007 decreased by 4.2 percentage points from 2006 to 65% primarily as a result of the less mature Global Signal towers that have lower revenues per tower and higher ground rent expense as a percentage of revenues than our pre-Global Signal Merger towers. We believe the Global Signal towers have significant additional revenue and margin growth opportunities provided by potential future tenant additions on those towers. General and administrative expenses for 2007 increased by $33.8 million from 2006 but decreased to 10% of total net revenues from 13% of total net revenues. General and administrative expenses are inclusive of stock-based compensation charges as discussed further below. The increase in general and administrative expenses in nominal dollars was primarily related to headcount additions and related employee costs as a result of the Global Signal Merger partially offset by cost reductions from the termination of the Modeo employees (see notes 17 and 19 to our consolidated financial statements). The decrease in general and administrative expenses as a percentage of net revenues was driven by synergies from operating a larger tower portfolio as a result of the Global Signal Merger. Adjusted EBITDA for 2007 increased by $319.5 million, or 80%, from 2006. Adjusted EBITDA was positively impacted by the same factors that drove the increase of 89% in our site rental revenues including the towers acquired in connection with the Global Signal Merger and tenant additions. We recognized stock-based compensation expense from continuing operations of $14.9 million and $23.5 million, respectively, for 2006 and 2007. The primary reason for fluctuations in the stock-based compensation expense during 2006 to 2007 is (1) accelerated vesting of awards granted in 2004 and 2005 and (2) our grants in 2006 and 2007. During 2005, restricted stock granted during 2004 and 2005 accelerated vested based on the market performance of our common stock. This accelerated vesting resulted in the recognition of $15.2 million of expense
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Table of ContentsIndex to Financial Statementsin 2005 that was originally to be recognized over the original vesting period (through 2009 and 2010). In addition, during 2006 and 2007 we granted 1.2 million and 1.4 million shares, respectively, of restricted stock with grant date weighted-average requisite service periods of 2.5 and 2.1 years, respectively. See note 12 to our consolidated financial statements. In July 2007, we entered into a lease of our Spectrum. The Spectrum is leased to a venture formed by Telcom Ventures, LLC and Columbia Capital LLC (“CCTV”) for a $13 million annual lease fee with an initial term from July 23, 2007 until October 1, 2013. As a result, we eliminated substantially all of the future Modeo operating and administrative expenses, which for 2007 were $4.0 million. In addition, for 2007, we recorded (1) site revenues of $5.7 million from the Spectrum lease, (2) asset write-down charges of $57.6 million as a result of the write-off of substantially all of our Modeo assets other than the Spectrum, and (3) restructuring charges of $3.1 million related to the termination of the Modeo employees. See note 17 to our consolidated financial statements. Integration costs for 2007 were $25.4 million and related to the Global Signal Merger. These integration costs included, among other things, expenses for retention bonus obligations with employees of the former Global Signal, costs for contracted employees directly related to the integration and stock-based compensation charges with respect to restricted stock awards assumed in the Global Signal Merger. See “Item 7. MD&A—General Overview—Acquisition of Global Signal” and notes 2 and 19 to our consolidated financial statements. Depreciation, amortization and accretion for 2007 increased by $254.3 million, or 99%, from 2006. The vast majority of this increase was related to the depreciation and amortization attributable to property and equipment and intangible assets recorded in connection with the purchase price allocation for the Global Signal Merger. Our tower assets are recorded at cost (estimated replacement cost for those acquired) and are depreciated using a useful life that is defined as the period equal to the shorter of 20 years or the term of the underlying ground lease (including renewal options). See “Item 7. MD&A—Accounting and Reporting Matters—Critical Accounting Policies and Estimates.” Interest expense and amortization of deferred financing costs for 2007 increased by $188.0 million, or 118%, from 2006. The increase was primarily attributable to additional indebtedness. The components of the increase in indebtedness primarily include (1) the issuance of the tower revenue notes ($1.55 billion) in November 2006, (2) the mortgage loans ($1.8 billion) that remained outstanding as obligations after the Global Signal Merger, and (3) the issuance of term loans ($650.0 million) during the first half of 2007. This additional indebtedness was offset by our repayment of $1.0 billion of borrowings under a credit facility using proceeds of the $1.55 billion tower revenue notes. Exclusive of the mortgage loans, our net increase in debt during 2007 primarily related to (1) funding the GS $550M Consideration and (2) purchases of our common stock in 2007. See “Item 7. MD&A—Liquidity and Capital Resources—Overview.” In 2007, we recorded an impairment charge of $75.6 million related to a decline in the value of our investment in FiberTower that was deemed other-than-temporary. Future declines in the stock price of FiberTower may be determined to be other-than-temporary and result in further write-downs of our investment. These potential future write-downs are limited to the carrying value of our investment of $60.1 million as of December 31, 2007. See “Item 1A. Risk Factors” and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.” Benefit (provision) for income taxes for 2007 was a benefit of $95.3 million compared to a provision of $0.5 million for 2006. We recorded a deferred tax liability of $556.6 million as part of the allocation of the purchase price of the Global Signal Merger, which was offset in part by the reversal of our federal valuation allowance of $259.7 million. As a result, we (1) are no longer in a net deferred tax asset position, (2) are generally no longer recording a valuation allowance on net deferred tax assets because of our historical net operating losses, and (3) can generally record the benefit of tax impacts of our results in the statement of operations and comprehensive income (loss). Income from discontinued operations of $5.7 million for 2006 relates primarily to the reversal of liabilities previously established in conjunction with the sale of our former CCUK operations, as a result of the termination of related contingencies during 2006. Net income (loss) for 2007 was a loss of $227.9 million, an increase from a loss of $40.8 million for 2006. The increased loss was primarily due to (1) the increases in depreciation, amortization and accretion and interest expense, all of which were predominantly related to the Global Signal Merger, (2) an impairment charge of $75.6 million related to our investment in FiberTower, and (3) asset write-down charges ($57.6 million) and restructuring
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Table of ContentsIndex to Financial Statementscharges ($3.1 million) related to Modeo totaling $60.7 million, partially offset by (1) the increase in Adjusted EBITDA as a result of the towers acquired in the Global Signal Merger and growth in our site rental business and (2) our benefit for income taxes. CCAL—2006 and 2007. The increases and decreases between 2006 and 2007 are inclusive of exchange rate fluctuations. Changes between the two periods were influenced by the average exchange rates from 2006 and 2007 of 0.7536 and 0.8387, respectively. See “Item 7A. Quantitative and Qualitative Disclosures about Market Risk.” Total net revenues for 2007 increased by $21.0 million, or 35%, from 2006. The increase in total net revenues was due to growth in site rental revenues primarily related to (1) tenant additions on our towers, (2) exchange rate fluctuations, (3) contractual escalations on existing leases with variable escalations, and (4) new towers acquired after the third quarter of 2006. See “Item 1. Business—The Company—CCAL.” Adjusted EBITDA for 2007 increased by $11.7 million, or 40%, from 2006. Adjusted EBITDA was positively impacted by the same factors that drove the increase in site rental revenues. More specifically, site rental gross margins increased by $13.3 million, or 37%, to 70% of site rental revenues, for 2007 from $36.4 million, or 69% of site rental revenues, for 2006. The $13.3 million incremental margin represents 71% of the related increase in site rental revenues. In May 2007, CCAL (our 77.6% majority-owned subsidiary) issued a capital return of approximately $166.0 million, including $37.2 million to the minority shareholders of CCAL. The capital return was funded by CCOC through an intercompany borrowing by CCAL. Upon issuance of the capital return, we recorded a reduction in additional paid-in capital of $8.9 million as a result of the capital return to the CCAL minority shareholders exceeding the carrying value of the minority interests in CCAL. The intercompany borrowing and related capital return was issued to increase the leverage of the CCAL business. The losses applicable to the minority interest shareholders will be included in our results in the future as long as their share of the CCAL losses exceeds their equity interests. Net income (loss) for 2007 was income of $5.1 million, an improvement of $6.2 million from 2006. The change from net loss to net income was primarily driven by the same factors that drove the improvement in Adjusted EBITDA, partially offset by the increase in stock-based compensation charges of $2.9 million (see note 12 to our consolidated financial statements). CCUSA—2005 and 2006. Net revenues for 2006 increased by $106.2 million, or 17%, from 2005. Of the $106.2 million increase in net revenues, $94.4 million, or 89%, relates to site rental revenues. Network services revenues for 2006 increased by $11.8 million from 2005. Network services revenues should continue to be somewhat volatile as these revenues, unlike site rental revenues, are typically not under long-term contract. The increase in site rental revenue for 2006 was primarily driven by the following that occurred during or after 2005 (1) tenant additions, (2) the combined 941 towers acquired from Trintel and Mountain Union, and (3) an increase in non-cash straight-line rents primarily relating to the renewal of certain leases. General and administrative expenses for 2006 decreased by $9.8 million to 13% of total net revenues from 16% of total net revenues for 2005. General and administrative expenses for 2006 included stock-based compensation expense of $14.5 million, which represents a decrease of $8.3 million from 2005. Stock-based compensation expense decreased from 2005 primarily as a result of accelerated vesting of shares of restricted stock awards during 2005 based on the performance of our stock. General and administrative expenses were also reduced as a result of the consolidation of certain management functions in 2005. The decrease in general and administrative expenses as a percentage of total net revenues is primarily a function of an increase in revenue without any significant increases in headcount as well as the decrease in stock-based compensation expense. Adjusted EBITDA for 2006 increased by $85.0 million, or 27%, from 2005. Adjusted EBITDA was positively impacted by the high incremental margin from tenant additions on existing towers that did not result in significant incremental tower operating costs due to the relatively fixed nature of the costs to operate our towers. More specifically, site rental gross margins increased by $77.9 million, or 21%, to 70% of site rental revenues, for 2006 from $370.0 million, or 67% of site rental revenues, for 2005. The $77.9 million incremental margin represents 83% of the related increase in site rental revenues, reflecting the relatively fixed nature of the costs to operate our towers.
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Table of ContentsIndex to Financial StatementsDepreciation, amortization and accretion for 2006 increased by $3.8 million, or 2%, from 2005. The increase was primarily attributable to the acquisition of the combined 941 Trintel and Mountain Union towers by CCUSA and an increase in our tower assets as a result of capital expenditures for both the modification to and maintenance on tower assets (see “Item 7. MD&A—Liquidity and Capital Resources—Investing Activities” for a further discussion of our capital expenditures), offset by the effects of our purchase of, or extension of ground leases relating to, the land on which our towers reside that resulted in increases in the useful life of our towers. Operating income for 2006 increased by $91.0 million, or 304%, from 2005. The increase in operating income was primarily driven by (1) the aforementioned $77.9 million increase in site rental gross margin and (2) the $6.2 million increase in network services and other gross margin, which is a reflection of our customers’ continued demand for our installation services. Losses on the purchases and redemptions of debt for 2006 decreased by $278.0 million from 2005. The decrease is primarily related to refinancing activities in 2005 that were completed to reduce our weighted-average cost of debt and simplify our capital structure. For 2005, the loss of $283.8 million related to the purchase and redemption of $1.6 billion of our debt securities repaid with proceeds from the tower revenue notes issued in 2005. Interest expense and amortization of deferred financing costs for 2006 increased by $29.1 million from 2005. The increase is primarily attributable to the approximately $1.2 billion increase in debt, including the borrowings under our credit facility in June 2006 and the tower revenue notes issued November 2006, offset by the refinancing of debt in June 2005, which reduced the weighted-average coupon on our debt, and the repayment of our previously outstanding credit facility entered into in July 2005. See note 7 to our consolidated financial statements. Our financing activities in 2005 and 2006 reflect (1) our focus to decrease our cost of debt and (2) our desire to position ourselves to have the financial flexibility to utilize our internally generated capital for investments which we believe satisfy our investment return criteria, including opportunistic share purchases, new assets and further investments in our existing assets (see “Item 7. MD&A—Liquidity and Capital Resources” for further discussion). Income from discontinued operations of $5.7 million for 2006, relates primarily to the reversal of liabilities previously established in conjunction with the sale of our former CCUK operations, as a result of the termination of related contingencies during 2006. Income from discontinued operations for 2005, relates primarily to OpenCell, which was sold on May 9, 2005. The cumulative effect of change in accounting principle for asset retirement obligations in 2005 represents the charge recorded upon adoption of FASB Interpretation No. 47 (“FIN 47”), Accounting for Conditional Asset Retirement Obligations—An interpretation of FASB Statement No. 143. See note 1 to our consolidated financial statements. Net loss for 2006 decreased by $352.1 million to $40.8 million from $392.9 million for 2005. The reduction in net loss was primarily driven by a $278.0 million decrease in losses on the purchase and redemption of debt, $91.0 million increase in operating income and $29.1 million increase in interest expense and deferred financing costs as a result of an increase in debt, partially reduced by the decrease in our weighted average interest rate. CCAL—2005 and 2006. The increases and decreases between 2005 and 2006 are inclusive of exchange rate fluctuations. Exchange rates did not have a significant impact on the changes between these two periods. See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.” Total net revenues for 2006 increased by $5.3 million, or 10%, from 2005. This increase is predominately driven by growth in site rental revenues, which reflects tenant additions on our towers and escalations on existing leases with variable escalations.
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Table of ContentsIndex to Financial StatementsAdjusted EBITDA for 2006 increased by $7.4 million, or 34%, from 2005. Adjusted EBITDA was positively impacted by the incremental margin from the tenant additions on existing towers and contractual escalations on existing leases with variable escalations. More specifically, site rental gross margins increased by $6.6 million, or 22%, to 69% of site rental revenues, for 2006 from $29.8 million, or 63% of site rental revenues, for 2005. The $6.6 million incremental margin represents 127% of the related increase in site rental revenues, primarily reflecting an improvement in the costs to operate our CCAL towers. Operating income (loss) for 2006 improved by $6.2 million from 2005. The change from operating loss to operating income is primarily due to the $6.6 million increase in gross margin from site rental revenues, offset slightly by an increase in general and administrative expenses as a result of increased employee related costs, including additional stock-based compensation expense as a result of the modification of the CCAL option plan to enable employees to require CCAL to periodically settle CCAL options in cash. Net loss for 2006 improved by $5.9 million from 2005. The improvement in net loss is primarily driven by the same factors that drove the improvement in operating income (loss), partially offset by the minority interest shareholder’s 22% portion of the results. Impact of Inflation Other than the towers acquired from Global Signal, the majority of our towers were acquired between 1999 and 2001; tower assets and related depreciation expense do not reflect the impact of inflation occurring subsequent to the acquisition of these towers. The impact of inflation on our results of operations for the 2005, 2006 and 2007 was not significant. Liquidity and Capital Resources Overview Strategy. We seek to invest our available capital among the investment alternatives that we believe exhibit sufficient potential to improve our long-term results of operations on a per share basis. We have and we expect to continue to invest in discretionary investments such as (1) opportunistically purchasing our own common stock, (2) entering into strategic acquisitions of tower businesses, (3) selectively constructing or acquiring towers, (4) acquiring the land on which towers are located, (5) improving and structurally enhancing our existing towers, (6) constructing distributed antenna systems, and (7) purchasing or redeeming our debt or preferred stock. See “Item 1. Business” for a further discussion. Our site rental business is generally characterized by a stable cash flow stream generated by revenues under long-term contracts that should be recurring for the foreseeable future. Over the last five years, our cash flows from operations have been sufficient to fund our cash interest payments and sustaining capital expenditures. We expect our cash flows from operations over the next 12 months will be sufficient to cover our debt service obligations (principal payments and cash interest) and our sustaining capital expenditures (discussed further below), including maintenance activities on our towers. We expect to fund the previously mentioned discretionary investments with cash on hand, operating cash flows, borrowings under our existing revolving credit facility and potential future debt financings. In the case of funding acquisitions, we also may utilize issuances of our common stock. In addition, we expect to continue to increase our debt in nominal dollars if we realize anticipated future growth in our operating cash flows in order to maintain debt leverage that we believe is appropriately leveraged to drive long-term shareholder value. With respect to future debt financings, we plan to continue to utilize a combination of bank debt and securitized notes with a similar structure to our existing tower revenue notes and mortgage loans. The amount of future debt financing is influenced by such factors as (1) our belief in the potential long-term return of our previously mentioned discretionary investments, (2) self imposed limits such as our targeted leverage ratio of generally six to eight times Adjusted EBITDA and interest coverage ratio of generally two times Adjusted EBITDA, (3) our restrictive debt covenants, discussed further below, and (4) the availability of financing at attractive rates, particularly in light of the current crisis in the credit markets (see “Item 1A. Risk Factors” and “Item 7. MD&A—Liquidity and Capital Resources—Factors Affecting Sources of Liquidity”).
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Table of ContentsIndex to Financial Statements2007 Highlights and Recent Developments. During 2007, we took certain actions in furtherance of our strategy of seeking long-term growth in our results of operations on a per share basis, including the Global Signal Merger and opportunistic purchases of our common stock. These purchases of our common stock and other actions taken to reduce our actual and potential shares of common stock outstanding have a short-term dilutive impact on our results due to the increased interest expense on the related additional borrowings. However, we believe these actions will drive long-term shareholder value and better position us to translate potential future growth in our site rental business into growth of our operating results on a per share basis. Our 2007 significant investing and financing activities are discussed further below and in the notes to our consolidated financial statements. We completed the Global Signal Merger on January 12, 2007 in a stock and cash transaction valued at approximately $4.0 billion exclusive of the debt that remained outstanding as obligations of Global Signal we acquired. As a result of the Global Signal Merger, we issued approximately 98.1 million shares of common stock and paid the maximum GS $550M Consideration. The $1.8 billion of mortgage loans have a structure similar to our tower revenue notes and are securitized by the cash flows of a majority of the Global Signal towers. Our decision to fund a portion of the Global Signal Merger in cash was in lieu of our issuing approximately 16.0 million additional shares of our common stock. We utilized cash from the issuance of our tower revenue notes in 2006 to fund the GS $550M Consideration. See “Item 7. MD&A—General Overview—Acquisition of Global Signal” and “Item 7. MD&A—Liquidity and Capital Resources—Financing Activities.” During 2007, we purchased 21.0 million shares of our common stock for approximately $729.8 million in cash (or an average price of $34.68 per share). The cash to fund the common stock purchases was predominately from borrowings under our term loans and revolving credit facility. Consistent with our previously mentioned strategy to allocate capital efficiently, we expect to continue to opportunistically purchase our common stock from time to time. Liquidity Position. As of December 31, 2007, after giving effect to our $75.0 million of borrowings under our revolving credit facility and our purchase of 1.1 million shares of common stock in January 2008, we had consolidated cash and cash equivalents of $108.2 million (exclusive of restricted cash of $170.6 million), consolidated long-term and short-term debt of $6.1 billion, consolidated redeemable preferred stock of $313.8 million and consolidated stockholders equity of $3.1 billion. As of February 19, 2008, we also have $100.0 million of availability under our revolving credit facility maturing in January 2009. As of December 31, 2007, our outstanding debt has a weighted-average interest rate of 5.4% and predominately consists of $5.3 billion of tower revenue notes and mortgage notes that are securitized by the cash flows from the vast majority of our CCUSA towers, as well as $645.1 million of term loans due in 2014. If our tower revenue notes are not repaid in full by their anticipated repayment dates (five years from original issuance) then our interest rates substantially increase (by at least an additional 5% per annum) and monthly principal payments commence. We anticipate refinancing the tower revenue notes and mortgage loans with new debt similar to our existing tower revenue notes on or before their repayment dates occurring between December 2009 and November 2011, respectively. Our mortgage loans have contractual maturities in December 2009 and February 2011. Our ability to obtain borrowings that are securitized by tower cash flows and are at commercially reasonable terms will depend on various factors such as, our ability to generate cash flows on our existing towers and the state of the capital markets. See “Item 7. MD&A—Liquidity and Capital Resources—Factors Affecting Sources of Liquidity” Our debt and redeemable preferred stock is discussed further in notes 7 and 10 to our consolidated financial statements. Summary Cash Flows Information
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Table of ContentsIndex to Financial StatementsOperating Activities The increase in net cash provided by operating activities for 2007 of $74.6 million from 2006 was due primarily to the cash flow generated by the towers acquired in connection with the Global Signal Merger and the growth in our core site rental business. The increase for 2007 was offset by an increase in cash interest paid of $179.1 million, payments for merger-related fees incurred by Global Signal of approximately $16.3 million, prepayments of long-term easements for land under our towers of $14.9 million and integration costs related to the Global Signal Merger of $24.3 million. We expect net cash provided by operating activities for 2008 will be greater than 2007, primarily as a result of anticipated growth in our core site rental business. Changes in working capital, and particularly changes in deferred rental revenues, prepaid ground leases and accrued interest, can have a dramatic impact on our net cash from operating activities for interim periods, largely due to the timing of payments. Investing Activities Capital Expenditures. Our capital expenditures can be generally categorized as sustaining or discretionary. Sustaining capital expenditures include capitalized costs related to (1) maintenance activities on our towers, (2) vehicles, (3) information technology equipment, and (4) office equipment. Discretionary capital expenditures, which we commonly also refer to as “revenue generating capital expenditures,” include (1) purchases of land under towers, (2) tower improvements in order to support additional site rentals, (3) the construction or purchase of towers, and (4) the construction of distributed antenna systems. In general, other than sustaining capital expenditures, our decisions regarding capital expenditures are discretionary and are made with respect to activities we believe exhibit sufficient potential to improve our long-term results of operations on a per share basis. Such decisions are influenced by the availability of capital and expected returns on alternative investments. A summary of our capital expenditures for 2006 and 2007 is as follows:
Total capital expenditures for 2007 increased by $175.2 million, or 140%, from 2006, predominately related to CCUSA. The increase in sustaining capital expenditures from 2006 to 2007 was primarily related to the towers acquired in connection with the Global Signal Merger. The increase in land purchases related to our ongoing efforts to purchase the land under our towers. During 2006 and 2007, we built or purchased 13 and 188 towers, respectively, exclusive of the Global Signal Merger and the acquisition of Mountain Union. See also “Item 7. MD&A—Results of Operations—Comparison of Operating Segment” for a discussion regarding Modeo. Consistent with our plan to continue to invest our available cash on hand, anticipated cash flows from operations and cash flows from borrowings in discretionary investments, we expect total capital expenditures for 2008 will be equal to, or modestly greater than, 2007 (primarily as a result of anticipated increases in purchases of land under towers and new tower construction). The amount of capital expenditures related to purchases of towers can vary from period to period; as such, an increase in tower purchases may further increase our 2008 capital expenditures. We expect that most if not all of our capital expenditures for 2008 will be funded from cash flows from operations. Acquisition of Global Signal. See “Item 7. MD&A—General Overview—Acquisition of Global Signal” and “Item 7. MD&A—Liquidity and Capital Resources—Overview.” Mountain Union. On January 2, 2007, we purchased the remaining approximately 2% minority interest in Mountain Union for $4.4 million. See note 2 to our consolidated financial statements.
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Table of ContentsIndex to Financial StatementsFinancing Activities Consistent with our strategy to allocate our capital to drive shareholder value, our financing activities for 2006 and 2007 are largely related to purchases of our common stock and additional borrowings. The additional borrowings were used to (1) fund our purchases of common stock, (2) fund the GS $550M Consideration of the Global Signal Merger, and (3) refinance our debt at attractive rates. The net cash provided by (used for) financing activities in 2007 is exclusive of the approximately $1.8 billion of debt that remained outstanding as obligations after the Global Signal Merger consisting of two mortgage loans (see note 7 to our consolidated financial statements). The following is a summary of the significant financing transactions we completed in 2007 and the beginning of 2008. 2007 Credit Agreement. In January 2007, CCOC entered into a credit agreement that provided a $250.0 million senior secured revolving credit facility. In January 2008, we extended the maturity of the revolving credit facility until January 2009. This one-year extension did not result in any other changes to the revolving credit facility including to our credit spreads. We currently have $150.0 million outstanding under the revolving credit facility. Availability of the revolving credit facility at any time will be determined by certain financial ratios. We may use the availability under the revolving credit facility for general corporate purposes, which may include financing of capital expenditures, acquisitions, and purchases of our common or preferred stock. The revolving credit facility bears interest at prime rate or LIBOR plus a credit spread based on our consolidated leverage ratio. As of February 19, 2008, the revolving credit facility bears interest at 6.0% (including the credit spread). In January and March 2007, CCOC entered into two term loans for an aggregate original principal amount of $650.0 million, which were issued under the credit agreement and are due in 2014. Our purchases of 21.0 million shares of our common stock during 2007 were primarily funded with proceeds from the term loans and borrowings under our revolving credit facility. Through the use of interest rate swaps we have fixed the interest rate on the vast majority of the term loans at a rate of 5.6% (including the credit spread) through December 31, 2009. The revolving credit facility and the term loans are guaranteed by CCIC and certain of its existing and future subsidiaries and secured by a pledge of certain equity interests of certain existing and future subsidiaries of CCIC, as well as a security interest in CCOC’s deposit accounts and securities accounts. For a further discussion of the revolving credit facility and the term loans, see note 7 to our consolidated financial statements and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.” Common Stock Activity. A summary of common stock activity for the years ended December 31, 2006 and 2007 is as follows:
During 2006 and 2007, we purchased 15.9 million and 21.0 million shares of our common stock, respectively. We utilized $518.0 million and $729.8 million in cash, respectively, to affect these purchases and paid an average price per share of $32.64 and $34.68, respectively. See note 11 to our consolidated financial statements. See “Item 7. MD&A—General Overview—Acquisition of Global Signal” for a discussion of common stock issued in the Global Signal Merger. In addition, in January 2008, we purchased 1.1 million shares of common stock utilizing $42.0 million (average price of $36.99 per share) in cash.
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Table of ContentsIndex to Financial StatementsCCAL Capital Return. See “Item 7. MD&A—Results of Operations—Comparison of Operating Segments” for a discussion of the minority interest and CCAL capital return. Preferred Stock Dividends. We have the option to pay dividends on our 6.25% Convertible Preferred Stock in cash or shares of common stock (valued at 95% of the current market value of the common stock, as defined) (see “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”). We are required to redeem all outstanding shares of our 6.25% Convertible Preferred Stock on August 15, 2012 at a price equal to the liquidation preference plus accumulated and unpaid dividends. The shares of 6.25% Convertible Preferred Stock are convertible, at the option of the holder, in whole or in part at any time, into shares of common stock at a conversion price of $36.875 per share of common stock. Under certain circumstances, we generally have the right to convert the 6.25% Convertible Preferred Stock, in whole or in part, into 8.6 million shares of common stock at 120% of the conversion price or $44.25. Interest Rate Swaps. We have used, and may continue to use when we deem prudent, interest rate swaps to manage and reduce our interest rate risk, including the use of interest rate swaps to hedge the variability in cash flows from changes in LIBOR on anticipated refinancing and outstanding variable rate debt. See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” and note 7 to our consolidated financial statements for a further discussion of our use of interest rate swaps. Restricted Cash. Pursuant to the indenture governing the tower revenue notes and the loan agreements governing the mortgage loans, all rental cash receipts of the issuers of these debt investments and their subsidiaries are restricted and held by an indenture trustee. The restricted cash in excess of required reserve balances is subsequently released to us in accordance with the terms of the indentures. See also notes 1 and 7 to our consolidated financial statements. Contractual Cash Obligations The following table summarizes our contractual cash obligations, which relate primarily to our outstanding borrowings and ground lease obligations, as of December 31, 2007 after giving effect to our borrowings of $75.0 million in January 2008 under our revolving credit facility and the extension of the maturity to January 2009 from January 2008.
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Table of ContentsIndex to Financial Statements
The following table summarizes as of December 31, 2007 the remaining terms to expiration (including renewal terms at our option) of (1) the ground leases, subleases, or licenses for the land on which approximately 18,400 of our towers reside and (2) agreements to manage approximately 700 towers owned by third parties where we had sublease agreements with the tower owner. In addition, we own in fee or have perpetual or long-term easements in the land on which approximately 4,700 of our towers reside (20% of total towers). See “Item 1A. Risk Factors.”
Factors Affecting Sources of Liquidity Holding Companies. As holding companies, CCIC and CCOC will require distributions or dividends from their subsidiaries, or will be forced to use their remaining cash balances, to fund their debt. The terms of the current indebtedness of their subsidiaries allow them to distribute cash to their holding companies unless they experience a deterioration of financial performance. Compliance with Debt Covenants. Our debt obligations contain certain financial covenants with which CCIC or our subsidiaries must maintain compliance in order to avoid the imposition of certain restrictions. Various of our debt obligations also place other restrictions on CCIC or our subsidiaries, including the ability to incur debt and liens, purchase our securities, make capital expenditures, dispose of assets, undertake transactions with affiliates, make other investments and pay dividends. See note 7 of our consolidated financial statements for further discussion of debt covenants. Factors that are likely to determine our subsidiaries’ ability to comply with their current and future debt covenants include their (1) financial performance, (2) levels of indebtedness, and (3) debt service requirements. Given the current level of indebtedness of our subsidiaries, the primary risk of a debt covenant violation would be from a deterioration of a subsidiary’s financial performance. Should a covenant violation occur in the future as a result of a shortfall in financial performance (or for any other reason), we might be required to make principal payments earlier than currently scheduled and may not have access to additional borrowings under these facilities as long as the covenant violation continues. Any such early principal payments would have to be made from our existing cash balances or cash from operations. If our subsidiaries that issued the tower revenue notes and mortgage loans were to default on the debt, the trustee could seek to foreclose upon or otherwise convert the ownership of the securitized towers, in which case we could lose the towers and the revenues associated with the towers. Based upon our current expectations, we believe our operating results will be sufficient to comply with our debt covenants. Financial Performance of Our Subsidiaries. A factor affecting our continued generation of cash flows from operating activities is our ability to maintain our existing recurring site rental revenues and to convert those revenues into operating cash flows by efficiently managing our operating costs. Our ability to service (pay principal and cash interest) or refinance our current debt obligations and obtain additional debt will depend on our future financial performance, which, to a certain extent, is subject to various factors that are beyond our control as discussed further herein and in “Item 1A. Risk Factors.” Levels of Indebtedness and Debt Service Requirements. Our ability to obtain cash financing in the form of debt instruments, preferred stock or common stock in the capital markets depends on, among other things, general economic conditions, conditions of the wireless industry, wireless carrier consolidation or network sharing, new technologies, our financial performance and the state of the capital markets. We anticipate refinancing the majority, if not all, of our debt and preferred stock within the next five years. There can be no assurances we will be able to effect this anticipated financing on commercially reasonable terms or on terms, including with respect to interest
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Table of ContentsIndex to Financial Statementsrates, as favorable as our current debt and preferred stock. If we are unable to refinance or renegotiate our debt, our debt service requirements may significantly increase in the future. The current credit crisis has resulted in a widening of credit spreads for us. However, there has recently been a general decrease in interest rates (such as LIBOR) corresponding with the challenges of the credit market. Currently, the negative impact of widening credit spreads has been somewhat mitigated by a general decrease in interest rates. By the end of 2011, we expect to refinance our outstanding indebtedness and have entered into interest rate swaps to manage and reduce our interest rate risk on this anticipated refinancing. Changes in our credit spreads over the intermediate to long-term may impact our interest expense and interest coverage ratios. Off-balance Sheet Arrangements We have no off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K. Accounting and Reporting Matters Related Party Transactions In January 2007, we purchased 17.7 million shares of common stock for $600.5 million in cash from certain investment funds affiliated with Fortress Investment Group LLC (collectively, “Fortress”), (2) Greenhill Capital Partners, L.P. and certain of its related partnerships (collectively, “Greenhill”), and (3) Abrams Capital Partners II, L.P. and certain of its related partnerships (collectively, “Abrams Capital”). See also notes 11 and 14 to our consolidated financial statements. Critical Accounting Policies and Estimates The following is a discussion of the accounting policies and estimates that we believe (1) are most important to the portrayal of our financial condition and results of operations and (2) require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The critical accounting policies and estimates for 2007 is not intended to be a comprehensive list of our accounting policies and estimates. See note 1 to our consolidated financial statements for a summary of our significant accounting policies In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the U.S., with no need for management’s judgment in their application. In other cases, management is required to exercise judgment in the application of accounting principles with respect to particular transactions. Revenue Recognition. Site rental revenues are recognized on a monthly basis over the fixed, non-cancelable term of the relevant lease or agreement with terms generally ranging from five to ten years. In accordance with applicable accounting standards, these revenues are recognized on a monthly basis, regardless of whether the payments from the customer are received in equal monthly amounts. If the payment terms call for fixed escalations (as in fixed dollar or fixed percentage increases), the effect of such increases is recognized on a straight-line basis over the fixed, non-cancelable term of the agreement. When calculating our straight-line rental revenues, we consider all fixed elements of tenant leases escalation provisions, even if such escalation provisions also include a variable element. As a result of recognizing revenue on a straight-line basis, a portion of the revenue in a given period represents cash collected in other periods. For 2005, 2006 and 2007, the non-cash portion of our site rental revenues related to recognizing revenue on a straight-line basis amounted to approximately $16.1 million, $20.5 million and $42.9 million, respectively. See note 1 to our consolidated financial statements. We provide network services, such as antenna installations and subsequent augmentation, network design and site selection, site acquisition services, site development and other services, on a limited basis. Network services revenues are generally recognized under a method which approximates the completed contract method. Under the completed contract method, revenues and costs for a particular project are recognized in total at the completion date. When using the completed contract method of accounting for network services revenues, we must accurately determine the completion date for the project in order to record the revenues and costs in the proper period. For antenna installations, we consider the project complete when the customer can begin transmitting its signal through the antenna. We must also be able to estimate losses on uncompleted contracts, as such losses must be recognized as soon as they are known. The completed contract method is used for projects that require relatively short periods of time to complete (generally less than one year), such as our network services agreements and contracts. We do
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Table of ContentsIndex to Financial Statementsnot believe that our use of the completed contract method for network services projects produces financial position and operating results that differ substantially from the percentage-of-completion method. Some of our arrangements with our customers call for the performance of multiple revenue-generating activities. Generally, these arrangements include both site rental and network services. In such cases, we determine whether the multiple deliverables are to be accounted for separately or on a combined basis. In order to be accounted for separately, the undelivered items must (1) have stand-alone value to the customer, (2) have reliably determinable fair value on a separate basis, and (3) have delivery which is probable and under our control. In addition, the delivered item must have stand-alone value to the customer. Allocation of recognized revenue in such arrangements is based on the relative fair value of the separately delivered items. We have generally determined that it is appropriate to account for antenna installation activities separately from the customer’s subsequent site rentals. Accounting for Long-Lived Assets. We allocate the purchase price of acquisitions to the assets acquired and liabilities assumed based on their estimated fair value at the date of acquisition. Any purchase price in excess of the net fair value of the assets and liabilities assumed is allocated to goodwill. The fair value of certain of our assets and liabilities is determined by (1) using estimates of replacement costs for tangible fixed assets (such as towers) and (2) using discounted cash flow valuation methods for estimating identifiable intangibles (such as site rental contracts and above and below market leases). The purchase price allocation requires subjective estimates that if incorrectly estimated could be material to our consolidated financials statements including the amount of depreciation, amortization and accretion expense. The determination of the final purchase price allocation could extend over several quarters resulting in the use of preliminary estimates that are subject to adjustment until finalized. We are required to make subjective assessments as to the useful lives of our tangible and intangible assets for purposes of determining depreciation, amortization and accretion expense that if incorrectly estimated could be material to our consolidated financial statements. Depreciation expense for our property and equipment is computed using the straight-line method over the estimated useful lives of our various classes of tangible assets. The substantial portion of our property and equipment represents the cost of our towers which is depreciated with an estimated useful life equal to the shorter of 20 years or the term of the lease (including optional renewals) for the land under the tower. The useful life of our intangible assets are estimated based on the period for which the intangible asset will benefit us. We review the carrying values of property and equipment, intangible assets and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. If the sum of the estimated future cash flows (undiscounted) from the asset is less than its carrying amount, an impairment loss is recognized. Measurement of an impairment loss is based on the fair value of the asset. Our determination that an adverse event or change in circumstance has occurred will generally involve (1) a deterioration in an asset’s financial performance compared to historical results, (2) a shortfall in an asset’s financial performance compared to forecasted results, or (3) a change in strategy affecting the utility of the asset. Our measurement of the fair value of an impaired asset will generally be based on an estimate of discounted future cash flows. We test goodwill for impairment on an annual basis, regardless of whether adverse events or changes in circumstances have occurred. This annual impairment test involves (1) a step to identify potential impairment at a reporting unit level based on fair values and (2) a step to measure the amount of the impairment, if any. Our measurement of the fair value for goodwill is based on an estimate of discounted future cash flows of the reporting unit. The most important estimates for such calculations are the expected additions of new tenants on our towers, the terminal multiple for our projected cash flows and our weighted-average cost of capital. During the fourth quarter of 2007, we performed our annual update of the impairment test for goodwill. The results of this test indicated that goodwill was not impaired at any of our reporting units. Future declines in our site rental business could result in an impairment of goodwill, property and equipment and intangible assets in the future. If impairment were to occur in the future, the calculations to measure the impairment could result in the write-off of some portion, to substantially all, of our goodwill, property and equipment and intangible assets. Deferred Income Taxes. We record deferred income tax assets and liabilities on our balance sheet related to events that impact our financial statements and tax returns in different periods. In order to compute these deferred tax balances, we first analyze the differences between the book basis and tax basis of our assets and liabilities (referred to as “temporary differences”). These temporary differences are then multiplied by current tax rates to
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Table of ContentsIndex to Financial Statementsarrive at the balances for the deferred income tax assets and liabilities. A valuation allowance is provided on deferred tax assets if it is determined that it is more likely than not that the asset will not be realized. The change in our net deferred income tax balances during a period generally results in a deferred income tax provision or benefit in our consolidated statement of operations and comprehensive income (loss). If our expectations about the future tax consequences of past events should prove to be inaccurate, the balances of our deferred income tax assets and liabilities could require significant adjustments in future periods. Such adjustments could cause a material effect on our results of operations for the period of the adjustment. See note 8 to our consolidated financial statements. Impact of Recently Issued Accounting Standards In July 2006, the FASB issued Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in tax positions. We adopted FIN 48 on January 1, 2007. The adoption of FIN 48 resulted in a decrease in accumulated deficit and a decrease in contingent tax liabilities through a cumulative effect adjustment of $4.7 million. See note 8 of our consolidated financial statements. In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS 157”), Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. The FASB amended SFAS 157 to exclude leases accounted for pursuant to SFAS 13. SFAS 157 will be applied prospectively and is effective for us on January 1, 2008, with the exception of a one-year deferral of implementation for certain non-financial assets and liabilities. We believe the impact of the adoption of SFAS 157 will not have a material impact on our consolidated financial statements. In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160 (“SFAS 160”), “Noncontrolling Interests in Consolidated Financial Statements—an Amendment to Accounting Research Bulletin No. 51.” SFAS 160 amends Accounting Research Bulletin No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. The provisions of SFAS 160 are effective for us as of January 1, 2009. We are currently evaluating the impact of the adoption of SFAS 160 on our consolidated financial statements. In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R) (“SFAS 141(R)”), Business Combinations (revised 2007). SFAS 141(R) replaces Statement of Financial Accounting Standards No. 141 (“SFAS 141”), Business Combinations. SFAS 141(R) establishes principles and requirements for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed and any noncontrolling interest in an acquisition, at their fair value as of the acquisition date. SFAS 141(R) will change the accounting treatment of certain items, including (1) acquisition and restructuring costs will be generally expensed as incurred, (2) noncontrolling interests will be valued at fair value at the acquisition date (3) acquired contingent liabilities will be recorded at fair value at the acquisition date and subsequently measured at either the higher of such amount or the amount determined under existing guidance for non-acquired contingencies, and (4) changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date will affect provision for income taxes. The provisions of SFAS 141(R) are applied prospectively to our business combinations for which the acquisition date is on or after January 1, 2009. We are currently evaluating the impact of the adoption of SFAS 141(R) on our consolidated financial statements. See note 1 to our consolidated financial statements for further discussion of recently issued accounting standards and the related impact on our consolidated financial statements. Non-GAAP Financial Measures Our measurement of profit or loss currently used to evaluate the operating performance of our operating segments is earnings before interest, taxes, depreciation, amortization and accretion, as adjusted, or Adjusted EBITDA. Our definition of Adjusted EBITDA is set forth in “Item 7. MD&A—Results of Operations—Comparison of Operating Segments.” Our measure of Adjusted EBITDA may not be comparable to similarly titled measures of other companies, including companies in the tower sector and as used in the historical financial statements of Global
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Table of ContentsIndex to Financial StatementsSignal, and is not a measure of performance calculated in accordance with GAAP. Adjusted EBITDA should not be considered in isolation or as a substitute for operating income or loss, net income or loss, cash flows provided by (used for) operating, investing and financing activities or other income statement or cash flow statement data prepared in accordance with GAAP. We believe Adjusted EBITDA is useful to an investor in evaluating our operating performance because:
Our management uses Adjusted EBITDA:
There are material limitations to using a measure such as Adjusted EBITDA, including the difficulty associated with comparing results among more than one company and the inability to analyze certain significant items, including depreciation and interest expense, that directly affect our net income or loss. Management compensates for these limitations by considering the economic effect of the excluded expense items independently as well as in connection with their analysis of net income (loss).
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Table of ContentsIndex to Financial Statements
Our primary exposures to market risks are related to changes in interest rates, equity security prices and foreign currency exchange rates which may adversely affect our results of operations and financial position. We seek to manage exposure to changes in interest rates where economically prudent to do so by utilizing predominately fixed rate debt and interest rate swaps. We do not currently hedge against foreign currency exchange risks or attempt to reduce our equity security price risk on our investment in FiberTower. Interest Rate Risk Certain of the financial instruments we have used to obtain capital are subject to market risks for fluctuations in market interest rates. As of February 19, 2008, we had $795.1 million (approximately 13% of total debt) of floating rate indebtedness, of which $625.0 million is effectively locked through an interest rate swap at a fixed rate until December 2009. As a result, a hypothetical unfavorable fluctuation in market interest rates of one percentage point over a twelve-month period would increase our interest expense by approximately $1.7 million after giving affect to our interest rate swaps. In addition, we anticipate refinancing the majority, if not all, of our debt within the next five years. We have used, and may continue to use when we deem prudent, interest rate swaps to manage and reduce our interest rate risk, including the use of interest rate swaps to hedge the variability in cash flows from changes in LIBOR on anticipated refinancing and outstanding variable rate debt. We do not enter into interest rate swaps for speculative or trading purposes. Our interest rate swaps call for us to pay interest at a fixed rate in exchange for receiving interest at a variable rate equal to LIBOR. We have hedged our exposure to variability in LIBOR on the expected future refinancing of our tower revenue notes and mortgage loans through the use of forward starting interest rate swaps with maturity dates between December 2014 and November 2016. Additional interest rate swaps have effectively locked in the interest rate on $625.0 million of our term loans issued in 2007 at a fixed rate until December 2009. The interest rate swaps are exclusive of any credit spread that would be incremental to the interest rate of the anticipated financing. See the tables below. Our outstanding debt as of December 31, 2006 and 2007 was $3.5 billion and $6.1 billion, respectively. The combined notional amount of outstanding interest rate swaps as of December 31, 2006 and 2007 was $3.5 billion and $5.9 billion, respectively. The increase in outstanding debt and the combined notional value of our outstanding interest rate swaps is primarily related to the $1.8 billion mortgage loans that remained outstanding following the Global Signal Merger and forward starting interest rate swaps to hedge our exposure to LIBOR on the forecasted refinancing of the mortgage loans. During 2005 and 2006, we terminated certain interest rate swaps relating to the tower revenue notes issued in 2005 and 2006, respectively. The effective interest rate on the tower revenue notes issued in 2005 and 2006 is approximately 4.95% and 5.83%, respectively, inclusive of an increase of approximately 0.06% and 0.12%, respectively, in the effective interest rate relating to interest rate swaps and exclusive of deferred financing costs. See note 7 to our consolidated financial statements.
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Table of ContentsIndex to Financial StatementsThe following tables provide information about our market risk related to changes in interest rates. The expected principal payments, weighted-average interest rates and the interest rate swaps are presented as of December 31, 2007, after giving effect to our $75.0 million of borrowings during January 2008 under our revolving credit facility and extension of the maturity to January 2009 from January 2008.
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Table of ContentsIndex to Financial StatementsEquity Security Price Risk We are exposed to price fluctuations on our available-for-sale investment in FiberTower equity securities. We do not currently attempt to reduce or eliminate the market exposure on these securities. For the year ended December 31, 2007, we recorded a charge of $75.6 million to write-down the value of our investment in FiberTower relating to a decline in value deemed other-than-temporary. Our potential future write-downs are limited to the carrying value of our investment of $60.1 million as of December 31, 2007. As of February 19, 2008, the fair value of our investment in FiberTower was $41.4 million (at $1.57 per FiberTower share). As of December 31, 2007, a 50% hypothetical adverse change in the FiberTower equity price would result in an approximately $30.0 million decrease in the fair value of our available-for-sale equity investments. The offsetting adjustment resulting from the hypothetical future decrease in fair value would be to “accumulated other comprehensive income” or, if determined to be an other-than-temporary decline, to “impairment of available-for-sale securities” on our consolidated statement of operations and comprehensive income (loss). See note 6 to our consolidated financial statements and “Item 1A. Risk Factors.” Foreign Currency Risk Our business activities in Australia, Canada and the U.K., expose us to fluctuations in foreign currency exchange rates. The vast majority of our foreign currency transactions are denominated in the Australian dollar, which is the functional currency of CCAL. As a result of CCAL’s transactions being denominated and settled in such functional currencies, the risks associated with currency fluctuations are primarily associated with foreign currency translation adjustments. We do not currently hedge against foreign currency translation risks. We do not currently believe our financial instruments denominated in foreign currencies expose us to material foreign currency exchange risk based on the estimated impact of a hypothetical 15% unfavorable change in currency exchange rates. As of December 31, 2007, the Company had approximately $24.0 million in cash and cash equivalents denominated in Australian dollars.
Crown Castle International Corp. and Subsidiaries Index to Consolidated Financial Statements
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Table of ContentsIndex to Financial StatementsReport of Independent Registered Public Accounting Firm The Board of Directors and Shareholders Crown Castle International Corp.: We have audited the accompanying consolidated balance sheets of Crown Castle International Corp. and subsidiaries (the Company) as of December 31, 2006 and 2007, and the related consolidated statements of operations and comprehensive income (loss), cash flows, and shareholders’ equity for each of the years in the three-year period ended December 31, 2007. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedule II. These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Crown Castle International Corp. and subsidiaries as of December 31, 2006 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As discussed in Notes 1 and 15 to the consolidated financial statements, in 2005 the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations—An Interpretation of FASB Statement No. 143.” Also, as discussed in Note 1 to the consolidated financial statements, in 2007, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48 “Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109,” effective January 1, 2007. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Crown Castle International Corp.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 26, 2008 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
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Table of ContentsIndex to Financial StatementsCROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
(In thousands of dollars, except share amounts)
See accompanying notes to consolidated financial statements.
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Table of ContentsIndex to Financial StatementsCROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (In thousands of dollars, except per share amounts)
See accompanying notes to consolidated financial statements.
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Table of ContentsIndex to Financial StatementsCROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands of dollars)
See accompanying notes to consolidated financial statements.
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Table of ContentsIndex to Financial StatementsCROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (In thousands of dollars, except share amounts)
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