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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2006
or
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-16441
CROWN CASTLE INTERNATIONAL CORP.
(Exact name of registrant as specified in its charter)
| Delaware | 76-0470458 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| 510 Bering Drive Suite 600 Houston, Texas |
77057-1457 | |
| (Address of principal executive offices) | (Zip Code) |
(713) 570-3000
(Registrant’s telephone number, including area code)
| Securities Registered Pursuant to Section 12(b) of the Act |
Name of Each Exchange on Which Registered | |
| Common Stock, $.01 par value |
New York Stock Exchange | |
| Rights to Purchase Series A Participating Cumulative Preferred Stock |
New York Stock Exchange |
Securities Registered Pursuant to Section 12(g) of the Act: NONE.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in 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 $7,235 million as of June 30, 2006, 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 $34.54 per share.
Applicable Only to Corporate Registrants
As of February 20, 2007, there were 282,778,796 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 “2007 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, 2006.
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CROWN CASTLE INTERNATIONAL CORP.
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”). Such statements include, plans, projections and estimates contained in “Business”, “Legal Proceedings”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “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 “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.
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EXPLAN ATORY NOTE REGARDING AMENDMENT
The Company is filing this amendment no. 1 to its Annual Report on Form 10-K for the year ended December 31, 2006 (“Amendment”), initially filed with the SEC on February 28, 2007 (the “Original Filing”), to revise its consolidated financial statements to reflect the recognition of certain non-cash equity-based compensation charges (credits) as of and for the years ended December 31, 2004 and 2005, and as a cumulative effect adjustment as of January 1, 2004, rather than via the previously recorded cumulative effect adjustment as of January 1, 2006. Reflecting these non-cash equity-based compensation charges (credits) as described results in revisions to the Company’s consolidated balance sheet as of December 31, 2005, and consolidated statements of operations and comprehensive income (loss) and stockholders’ equity for the years ended December 31, 2004 and 2005. The revisions to the Company’s consolidated financial statements also affected periods prior to 2004 (see “Item 6. Selected Financial Data” and note 1 to the Company’s consolidated financial statements in “Item 8. Financial Statements and Supplementary Data”). The impact of the revisions to the Company’s consolidated financial statements for periods prior to 2004 is reflected in the Company’s consolidated financial statements as an adjustment to opening accumulated deficit as of January 1, 2004. The Company’s consolidated financial statements have been revised as the result of a request from the SEC to provide additional information relating to such non-cash equity-based compensation charges (credits), including additional information regarding the non-cash equity-based compensation charges (credits) related to years not individually disclosed in the Original Filing (the years ended December 31, 1998, 1999, 2000, and 2001). The non-cash equity-based compensation adjustment related to those years totaled $78,032,000, or approximately 93% of the previously disclosed total non-cash equity-based compensation adjustment of $83,985,000. Further, as previously disclosed, approximately 55% of the total non-cash equity-based compensation adjustment resulted from the deemed modification of certain stock options as a result of entering into severance agreements with six former executives at the time of, and as disclosed in detail in our Form S-1 filed in connection with, our IPO in 1998. None of these deemed modifications involved any pricing or re-pricing adjustments for any affected options. This Amendment has no impact on previously reported additional paid-in capital, accumulated deficit or total stockholders’ equity as of January 1, 2006 or any subsequent period, nor does it impact net income (loss) for any period subsequent to January 1, 2006. This Amendment also reiterates certain disclosures previously made in its quarterly reports on Form 10-Q for the periods ended June 30, 2006 and September 30, 2006 (“2006 10-Q’s”).
The Company had previously disclosed the above non-cash equity-based compensation charges (credits) in its 2006 10-Q’s and in the Original Filing, and had previously recorded the non-cash equity-based compensation adjustments upon adopting Staff Accounting Bulletin No. 108 (“SAB 108”), Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, by recording an offsetting cumulative effect adjustment of $83,985,000 within stockholders’ equity that increased additional paid-in capital and increased accumulated deficit as of January 1, 2006. The revisions to the Company’s consolidated financial statements reverses the adjustment recorded upon adoption of SAB 108 as previously reflected in the Original Filing; and as described above, records the non-cash equity-based compensation charges (credits) in the Company’s consolidated financial statements as of and for the years ended December 31, 2004 and 2005, and as an opening accumulated deficit adjustment as of January 1, 2004 for the impact of such adjustments on periods prior to 2004.
For a discussion of the revisions to the Company’s consolidated financial statements, see note 1 to the Company’s consolidated financial statements in “Item 8. Financial Statements and Supplementary Data.” Changes have been made to the following items to Part II in this Amendment as a result of the changes described above.
| • | “Item 6. Selected Financial Data” |
| • | “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations;” see “Effects of Revisions to Consolidated Financial Statements ” |
| • | “Item 8. Financial Statements and Supplementary Data;” see notes 1, 12 and 19 to the Company’s consolidated financial statements |
| • | “Item 9A. Controls and Procedures;” see “Consideration of the Revisions to Consolidated Financial Statements and Related Amendment” |
| • | “Item 15. Exhibits, Financial Statement Schedules” |
For ease of reference, this Amendment sets forth the Original Filing in its entirety. However, this Amendment does not reflect events that have occurred after February 28, 2007, the filing date of the Original Filing, or modify or
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update the disclosures presented in the Original Filing, except to reflect the changes described above. Accordingly, this Amendment should be read in conjunction with the Company’s Current Reports filed on Form 8–K subsequent to the filing date of the Original Filing and the Company’s periodic report on Form 10-Q for the fiscal quarter ended March 31, 2007. Any reference to facts and circumstances at a “current” date refer to such facts and circumstances as of the filing date of the Original Filing.
All referenced balances and amounts in this Annual Report for prior periods and prior period comparisons reflect the balances and amounts on a revised basis.
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Unless this Form 10-K/A indicates otherwise or the context otherwise requires, the terms, “we,” “our,” “our company,” “the company” or “us” as used in this Form 10-K/A refer to Crown Castle International Corp. and its subsidiaries as of December 31, 2006 and exclude Global Signal Inc. (“Global Signal”). Unless this Form 10-K/A indicates otherwise or the context otherwise requires, the terms “CCUSA” and “in the U.S.” refer to our CCUSA segment as of December 31, 2006 and exclude Global Signal.
| Item 1. | Business |
Overview
We own, operate and lease towers and other communication structures, including certain rooftop installations (collectively, “towers”), for wireless communications (see “Item 2. Properties”). We engage in such activities through a variety of structures, including subleasing and management arrangements. We also provide certain network services relating to our towers on a limited basis for our customers, including antenna installations and subsequent augmentation, network design and site selection, site acquisition, site development and other services.
As of December 31, 2006, after giving effect to the merger (“Global Signal Merger”) of Global Signal into a wholly-owned subsidiary of ours in January 2007 (“Post-Merger”), we owned, leased or managed 23,661 towers (see “Item 1. Business—Global Signal Merger”). Post-Merger, we have the most towers in the United States (“U.S.”) of any wireless tower company, with approximately 21,700 towers, exclusive of rooftop installations. In addition, we have 1,387 towers in Australia and the remainder of our towers are located in Puerto Rico and Canada. As of December 31, 2006, Post-Merger, we also owned, leased or had easements on 280 land sites for towers owned by third parties which are located in the U.S. and the United Kingdom (“U.K.”). Our customers currently include many of the world’s major wireless communications companies, including Sprint Nextel Corp. (“Sprint Nextel”), AT&T (formerly Cingular Wireless), Verizon Wireless, T-Mobile, Alltel, SingTel Optus (“Optus”) and Vodafone Australia.
As of December 31, 2006, Post-Merger, we own in fee or have permanent or long-term easements in the land and other properties (collectively “land”) on which 3,930 of our towers reside, and we lease, sublease or license the land on which 18,994 of our towers reside. In addition, as of December 31, 2006, Post-Merger, we managed 737 towers 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.
Our core business is the leasing (including via licensing) of antenna space on our towers that can accommodate multiple tenants (“co-location”). Our site rental leasing revenues are derived from this core business. Typically, these revenues result from long-term (five to 10 year) contracts with our customers with renewal terms at the option of the customer. As a result, in any given year in excess of 90% of our site rental revenue, excluding acquisitions, has been contracted for in a prior year.
Our tower portfolio consists primarily of towers in various metropolitan areas. As of December 31, 2006, Post-Merger, approximately 55% of our U.S. and Puerto Rico towers were located in the 50 largest basic trading areas, or “BTAs”, in the U.S. and Puerto Rico, and approximately 72% of such towers were located in the 100 largest BTAs. See “Item 1. Business—The Company—CCUSA.” Through our Australia tower portfolio we have a strategic presence in each of Australia’s major metropolitan areas, including Sydney, Melbourne, Brisbane, Adelaide and Perth. See “Item 1. Business—The Company—CCAL.”
We believe our towers are attractive to a diverse range of wireless communications industries, including cellular, personal communications services (“PCS”), enhanced specialized mobile radio (“ESMR”), third generation (“3G”), wireless data, paging, fixed point-to-point radio, and point to multipoint broadcasting (such as radio and television broadcasting). In the U.S. our major customers include Sprint Nextel, AT&T (formerly Cingular Wireless), Verizon Wireless, T-Mobile and Alltel. Our principal customers in Australia are Optus, Vodafone Australia, Hutchison and Telstra.
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In addition to our tower portfolios, we also have invested in adjacent businesses that we believe exhibit sufficient potential to achieve acceptable risk-adjusted returns or complement our core tower rental business, as evidenced by our investments in Modeo and FiberTower (NASDAQ: FTWR).
Strategy
Our strategy is to increase our recurring revenue and cash flow by leasing space on our towers to wireless companies and, where appropriate, to continue to build, acquire and operate towers and wireless infrastructure, through opportunities created by:
| • | the need for existing wireless carriers to expand coverage and improve network capacity; |
| • | the introduction of new wireless technologies, including 3G and wireless data technology; |
| • | the additional demand for towers and wireless infrastructure created by new entrants into the wireless communications industry; |
| • | our development of adjacent businesses which complement our existing businesses and assets; and |
| • | the transfer to third parties, or outsourcing, of tower ownership and management by our customers. |
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, which leverages our experience in expanding, marketing and operating our portfolio of towers, are to:
| • | Grow Revenue Organically. We are seeking to increase the utilization of our towers by increasing the number of antenna leases on our towers. Our towers generally have capacity available for additional antenna space rental. We believe there is demand for such co-location capacity both from existing wireless carriers and new wireless carriers. We seek to assist our customers in solving their coverage or capacity gaps through our four-point-value proposition (see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—General Overview”). We intend to continue to use targeted sales and marketing techniques to lease space and increase the investment return on our towers. |
| • | Grow Margins and Operating Cash Flow. We are seeking to maximize operating cash flow by taking advantage of the potential for operating margin expansion afforded by the relatively fixed nature of the operating costs associated with our site rental business. The majority of the operating costs of our site rental business consist of ground lease expense, property taxes, repairs and maintenance, utilities and salaries, which tend to escalate at approximately the rate of inflation. Consequently, if increased utilization of tower capacity is achieved at low incremental cost, our site rental business should experience operating margin expansion and result in growth in operating cash flow. |
| • | Allocate Capital Efficiently. We are focused on the efficient utilization of capital. We may seek to enhance or expand our existing portfolio of towers through (1) the selective acquisition or build of strategically located towers that satisfy certain investment criteria and are complementary to our tower portfolio, (2) the acquisition of real property interests in the land on which our towers are located or (3) the enhancement of our existing towers. With respect to tower and site acquisitions, such transactions may include acquisitions of towers from major wireless carriers or other tower companies through direct acquisitions, tower exchanges, joint ventures, mergers or other means, as evidenced by the Global Signal Merger. With respect to tower builds and structural enhancements, we may selectively build new towers and structurally enhance our existing towers for customers as they expand and fill in their service areas and deploy new technologies requiring additional antenna space. Our decisions to invest additional capital in structural enhancements and selective acquisitions or build activities are generally based upon whether such investments exhibit sufficient co-location revenue potential to achieve acceptable risk-adjusted returns. From time to time, we may sell or exchange certain of our towers or other assets as opportunities arise. In addition, we have used, and may continue to use, some of our capital to acquire our debt and equity securities when such acquisitions appear economically viable and capital efficient. |
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| • | Extend Revenue by Leveraging our Existing Expertise. We are seeking to extend the products and services we offer beyond the leasing of space on our towers to other potentially shareable activities, such as distributed antenna systems (“DAS”), antenna and base station maintenance, shared antennas, shared radio spectrum, shared point-to-point radio backhaul and network maintenance and monitoring. We believe these opportunities would leverage our experience in engineering, deploying, owning, managing and operating our extensive portfolio of towers and our strong customer relationships. We believe many of these opportunities are consistent with our four-point-value proposition to assist our customers in solving their coverage and capacity gaps, as discussed further in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – General Overview”. Further, we are pursuing other strategic opportunities, or adjacent businesses, which we believe exhibit sufficient potential to achieve acceptable risk-adjusted returns or exhibit potential to complement our existing assets and expertise, as evidenced by our investments in Modeo and FiberTower. See “Item 1. Business—The Company—Emerging Businesses”. |
2006 Highlights and Recent Developments
During 2006, we engaged in a number of significant activities consistent with our strategy, including entering into a definitive agreement to acquire Global Signal, the purchase of shares of our common stock (“common stock”), the refinancing and issuance of indebtedness and the acquisition of Mountain Union Telecom, LLC (“Mountain Union”). The Global Signal Merger is discussed below under “Item 1. Business—Global Signal Merger.” See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—General Overview—Overview” for a summary description of the highlights of such other activities occurring in 2006 and the beginning of 2007.
Global Signal Merger
On October 5, 2006, we entered into a definitive agreement (“Merger Agreement”) which contemplated the merger of Global Signal into a wholly-owned subsidiary of ours. Global Signal operated 10,749 towers, primarily concentrated in the southwestern, midwestern, Pacific coast and northeastern regions of the U.S. 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 that remained outstanding as obligations of the Global Signal entities acquired. 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 (“Cash 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. Pursuant to the Merger Agreement, Global Signal common stockholders were entitled to convert each share of Global Signal common stock into 1.61 shares of our common stock or, alternatively, could elect to receive cash in the amount of $55.95 per Global Signal share. Following the Global Signal Merger, the former Global Signal stockholders owned approximately 32.7% of our outstanding shares. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—General Overview—Current Year Highlights and Recent Developments,” “Item 1A. Risk Factors” and “Item 1. Business—The Company—CCUSA.”
Upon closing of the Global Signal Merger, Global Signal’s subsidiaries had debt outstanding of approximately $1.8 billion (all of which remained outstanding as obligations of the Global Signal entities we acquired) having a structure similar to the $1.9 billion in notes issued through certain of our subsidiaries in June 2005 (“2005 Tower Revenue Notes”) and the $1.55 billion in notes issued through certain of our subsidiaries in November 2006 (“2006 Tower Revenue Notes”). As a result, we have significantly increased our interest expense. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing Activities.”
Global Signal revenues, cost of operations and gross margins for 2006 were approximately $500 million (unaudited), $225 million (unaudited) and $275 million (unaudited), respectively. We entered into the Global Signal Merger primarily because of the growth opportunities we anticipate the Global Signal tower portfolio will provide, including through the leveraging of our management team and customer service across an enhanced national footprint. We believe the anticipated opportunities for growth will be driven by the carrier focus on improving network quality, subscriber growth, increasing subscriber usage, wireline replacement and next generation network
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builds. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-General Overview-Overview." Secondarily, we believe there will be synergistic opportunities provided by the Global Signal Merger. In 2007, as a result of the Global Signal Merger, we do expect a substantial increase in our general and administrative expenses from 2006, but we also anticipate a decrease in general and administrative expenses as a percentage of revenue. We also expect to incur a substantial amount of costs to integrate Global Signal into our internal control structure and operations.
Stockholders Agreement. Concurrently with the execution of the Merger Agreement, we entered into a stockholders agreement (“Stockholders Agreement”) with (1) 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”, and together with Fortress and Greenhill, the “Global Signal Significant Stockholders”). Pursuant to the Stockholders Agreement, we have filed an automatic shelf registration statement with the SEC registering certain shares of our common stock received by the Global Signal Significant Stockholders in the merger (“Merger Shares”). In addition, pursuant to the Stockholders Agreement, the Global Signal Significant Stockholders (and certain of their affiliates) (1) have a limited number of demands for us to register their Merger Shares and (2) will be able to have their respective Merger Shares registered whenever we propose to register our equity securities.
In lieu of Global Signal Significant Stockholders’ right to require us to conduct a marketed secondary offering of certain of their Merger Shares within 90 days after the merger, on January 19, 2007, we entered into a stock purchase agreement with the Global Signal Significant Stockholders, pursuant to which we purchased an aggregate of 17.7 million shares of our common stock from the Global Signal Significant Stockholders (“January 2007 Stock Purchase”). See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—General Overview—Current Year Highlights and Recent Developments.”
As required by the Stockholders Agreement, we have appointed a representative of each of the Global Signal Significant Stockholders to our Board of Directors. Wesley R. Edens, Robert H. Niehaus and David C. Abrams were appointed to the Board of Directors as representatives of Fortress, Greenhill and Abrams Capital, respectively. Each Global Signal Stockholder has a one-time right to re-nominate its designated director (or another individual reasonably acceptable to us) if such Global Signal Stockholder owns more than 3.0% of the outstanding shares of our common stock at the time of such re-nomination.
The Company
We operate our business primarily in the U.S. (including Puerto Rico) and Australia, with limited additional operations in Canada and the 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 (referred to as “CCUSA”) and (2) a joint venture in which we have a 77.6% interest that operates our Australia tower portfolio (referred to as “CCAL”). For more information about our operating segments, as well as financial information about the geographic areas in which we operate, see note 16 to our consolidated financial statements and the section entitled “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.
CCUSA
Overview
The primary business of CCUSA is the leasing of antenna space on multiple-tenant towers to a variety of customers under long-term leases. Supporting our competitive position in the site rental business, we offer our customers certain network services relating to our towers, including antenna installations and other services.
At December 31, 2006, Post-Merger, CCUSA owned, leased or managed 22,274 towers, including rooftop installations. Although we own, lease or manage 252 towers located in Puerto Rico and Canada that are included in CCUSA, our towers are primarily located throughout the U.S. The U.S. towers are located predominantly in the northeast, southeast, midwest, southwest and Pacific coast regions of the U.S. Most of our towers were acquired
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through transactions consummated within the past eight years, including through transactions with Global Signal, Bell Atlantic Mobile and GTE Wireless (both now part of Verizon Wireless), BellSouth Mobility and BellSouth DCS (both now part of AT&T (formerly Cingular Wireless)) and Powertel (now a part of T-Mobile).
Through the Global Signal Merger, which closed on January 12, 2007, we acquired 10,749 towers which are located primarily in the U.S. Of the 10,749 towers Global Signal operated and which we now operate, 6,553 towers (“Sprint Towers”) are to be leased or operated 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, Post-Merger we have the option to purchase all (but not less than all) of the Sprint Towers then leased for approximately $2.3 billion. Post-Merger 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 of 10 years. At the closing of the Global Signal Merger, the Sprint Master Leases remained effective as an asset and commitment of the Global Signal entities we acquired.
Prior to the Global Signal Merger, our communication towers were primarily acquired in transactions beginning in 1998 through 2000, including the following transactions:
| Acquisition |
Transaction Closing Dates | No. of Current Communication Towers |
Primary Tower Locations | ||||
| Bell Atlantic Mobile |
March 1999 | 2,020 | Eastern, Southwestern U.S. | ||||
| GTE Wireless |
January – September 2000 (a) | 2,881 | Eastern, Midwestern, Southwestern and Pacific Coast areas of the U.S. | ||||
| Bell South Mobility and Bell South DCS |
June 1999 – December 2000(b) | 3,046 | Southeastern and Midwestern U.S. | ||||
| Powertel |
June 1999 | 675 | Southeastern U.S. | ||||
| Trintel Communications Inc. |
August 2005 | 467 | Midwestern U.S. | ||||
| Mountain Union Telecom, LLC |
July 2006 | 474 | (c) | Puerto Rico and Southern U.S. |
| (a) | The towers from GTE wireless were acquired in tranches from January 2000 through September 2000. |
| (b) | The towers from Bell South Mobility and Bell South DCS were acquired in tranches from June 1999 through December 2000. |
| (c) | The tower count is exclusive of 77 towers in various stages of development as of July 2006. |
We plan to continue to structurally enhance our existing towers and selectively build or acquire strategically located towers which meet certain economic criteria on a limited basis. To reduce risk and speculation, in connection with building towers, we generally look for towers with multiple tenant demand and obtain lease commitments from customers prior to building such towers. Further, the towers are constructed to accommodate multiple tenants in order to obviate the need for later structural enhancement, saving capital and time for our customers.
Site Rental
CCUSA rents antenna space on its towers to a variety of carriers operating cellular, PCS, ESMR, 3G, wireless data services, paging and other networks. The number of antennae that our towers can accommodate varies depending on the tower’s location, height and structural capacity.
We generally receive monthly rental payments from customers, payable under site leases. The new leases at CCUSA recently entered into by us typically have original terms of seven to 10 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 customers relating to tower network
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acquisitions generally have an original term of 10 years, with multiple renewal options, each typically ranging from five to 10 years. We have existing master lease agreements with most major wireless carriers, including Sprint Nextel, AT&T (formerly Cingular Wireless), 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. In addition, 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.
Network Services
We also provide network services, on a limited basis, primarily relating to our towers for our customers. Our service offering consists of antenna installations and subsequent augmentation, network design and site selection, site acquisition, site development and other services.
Customers
In both the CCUSA site rental and network services businesses, we work with a number of customers in a variety of businesses including cellular, PCS, ESMR, 3G, wireless data services and paging. We work extensively with large national wireless carriers such as Sprint Nextel, AT&T (formerly Cingular Wireless), Verizon Wireless, and T-Mobile. For the year ended December 31, 2006, these four carriers, accounted for approximately 72.7% of CCUSA’s revenues and 67.2% of our consolidated revenues, with Sprint Nextel, AT&T (formerly Cingular Wireless), Verizon Wireless, and T-Mobile accounting for 16.0%, 25.4%, 22.0%, and 9.3%, respectively, of CCUSA’s revenues and 14.8%, 23.5%, 20.3%, and 8.6%, respectively, of our consolidated revenues. For the year ended December 31, 2006, on a pro forma basis as if the Global Signal Merger was completed January 1, 2006, approximately 68.3% of our total combined revenues was derived from Sprint Nextel, AT&T (formerly Cingular Wireless), Verizon Wireless, and T-Mobile, with such customers representing 24.2%, 20.4%, 15.3%, and 8.4% of our combined consolidated revenues, respectively. No other single customer of CCUSA accounted for more than 10.0% of our 2006 consolidated revenues. See “Item 1A. Risk Factors—A Substantial Portion of Our Revenues is Derived From a Small Number of Customers.”
Sales and Marketing
The CCUSA sales organization markets our towers within the wireless telecommunications industry. We seek to become the preferred independent tower provider for our customers. 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. In addition, we have developed patented property management tools and software which allow us to estimate site leasing demand with greater speed and accuracy. Through these and other tools we have developed, we seek to determine “potential demand” for our towers, allowing for proactive discussions with our carrier customers regarding these towers and the timing of their demand.
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. We target numerous types of customers, including cellular, PCS, ESMR, 3G, wireless data, paging and government agencies. Our objective is to lease space on existing towers and pre-sell capacity on our new towers prior to construction.
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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 other independent tower owners which also provide site rental and network services; wireless carriers which build, own and operate their own tower networks; broadcasters with respect to their broadcast towers; building owners that lease antenna space on rooftop sites; and 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, deployment speed, capacity, quality of service and price has 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 leasing of rooftops, utility structures and other alternative sites for antennas.
Competitors in the network services business include site acquisition consultants, zoning consultants, real estate firms, right-of-way consulting firms, construction companies, tower owners/managers, radio frequency engineering consultants, telecommunications equipment vendors who can provide turnkey site development services through multiple subcontractors, and 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. See “Item 1A. Risk Factors—We Operate Our Business In a Competitive Industry and Some of Our Competitors Have Significantly More Resources or Less Debt Than We Do.”
CCAL
Our primary business in Australia is the leasing of antenna space on towers to our customers. CCAL, a joint venture which 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, is our principal Australian operating subsidiary. CCAL is the largest independent tower operator in Australia. As of December 31, 2006, CCAL had 1,387 towers, with a strategic presence in each of Australia’s major metropolitan areas, including Sydney, Melbourne, Brisbane, Adelaide and Perth.
For the year ended December 31, 2006, CCAL comprised 7.6% of our consolidated revenues. CCAL’s principal customers are Optus, Vodafone Australia, Hutchison and Telstra. For the year ended December 31, 2006, these four carriers accounted for approximately 94.4% of CCAL’s revenues, with Vodafone Australia and Optus accounting for 34.5% and 34.1%, respectively. See “Item 1A. Risk Factors—A Substantial Portion of Our Revenues is Derived From a Small Number of Customers.”
The majority of CCAL towers were acquired from Optus and Vodafone Australia in 2000 and 2001, respectively. In connection with these transactions, Optus agreed to lease space on the former Optus towers for an initial term of 15 years, and Vodafone Australia agreed to lease space on the former Vodafone Australia towers for an initial rent free term of 10 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 and Telstra. 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 site.
Several 3G networks continue to be developed in Australia. Two metropolitan networks are being built by joint ventures between Hutchison and Telstra and between Optus and Vodafone Australia, respectively. In addition,
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Telstra has constructed the first phase of a new national 3G network, which is currently not shared with Hutchison, to replace one of its existing networks. The Telstra network was launched commercially in October 2006. Each of the 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 the networks in 2007. In addition, Optus recently announced plans to provide nationwide 3G coverage with deployment commencing in 2007. Unwired Australia and Personal Broadband Australia also continued their deployment of broadband wireless networks (providing high speed internet services to consumers) in 2006, which are currently operating in key metropolitan markets.
Emerging Businesses
We have pursued and are currently pursuing other strategic opportunities, or adjacent businesses, which we believe exhibit sufficient potential to achieve acceptable risk-adjusted returns or exhibit potential to complement our core tower rental business. Such emerging adjacent businesses currently consist of Modeo.
Modeo was formed in 2004 to explore a potential offering of live digital television and audio broadcast and podcasting to mobile devices, such as wireless phones. Modeo plans to offer this service as a wholesale network provider, utilizing the spectrum under our 1670-1675 MHz U.S. nationwide spectrum license (having an initial term of 10 years), which we acquired in 2003 through a Federal Communications Commission (“FCC”) auction. Modeo broadcasts its service using the Digital Video Broadcast to Handheld (“DVB-H”) standard, the open standard for the broadcast of digital television to mobile devices. Modeo has had no revenues since inception.
During 2006, Modeo completed the development of a commercial grade mobile television DVB-H network in New York City. In December 2006, Modeo launched a live, commercial quality mobile television beta service in New York City that includes live video content from leading network programmers as well as streaming audio content. Modeo plans to stage its New York beta activities in phases throughout the first and second quarters of 2007, which will include establishing a formal beta test group. After we have received and evaluated the feedback from these beta activities, we will review and evaluate our options for expanding the Modeo network beyond New York City. We continue to evaluate the potential options for funding the build out of the Modeo network beyond New York City, which include: non-recourse debt secured by our 1670-1675 MHz spectrum license, equity investors in Modeo, joint venture proposals, proposals to sell a controlling interest in Modeo along with a combination of the above.
Many other companies, some with significantly greater resources than us, offer or plan to offer video and audio content to wireless handsets and other mobile devices. Although Modeo’s planned services are not yet commercially available, Modeo competes with these other offerings in bringing its service to commercial availability. If and when Modeo’s planned service becomes commercially available, Modeo will compete with these offerings to capture potential subscribers and market share. In particular, Qualcomm has announced that it is currently developing a multicast digital video service, marketed under the brand name MediaFLO. Verizon Wireless and AT&T (formerly Cingular Wireless) have announced that they plan to offer their customers mobile video services over the MediaFLO network. In addition, Modeo may face competition from other companies offering podcasting and alternate methods of distributing video and audio to handheld devices. See “Item 1A. Risk Factors—Modeo’s Business Has Certain Risk Factors Different from our Core Tower Business, Including an Unproven Business Model.”
Employees
At February 20, 2007, we employed approximately 1,160 people worldwide, inclusive of approximately 210 people previously employed by Global Signal who are providing services only during the integration of the Global Signal business. 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. See “Item 1A. Risk Factors—Laws and Regulations, Which May Change at Any Time and With Which We May Fail to Comply, Regulate Our Business.”
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United States
Federal Regulations
Both the FCC and the Federal Aviation Administration (“FAA”) regulate towers used for wireless communications transmitters and receivers. Such regulations control the siting and marking of towers and may, depending on the characteristics of particular towers, require the registration of tower facilities 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 new 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. 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 radiofrequency 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.
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 1670 to 1675 MHz spectrum band 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 any of our FCC licenses.
Australia
Federal Regulation
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. 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.
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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 carrier would be required to pay for CCAL’s financial loss, which would roughly equal the tower rental 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—Laws and Regulations, Which May Change at Any Time and With Which We May Fail to Comply, Regulate Our Business” and “—Emissions From Antennas on Our Towers or Wireless Devices May Create Health Risks.”
The construction of new towers in the U.S. may be subject to environmental review under the National Environmental Policy Act of 1969, which requires federal agencies to evaluate the environmental impact of major federal actions. The FCC has promulgated regulations implementing the National Environmental Policy Act 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. 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
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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.
| Ite m 1A. | Risk Factors |
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.
Global Signal Merger—The Global Signal Merger may cause disruptions in our business, which may have an adverse effect on our business and financial results.
The Global Signal Merger could cause disruptions in or otherwise negatively impact our business. Among other things:
| • | the business combination of Global Signal with us may disrupt our business relationships with our customers, who may delay or defer decisions about current and future agreements with us because of the merger; |
| • | current and prospective employees may experience uncertainty about their future roles with us, which might adversely affect our ability to retain or attract key managers and other employees; and |
| • | the attention of management may be directed toward the integration of Global Signal with us and away from other business operations. |
Performance of Assets Acquired in the Global Signal Merger—The assets acquired in the Global Signal Merger may not perform as expected, which may have an adverse effect on our business, financial condition or results of operations.
In evaluating the anticipated benefits of a potential transaction with Global Signal, we performed due diligence on Global Signal’s tower portfolio and other assets to be acquired in the Global Signal Merger, which due diligence included, among other things, analyzing tower locations, visiting select towers, evaluating radio frequency information, and evaluating potential carrier customer demand. The results of this due diligence were used to support assumptions that were made by us in creating financial models to evaluate the potential future performance of Global Signal’s assets and the combined company. There can be no assurances that the towers and other assets of Global Signal will perform as expected by us based on our due diligence and provide us with the benefits that have been anticipated. A variety of factors could cause these assets not to provide such benefits, including, among other things:
| • | the inability to procure additional ground space at existing tower locations; |
| • | local and state restrictions on the ability to modify such towers; and |
| • | latent structural weaknesses associated with such towers and the related cost of repairing, reinforcing or upgrading them. |
If Global Signal’s assets fail to perform as expected or we fail to otherwise realize the anticipated benefits of Global Signal’s assets for these or other reasons, our business, financial condition or results of operations could be adversely affected.
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Integration of Global Signal—The integration of Global Signal is expected to result in substantial expenses and may present significant challenges.
We may face significant challenges in combining Global Signal’s operations in a timely and efficient manner and retaining key Global Signal personnel. This integration will be complex and time-consuming. The failure to successfully integrate Global Signal’s business and to manage the challenges presented by the integration process successfully, including the retention of key Global Signal personnel, may result in us and our stockholders not achieving the anticipated potential benefits of the Global Signal Merger.
Achieving the benefits of the Global Signal Merger will depend in part on the integration of Global Signal’s operations, wireless communications tower portfolio and personnel in a timely and efficient manner and our ability to realize the anticipated synergies from this integration. This integration may be difficult and unpredictable for many reasons, including, among others, the size of Global Signal’s wireless communications tower portfolio and because Global Signal’s and our internal systems and processes were developed without regard to such integration. Successful integration of Global Signal also requires coordination of personnel, which may be difficult and unpredictable because of possible cultural conflicts and differences in policies, procedures and operations between the companies and the different geographical locations of the companies and their assets. If the integration is not successful, we might not realize the expected benefits of the merger, which could adversely affect our business and the value of our common stock after the merger.
We expect to incur substantial expenses in connection with the integration of the Global Signal business into our policies, procedures, operations and systems. There are a large number of systems that must be integrated, including management information, accounting and finance, sales, billing, payroll and benefits, lease administration systems and regulatory compliance.
Although we expect that the realization of efficiencies related to the integration of the Global Signal business may offset incremental transaction, merger-related and restructuring costs over time, no assurances can be made that this net benefit will be achieved in the near term, or at all, and there are a number of factors, some of which are beyond our control, that could affect the total amount or the timing of all of the expected integration expenses.
Our Business Depends on the Demand for Wireless Communications and Towers—We may be adversely affected by any slowdown in such demand, including a slowdown attributable to wireless carrier consolidation or by the sharing of networks by wireless carriers.
Demand for our towers depends on demand for antenna space from our customers, which, in turn, depends on the demand for wireless services. The willingness of our customers to utilize our infrastructure, or renew existing leases on our towers, will be affected by numerous factors, including:
| • | consumer demand for wireless services; |
| • | availability and location of our towers and alternative towers; |
| • | cost of capital, including interest rates; |
| • | availability of capital to our customers; |
| • | willingness to co-locate equipment; |
| • | local and state restrictions on the proliferation of towers; |
| • | cost of building towers; |
| • | technological changes affecting the number or type of communications sites needed to provide wireless communications services to a given geographic area; |
| • | our ability to efficiently satisfy our customer’s service requirements; and |
| • | tax policies. |
A slowdown in demand for a particular wireless segment may adversely affect the demand for our towers. Moreover, some wireless carriers operate with substantial indebtedness, and financial problems for our customers may result in accounts receivable going uncollected, the loss of a customer (and associated lease revenue) or a reduced ability of these customers to finance expansion activities.
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A slowdown in the deployment of equipment for new wireless technologies, the consolidation of wireless carriers, the sharing of networks by wireless carriers or the increased use of alternative sites may also adversely affect the demand for our towers. In addition, advances in technology, such as the development of new antenna systems, new terrestrial deployment technologies and new satellite systems, may reduce the need for land-based, or terrestrial, transmission networks or our towers. To some extent, almost all of the above factors have occurred in recent years with an adverse effect on our business, and such factors are likely to persist in the future. The occurrence of any of these factors 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—The loss or consolidation of, network sharing among, or financial instability of any of our limited number of customers may materially decrease revenues.
For the year ended December 31, 2006, approximately 67.2% of our consolidated revenue was derived from Sprint Nextel, Cingular, Verizon Wireless and T-Mobile, which represented 14.8%, 23.5%, 20.3% and 8.6%, respectively, of our consolidated revenues. For the year ended December 31, 2006, on a pro forma basis as if the Global Signal Merger was completed January 1, 2006, approximately 68.3% of our total combined revenues were derived from Sprint Nextel, Cingular, Verizon Wireless, and T-Mobile, which represented 24.2%, 20.4%, 15.3%, and 8.4% of our consolidated revenues, respectively. The loss of any one of our large customers as a result of bankruptcy, 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 service 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 leasing 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.
In the ordinary course of business, we also sometimes experience disputes with customers, generally regarding the interpretation of terms in their respective agreements. Although, historically, we have resolved these disputes on commercially reasonable terms, future disputes could lead to increased tensions and damaged relationships with customers that could have a material adverse effect on our business, results of operations and financial condition. If we are forced to resolve any of these disputes through litigation, our relationship with the applicable customer could be damaged, which could lead to decreased revenues (including as a result of losing a customer) or increased costs, resulting in a corresponding adverse effect on our business, results of operations and financial condition.
Wireless Carrier Consolidation—Consolidation among 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 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 recent 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. Recent regulatory developments have made consolidation in the wireless industry easier and more likely. For example, in February 2002, the FCC enabled the ownership by a single entity of interests in both cellular carriers in overlapping metropolitan cellular service areas. In January 2003, the FCC eliminated the spectrum aggregation cap in a geographic area in favor of a case-by-case review of spectrum transactions. It is possible that at least some customers may take advantage of this relaxation of spectrum and ownership limitations and consolidate their businesses. Any industry consolidation could decrease the demand for our towers, which in turn may result in a reduction in our revenues.
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Substantial Level of Indebtedness—Our substantial level of indebtedness may adversely affect our ability to react to changes in our business. We may also be limited in our ability to use debt to fund future capital needs.
We have a substantial amount of indebtedness. As a consequence of our indebtedness, we (1) are subject to restrictive covenants that further limit our financial and operating flexibility and (2) may choose to institute self-imposed limits on our indebtedness based on certain considerations including market interest rates, our relative leverage and our strategic plans. For example, the limits imposed by our indebtedness restrict, under certain circumstances, our and certain of our respective subsidiaries’ ability to take various actions, including incurring additional debt, guaranteeing indebtedness, issuing preferred stock, engaging in various types of transactions, such as mergers and sales of assets, and paying dividends and making distributions or other restricted payments and investments. These restrictions could have an adverse effect on our business by limiting our ability to take advantage of financing, new tower development, mergers and acquisitions or other opportunities.
The following chart sets forth certain important credit information and is presented on a U.S. GAAP basis as of December 31, 2006, Post-Merger, and after giving effect to the $600.0 million term loan entered into in January 2007 (“2007 Term Loan”) and the January 2007 Stock Purchase.
| (In thousands of dollars) | |||
| Total indebtedness |
$ | 5,945,534 | |
| Redeemable preferred stock |
312,871 | ||
| Stockholders’ equity |
3,533,332 | ||
| Debt and redeemable preferred stock to equity ratio |
1.77 | ||
As a result of our substantial debt, demands on our cash resources will increase, 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 may be more vulnerable to general adverse economic and industry conditions; |
| • | we may find it more difficult to obtain additional financing to fund future working capital, capital expenditures and other general corporate requirements; |
| • | we will be required to dedicate a substantial portion of our cash flow from operations to the payment of principal and interest on our debt, reducing the available cash flow to fund other investments, including capital expenditures; |
| • | we may have limited flexibility in planning for, or reacting to, changes in our business or in the industry; and |
| • | we may have a competitive disadvantage relative to other companies in our industry with less debt. |
We cannot guarantee that we will be able to generate enough cash flow from operations or that we will be able to obtain enough capital to service our debt or pay our obligations under our preferred stock. In addition, we may need to refinance some or all of our indebtedness and preferred stock on or before maturity. If we are unable to refinance our debt or renegotiate the terms of such debt, we may not be able to meet our debt service requirements in the future.
Fluctuations in market interest rates may increase interest expense relating to our floating rate indebtedness. As of December 31, 2006, Post-Merger, and after giving effect to the 2007 Term Loan, approximately 89.9% of our outstanding indebtedness consists of long-term fixed interest rate notes. In addition, there is no guarantee future refinancing of our indebtedness will have fixed interest rates or that interest rates on such indebtedness will be equal to or lower than the rates on our current indebtedness.
Crown Castle International Corp. (“CCIC”) is a holding company with no business operations of its own. We conduct all of our business operations through our subsidiaries. As of January 31, 2007, approximately 1.1% of our consolidated indebtedness, was held at the holding company level (another 10.1% of our consolidated indebtedness is unconditionally guaranteed by the holding company). Accordingly, our only source of cash to pay interest and principal on our outstanding indebtedness held at the holding company level is distributions relating to our ownership interest in our subsidiaries from the cash flows and net earnings generated by such subsidiaries or from proceeds of debt, equity offerings, sale of FiberTower or Modeo or certain asset sales. If our subsidiaries are unable to dividend cash to us when we need it, we may be unable to satisfy our obligations, including interest and principal payments, under our debt instruments.
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Economic and Wireless Telecommunications Industry Slowdown—an economic or wireless telecommunications 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 U.S. economy, including the wireless telecommunications industry, has 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 U.S. or Australia 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, including 3G and other wireless broadband services. Further, unforeseen events, including the war on terrorism, the threat of additional terrorist attacks, the political and economic uncertainties resulting therefrom may impose additional risks upon and adversely affect the wireless telecommunications industry and us.
We believe that the prior economic slowdowns in the U.S., particularly in the wireless telecommunications industry, have harmed, and similar slowdowns in the U.S. or Australia may further harm, the financial condition or operations of wireless carriers, some of which, including customers of ours, have filed for bankruptcy protection.
We Operate Our Business In a Competitive Industry and Some of Our Competitors Have Significantly More Resources or Less Debt Than We Do—As a result of this competition, we may find it more difficult to achieve favorable lease rates on our towers.
We face competition for site rental customers from various sources, including:
| • | other large independent tower owners; |
| • | wireless carriers that own and operate their own towers and lease antenna space to other carriers; |
| • | alternative facilities such as rooftops, broadcast towers and utility poles; |
| • | new alternative deployment methods; |
| • | site development companies that acquire antenna space on existing towers for wireless carriers and manage new tower construction; and |
| • | local independent tower operators. |
Wireless carriers that own and operate their own tower portfolios generally are substantially larger (particularly given the impact of recently completed wireless carrier mergers) and have greater financial resources than we have. Competition for tenants on towers may adversely affect lease rates and revenues.
New Technologies May Make Our Tower Leasing Service Less Desirable to Potential Tenants and Result in Decreasing Revenues—Such new technologies may significantly reduce demand for tower leases and negatively impact the growth in our revenues.
The development and deployment of signal combining technologies, which permit one antenna to service multiple frequencies and, thereby, multiple customers, may reduce the need for our antenna space. In addition, other technologies, such as DAS, wireless mesh networks, mobile satellite systems and the delivery of video services by direct broadcast satellites, 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 reduction in tower leasing demand resulting from multiple frequency antennas, satellite, DAS, mesh networks or other technologies may negatively impact our revenues or otherwise have a material adverse effect on us.
New Technologies May Not Perform as Projected—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 or other new wireless technologies will be introduced or deployed as rapidly or in the manner previously or presently projected by the wireless or broadcast industries. In
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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 site rental as a result of such technologies may not be realized at the times or to the extent previously or presently anticipated.
We Generally Lease or Sublease the Land Under Our Towers and May Not Be Able to Extend These Leases—If we fail to protect our rights against persons claiming superior rights to the land on which our towers are located, our business may be adversely affected.
Our real property interests relating to the land on which our towers are located 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. Post-Merger, approximately 9.8% of our towers are on land where our property interests in such land have a final expiration date of less than 10 years. Our inability to protect our rights to the land under our towers may have a material adverse affect on us.
Our ability to protect our rights against persons claiming superior rights in towers or real property depends on our ability to:
| • | recover under title insurance policies, the policy limits of which are likely to be less than the purchase price or economic value of a particular tower; |
| • | in the absence of title insurance coverage, recover under title warranties given by tower sellers, which often terminate after the expiration of a specific period (typically in three years or less), contain various exceptions and are dependent on the general creditworthiness of the sellers making the title warranties; |
| • | obtain estoppels from landlords in connection with the acquisitions, or in some cases the subsequent financing, of towers, which protect the collateral of our lenders and may provide a basis for defending post-closing claims arising from pre-closing events; |
| • | recover from landlords under title covenants contained in lease agreements, which are dependent on the general creditworthiness of the landlords making the title covenants; |
| • | obtain non-disturbance agreements from mortgagees and superior lienholders of the land under our towers; and |
| • | renegotiate and extend the terms of the ground leases, subleases and licenses relating to the land on which our towers are located or purchase the land on which such towers reside. |
We May Need Additional Financing, Which May Not Be Available, for Strategic Growth Opportunities—If we are unable to raise capital in the future when needed, we may not be able to fund future growth opportunities.
In the future, we may require significant capital expenditures for strategic growth opportunities. As of December 31, 2006, Post-Merger, and after giving effect to the 2007 Term Loan and the January 2007 Stock Purchase, we had consolidated cash and cash equivalents of $139.4 million and restricted cash of $137.5 million. In addition, we have $250.0 million of availability under our senior secured revolving credit facility (“2007 Revolver”). We may need additional sources of debt or equity capital in the future to fund future 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.
Modeo’s Business Has Certain Risk Factors Different from our Core Tower Business, Including an Unproven Business Model—Modeo’s business may fail to operate successfully and produce results that are less than anticipated.
Modeo is a new company with no operating history and may not be able to operate successfully. Modeo has an unproven business model and operates in the new, largely untested and rapidly evolving mobile media market. Modeo is subject to all of the business risks and uncertainties associated with any new business enterprise. Modeo has had no revenues since inception. We expect Modeo to experience initial operating losses due to the costs and expenses associated with a start-up operation. No assurance can be made that Modeo will ever generate positive cash flows or that losses recorded from Modeo will not increase in the future.
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Modeo’s planned business model assumptions include:
| • | wireless carriers and other potential retailers will want to offer Modeo’s service to their customers; |
| • | a sufficient number of end users of wireless handsets and other mobile devices will subscribe to Modeo’s service; |
| • | an adequate supply of wireless handsets and other mobile devices capable of operating on Modeo’s network will be timely available; and |
| • | Modeo will be able to secure video and audio content licenses on favorable terms. |
If any of the assumptions is incorrect, Modeo’s proposed business will be harmed and may not become commercially available or survive.
In addition, Modeo’s ability to achieve its strategic objectives will depend in large part upon the successful, timely and cost-effective completion of a DVB-H network beyond New York City. A variety of factors, uncertainties and contingencies could affect or prevent the successful, timely and cost-effective build out of the planned Modeo network including:
| • | Modeo’s ability to wholesale its service to wireless carriers and other potential retailers; |
| • | Modeo’s ability to obtain sufficient base station and broadcast equipment devices compatible with our spectrum license and DVB-H; |
| • | unforeseen delays, costs or impediments relating to the granting of state and municipal permits; |
| • | Modeo’s ability to manage the build out effectively and cost-efficiently; |
| • | delays or disruptions resulting from the failure of third-party suppliers, including equipment manufacturers, or contractors to meet their obligations in a timely and cost-effective manner; and |
| • | unsuccessful operation of, or the receipt of negative results or feedback relating to, our New York City network beta service. |
We continue to evaluate the potential options for funding the build out of the Modeo network beyond New York City, which include: non-recourse debt secured by our 1670-1675 MHz spectrum license, equity investors in Modeo, joint venture proposals, proposals to sell a controlling interest in Modeo along with a combination of the above. There can be no assurances that we will be able to obtain additional third party financing on terms acceptable to us or that Modeo will be able to complete a DVB-H network beyond New York City in a timely manner or at all. If we are unable to raise additional capital from third party investors on acceptable terms in a timely manner or if Modeo is otherwise unable to meet its network development targets, then Modeo may not be able to implement its current business plan, and Modeo’s planned mobile media service may not become operationally active or commercially available.
Many other companies, some with significantly greater resources than us, currently offer or plan to offer video and audio content to wireless handsets and other mobile devices. Although Modeo’s planned services are not yet commercially available, Modeo competes with these other offerings in bringing its service to commercial availability. If and when Modeo’s planned service becomes commercially available, Modeo will compete with these offerings in capturing potential subscribers and market share. Sprint Nextel, AT&T (formerly Cingular Wireless) and Verizon Wireless currently offer streaming video services over their networks under the brand names Sprint TV, MobiTV and Vcast, respectively. In addition, Qualcomm has announced that it is developing a multicast digital video service, marketed under the brand name MediaFLO. Verizon Wireless and AT&T (formerly Cingular Wireless) have announced that they plan to offer their customers mobile video services over the MediaFLO network. Modeo’s planned service offering may also face competition from other companies offering podcasting and alternate methods of distributing video and audio to mobile devices. As a result of such competition, Modeo may not become viable or gain market share.
There can be no assurances that wireless carriers will adopt a wholesale model, such as Modeo’s, to provide video and audio services to their subscribers. Modeo’s failure to operate successfully or accomplish its strategic
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objectives could negatively impact Modeo’s ability to generate positive cash flow, could require us to dispose of all or part of Modeo’s business and assets, including the FCC spectrum license, or otherwise have an adverse effect on us.
FiberTower’s Business Has Certain Risk Factors Different from our Core Tower Business, Including an Unproven Business Model—FiberTower’s business may produce results that are less than anticipated, resulting in a write-off of all or part of our investment in FiberTower.
FiberTower commenced its principal operations in 2003 and has a limited operating history. 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 the backhaul solutions FiberTower provides to 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. In addition, as a minority shareholder, we have a limited ability to affect FiberTower’s operations. Additional risk factors relating to FiberTower’s business can be found in FiberTower’s filings with the SEC.
Our investment in FiberTower is classified as an available-for-sale security, carried at fair value on our consolidated balance sheet. The net unrealized gains or losses on our investment as a result of fluctuations in FiberTower’s share price are reported as accumulated other comprehensive income unless such changes are 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 write-off all or a portion of our investment in FiberTower. As of January 31, 2007, the fair value of our investment in FiberTower was $137.8 million (at $5.23 per FiberTower share). As of January 31, 2007, the unrealized investment gain included in accumulated other comprehensive income totaled $2.1 million or equivalent to $0.08 per FiberTower share. Although we currently have no plans to do so, should we choose to liquidate our investment in FiberTower, we can provide no assurances that we will be able to do so at a desirable value. In addition, our investment in FiberTower is subject to certain transfer restrictions that terminate in August 2007 or earlier in some cases.
Laws and Regulations, Which May Change at Any Time and With Which We May Fail to Comply, Regulate Our Business—If we fail to comply with applicable laws or regulations, 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.
Shares Eligible For Future Sale—Sales or issuances of a substantial number of shares of 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 20, 2007, we had 282.8 million shares of common stock outstanding. In addition, we have reserved (1) 16.5 million shares of common stock for future issuance under our various stock compensation plans, (2) 1.2 million shares of common stock upon exercise of outstanding warrants, inclusive of 0.6 million shares of common stock as a result of the Global Signal Merger, (3) 5.9 million shares of common stock for the conversion of our 4% Convertible Senior Notes and (4) 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. In addition, pursuant to the Stockholders Agreement, we have filed with the SEC a registration statement covering certain shares of common stock issued to the Global Signal Significant Stockholders in the Global Signal Merger. The Global
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Signal Significant Stockholders are subject to certain restrictions on their ability to sell or otherwise dispose of their shares of common stock for a period of up to 180 days after the closing of the Global Signal Merger. 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 shares of our common stock, the market price of our common stock may significantly decline.
The holders of our 6.25% convertible preferred stock (“6.25% Convertible Preferred Stock”) are entitled to receive cumulative dividends at the rate of 6.25% per annum (approximately $19.9 million 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. At various times in the past, we have paid such dividends with shares of common stock, and we may elect to do so again in the future from time to time. The number of shares of common stock required to be issued to pay such dividends is dependent upon the current market value of our common stock at the time such dividend is required to be paid.
We Are Heavily Dependent on Our Senior Management—If we lose members of our senior management, we may not be able to find appropriate replacements on a timely basis and our business may be adversely affected.
Our existing operations and continued future development depend to a significant extent upon the performance and active participation of certain key individuals as employees, including our chief executive officer. We cannot guarantee that we will be successful in retaining the services of these or other key personnel. If we were to lose any of these individuals, we may not be able to find or integrate appropriate replacements on a timely basis, and we may be materially adversely affected.
Variability in Demand For Network Services Business Reduces the Predictability of Our Results—Our network services business has historically experienced significant volatility in demand.
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. Network services revenues declined as a percentage of our total revenues during 2003 and 2004, reflecting our efforts to de-emphasize this area of our business and increased competition, while such revenues increased modestly in 2005 and 2006. In the foreseeable future, network services revenues may decline as a percentage of our total revenues due to our focus on our core leasing business, increased competition or other factors.
Emissions From Antennas on Our Towers or Wireless Devices May Create Health Risks—If 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 FCC and other government agencies impose requirements and other guidelines on their licensees relating to radio frequency emissions. 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.
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Anti-Takeover Provisions in Our Certificate of Incorporation and Competition Laws May Have Effects That Conflict with the Interests of Our Stockholders—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 you.
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:
| • | a staggered Board of Directors; |
| • | a shareholder rights agreement; |
| • | the authority of the Board of Directors to issue preferred stock without approval of the holders of our common stock; and |
| • | advance notice requirements for director nominations and actions to be taken at annual meetings. |
Our by-laws permit special meetings of the stockholders to be called only upon the request of 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.
Our Operations Outside the U.S. Expose Us to Changes in Foreign Currency Exchange Rates—We may suffer losses as a result of changes in such currency exchange rates.
After giving effect to the Global Signal Merger, we conduct business in Australia, Canada and United Kingdom, which exposes us to fluctuations in foreign currency exchange rates. For the year ended December 31, 2006, approximately 9.3% of our consolidated 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. Approximately 1% of the revenue expected to be realized from the Global Signal business will be denominated in currencies other than U.S. dollars.
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 through 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 16, 2006 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.
| It em 1B. | Unresolved Staff Comments |
None.
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| It em 2. | Properties |
Our principal corporate offices are located in Houston, Texas; Canonsburg, Pennsylvania; and Sydney, Australia. As a result of the Global Signal Merger, a lease for office space with an end date in 2010, relating to the Global Signal corporate office in Sarasota, Florida remains in effect.
| Location |
Property Interest | Size (Sq. Ft.) | Use | |||
| Canonsburg, PA |
Owned | 124,000 | Corporate office | |||
| Houston, TX |
Leased | 18,586 | Corporate office | |||
| Sydney, Australia |
Leased | 21,000 | Corporate office |
In the U.S., we also lease and maintain three additional area offices (“Area Offices”) in addition to the Area Office operated from our Canonsburg, Pennsylvania office, located in (1) Charlotte, North Carolina, (2) Alpharetta, Georgia, and (3) Phoenix, Arizona. The principal responsibilities of these offices are to manage the leasing 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. We anticipate the expansion of certain Area Offices and district offices in 2007 as a result of the Global Signal Merger.
In the CCUSA portfolio, Post-Merger, 18.4% of the towers are guyed towers, 34.6% are self support lattice towers, 1.2% are rooftop installations and the remaining 45.5% are predominantly monopoles. Typical guyed towers are generally located on larger tracts of land of up to 7 acres, while non-guyed towers are generally located on smaller tracts of land that typically range from approximately 1,600 to 22,000 square feet. These tracts of land support the towers, equipment shelters and, where applicable, guy wires to stabilize the structure. The actual square footage of the land relating to any particular tower depends on a number of things, including the topography of the site, the size of the area the landlord is willing to lease, the number of customers locating on the tower and the type of structure at the site.
As of December 31, 2006, Post-Merger, we own in fee or have permanent or long-term easements in the land on which 3,926 of our CCUSA towers reside, or approximately 17.6% of our CCUSA portfolio, and we lease, sublease or license the land on which 17,611 of our CCUSA towers reside. In addition, as of December 31, 2006, Post-Merger, CCUSA managed 737 towers 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, 2006, for 1,383 of our 1,387 CCAL towers site tenure of the land under our towers takes the form of a lease or license, and we own the remaining four sites in fee. Our ground leases, subleases and licenses generally have five or 10 year initial terms at CCUSA and 10 to 15 years at CCAL, and frequently contain one or more renewal options.
For a tabular presentation of the remaining terms to expiration (including any renewal terms at our option) of the ground leases, subleases, or licenses for the CCUSA land which we do not own and on which our towers are located as of December 31, 2006, Post-Merger, see “Item 7. Management’s Discussion and Analysis of Financial Competition and Results of Operations—Liquidity and Capital Resources—Contractual Cash Obligations”.
In 2004, we began a program (“Portfolio Extension Program”) through which we seek to (1) renegotiate and extend the terms of the ground leases, subleases and licenses relating to the land on which our CCUSA towers are located or (2) purchase the land on which such towers reside. Global Signal had an ongoing initiative similar to the Portfolio Extension Program, which we expect to continue after the Global Signal Merger. See “Item 1A. Risk Factors—We Generally Lease or Sublease the Land Under Our Towers and May Not Be Able to Extend These Leases.”
On June 8, 2005, we issued $1.9 billion aggregate principal amount of 2005 Tower Revenue Notes. On November 29, 2006, we issued $1.55 billion aggregate principal amount of 2006 Tower Revenue Notes as additional debt securities under the existing indenture pursuant to which the 2005 Tower Revenue Notes were issued in 2005. The 2005 Tower Revenue Notes and 2006 Tower Revenue Notes are effectively secured by 6,639 of our CCUSA towers and the cash flows from those towers. Governing instruments related to another 4,901 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 these notes.
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Approximately 8,975 of the 10,749 towers acquired as a result of the Global Signal Merger and the cash flows from those towers are effectively pledged as security for debt of Global Signal consisting of the Commercial Mortgage Pass-through Certificates, Series 2004-2 (“2004 Mortgage Loan”) and the Commercial Mortgage Pass-through Certificates, Series 2006-1 (“2006 Mortgage Loan”). The 2004 Mortgage Loan and the 2006 Mortgage Loan remain outstanding as obligations of the Global Signal entities we acquired in the Global Signal Merger.
Substantially 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, 2006, Post-Merger, the weighted average number of tenants per tower is approximately 2.50 on our 22,274 CCUSA towers, including rooftop installations. A summary of the number of existing tenants per tower as of December 31, 2006, Post-Merger, is as follows:
| Number of Tenants |
Number of Towers | |
| Greater than five |
1,200 | |
| Five |
1,177 | |
| Four |
2,324 | |
| Three |
3,862 | |
| Two |
5,688 | |
| Less than two |
8,023 | |
| 22,274 | ||
| Ite m 3. | Legal Proceedings |
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.
We know of five shareholder derivative lawsuits filed in 2006 in Texas state courts against various of our current and former directors and officers. The lawsuits all made allegations relating to our historic stock option practices and allege claims for breach of fiduciary duty and other similar matters. Among the forms of relief, the lawsuits seek alleged monetary damages sustained by CCIC. The plaintiffs have named CCIC as a nominal defendant and ostensibly bring the lawsuits on CCIC’s behalf. In December 2006 an order to consolidate the lawsuits into a single action and appoint lead plaintiffs counsel was entered. In February 2007, the 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.
| Item 4. | Submissions of Matters to a Vote of Security Holders |
On January 11, 2007 at a special meeting, the stockholders of the Company provided an affirmative vote to approve the issuance of common stock to stockholders of Global Signal pursuant to the Global Signal Merger. See note 20 to our consolidated financial statements.
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Unless this Form 10-K/A indicates otherwise or the context otherwise requires, the terms, “we,” “our,” “our company,” “the company” or “us” as used in this Form 10-K/A refer to Crown Castle International Corp. and its subsidiaries as of December 31, 2006 and exclude Global Signal. Unless this Form 10-K/A indicates otherwise or the context otherwise requires, the terms “CCUSA” and “in the U.S.” refer to our CCUSA segment as of December 31, 2006 and exclude Global Signal.
| It em 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
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.
| High | Low | |||||
| 2005: |
||||||
| First Quarter |
$ | 17.52 | $ | 15.40 | ||
| Second Quarter |
20.75 | 15.71 | ||||
| Third Quarter |
25.43 | 19.81 | ||||
| Fourth Quarter |
29.20 | 23.47 | ||||
| 2006: |
||||||
| First Quarter |
$ | 32.77 | $ | 26.41 | ||
| Second Quarter |
34.93 | 27.45 | ||||
| Third Quarter |
35.83 | 32.23 | ||||
| Fourth Quarter |
35.29 | 31.84 | ||||
As of February 20, 2007, there were approximately 797 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 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 the certificates of designations in respect 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 current market value of our common stock at the time such dividend is required to be paid. For the year ended December 31, 2004, dividends on our 6.25% Convertible Preferred Stock were paid with 1,498,361 shares of common stock. For the years ended December 31, 2005 and 2006, dividends on our 6.25% Convertible Preferred Stock were paid with 631,700 and -0- shares of common stock, respectively, and approximately $9,939,000 and $19,877,000 in cash, respectively.
On November 30, 2005, we exercised our redemption right for our $200 million 8 1/4% convertible preferred stock (“8 1/4% Convertible Preferred Stock”). On December 16, 2005, we redeemed the 8 1/4% Convertible Preferred Stock. Prior to the redemption, the holders of our 8 1/4% Convertible Preferred Stock were entitled to receive cumulative dividends at the rate of 8 1/4% per annum, payable on a quarterly basis. Prior to redemption, we had the option to pay the dividends on such series of preferred stock in cash or in shares of common stock. The number of
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shares required to pay such dividends was dependent upon the current market value of our common stock at the time such dividend was required to be paid. For the years ended December 31, 2004, dividends on our 8 1/4% Convertible Preferred Stock were paid with 1,140,000 shares of common stock. For the year ended December 31, 2005, dividends on our 8 1/4% Convertible Preferred Stock were paid with 245,000 shares of common stock and approximately $12,375,000 in cash.
Any shares of common stock issued to pay such dividends will continue to have a dilutive effect upon the shares of common stock otherwise outstanding, and declines in the fair market value of our common stock will increase the effective dilution. In 2004, 2005 and 2006, we purchased 845,000, 245,000 and -0- shares of common stock, respectively, from the dividend paying agent for a total of $12.2 million, $4.1 million and $-0- in cash, respectively. We have also purchased shares of common stock on other occasions (see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources”).
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.
Issuance of Unregistered Securities
Unregistered Sales of Equity Securities
On May 10, 2006, we issued an aggregate of 38,196 unregistered shares of common stock to two holders of our outstanding warrants upon the cashless exercise of warrants to purchase 50,270 shares of common stock at an exercise price of $7.508 per share. We issued the shares in reliance upon exemptions from registration pursuant to the Securities Act of 1933, as amended, including Section 3(a)(9) and Section 4(2) therein.
Equity Compensation Plans
Certain information with respect to our equity compensation plans is set forth in Item 12 herein.
Purchases of Equity Securities
We made no purchases of equity securities during the fourth quarter of 2006.
Performance 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, 2001 and ending December 31, 2006. 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.
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| Fiscal Year Ending | ||||||||||||||||||
| Company/Index/Market |
December 31, 2001 |
December 31, 2002 |
December 31, 2003 |
December 31, 2004 |
December 30, 2005 |
December 29, 2006 | ||||||||||||
| Crown Castle International Corp. |
$ | 100.00 | $ | 35.11 | $ | 103.28 | $ | 155.81 | $ | 251.97 | $ | 302.43 | ||||||
| Communications Services, NEC |
100.00 | 40.86 | 93.12 | 145.16 | 120.77 | 151.55 | ||||||||||||
| NYSE Market Index |
100.00 | 81.69 | 105.82 | 119.50 | 129.37 | 151.57 | ||||||||||||
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.
| It em 6. | Selected Financial Data |
Our selected historical consolidated financial and other data set forth below for each of the five years in the period ended December 31, 2006, and as of December 31, 2002, 2003, 2004, 2005 and 2006 have been derived from our consolidated financial statements. The information set forth below should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data.”
The financial information set forth below has been revised to reflect the recognition of certain previously recorded adjustments in accounting for equity-based compensation for 2002, 2003, 2004, 2005 and 2006 in the year in which the charges (credits) related to rather than via the previously recorded cumulative effect adjustment as of January 1, 2006, as further discussed in the “Explanatory Note Regarding Amendment” in the forepart of this Amendment. This information should be read in conjunction with our consolidated financial statements included in this Amendment.
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| Years Ended December 31, | ||||||||||||||||||||
| 2002 | 2003 | 2004 | 2005 | 2006 | ||||||||||||||||
| (In thousands of dollars, except per share amounts) | ||||||||||||||||||||
| Statement of Operations Data: | ||||||||||||||||||||
| Net revenues: |
||||||||||||||||||||
| Site rental |
$ | 447,271 | $ | 484,841 | $ | 538,309 | $ | 597,125 | $ | 696,724 | ||||||||||
| Network services and other (a) |
159,217 | 72,316 | 65,893 | 79,634 | 91,497 | |||||||||||||||
| Total net revenues |
606,488 | 557,157 | 604,202 | 676,759 | 788,221 | |||||||||||||||
| Costs of operations (exclusive of depreciation, amortization and accretion): |
||||||||||||||||||||
| Site rental |
175,267 | 179,305 | 184,273 | 197,355 | 212,454 | |||||||||||||||
| Network services and other (a) |
122,027 | 46,888 | 46,752 | 54,630 | 60,507 | |||||||||||||||
| Total costs of operations |
297,294 | 226,193 | 231,025 | 251,985 | 272,961 | |||||||||||||||
| General and administrative |
88,936 | 100,586 | 99,738 | 109,612 | 95,751 | |||||||||||||||
| Corporate development |
7,483 | 5,564 | 1,455 | 4,298 | 8,781 | |||||||||||||||
| Restructuring charges (credits) |
8,665 | 1,291 | 939 | 2,615 | (391 | ) | ||||||||||||||
| Asset write-down charges (b) |
52,598 | 14,317 | 7,652 | 2,925 | 2,945 | |||||||||||||||
| Integration costs |
— | — | — | — | 1,503 | |||||||||||||||
| Depreciation, amortization and accretion |
276,479 | 281,028 | 284,991 | 281,118 | 285,244 | |||||||||||||||
| Operating income (loss) |
(124,967 | ) | (71,822 | ) | (21,598 | ) | 24,206 | 121,427 | ||||||||||||
| Gains (losses) on purchases and redemptions of debt and preferred stock (c) |
79,138 | (119,405 | ) | (78,036 | ) | (283,797 | ) | (5,843 | ) | |||||||||||
| Interest and other income (expense) (d) |
(14,214 | ) | (12,387 | ) | (228 | ) | 1,354 | (1,629 | ) | |||||||||||
| Interest expense, amortization of deferred financing costs and dividends on preferred stock |
(273,842 | ) | (258,834 | ) | (206,770 | ) | (133,806 | ) | (162,328 | ) | ||||||||||
| Income (loss) from continuing operations before income taxes, minority interests and cumulative effect of change in accounting principle |
(333,885 | ) | (462,448 | ) | (306,632 | ) | (392,043 | ) | (48,373 | ) | ||||||||||
| Benefit (provision) for income taxes |
(4,407 | ) | (2,465 | ) | 5,370 | (3,225 | ) | (843 | ) | |||||||||||
| Minority interests |
11,770 | 3,992 | 398 | 3,525 | 1,666 | |||||||||||||||
| Income (loss) from continuing operations before cumulative effect of change in accounting principle |
(326,522 | ) | (460,921 | ) | (300,864 | ) | (391,743 | ) | (47,550 | ) | ||||||||||
| Discontinued operations (e): |
||||||||||||||||||||
| Income (loss) from discontinued operations, net of tax |
7,340 | 4,430 | 40,578 | (1,953 | ) | — | ||||||||||||||
| Net gain (loss) on disposal of discontinued operations, net of tax |
— | — | 494,110 | 2,801 | 5,657 | |||||||||||||||
| Income (loss) from discontinued operations, net of tax |
7,340 | 4,430 | 534,688 | 848 | 5,657 | |||||||||||||||
| Income (loss) before cumulative effect of change in accounting principle |
(319,182 | ) | (456,491 | ) | 233,824 | (390,895 | ) | (41,893 | ) | |||||||||||
| Cumulative effect of change in accounting principle for asset retirement obligations |
— | (551 | ) | — | (9,031 | ) | — | |||||||||||||
| Net income (loss) (f) |
(319,182 | ) | (457,042 | ) | 233,824 | (399,926 | ) | (41,893 | ) | |||||||||||
| Dividends on preferred stock, net of gains (losses) on purchases of preferred stock (g) |
16,023 | (55,897 | ) | (38,618 | ) | (49,356 | ) | (20,806 | ) | |||||||||||
| Net income (loss) after deduction of dividends on preferred stock, net of gains (losses) on purchases of preferred stock |
$ | (303,159 | ) | $ | (512,939 | ) | $ | 195,206 | $ | (449,282 | ) | $ | (62,699 | ) | ||||||
| Per common share—basic and diluted: |
||||||||||||||||||||
| Income (loss) from continuing operations before cumulative effect of change in accounting principle |
$ | (1.36 | ) | $ | (2.37 | ) | $ | (1.54 | ) | $ | (2.02 | ) | $ | (0.33 | ) | |||||
| Income (loss) from discontinued operations |
(0.03 | ) | 0.02 | 2.42 | — | 0.03 | ||||||||||||||
| Cumulative effect of change in accounting principle |
— | (0.01 | ) | — | (0.04 | ) | — | |||||||||||||
| Net income (loss) |
$ | (1.39 | ) | $ | (2.36 | ) | $ | 0.88 | $ | (2.06 | ) | $ | (0.30 | ) | ||||||
| Weighted average common shares outstanding—basic and diluted (in thousands) |
218,028 | 216,947 | 221,693 | 217,759 | 207,245 | |||||||||||||||
28
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Index to Financial Statements
| Years Ended December 31, | |||||||||||||||||||
| 2002 | 2003 | 2004 | 2005 | 2006 | |||||||||||||||
| (In thousands of dollars, except per share amounts) | |||||||||||||||||||
| Other Data: | |||||||||||||||||||
| Summary cash flow information: |
|||||||||||||||||||
| Net cash provided by (used for) operating activities |
$ | 94,107 | $ | 85,324 | $ | 121,501 | $ | 204,912 | $ | 275,759 | |||||||||
| Net cash provided by (used for) investing activities |
51,626 | 119,081 | (319,200 | ) | (264,140 | ) | (432,499 | ) | |||||||||||
| Net cash provided by (used for) financing activities |
(286,258 | ) | 71,086 | (1,689,601 | ) | (445,636 | ) | 678,914 | |||||||||||
| Ratio of earnings to fixed charges (h) |
— | — | — | — | — | ||||||||||||||
| Balance Sheet Data (at period end): | |||||||||||||||||||
| Cash and cash equivalents |
$ | 339,837 | $ | 409,584 | $ | 566,707 | $ | 65,408 | $ | 592,716 | |||||||||
| Short-term investments |
178,697 | 26,600 | — | — | — | ||||||||||||||
| Assets of discontinued operations |
1,974,602 | 2,055,162 | 3,693 | — | — | ||||||||||||||
| Available-for-sale securities (i) |
— | — | — | — | 154,955 | ||||||||||||||
| Property and equipment, net |
3,839,178 | 3,600,894 | 3,375,022 | 3,294,333 | 3,246,446 | ||||||||||||||
| Total assets |
6,802,951 | 6,616,908 | 4,574,567 | 4,131,317 | 5,006,168 | ||||||||||||||
| Liabilities of discontinued operations (e) |
645,619 | 354,357 | 568 | — | — | ||||||||||||||
| Total debt |
2,880,917 | 3,449,992 | 1,850,398 | 2,270,686 | 3,513,890 | ||||||||||||||
| Redeemable preferred stock (j) |
756,014 | 506,702 | 508,040 | 311,943 | 312,871 | ||||||||||||||
| Total stockholders’ equity |
2,086,115 | 1,810,542 | 1,849,494 | 1,178,376 | 756,281 | ||||||||||||||
| (a) | The decline in the network services revenue and the related costs of operations during 2003 and 2004 reflects our de-emphasis of this area of our business and increased competition. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Overview” for a further discussion of our network services revenues and costs of operations. |
| (b) | The 2002 amount represents charges related to the abandonment of certain construction in-process projects and the write-down of certain inventories. |
| (c) |
The 2002 amount represents gains on the purchase of debt with a combined principal amount of $244.6 million. The 2003 amount represents losses of $87.1 million on purchases of debt with a combined principal amount of $885.0 million and losses of $32.3 million on the purchase of the 12 3/4% senior exchangeable preferred stock. See note 7 to our consolidated financial statements for a discussion of 2004, 2005 and 2006. |
| (d) | The 2002 amount includes charges of $29.1 million for losses from, and write-downs of, investments in unconsolidated affiliates. The 2003 amount includes a loss on the issuance of the interest in Crown Atlantic of $11.2 million. |
| (e) | On June 28, 2004, we signed a definitive agreement to sell our U.K. subsidiary (“CCUK”) to an affiliate of National Grid Transco Plc (“National Grid”) for over $2.0 billion. On August 31, 2004, we completed the sale of CCUK. On May 9, 2005, we sold OpenCell Corp. (“OpenCell”), a business which manufactures distributed antenna systems and is a supplier to Crown Castle Solutions. For all periods presented, CCUK’s and OpenCell’s assets, liabilities, results of operations and cash flows are classified as amounts from discontinued operations. |
| (f) | No cash dividends were declared or paid in 2002, 2003, 2004, 2005 or 2006. |
| (g) | Includes gains of $95.8 million on purchases of preferred stock in 2002 and net losses of $1.6 million and $12.0 million on purchases of preferred stock in 2003 and 2005, respectively. |
| (h) | For purposes of computing the ratio of earnings to fixed charges, earnings represent income (loss) from continuing operations before income taxes, minority interests, cumulative effect of change in accounting principle and fixed charges. Fixed charges consist of interest expense, the interest component of operating leases, amortization of deferred financing costs and dividends on preferred stock classified as liabilities. For 2002, 2003, 2004, 2005 and 2006 earnings were insufficient to cover fixed charges by $331.0 million, $457.0 million, $307.3 million, $393.7 million and $48.4 million, respectively. |
| (i) | The 2006 amount represents our investment in FiberTower common stock that is classified as an available-for-sale equity security following the merger of FiberTower and First Avenue Networks, Inc. completed in 2006. See note 6 to our consolidated financial statements. |
| (j) |
The 2002 amount represents the 12 3/4% senior exchangeable preferred stock, the 8 1/4% Convertible Preferred Stock and the 6.25% Convertible Preferred Stock. The 2003 and 2004 amounts represent the 8 1/4% Convertible Preferred Stock and the 6.25% Convertible Preferred Stock. The 2005 and 2006 amounts represent the 6.25% Convertible Preferred Stock. |
29
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Index to Financial Statements
Effect of Revisions Prior to 2004
The financial information set forth below presents the revisions related to the recognition of certain previously recorded adjustments in accounting for equity-based compensation, as further discussed in the “Explanatory Note Regarding Amendment” in the forepart of this Amendment and in our consolidated financial statements. See note 1 to our consolidated financial statements for tables summarizing the adjustments to the years ended December 31, 2004 and 2005.
The impact of the revisions for the non-cash equity-based compensation charges (credits) for the years ended December 31, 1998 through December 31, 2003 are presented in the following table. In addition to presenting the adjustments for non-cash equity-based compensation in selected financial data as of and for the years ended December 31, 1998, 1999 and 2000, it is appropriate to present the adjustments to the originally reported financial data for those periods to reflect the impact of (i) our prior restatements to correct errors for non-cash items relating to our lease accounting, (ii) reporting CCUK on a discontinued operations basis, and (iii) reclassifying non-cash compensation charges in accordance with Staff Accounting Bulleting No. 107 (“SAB 107”), which were previously reported by the Company in prior annual reports on Form 10-K, but for which the financial data as of and for such years was not previously reported (see footnotes 1, 2 and 3 for additional information).
| As Originally Reported |
Adjustments for Prior Restatements(1) |
Reclassification to Present CCUK as Discontinued Operations(2) |
Reclassification to Present Non-Cash Compensation in Accordance with SAB107(3) |
Adjustments for Non-Cash Equity-Based Compensation |
As Revised and Reclassified on a Continuing Operations Basis |
|||||||||||||
| (In thousands of dollars, except per share amounts) | ||||||||||||||||||
| 1998: |
||||||||||||||||||
| General and administrative |
23,571 | — | (2,418 | ) | 9,907 | 45,822 | 76,882 | |||||||||||
| Non-cash compensation charges |
12,758 | — | (2,851 | ) | (9,907 | ) | — | — | ||||||||||
| Operating income (loss) |
(12,933 | ) | (381 | ) | (8,096 | ) | — | (45,822 | ) | (67,232 | ) | |||||||
| Net income (loss) |
(37,775 | ) | (381 | ) | — | — | (45,822 | ) | (83,978 | ) | ||||||||
| Net income (loss) per common share – basic and diluted |
(1.02 | ) | (0.01 | ) | — | — | (1.07 | ) | (2.10 | ) | ||||||||
| 1999: |
||||||||||||||||||
| General and administrative |
43,823 | — | (5,625 | ) | 1,404 | 6,343 | 45,945 | |||||||||||
| Non-cash compensation charges |
2,173 | — | (769 | ) | (1,404 | ) | — | — | ||||||||||
| Operating income (loss) |
1,861 | (12,113 | ) | (29,826 | ) | — | (6,343 | ) | (46,421 | ) | ||||||||
| Net income (loss) |
(96,761 | ) | (10,019 | ) | — | — | (6,343 | ) | (113,123 | ) | ||||||||
| Net income (loss) per common share – basic and diluted |
(0.96 | ) | (0.07 | ) | — | — | (0.05 | ) | (1.08 | ) | ||||||||
| 2000: |
||||||||||||||||||
| General and administrative |
68,872 | — | — | 2,153 | 18,475 | 89,500 | ||||||||||||
| Non-cash compensation charges |
2,153 | — | — | (2,153 | ) | — | — | |||||||||||
| Operating income (loss) |
(61,654 | ) | (4,738 | ) | — | — | (18,475 | ) | (84,867 | ) | ||||||||
| Net income (loss) |
(237,337 | ) | (5,218 | ) | — | — | (18,475 | ) | (261,030 | ) | ||||||||
| Net income (loss) per common share – basic and diluted |
(1.66 | ) | (0.03 | ) | — | — | (0.10 | ) | (1.79 | ) | ||||||||
| (1) | For the years ended December 31, 1998, 1999 and 2000, the information reflects the impact of the Company’s prior restatements to correct errors for non-cash items relating to lease accounting disclosed in the Company’s annual reports on Form 10-K for the years ending December 31, 2004 and 2005, as applicable. See explanatory notes at the beginning of those annual reports on Form 10-K for additional information. |
| (2) | As indicated previously, the Company sold CCUK in 2004. For all periods presented, CCUK’s assets, liabilities, results of operations and cash flows are classified as amounts from discontinued operations. The year ended December 31, 2000 and all subsequent affected years have previously been reported with CCUK on a discontinued operations basis. |
| (3) | In accordance with the provisions of SAB 107, the Company has reclassified non-cash compensation charges to the same lines within the consolidated statement of operations as cash compensation paid to employees for all years presented. The Company adopted the classification provisions of SAB 107 in 2005 (and reflected the re-classification in all presented prior periods for comparative purposes), and the remainder of the provisions effective January 1, 2006. |
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Index to Financial Statements
| As Previously Reported |
Revisions for Non-Cash Equity-Based Compensation |
As Revised | ||||||||||
| (In thousands of dollars, except per share amounts) |
||||||||||||
| 2001: |
||||||||||||
| General and administrative |
$ | 94,662 | $ | 7,392 | $ | 102,054 | ||||||
| Operating income (loss) |
(92,431 | ) | (7,392 | ) | (99,823 | ) | ||||||
| Net income (loss) |
(396,607 | ) | (7,392 | ) | (403,999 | ) | ||||||
| Net income (loss) per common share – basic and diluted |
(2.22 | ) | (0.03 | ) | (2.25 | ) | ||||||
| 2002: |
||||||||||||
| General and administrative |
$ | 86,086 | $ | 2,850 | $ | 88,936 | ||||||
| Operating income (loss) |
(122,117 | ) | (2,850 | ) | (124,967 | ) | ||||||
| Net income (loss) |
(316,332 | ) | (2,850 | ) | (319,182 | ) | ||||||
| Net income (loss) per common share – basic and diluted |
(1.38 | ) | (0.01 | ) | (1.39 | ) | ||||||
| 2003: |
||||||||||||
| General and administrative |
$ | 95,155 | $ | 5,431 | $ | 100,586 | ||||||
| Operating income (loss) |
(66,391 | ) | (5,431 | ) | (71,822 | ) | ||||||
| Net income (loss) |
(451,611 | ) | (5,431 | ) | (457,042 | ) | ||||||
| Net income (loss) per common share – basic and diluted |
(2.34 | ) | (0.02 | ) | (2.36 | ) | ||||||
See note 1 to our consolidated financial statements for tables summarizing the adjustments to the years ended December 31, 2004 and 2005.
31
Table of Contents
Index to Financial Statements
| Ite m 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Review of Equity-Based Compensation and Revision to Previously Issued Financial Statements
As discussed in the “Explanatory Note Regarding Amendment” in the forepart of this Amendment, the revisions to the consolidated financial statements, selected financial data and additional, and reiterated, information included in this Amendment relates to the recognition of certain previously recorded adjustments in accounting for equity-based compensation. We received a letter dated July 17, 2006, from the SEC stating that the SEC is conducting an informal inquiry into various accounting matters related to us, including whether grants of stock options may have been backdated. The SEC’s letter states that it should not be construed as an indication by the SEC or its staff that any violations of law have occurred. We cooperated promptly and fully with the SEC as to such inquiry. In response to the letter, we conducted a detailed review of our equity-based compensation practices, including a review of our underlying stock option and restricted stock grant documentation and procedures and related accounting. We disclosed the results of our review, including the amount of charges relating to prior periods, in our periodic reports on Form 10-Q for the fiscal quarters ended June 30, 2006 and September 30, 2006. The following is a summary of the key findings:
| • | We found no inappropriate actions related to the administration of our equity-based compensation plans. |
| • | We discovered certain required adjustments to our historical accounting for equity-based compensation. The adjustments do not involve any malfeasance or the concealment of an unlawful transaction. |
| • | The adjustments identified totaling an approximately $84.0 million net cumulative increase to equity-based compensation expense (“$84.0 million net revision”) relate to our accounting for stock options. We stopped granting stock options to executives in 2001 and to all employees in 2003. In 2006, the equity-based compensation relating to stock options was a nominal amount, $0.5 million, relating to unvested stock options during 2006 and virtually all stock options are fully vested as of December 31, 2006 (see note 12 to our consolidated financial statements included in Item 8). Beginning in 2003, we started to exclusively grant restricted stock awards. No adjustments were discovered related to our accounting or administration of restricted stock awards. |
| • | Approximately $78.0 million of the $84.0 million net revision relates to periods prior to January 1, 2002 as follows: 1998—$45.8 million, 1999—$6.3 million, 2000—$18.5 million and 2001—$7.4 million. |
| • | Approximately $6.0 million relates to the periods from January 1, 2002 to December 31, 2005 as follows: 2002—$2.9 million, 2003—$5.4 million, 2004—$(0.7) million and 2005—$(1.6) million. The $6.0 million includes the 2004 and 2005 amounts related to the historical consolidated statements of operations discussed in this “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” |
| • | Approximately $45.7 million of the $84.0 million net revision, or approximately 55%, relates to the deemed modification of certain stock options as a result of entering into severance agreements with certain former executives at the time of, and as disclosed in detail in our Form S-1 filed in connection with, our IPO in 1998. None of these deemed modifications involved any pricing or re-pricing adjustments for any affected options. |
| • | Approximately $5.4 million of the $84.0 million net revision relates to the deemed modification of certain stock options as a result of entering into severance agreements in 1999 with two other executives, including one former executive, which agreements had terms similar to the severance agreements entered into at the time our IPO in 1998. None of these deemed modifications involved any pricing or re-pricing adjustments for any affected options. |
| • | An additional $7.8 million of the $84.0 million net revision relates to stock options granted to executives and other employees that had significant involvement in major acquisitions or other transactions that were consummated by us. The plan under which these stock options were issued was disclosed in our 1999, 2000, and 2001 proxy statements. |
32
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Index to Financial Statements
| • | The remainder of the $84.0 million net revision is comprised of (i) $20.6 million related to minor document deficiencies for certain stock options issued either (a) in 2000 in conjunction with the our broad-based employee awards program or (b) from 1998 through 2002 to employees in conjunction with promotions or acceptance of employment, and (ii) $4.5 million related to various other modifications to stock options. |
See note 1 to our consolidated financial statements for additional information regarding the effects of revisions to the consolidated financial statements.
General Overview
Overview
We own, operate and lease towers for wireless communications, including certain rooftop installations (see “Item 2. Properties”). We engage in such activities through a variety of structures, including subleasing and management arrangements. We also provide certain network services relating to our towers on a limited basis for our customers, including antenna installations and subsequent augmentation, network design and site selection, site acquisition and site development.
As of December 31, 2006, Post-Merger, we owned, leased or managed 23,661 towers. Post-Merger, we have the most towers in the U.S. of any wireless tower company with approximately 21,700 towers, exclusive of rooftop installations. In addition, we have 1,387 towers in Australia and the remainder of our towers are located in Puerto Rico and Canada. As of December 31, 2006, Post-Merger, approximately 55% and 72% of our U.S. and Puerto Rico towers were located in the 50 and 100 largest BTAs, respectively. As of December 31, 2006, Post-Merger, we also owned, leased or had easements on 280 land sites for towers owned by third parties which are located in the U.S. and the U.K., as of December 31, 2006 Post-Merger.
As of December 31, 2006, Post-Merger, we own in fee or have permanent or long-term easements in the land on which 3,930 of our towers reside, and we lease, sublease or license the land on which 18,994 of our towers reside. In addition, as of December 31, 2006, Post-Merger, we managed 737 towers 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.
Our customers currently include many of the world’s major wireless communications companies, including Sprint Nextel, AT&T (formerly Cingular Wireless), Verizon Wireless, T-Mobile, Alltel, Optus and Vodafone Australia. Our customers use our towers for antennas and other equipment necessary for the transmission of wireless signals for mobile telephones and other devices. This leasing activity represents approximately 88.4% of our 2006 consolidated revenues.
As an important part of our business strategy, we seek to:
| (1) | grow revenues organically by maximizing utilization of our tower capacity through increasing the number of antenna leases on our towers, |
| (2) | maximize operating cash flow and grow our margins by taking advantage of the relatively fixed nature of the operating costs associated with our site rental business, |
| (3) | allocate capital efficiently as we selectively build new towers for our customers, acquire other assets or purchase our own securities, and |
| (4) | extend revenues around existing assets by utilizing the expertise of our personnel. |
The growth of our business depends substantially on the condition of the wireless communications industry. The willingness of our customers to utilize our infrastructure and related services is affected by numerous factors, including:
| • | consumer demand for wireless services; |
| • | availability and location of our towers and alternative towers; |
| • | cost of capital, including interest rates; |
| • | availability of capital to our customers; |
33
Table of Contents
Index to Financial Statements
| • | willingness to co-locate equipment; |
| • | local restrictions on the proliferation of towers; |
| • | cost of building towers; |
| • | technological changes affecting the number of communications sites needed to provide wireless communications services to a given geographic area; |
| • | our ability to efficiently satisfy our customer’s service requirements; and |
| • | tax policies. |
We believe the demand for our towers will continue for a variety of reasons, including the wireless industry’s dramatic growth in minutes of use, wireless data service revenues and new subscribers. The demand for towers depends on the demand for antenna space from our customers, which in turn, depends on the demand for wireless telephony and data services from their customers. Important indicators of this demand are wireless minutes of use, the volume of non-telephony wireless services such as data, text messaging and mobile video, and to a lesser extent, the number of new wireless subscribers. Highlights of the Cellular Telecommunications & Internet Association (“CTIA”) U.S. wireless industry survey issued on September 13, 2006 include:
| • | Wireless data service revenues for the first half of 2006 were $6.5 billion, an increase of 70% from the first six months of 2005, |
| • | Minutes of use for the first half of 2006 grew by 27% from the first half of 2005 to nearly 1.7 trillion minutes of use on an annualized basis; and |
| • | Wireless users totaled 219 million as of June 30, 2006, which represents a year-over-year increase of 25 million subscribers, or 12.9%. |
Demand for antenna space on our towers may be influenced by the availability of new spectrum to our customers. The FCC Advanced Wireless Services Auction No. 66 was completed during the third quarter of 2006. This auction for 1,087 licenses to use wireless spectrum raised nearly $14 billion, making it the largest single FCC spectrum auction. The auctioned spectrum is expected to be used for advanced mobile communications and many of our customers were among the highest bidders.
The 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 per quarter 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.
When wireless carriers identify coverage or capacity gaps, we seek to provide carriers with the following four-point-value proposition as part of our overall on-going goal to increase customer satisfaction relative to our peers while still balancing commercial realities:
| (1) | We will attempt to solve the coverage or capacity gap by co-locating the carrier on one of our towers; |
| (2) | If we don’t have a tower to solve the coverage or capacity gap, we will attempt to identify a non-Crown Castle structure; |
| (3) | If there are no towers or other suitable structures to solve the coverage or capacity gap, we will attempt to build a tower; or |
| (4) | If a tower cannot be built to solve the coverage or capacity gap due to zoning or other impediments, we will attempt to build a DAS. DAS is a low visibility network that uses a hub and spoke architecture to connect base station equipment to a fiber-fed network. DAS is particularly useful in areas with challenging zoning regulations or other impediments to traditional towers. |
We plan to continue to leverage our asset management tools and the strength of our management team to deliver on this four-point-value proposition.
34
Table of Contents
Index to Financial Statements
Current Year Highlights and Recent Developments
Acquisition of Global Signal. On October 5, 2006, we entered into a definitive agreement which contemplated the merger of Global Signal into a wholly-owned subsidiary of ours. Global Signal operated 10,749 towers, which are primarily concentrated in the southwestern, midwestern, Pacific coast and northeastern regions of the U.S. We completed the Global Signal Merger on January 12, 2007 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 of the Global Signal entities we acquired. As a result of the completion of Global Signal Merger, we issued approximately 98.1 million shares of common stock to the shareholders of Global Signal and paid the maximum Cash Consideration of $550.0 million and reserved for issuance approximately 0.6 million shares of common stock issuable pursuant to Global Signal warrants. Pursuant to the Merger Agreement, Global Signal common stockholders were entitled to convert each share of Global Signal common stock into 1.61 shares of our common stock or, alternatively, could elect to receive cash in the amount of $55.95 per Global Signal share. Following the Global Signal Merger the former Global Signal shareholders owned approximately 32.7% of our outstanding shares. See “Item 1. Business—Global Signal Merger” and “Item 1. Business—The Company—CCUSA” for a further discussion of the Global Signal Merger.
The total preliminary purchase price of approximately $4.0 billion includes the fair value of common stock issued (using a $ 34.20 per share value) of $3.4 billion, the Cash Consideration, the fair value of Global Signal restricted common stock and warrants assumed and estimated transaction costs. See note 20 to our consolidated financial statements.
We financed the Cash Consideration primarily with cash received from the issuance of the 2006 Tower Revenue Notes in November 2006. Upon closing of the Global Signal Merger, Global Signal’s subsidiaries had debt outstanding of approximately $1.8 billion, all of which remained outstanding as obligations of the Global Signal entities we acquired. Such debt included the 2004 Mortgage Loan and the 2006 Mortgage Loan, which have a structure similar to our 2005 Tower Revenue Notes and 2006 Tower Revenue Notes. As a result, we have significantly increased our interest expense. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing Activities.”
Global Signal revenues, cost of operations and gross margins for 2006 were approximately $500 million (unaudited), $225 million (unaudited) and $275 million (unaudited), respectively. We entered into the Global Signal Merger primarily because of the growth opportunities we anticipate the Global Signal tower portfolio will provide, including through the leveraging of our management team and customer service across an enhanced national footprint. We believe the opportunity for growth will be driven by the carrier focus on improving network quality, subscriber growth, increasing subscriber usage, wireline replacement and next generation network builds. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-General Overview-Overview." Secondarily, we believe there will be synergistic opportunities provided by the Global Signal Merger. In 2007, as a result of the Global Signal Merger, we do expect a substantial increase in our general and administrative expenses from 2006; but we also anticipate a decrease in general and administrative expenses as a percentage of revenue. We also expect to incur a substantial amount of costs to integrate Global Signal into our internal control structure and operations.
We are in the process of finalizing the valuation of certain of Global Signal’s assets and liabilities, including property and equipment and intangibles, with a third-party valuation expert. Given the size and timing of the Global Signal Merger, the amount of certain assets and liabilities presented are based on preliminary valuations and are subject to adjustment as additional information is obtained and the third-party valuation is finalized. The primary areas of the purchase price allocation that are not finalized relate to fair values of property and equipment, intangibles, restructuring and merger related liabilities, other liabilities and goodwill. We expect to finalize the purchase price allocation in the second or third quarters of 2007. The preliminary allocation of the total preliminary purchase price for the Global Signal Merger, subject to future adjustment in the allocation of the purchase price, can be found in note 20 to our consolidated financial statements.
Strong Revenue Growth. Net revenues grew by 12.0% and 16.5% for 2005 and 2006, respectively, compared to the prior year, which was primarily driven by site rental revenues from new tenant additions (or modifications to
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existing installations) on existing towers, new towers acquired or built since the end of prior fiscal year, contractual escalations on existing leases with variable escalations and increases in non-cash straight-line rents primarily related to the renewal of certain leases. New tenant additions and modifications were influenced by the aforementioned on-going demand for additional antenna space on our towers primarily due to the continued strong growth in the usage of wireless minutes and introduction of new data services by wireless carriers.
Significant Margin Expansion. Gross margins (net revenues less costs of operations) grew by 13.8% to $424.8 million and 21.3% to $515.3 million for 2005 and 2006, respectively, compared to the prior year, which was primarily driven by the increase in site rental revenues. The incremental margin percentage (percentage of revenue growth converted to gross margin) on the site rental revenue growth of $58.8 million and $99.6 million for 2005 and 2006 was 77.8% and 84.8%, respectively, reflecting the relatively fixed nature of the costs to operate our towers.
Refinancing and Issuance of Indebtedness. Pursuant to the indenture supplement (“2006 Indenture Supplement”) dated November 29, 2006, we issued the 2006 Tower Revenue Notes as additional debt securities under the existing indenture (as amended “Amended Indenture”) pursuant to which the 2005 Tower Revenue Notes were issued in 2005. The 2006 Tower Revenue Notes have a weighted average fixed interest rate of approximately 5.71%, and 78.6% of the outstanding balance was rated investment grade. The 2005 Tower Revenue Notes and 2006 Tower Revenue Notes are secured by the personal property, license agreements, revenues or distributions related to substantially all of our U.S. (including Puerto Rico) towers as of the date of issuance of the 2006 Tower Revenue Notes. Proceeds from the 2006 Tower Revenue Notes were used to repay our previously outstanding credit facility entered into in June 2006 (“2006 Credit Facility”) under which approximately $1.0 billion was outstanding at the time of repayment, and the remaining proceeds were used primarily to fund the Cash Consideration of the Global Signal Merger. The repayment of the 2006 Credit Facility resulted in a loss of $4.7 million during November 2006 primarily consisting of the write-off of deferred financing costs. Periodically, we contemplate issuing additional notes under the Amended Indenture with a structure similar to the 2005 Tower Revenue Notes and 2006 Tower Revenue Notes in order to leverage growth in our site rental business. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing Activities.”
On January 9, 2007, CCOC entered into a credit agreement (“2007 Credit Agreement”) with a syndicate of lenders, pursuant to which such lenders agreed to provide the 2007 Revolver in the amount of $250.0 million, which matures in January 2008. The proceeds of the 2007 Revolver may be used for general corporate, which may include the financing of capital expenditures, acquisitions and purchases of our securities. The 2007 Revolver is currently undrawn. On January 26, 2007, CCOC entered into a term loan joinder pursuant to which CCOC borrowed the 2007 Term Loan under the 2007 Credit Agreement. The 2007 Term Loan matures in January 2014. The proceeds of the 2007 Term Loan were used for the January 2007 Stock Purchase. See “Item 7. Management’s Discussion and analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing Activities.”
We believe the aforementioned refinancing and issuance of additional indebtedness provide us flexibility to invest expected future cash flows in activities that we believe exhibit potential to achieve acceptable risk-adjusted returns or exhibit potential to complement our core tower rental business. Such activities could include acquiring or building towers, improving existing towers, purchasing our own stock or debt securities or making investments in adjacent businesses, such as Modeo. See “Item 1. Business—Strategy.” In addition, through the use of interest rate swap agreements, we have effectively locked in the interest rate on the rollover of (1) the 2005 Tower Revenue Notes to June 2015 (2) the 2006 Tower Revenue Notes to November 2016. (3) $1.55 billion 2006 Mortgage Loan to February 2016 and (4) $293.8 million 2004 Mortgage Loan to December 2014.
Purchases and Investments. We believe our recent financing activities provide us significantly more flexibility to invest the cash flow produced from operations in activities that we believe exhibit potential to achieve acceptable risk-adjusted returns or exhibit potential to complement our core tower rental business. We anticipate investing, from time to time on an on-going basis, in activities that we believe exhibit potential to achieve acceptable risk-adjusted returns or exhibit potential to complement our core tower rental business, such activities could include, among other things, acquiring or building towers, improving existing towers, purchasing our own stock or debt securities or making investments in adjacent businesses, such as Modeo. See “Item 1. Business—Strategy.”
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In 2006, we purchased 15.9 million shares of common stock. We utilized $518.0 million in cash to affect these purchases and paid an average price of $32.64 per share. On January 26, 2007, we purchased 17.7 million shares of common stock in a private transaction with certain investment funds affiliated with Fortress, Greenhill and Abrams Capital. We paid $600.0 million in cash, or approximately $33.87 per share to affect the January 2007 Stock Purchase. The purchase was primarily funded with proceeds from the 2007 Term Loan. We expect to continue to purchase our own stock from time to time as market prices make such investments attractive. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Overview” for further discussion.
In July 2006, we acquired approximately 98% of the outstanding equity interests of Mountain Union for approximately $305 million. Mountain Union assets at closing included 474 towers as well as 77 towers in various stages of development from Mountain Union. In January 2007, we acquired the remaining approximate 2% interest for $4.8 million. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Investing Activities.”
Results of Operations
Overview
Revenue. Our primary sources of revenues are from:
| (1) | renting antenna space on towers, and, to a lesser extent |
| (2) | providing network services, including the installation of antennas on our towers. |
Our core business is the leasing (including via licensing) of antenna space on our towers that can accommodate multiple tenants (co-location). Our site rental revenues are derived from this core business, which we are seeking to grow by increasing the utilization of our existing towers by increasing the number of antenna leases on our towers. Typically, these revenues result from long-term (five to 10 year) contracts with our customers with renewal terms at the option of the customer. As a result, in any given year in excess of 90% of our site rental revenue, excluding acquisitions, has been contracted for in a prior year and is of a recurring nature. When we discuss growth in this core business, we are generally describing the rate at which we are adding revenues to the previously contracted base, sometimes referred to as the revenue “run-rate”. Site rental revenues in the U.S. and Australia are received primarily from wireless communications companies, including those operating in the following categories of wireless communications:
| • | cellular; |
| • | PCS; |
| • | ESMR; |
| • | 3G; |
| • | wireless data services; and |
| • | paging. |
Site rental revenues are generally recognized on a monthly basis under lease agreements, which typically have original terms of five to 10 years at CCUSA and original terms of 10 to 15 years at CCAL. The new leases recently entered into by us at CCUSA typically have original terms of seven to 10 years. Our lease agreements at CCUSA and CCAL typically have three of four optional renewal periods of five or 10 years each. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Accounting and Reporting Matters—Critical Accounting Policies—Revenue Recognition” and note 1 to our consolidated financial statements.
Network services revenues at CCUSA consist of revenues from:
| (1) | antenna installations and subsequent augmentation, substantially all on towers owned or managed by us, |
| (2) | network design and site selection, |
| (3) | site acquisition services, |
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| (4) | site development, and |
| (5) | other services. |
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. 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. Demand for our network services fluctuates from period to period and within periods. See “Item 1A. Risk Factors.” Consequently, the operating results of our network services business for any particular period may vary significantly and should not be considered as indicative of longer-term results for this activity.
Costs of Operations. Costs of operations consist primarily of ground leases, repairs and maintenance, utilities, property taxes, employee compensation and related benefit costs, insurance and monitoring costs. Generally, our ground lease agreements are specific to each site and are for an initial term of five years and are renewable for pre-determined periods. Ground lease expense is recognized on a monthly basis, regardless of whether the lease agreement payment terms require us to make payments annually, quarterly, or in equal monthly amounts. If the payment terms include fixed escalation provisions, the effect of such increases is recognized on a straight-line basis. We calculate the straight-line ground lease expense using a time period that equals or exceeds the remaining depreciable life of the tower asset in situations where tenant leases (including renewal options) exceed the depreciable life. Further, when a tenant has exercisable renewal options that would compel us to exercise existing ground lease renewal options, we have straight-lined the ground lease expense over a sufficient portion of such ground lease renewals to coincide with the final termination of the tenant’s renewal options. As a result of this accounting method, a portion of the expense recognized in a given period represents cash paid in other periods. Because our tower operating expenses generally do not increase significantly as we add additional customers, once a tower has an anchor customer, additional customers provide significant incremental cash flow. For any given tower, costs of operations are relatively fixed over a monthly or an annual time period. As such, operating costs for owned towers do not generally increase significantly as additional customers are added.
Costs of operations for network services consist primarily of employee compensation and related benefits costs, subcontractor services, consulting fees, and other on-site construction and materials costs. Certain costs incurred in connection with antenna installations are capitalized as property and equipment since they represent assets owned by us. As such, those costs are not included in our results of operations in the year incurred, but rather will be charged to depreciation expense over the life of the assets. Costs associated with contracts not complete at the end of a period are deferred and recognized when the installation becomes operational. Any losses on contracts are recognized at such time as they become known.
Non-Cash Site Rental Margin. A summary of the non-cash portions of our site rental revenues, ground lease expense and stock-based compensation expense for those employees directly related to CCUSA tower operations and resulting impact on our site rental gross margins is as follows:
| Years Ended December 31, | ||||||||||||
| 2004 | 2005 | 2006 | ||||||||||
| (In thousands of dollars) | ||||||||||||
| Non-cash impact on site rental gross margins: |
||||||||||||
| Non-cash portion of site rental revenues amounts attributable to straight-line recognition of revenue |
$ | 19,198 | $ | 16,056 | $ | 20,496 | ||||||
| Non-cash portion of ground lease expense amounts attributable to straight-line recognition of expense |
(17,529 | ) | (17,013 | ) | (15,812 | ) | ||||||
| Stock-based compensation charges |
(553 | ) | (715 | ) | (174 | ) | ||||||
| Total |
$ | 1,116 | $ | (1,672 | ) | $ | 4,510 | |||||
General and Administrative Expenses. General and administrative expenses consist primarily of:
| • | employee cash and stock-based compensation and related benefits costs; |
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| • | professional and consulting fees; |
| • | office rent and related expenses; |
| • | state franchise taxes; |
| • | travel costs; and |
| • | corporate office expenses. |
Corporate Development Expenses. Corporate development expenses represent costs incurred in connection with the evaluation and negotiation of potential acquisitions and the development of new business initiatives. These expenses consist primarily of:
| • | compensation and related benefits costs; |
| • | external professional fees; and |
| • | other costs directly related to new business initiatives. |
Integration Costs. Integration costs are incremental, non-capitalizeable costs incurred to integrate an acquired business’ operations, wireless communication tower portfolio and personnel. These costs primarily consist of retention bonuses to personnel of the acquired business, costs of contracted employees, travel costs and certain other costs directly related to the integration of the acquisition.
Depreciation, Amortization and Accretion. Depreciation, amortization and accretion charges relate to our property and equipment (which consists primarily of towers, associated buildings, construction equipment and vehicles) and other intangible assets. Depreciation of towers is generally computed with a useful life equal to the shorter of 20 years or the term of the underlying ground lease (including optional renewal periods). See note 1 to our consolidated financial statements. Amortization of other intangible assets (the value of certain site rental contracts at CCUSA) is computed with a useful life of 10 to 20 years. Depreciation of buildings is generally computed with useful lives of 40 years. Depreciation of construction equipment and vehicles is generally computed with useful lives of 10 years and 5 years, respectively.
Discontinued Operations. On June 28, 2004, we signed a definitive agreement to sell our UK subsidiary, CCUK, for over $2 billion to an affiliate of National Grid. On August 31, 2004, we completed the sale of CCUK. On May 9, 2005, we sold OpenCell to a company in the business of developing and manufacturing wireless equipment, including distributed antenna systems. As part of the transaction, we entered into a product procurement arrangement that permits us to continue the purchase of equipment for our distributed antenna activities. For all periods presented, the assets, liabilities, results of operations and cash flows of the businesses of CCUK and OpenCell are classified as amounts from discontinued operations.
Effects of Revisions to Consolidated Financial Statements
Our consolidated results of operations for the years ended December 31, 2004 and 2005 have been revised to reflect the recognition of certain non-cash equity-based compensation charges (credits) as of and for the years ended December 31, 2004 and 2005, and as a cumulative effect adjustment as of January 1, 2004, rather than via the previously recorded cumulative effect adjustment as of January 1, 2006, as further discussed in the “Explanatory Note Regarding Amendment” in the forepart of this Amendment.
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The following information is derived from our historical consolidated statements of operations for the periods indicated:
Comparison of Years Ended December 31, 2006 and 2005—Consolidated
| Year Ended December 31, 2005 |
Year Ended December 31, 2006 |
||||||||||||||||||||
| Amount | Percent of Net |
Amount | Percent of Net |
Dollar Change |
Percentage Change |
||||||||||||||||
| (In thousands of dollars) | |||||||||||||||||||||
| Net revenues: |
|||||||||||||||||||||
| Site rental |
$ | 597,125 | 88.2 | % | $ | 696,724 | 88.4 | % | $ | 99,599 | 16.7 | % | |||||||||
| Network services and other |
79,634 | 11.8 | % | 91,497 | 11.6 | % | 11,863 | 14.9 | % | ||||||||||||
| Total net revenues |
676,759 | 100.0 | % | 788,221 | 100.0 | % | 111,462 | 16.5 | % | ||||||||||||
| Operating expenses: |
|||||||||||||||||||||
| Costs of operations (exclusive of depreciation, amortization and accretion): |
|||||||||||||||||||||
| Site rental |
197,355 | 33.1 | % | 212,454 | 30.5 | % | 15,099 | 7.7 | % | ||||||||||||
| Network services and other |
54,630 | 68.6 | % | 60,507 | 66.1 | % | 5,877 | 10.8 | % | ||||||||||||
| Total costs of operations |
251,985 | 37.2 | % | 272,961 | 34.6 | % | 20,976 | 8.3 | % | ||||||||||||
| General and administrative |
109,612 | 16.3 | % | 95,751 | 12.1 | % | (13,861 | ) | 12.6 | % | |||||||||||
| Corporate development |
4,298 | 0.6 | % | 8,781 | 1.1 | % | 4,483 | 104.3 | % | ||||||||||||
| Restructuring charges (credits) |
2,615 | 0.4 | % | (391 | ) | — | (3,006 | ) | (115.0 | )% | |||||||||||
| Asset write-down charges |
2,925 | 0.4 | % | 2,945 | 0.4 | % | 20 | 0.7 | % | ||||||||||||
| Integration costs |
— | — | 1,503 | 0.2 | % | 1,503 | * | ||||||||||||||
| Depreciation, amortization and accretion |
281,118 | 41.6 | % | 285,244 | 36.2 | % | 4,126 | 1.5 | % | ||||||||||||
| Operating income (loss) |
24,206 | 3.5 | % | 121,427 | 15.4 | % | 97,221 | 401.6 | % | ||||||||||||
| Losses on purchases and redemptions of debt |
(283,797 | ) | (41.9 | )% | (5,843 | ) | (0.7 | )% | 277,954 | * | |||||||||||
| Interest and other income (expense) |
1,354 | 0.2 | % | (1,629 | ) | (0.2 | )% | (2,983 | ) | * | |||||||||||
| Interest expense and amortization of deferred financing costs |
(133,806 | ) | (19.8 | )% | (162,328 | ) | (20.6 | )% | (28,522 | ) | 21.3 | % | |||||||||
| Income (loss) from continuing operations before income taxes, minority interests and cumulative effect of change in accounting principle |
(392,043 | ) | (58.0 | )% | (48,373 | ) | (6.1 | )% | 343,670 | * | |||||||||||
| Benefit (provision) for income taxes |
(3,225 | ) | (0.5 | )% | (843 | ) | (0.1 | )% | 2,382 | * | |||||||||||
| Minority interests |
3,525 | 0.5 | % | 1,666 | 0.2 | % | (1,859 | ) | * | ||||||||||||
| Income (loss) from continuing operations before cumulative effect of change in accounting principle |
(391,743 | ) | (58.0 | )% | (47,550 | ) | (6.0 | )% | 344,193 | * | |||||||||||
| Discontinued operations: |
|||||||||||||||||||||
| Income (loss) from discontinued operations, net of tax |
(1,953 | ) | (0.2 | )% | — | — | 1,953 | * | |||||||||||||
| Net gain (loss) on disposal of discontinued operations, net of tax |
2,801 | 0.3 | % | 5,657 | 0.7 | % | 2,856 | * | |||||||||||||
| Income from discontinued operations, net of tax |
848 | 0.1 | % | 5,657 | 0.7 | % | 4,809 | * | |||||||||||||
| Income (loss) before cumulative effect of change in accounting principle |
(390,895 | ) | (57.9 | )% | (41,893 | ) | (5.3 | )% | 349,002 | * | |||||||||||
| Cumulative effect of change in accounting principle for asset retirement obligations |
(9,031 | ) | (1.2 | )% | — | — | 9,031 | * | |||||||||||||
| Net income (loss) |
$ | (399,926 | ) | (59.1 | )% | $ | (41,893 | ) | (5.3 | )% | $ | 358,033 | * | ||||||||
| *: | Percentage is not meaningful |
Net revenues for 2006 increased by $111.5 million, or 16.5%, from 2005. Of this increase, $106.2 million, or 95.3%, was attributable to CCUSA and $5.3 million, or 4.7%, was attributable to CCAL. The increase for 2006 resulted from an increase in site rental revenues of $99.6 million, which represents 89.4% of the overall increase in net revenues. The balance of the increase was related to network services and other revenues.
The increase in site rental revenue for 2006 was primarily driven by the following that occurred during or after 2005: (1) new tenant additions (or modifications to existing installations) of $51.0 million, (2) the leases (as originally acquired) related to the combined 941 towers from Trintel and Mountain Union of $21.6 million, and (3) an increase in non-cash straight-line rents of $16.3 million primarily relating to the renewal of certain leases. As a result of our long-term (five to 10 year) contracts with our customers, in any given year in excess of 90% of our site rental revenue, excluding acquisitions, is contracted for in a prior year and are of a recurring nature.
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Network services and other revenues for 2006 increased by $11.9 million, or 14.9%, from 2005. The increase in the network services and other revenues reflect both the demand by our tenants for space on our towers and the variable nature of the network services business as these revenues is typically not under long-term contract.
Site rental gross margins (site rental revenues less site rental costs of operations) for 2006 increased by $84.5 million, or 21.1%, from 2005. Site rental gross margins as percentage of site rental revenues increased by 2.6 percentage points to 69.5% for 2006. The incremental margin of $84.5 million represents 84.8% 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 new tenant additions (or modifications to existing installations) 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.
General and administrative expenses for 2006 decreased by $13.9 million to 12.1% of total net revenue from 16.3% for 2005. General and administrative expenses for 2006 included stock-based compensation expense of $14.7 million, which represents a decrease of $8.1 million from 2005. Stock-based compensation expense decreased from 2005 primarily as a result of accelerated vesting of shares of restricted common stock during 2005 based on the performance of our stock. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Compensation Charges Related to Restricted Stock Awards.” General and administrative expenses were also reduced via 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.
Corporate development expenses for 2006 were $8.8 million, an increase of $4.5 million from $4.3 million for 2005. This increase was primarily attributable to an increase in salary costs related to Modeo within Emerging Businesses.
Depreciation, amortization and accretion for 2006 increased by $4.1 million, or 1.5%, 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. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Investing Activities” for a further discussion of our capital expenditures), offset by the effects of the Portfolio Extension Program that resulted in increases in the useful life of our towers resulting from the purchase of, or extension of ground leases relating to, the land on which our towers reside. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Contractual Cash Obligations.”
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 2005 Tower Revenue Notes.
Interest expense and amortization of deferred financing costs for 2006 increased by $28.5 million from 2005. The increase is primarily attributable to the approximately $1.2 billion increase in debt, including the borrowings under the 2006 Credit Facility in June 2006 and the 2006 Tower Revenue Notes, 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 (“2005 Credit Facility”).
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. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for further discussion).
Minority interests primarily represent the minority shareholder’s 22.4% interest in the CCAL operations.
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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 “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Accounting and Reporting Matters—Impact of Recently Issued Accounting Standards” for more information).
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 Years Ended December 31, 2006 and 2005—Operating Segments
See note 16 to our consolidated financial statements for a tabular presentation of the financial results for our operating segments. Our reportable operating segments for 2006 are (1) CCUSA, (2) CCAL, (3) Emerging Businesses, our Modeo business, and (4) Corporate Office and Other. Our financial results are reported to management and the Board of Directors in this manner.
Prior to January 1, 2006, Modeo and Crown Castle Solutions were included in the segment Emerging Businesses. Effective January 1, 2006, Crown Castle Solutions became part of CCUSA, an operational change that reflects our belief that a DAS can be an alternative to traditional tower leasing in circumstances in which a tower or other structure is not available or cannot be built due to zoning or other impediments. These changes in reportable segments were effective as of January 1, 2006, and segment information for all periods presented has been reclassified.
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 companies 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, benefit (provision) for income taxes, minority interests, cumulative effect of a change in accounting principle, income (loss) from discontinued operations and stock-based compensation charges (see note 12 to our consolidated financial statements). The calculation of Adjusted EBITDA for our operating segments is set forth in note 16 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. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Accounting and Reporting Matters—Non-GAAP Financial Measures.”
CCUSA. Net revenues for 2006 increased by $106.2 million, or 17.1%, from 2005. Of the $106.2 million increase in net revenues, $94.4 million, or 88.9%, relates to site rental revenues. This increase represents approximately 94.8% of the consolidated increase in site rental revenues for this same period. 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) new tenant additions (or modifications to existing installations) of $46.3 million, (2) the leases (as originally acquired) related to the combined 941 towers acquired from Trintel and Mountain Union of $21.6
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million and (3) an increase in non-cash straight-line rents of $16.6 million primarily relating to the renewal of certain leases. As mentioned previously, in excess of 90% of our site rental revenue, excluding acquisitions, is of a recurring nature.
General and administrative expenses for 2006 decreased by $2.1 million to 8.8% of total net revenues from 10.6% of total net revenues for 2005. General and administrative expenses for 2006 included stock-based compensation expense of $5.6 million, which represents a decrease of $3.2 million from 2005. Non-cash compensation charges decreased from 2005 primarily as a result of accelerated vesting of shares of restricted common stock during 2005 based on the performance of our stock (see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Compensation Charges Related to Restricted Stock Awards”). 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 $84.2 million, or 25.1%, from 2005. Adjusted EBITDA was positively impacted by the high incremental margin from new tenant additions (or modifications to existing installations) 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 $79.7 million, or 21.5%, to 69.9% of site rental revenues, for 2006 from $370.4 million, or 67.4% of site rental revenues, for 2005. The $79.7 million incremental margin represents 84.4% of the related increase in site rental revenues, reflecting the relatively fixed nature of the costs to operate our towers.
Operating income for 2006 increased by $82.4 million, or 118.9%, from 2005. The increase in operating income was primarily driven by (1) the aforementioned $79.7 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.
Net income (loss) for 2006 was an unfavorable reduction of $7.2 million from 2005. The change from net income to net loss was primarily driven by incremental interest expense of $89.4 million as a result of our issuance of debt during 2005 and 2006, including the 2005 Tower Revenue Notes, 2006 Tower Revenue Notes, the 2005 Credit Facility and the 2006 Credit Facility (see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for further discussion), partially offset by the $81.0 million increase in operating income.
CCAL. Total net revenues for 2006 increased by $5.3 million, or 9.7%, from 2005. This increase is primarily driven by growth in site rental revenues, which reflects tenant additions (or modifications to existing installations) on our towers and escalations on existing leases with variable escalations that occurred during or after 2005. Our site rental revenues included a payment of $2.1 million for each of 2005 and 2006 related to a fee for the shortfall in a committed number of site licenses. See “Item 1. Business—The Company—CCAL.”
Adjusted EBITDA for 2006 increased by $7.4 million, or 33.6%, from 2005. Adjusted EBITDA was positively impacted by the incremental margin from the new tenant additions (or modifications to existing installations) on existing towers and contractual escalations on existing leases with variable escalations. More specifically, site rental gross margins increased by $6.6 million, or 22.2%, to 69.1% of site rental revenues, for 2006 from $29.8 million, or 62.7% of site rental revenues, for 2005. The $6.6 million incremental margin represents 127.1% 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 both the modification of (1) Crown Castle Australia Pty. Ltd. Director and Employee Share Option Scheme (“CCAL Share Option Scheme”) to enable employees to require CCAL to periodically settle vested shares and options in cash and (2) certain awards issued under the CCAL Share Option Scheme.
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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 22.4% portion of the results.
The increases and decreases between 2006 and 2005 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.”
Emerging Businesses. Emerging Businesses represent new strategic opportunities, or adjacent businesses, which we believe exhibit sufficient potential to achieve acceptable risk-adjusted returns or exhibit potential to complement our core site rental business. Emerging businesses currently consist of our Modeo business. Modeo continues to explore a potential offering, as a wholesale network provider, of live digital television and audio broadcast and podcasting to mobile devices, utilizing the spectrum under our 1670-1675MHz U.S. nationwide license. See “Item 1. Business—The Company—Emerging Businesses” and “Item 1A. Risk Factors.”
The operating loss and net loss of $9.2 million and Adjusted EBITDA of ($8.0) million for 2006 consisted of the operating costs of Modeo, primarily payroll and related employee costs.
Corporate Office and Other. General and administrative expenses for 2006 decreased by $12.2 million, or 38.3%, from $31.7 million for 2005. General and administrative stock-based compensation expense for 2006 totaled $7.3 million a decrease of $6.4 million from 2005. Stock-based compensation expense decreased from 2005 as a result of accelerated vesting of shares of restricted common stock during 2005 based on the performance of our stock. General and administrative expenses were effectively reduced via the consolidation of certain corporate management functions in 2005.
Adjusted EBITDA for 2006 improved by $4.7 million, or 26.0%, from 2005, as a result of the factors mentioned above related to general and administrative expenses.
Net loss for 2006 was $24.8 million, inclusive of $5.5 million of income from discontinued operations, an improvement of $364.0 million from a loss of $388.8 million for 2005, which included $283.8 million of losses from the early retirement of debt and $65.2 million of interest expense that primarily related to debt purchased or redeemed in the second and third quarters of 2005. These borrowings were effectively replaced with the aforementioned borrowings by CCOC, within our CCUSA segment. The income from discontinued operations represents the reversal of liabilities previously established in conjunction with the sale of CCUK, as a result of the termination of related contingencies during 2006.
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The following information is derived from our historical consolidated statements of operations for the periods indicated:
Comparison of Years Ended December 31, 2005 and 2004—Consolidated
| Year Ended December 31, 2004 |
Year Ended December 31, 2005 |
||||||||||||||||||||
| Amount | Percent of Net |
Amount | Percent of Net |
Dollar Change |
Percentage Change |
||||||||||||||||
| (In thousands of dollars) | |||||||||||||||||||||
| Net revenues: |
|||||||||||||||||||||
| Site rental |
$ | 538,309 | 89.1 | % | $ | 597,125 | 88.2 | % | $ | 58,816 | 10.9 | % | |||||||||
| Network services and other |
65,893 | 10.9 | % | 79,634 | 11.8 | % | 13,741 | 20.9 | % | ||||||||||||
| Total net revenues |
604,202 | 100.0 | % | 676,759 | 100.0 | % | 72,557 | 12.0 | % | ||||||||||||
| Operating expenses: |
|||||||||||||||||||||
| Costs of operations (exclusive of depreciation, amortization and accretion): |
|||||||||||||||||||||
| Site rental |
184,273 | 34.2 | % | 197,355 | 33.1 | % | 13,082 | 7.1 | % | ||||||||||||
| Network services and other |
46,752 | 71.0 | % | 54,630 | 68.6 | % | 7,878 | 16.8 | % | ||||||||||||
| Total costs of operations |
231,025 | 38.2 | % | 251,985 | 37.2 | % | 20,960 | 9.1 | % | ||||||||||||
| General and administrative |
99,738 | 16.5 | % | 109,612 | 16.3 | % | 9,874 | 9.9 | % | ||||||||||||
| Corporate development |
1,455 | 0.2 | % | 4,298 | 0.6 | % | 2,843 | 195.4 | % | ||||||||||||
| Restructuring charges (credits) |
939 | 0.2 | % | 2,615 | 0.4 | % | 1,676 | 178.5 | % | ||||||||||||
| Asset write-down charges |
7,652 | 1.3 | % | 2,925 | 0.4 | % | (4,727 | ) | (61.8 | )% | |||||||||||
| Integration costs |
— | — | — | — | — | — | |||||||||||||||
| Depreciation, amortization and accretion |
284,991 | 47.2 | % | 281,118 | 41.6 | % | (3,873 | ) | (1.4 | )% | |||||||||||
| Operating income (loss) |
(21,598 | ) | (3.6 | )% | 24,206 | 3.5 | % | 45,804 | 212.1 | % | |||||||||||
| Losses on purchases and redemptions of debt |
(78,036 | ) | (13.0 | )% | (283,797 | ) | (41.9 | )% | (205,761 | ) | * | ||||||||||
| Interest and other income (expense) |
(228 | ) | — | 1,354 | 0.2 | % | 1,582 | * | |||||||||||||
| Interest expense and amortization of deferred financing costs |
(206,770 | ) | (34.2 | )% | (133,806 | ) | (19.8 | )% | 72,964 | (35.3 | )% | ||||||||||
| Income (loss) from continuing operations before income taxes, minority interests and cumulative effect of change in accounting principle |
(306,632 | ) | (50.8 | )% | (392,043 | ) | (58.0 | )% | (85,411 | ) | * | ||||||||||
| Benefit (provision) for income taxes |
5,370 | 0.9 | % | (3,225 | ) | (0.5 | )% | (8,595 | ) | * | |||||||||||
| Minority interests |
398 | — | 3,525 | 0.5 | % | 3,127 | * | ||||||||||||||
| Income (loss) from continuing operations before cumulative effect of change in accounting principle |
(300,864 | ) | (49.9 | )% | (391,743 | ) | (58.0 | )% | (90,879 | ) | * | ||||||||||
| Discontinued operations: |
|||||||||||||||||||||
| Income (loss) from discontinued operations, net of tax |
40,578 | 6.7 | % | (1,953 | ) | (0.2 | )% | (42,531 | ) | * | |||||||||||
| Net gain (loss) on disposal of discontinued operations, net of tax |
494,110 | 81.9 | % | 2,801 | 0.3 | % | (491,309 | ) | * | ||||||||||||
| Income (loss) from discontinued operations, net of tax |
534,688 | 88.6 | % | 848 | 0.1 | % | (533,840 | ) | * | ||||||||||||
| Income (loss) before cumulative effect of change in accounting principle |
233,824 | 38.7 | % | (390,895 | ) | (57.9 | )% | (624,719 | ) | * | |||||||||||
| Cumulative effect of change in accounting principle for asset retirement obligations |
— | — | (9,031 | ) | (1.2 | )% | (9,031 | ) | * | ||||||||||||
| Net income (loss) |
$ | 233,824 | 38.7 | % | $ | (399,926 | ) | (59.1 | )% | $ | (633,750 | ) | * | ||||||||
| *: | Percentage is not meaningful |
Site rental revenues for 2005 were $597.1 million, an increase of $58.8 million, or 10.9%, from 2004. Of this increase, $51.6 million, or 87.8%, was attributable to CCUSA and $7.2 million, or 12.2%, was attributable to CCAL. The revenue growth was primarily driven by site rental revenues from new tenant additions (or modifications to existing installations) in 2005 on existing towers and, to a lesser extent, (1) contractual escalations on existing leases with variable escalations, (2) new towers built or acquired in 2005, and (3) renewal of certain leases and associated step up in the straight-line rents.
Network services and other revenues for 2005 were $79.6 million, an increase of $13.7 million, or 20.9%, from 2004. This increase was primarily attributable to a $10.9 million increase from CCUSA, and a $2.8 million increase from CCAL, and reflects the variable nature of the network services business as these revenues are typically not under long-term contract.
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Site rental costs of operations for 2005 were $197.4 million, an increase of $13.1 million from 2004. This increase was primarily attributable to cost increases of $11.1 million for CCUSA and $1.6 million for CCAL. Such cost increases relate to normal and customary increases in ground rentals on leases with variable escalations, repairs and maintenance, employee compensation and related benefits, property taxes and $2.9 million of operating costs related to the towers acquired from Trintel in August 2005. Network services and other costs of operations for 2005 were $54.6 million, an increase of $7.9 million from 2004. This increase was primarily attributable to a $7.7 million increase in costs from CCUSA and a $0.2 million increase in costs from CCAL.
Site rental gross margins increased by $45.7 million, or 12.9%, to $399.8 million, or 66.9% of site rental revenues, for 2005, from $354.0 million, or 65.8% of site rental revenues, for 2004. The $45.7 million incremental margin represents 77.8% of the related increase in site rental revenues for 2005, reflecting the relatively fixed nature of the costs to operate our towers.
General and administrative expenses were $109.6 million, or 16.3% of total net revenues, including $22.7 million of stock-based compensation charges, for 2005, an increase of $9.9 million from $99.7 million, or 16.5% of total net revenues, including $14.3 million of stock-based compensation charges, from 2004. Stock-based compensation charges increased $6.2 million as a result of accelerated vesting of shares of restricted common stock based on performance of our stock in 2005. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Compensation Charges Related to Restricted Stock Awards.”
Corporate development expenses for 2005 were $4.3 million, an increase of $2.8 million from $1.5 million for 2004. This increase was primarily attributable to an increase in salary costs related to Modeo within Emerging Businesses.
During 2005, we recorded asset write-down charges of $2.9 million, compared to $7.7 million for 2004. Such non-cash charges related to the abandonment or disposal of certain towers and towers in development. We may record such charges in the future if conditions warrant. During the fourth quarter of 2005, 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.
Depreciation, amortization and accretion for 2005 was $281.1 million, a decrease of $3.9 million, or 1.4%, from 2004. This decrease was primarily attributable to the portfolio extension program in the U.S., which is designed to either purchase the land on which our towers reside or renegotiate and extend the terms of the ground leases, subleases, and licenses relating to the land on which our U.S. towers are located, partially offset by:
| (1) | the acquisition of 467 towers from Trintel in August 2005, and |
| (2) | an increase in our tower assets as a result of capital expenditures for the construction, modification and maintenance of tower assets. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for further discussion of our capital expenditures. |
Losses on purchases and redemptions of debt for 2005 were $283.8 million and relate to the purchase and redemption of $1.6 billion carrying value of high yield and convertible debt. These purchases and redemptions in conjunction with the issuance of the 2005 Tower Revenue Notes were completed to lower our future cash interest payments and simply our capital structure. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
Interest expense and amortization of deferred financing costs for 2005 was $133.8 million, a decrease of $73.0 million, or 35.3%, from 2004. This decrease was primarily attributable to the purchases and repayments of outstanding debt during 2004 and 2005. These financing transactions were completed to lower our future cash interest payments and simplify our capital structure. The reductions in outstanding debt during 2004 included (1) $1.3 billion for CCOC’s former credit agreement with a syndicate of banks (“2000 Credit Facility”), which was repaid in August 2004 via proceeds from the sale of CCUK and (2) $48.0 million of 4% Convertible Senior Notes via purchases in December 2004. The reductions in outstanding debt during 2005 included $1.6 billion purchase of notes and $180.0 million repayment on the Crown Atlantic Credit Facility partially offset by $295.0 million in borrowings under the 2005 Credit Facility. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing Activities.”
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Minority interests represent the minority shareholders 22.4% interest in CCAL and, through November 4, 2004, Verizon’s 37.245% interest in Crown Atlantic. On November 4, 2004, we acquired the remaining 37.245% equity interest in Crown Atlantic.
Income from discontinued operations in 2005 represents the loss from operations of OpenCell and the net gain on sale of OpenCell. Income from discontinued operations in 2004 primarily relates to the results from operations of CCUK and the net gain on sale of CCUK.
The cumulative effect of change in accounting principle for asset retirement obligations represents the charge recorded upon adoption of FIN 47. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Accounting and Reporting Matters—Impact of Recently Issued Accounting Standards” for more information.
Comparison of Years Ended December 31, 2005 and 2004—Operating Segments
CCUSA. Net revenues for 2005 were $622.2 million, a net increase of $62.6 million, or 11.2 %, from 2004. Of the $62.6 million overall increase in net revenues, $51.7 million relates to site rental revenues. The $51.7 million increase in site rental revenues for 2005 was primarily driven by new tenant additions (or modifications to existing installations) on our towers and, to a lesser extent, (1) contractual escalations on existing leases with variable escalations, (2) new towers acquired or built since the end of the third quarter of 2004 and (3) renewal of certain leases and associated step up in the straight-line rents. This increase represents approximately 87.8% of the consolidated increase in site rental revenues for this same period. As mentioned previously, in excess of 90% of our site rental revenue, excluding acquisitions, has been contracted for in a prior year. Network services revenues total $72.5 million for 2005 should continue to be somewhat volatile as these revenues are typically not under long-term contract.
General and administrative expenses were $66.1 million, or 10.6% of total net revenues, including $8.7 million of stock-based compensation charges, for 2005, an increase of $4.0 million from $62.2 million, or 11.1% of total net revenues, including $6.6 million of stock-based compensation charges, for 2004. Stock-based compensation charges increased $2.1 million primarily as a result of accelerated vesting of shares of restricted common stock based on the performance of our stock during 2005. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Compensation Charges Related to Restricted Stock Awards.”
Adjusted EBITDA for 2005 was $335.3 million representing a net increase of $42.2 million, or 14.4%, from 2004. Adjusted EBITDA was positively impacted by the high incremental margin from new tenant additions (or modifications to existing installations) on existing towers. More specifically, site rental gross margins increased by $40.5 million, or 12.3%, to $370.4 million, or 67.4% of site rental revenues, for 2005, from 66.2% of site rental revenues for 2004. The $40.5 million incremental margin represents 78.4% of the related increase in site rental revenues, reflecting the relatively fixed nature of the costs to operate our towers.
Operating income for 2005 was $69.3 million, a net increase of $48.2 million from 2004. The increase in operating income is primarily driven by the $40.5 million increase in site rental gross margin.
Net income (loss) for 2005 was $0.4 million, an improvement of $45.7 million from 2004. The improvement of $45.7 million in net income (loss) is primarily driven by:
| (1) | the $40.5 million increase in site rental gross margin; and |
| (2) | the $14.3 million improvement in losses of purchases on redemptions of debt as a result of a $13.9 million loss on the repayment of the 2000 Credit Facility in 2004 (not repeated in 2005); partially offset by |
| (3) | an $11.0 million increase in interest expense and amortization of deferred financing costs as a result of incremental interest charges related to the 2005 Tower Revenue Notes issued in June 2005 with a weighted average interest rate of 4.89% and borrowings under the 2005 Credit Facility and reductions in interest charges as a result of the repayment of the 2000 Credit Facility during the third quarter of 2004 and the |
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| reduction of the Crown Atlantic Credit Facility via regular payments throughout 2004 and 2005 up to the repayment date in June 2005 (see also note 7 to our consolidated financial statements for further discussion of debt transactions); and |
| (4) | $7.9 million incremental expense from the cumulative effect of adopting FIN 47. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Accounting and Reporting Matters—Impact of Recently Issued Accounting Standards” for further discussion of FIN 47. |
See note 16 to our consolidated financial statements for a reconciliation from net income (loss) to Adjusted EBITDA.
CCAL. Total net revenues for 2005 were $54.6 million, a net increase of $9.9 million, or 22.3%, from 2004. Approximately 70% of this increase relates to growth in site rental revenues, with the remaining approximately 30% related to growth in service revenues. The site rental revenue growth was primarily driven by new tenant additions (or modifications to existing installations) on our towers and, to a lesser extent, contractual escalations on existing leases with variable escalations. Our site rental revenues included a contractual payment of $2.1 million and $2.1 million for 2004 and 2005, respectively, related to a fee for the shortfall in contractually committed licenses.
Adjusted EBITDA for 2005 was $22.1 million, a net increase of $7.3 million, or 49.0%, from 2004. Adjusted EBITDA was positively impacted by the incremental margin from the new tenant additions (or modifications to existing installations) on existing towers. Site rental gross margins increased by $5.6 million, or 23.1%, to $29.8 million, or 62.7% of site rental revenues, for 2005, from $24.2 million, or 60.0% of site rental revenues, for 2004. The $5.6 million incremental margin represents 78.1% of the related increase in site rental revenues, reflecting the relatively fixed nature of the costs to operate our towers.
Operating loss for 2005 was $5.7 million, an improvement of $6.7 million from 2004. The improvement in operating loss is primarily due to the $5.6 million increase in gross margin from site rental revenues and the $2.6 million increase in gross margin from network service revenues, offset by a $1.2 million increase in general and administrative expenses as a result of increased employee related costs.
Net loss for 2005 was $7.0 million, an improvement of $5.3 million from 2004. The decrease in net loss is primarily driven by the aforementioned factors that resulted in the operating loss improvement. See note 16 to our consolidated financial statements for a reconciliation of net income (loss) to Adjusted EBITDA.
The increases and decreases between 2005 and 2004 are inclusive of exchange rate fluctuations. Exchange rates did not have a significant impact on the changes between these two periods.
Emerging Businesses. The operating loss and net loss of $4.6 million and $4.5 million, respectively, and negative Adjusted EBITDA of $4.1 million for 2005 is associated with the operating costs of Modeo.
Corporate Office and Other. General and administrative expenses were $31.7 million, including $13.7 million of stock-based compensation charges, for 2005, an increase of $6.5 million from $25.2 million, including $7.6 million of stock-based compensation charges, for 2004. Stock-based compensation charges increased $6.1 million primarily as a result of accelerated vesting of shares of restricted common stock based on the performance of our stock during 2005. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Compensation Charges Related to Restricted Stock Awards.”
Negative Adjusted EBITDA for 2005 was $18.3 million, an improvement of $0.8 million, or 4.2%, from 2004. The negative Adjusted EBITDA was positively impacted by the consolidation of certain corporate management functions.
Net loss for 2005 was $388.8 million, compared to net income of $293.2 million for 2004. The reduction in net income of $682.0 million is primarily the result of $539.0 million income from discontinued operations of CCUK, including the $494.1 million net gain on sale of CCUK in 2004 (not repeated in 2005), $283.8 million losses on purchases and redemption of debt, an increase in losses on purchases and redemption of debt of $220.0 million, due to (1) the purchases of $1.5 billion combined face value of the 4% Convertible Senior Notes, 10 3/4% senior notes due 2011 (“10 3/4% Senior Notes”), 9 3/8% senior notes due 2011 (“9 3/8% Senior Notes”), 7.5% senior notes due 2013, and
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7.5% Series B senior notes due 2013 in 2005 and (2) the redemption of the combined $52.9 million of 9% senior notes due 2011 (“9% Senior Notes”), 9 1/2% senior notes due 2011, 10 3/8% senior discount notes due 2011, and 11 1/4% senior discount notes due 2011, $4.9 million from our share of losses incurred by unconsolidated affiliates, partially offset by a $83.5 million reduction in interest expense and amortization of deferred financing costs to $65.2 million driven by the resultant lower interest expense from the aforementioned purchases, redemptions, and repayment of long-term debt in 2004 and 2005. See note 16 to our consolidated financial statements for a reconciliation of net income (loss) to Adjusted EBITDA.
Compensation Charges Related to Restricted Stock Awards
During 2003, 2004 and 2005, we granted approximately 5.9 million, 1.4 million and 0.8 million shares, respectively, of restricted common stock to our executives and certain employees including employees of the former CCUK. These shares were to vest in various annual amounts over their respective service period, ranging from four to five years, with provision for accelerated vesting based on the market performance of our common stock. In addition, the 2005 shares awarded to executives contained an additional market performance target that had to be achieved in order for the shares to time vest, if the award had not accelerated vested. In connection with these restricted shares, we were to recognize stock-based compensation charges over the vesting period for the awards granted in 2003, 2004 and 2005. The weighted average grant-date per share fair value of the grants in 2003, 2004 and 2005 was $4.21, $13.99 and $16.76, respectively. The market performance of our common stock reached the third and final target level for accelerated vesting on April 27, 2004 for the awards granted in 2003, on September 16, 2005 for the awards granted in 2004, and November 29, 2005 for the awards granted in 2005.
A summary of accelerated vesting charges recorded in continuing operations, by year, for the restricted common stock granted in years 2003 to 2005 is as follows:
| Accelerated Vesting Charge for the Years Ended, | ||||||||||||||||
| Grant Year | Grant Recipients |
Early Vesting Date |
2004 | 2005 | 2006 | Total | ||||||||||
| (In thousands of dollars) | ||||||||||||||||
| 2003 | Executives and non-executive employees | April 29, 2003 | $ | — | $ | — | $ | — | $ | — | ||||||
| July 30, 2003 | — | — | — | — | ||||||||||||
| April 27, 2004 | 4,261 | — | — | 4,261 | ||||||||||||
| $ | 4,261 | $ | — | $ | — | $ | 4,261 | |||||||||
| 2004 | Executives and non-executive employees | October 27, 2004 | $ | 2,495 | $ | — | $ | — | $ | 2,495 | ||||||
| July 19, 2005 | — | 1,957 | — | 1,957 | ||||||||||||
| September 16, 2005 | — | 2,993 | — | 2,993 | ||||||||||||
| $ | 2,495 | $ | 4,950 | $ | — | $ | 7,445 | |||||||||
| 2005 | Executives | July 19, 2005 | $ | — | $ | 1,570 | $ | — | $ | 1,570 | ||||||
| August 30, 2005 | — | 1,962 | — | 1,962 | ||||||||||||
| November 29, 2005 | — | 1,943 | — | 1,943 | ||||||||||||
| $ | — | $ | 5,475 | $ | — | $ | 5,475 | |||||||||
| 2005 | Non-executive employees | July 19, 2005 | $ | — | $ | 1,312 | $ | — | $ | 1,312 | ||||||
| August 30, 2005 | — | 1,874 | — | 1,874 | ||||||||||||
| November 29, 2005 | — | 1,603 | — | 1,603 | ||||||||||||
| $ | — | $ | 4,789 | $ | — | $ | 4,789 | |||||||||
| Total Accelerated Vesting Charge |
$ | 6,756 | $ | 15,214 | $ | — | $ | 21,970 | ||||||||
We recognized combined stock-based compensation charges (inclusive of the accelerated vesting charges in the above table) from continuing operations of $12.6 million and $18.1 million in 2004 and 2005, respectively, related to the restricted stock awards granted in 2003, 2004 and 2005. See also note 12 to our consolidated financial statements for further discussion of these and other stock-based compensation awards.
In 2006, we granted 1.2 million shares of restricted stock to our executives and certain employees including 0.5 million retention awards, 0.6 million performance awards and 0.1 million one-off awards. The awards have a
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weighted average requisite service period of approximately 2.5 years and a weighted average grant-date fair value per share of $23.63. The performance restricted stock awards issued to certain employees contain provisions for accelerated vesting based on the market performance of our stock. Additionally, the performance and retention awards for the executives contain an additional market performance target that must be achieved in order for any remaining unvested shares to vest after three to four years. None of the 2006 awards have accelerated vested as of December 31, 2006. We recognized stock-based compensation expense related to restricted stock awards of $12.3 million for 2006. The unrecognized compensation (net of estimated forfeitures) related to restricted stock awards at December 31, 2006 is $15.4 million and is estimated to be recognized over a weighted average period of 1.7 years. See note 12 to our consolidated financial statements.
In February 2007, we granted 1.3 million shares of restricted stock to our executives and certain employees, including 0.6 million performance and one-off restricted stock awards and 0.7 million integration restricted stock awards. The integration restricted stock awards were granted to executives and employees deemed to be integral to the successful integration of Global Signal. See note 20 to our consolidated financial statements.
We believe stock-based compensation is an important part of our overall compensation strategy that promotes employee retention and aligns the employee’s compensation with our performance and the interests of our shareholders.
Liquidity and Capital Resources
Overview
Strategy. We seek to allocate our available capital among the investment alternatives that we believe exhibit sufficient potential to achieve acceptable risk-adjusted returns or exhibit potential to complement our core tower rental business. As such, we may continue to:
| (1) | acquire or build new towers, extend leaseholds on our land, acquire the land on which our towers are located, and make improvements to existing towers, |
| (2) | utilize a portion of our available cash balances and debt capacity to purchase our own common stock or preferred stock from time to time as market prices make such investments attractive, and |
| (3) | to a lesser extent, make investments in emerging businesses that we believe are complementary to our core tower leasing business when the expected returns from such investments meet our investment return criteria. |
Our goal is to maximize long-term net cash from operating activities and fund all non-discretionary capital spending and debt service from our operating cash flow, without reliance on additional borrowing or the use of our pre-existing cash. However, due to risk factors, including those set forth herein and in “Item 1A. Risk Factors,” there can be no assurance that this will be possible. As part of our strategy to achieve increases in net cash from operating activities, in addition to improving operating results, we have lowered interest rates on debt through attractive refinancing opportunities. We may also incur additional indebtedness on a discretionary basis to fund discretionary investments.
Our long-term business strategy contemplates discretionary capital expenditures in connection with the further improvement and selective expansion of our existing tower portfolios. We expect that the majority of our discretionary investments will occur in connection with strategic tower acquisitions like the Global Signal Merger in January 2007, purchases of common or preferred stock, modifications and reinforcements of our existing towers for new tenant additions, purchases of land under our towers, selected new tower builds and, to a lesser extent, investments in adjacent businesses such as Modeo. We may incur additional indebtedness on a discretionary basis to fund these investments. Our long-term business strategy may be influenced over the near term as a result of the debt and equity financing of the Global Signal Merger and the related commitment of time and expense to the execution of the integration of Global Signal’s business.
Liquidity Position. As of December 31, 2006 (Post-Merger, and after giving effect to the 2007 Term Loan and the January 2007 Stock Purchase), we had consolidated cash and cash equivalents of $139.4 million (exclusive of restricted cash of $137.5 million), consolidated long-term and short-term debt of $5,945.5 million, consolidated redeemable preferred stock of $312.9 million and consolidated stockholders equity of $3,533.3 million. We also had $250.0 million of availability under our 2007 Revolver.
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Net Cash from Operations
A summary of our net cash provided by operating activities (from our consolidated statement of cash flows) is as follows:
| Years Ended December 31, | |||||||||
| 2004 | 2005 | 2006 | |||||||
| (In thousands of dollars) | |||||||||
| Net cash provided by (used for) operating activities |
$ | 121,501 | $ | 204,912 | $ | 275,759 | |||
The net cash provided by operating activities for 2006 increased by $70.8 million from 2005 due primarily to growth in our core site leasing and a decrease in cash interest paid. 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 separated into two general categories:
| (1) | sustaining (which includes maintenance activities on our towers, vehicles, information technology equipment and office equipment), and |
| (2) | revenue generating (which includes tower improvements, enhancements to the structural capacity of our towers in order to support additional leasing, the construction of new towers and distributed antenna systems, land purchases and investments in adjacent businesses). |
A summary of our capital expenditures (including the total capital expenditures, which can be found on our consolidated statement of cash flows) is as follows:
| Years Ended December 31, | ||||||||||||||||||
| Sustaining Capital Expenditures |
Revenue Generating Capital Expenditures |
Total Capital Expenditures | ||||||||||||||||
| 2005 | 2006 | 2005 | 2006 | 2005 | 2006 | |||||||||||||
| (In thousands of dollars) | ||||||||||||||||||
| CCUSA |
$ | 11,874 | $ | 8,005 | $ | 42,006 | $ | 70,157 | $ | 53,880 | $ | 78,162 | ||||||
| CCAL |
1,877 | 1,176 | 753 | 3,668 | 2,630 | 4,844 | ||||||||||||
| Emerging Businesses |
49 | 92 | 8,074 | 41,689 | 8,123 | 41,781 | ||||||||||||
| Corporate Office and Other |
45 | 33 | — | — | 45 | 33 | ||||||||||||
| Consolidated |
$ | 13,845 | $ | 9,306 | $ | 50,833 | $ | 115,514 | $ | 64,678 | $ | 124,820 | ||||||
For 2006, total capital expenditures increased $60.1 million, or 93.0%, from 2005. The increase in revenue generating capital expenditures is primarily driven by:
| (1) | a $33.7 million increase in capital expenditures by Emerging Businesses that is attributable to the development of the Modeo network (see “Item 1. Business—The Company—Emerging Businesses”); and |
| (2) | a $17.7 million increase in land purchases to $27.5 million as a result of executing our Portfolio Extension Program to either purchase the land on which our towers reside or renegotiate and extend the terms of ground leases, subleases and licenses related to our towers. |
Our decisions regarding enhancement of towers, the construction of new towers and DAS, land purchases and investments in emerging businesses, such as Modeo, are discretionary and depend upon expectations of achieving acceptable risk-adjusted returns (given current market conditions). Such decisions are influenced by the availability of capital and expected returns on alternative investments.
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Acquisition of Mountain Union. On July 1, 2006, we acquired approximately 98% of the outstanding equity interests of Mountain Union for approximately $305 million. In January 2007, we acquired the remaining approximately 2% interest for $4.8 million. We utilized borrowings under the 2006 Credit Facility to acquire the Mountain Union equity interests and pay off the outstanding indebtedness of Mountain Union. Mountain Union's assets at closing included 474 completed towers as well as 77 towers in various stages of development. Mountain Union's completed towers at closing are expected to produce approximately $26 million in annualized site rental revenue and approximately $18.2 million in annualized site rental gross margin. We believe the acquisition of the towers from Mountain Union is consistent with our mission, which is 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. We also believe acquiring these towers from Mountain Union is consistent with our strategy of increasing recurring revenue and cash flow. We expect to incur minimal additional general and administrative expenses as a result of this acquisition. The Mountain Union tower portfolio has concentrations in markets such as Puerto Rico, Los Angeles, Denver, Phoenix and Las Vegas. See note 12 to the consolidated financial statements.
Acquisition of Global Signal. On October 5, 2006, we entered into a definitive agreement to merge Global Signal into a subsidiary of ours in a stock and cash transaction valued at approximately $4.0 billion exclusive of the debt that remained outstanding as obligations of the Global Signal entities we acquired. We completed the Global Signal Merger on January 12, 2007. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—General Overview—Current Year Highlights and Recent Developments” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing Activities.”
Investment in FiberTower. On August 29, 2006, FiberTower and First Avenue Networks, Inc. completed an all-stock merger transaction contemplated by a definitive merger agreement dated May 14, 2006. Prior to the FiberTower Merger, we owned approximately a 36% minority interest position in FiberTower, which was accounted for under the equity method. Following the FiberTower Merger transaction, we own approximately 18.7% of the outstanding equity interests in the combined company. Our investment in FiberTower is subject to certain transfer restrictions that terminate in August 2007 or earlier. As a result of the FiberTower Merger, we wrote up the carrying value of the investment by $144.6 million, to $204.0 million, and recorded an offsetting adjustment to stockholders equity. As of December 31, 2006 and January 31, 2007, the carrying value of the investment in FiberTower (NASDAQ: FTWR) is $155.0 million and $137.8 million, respectively (at a per FiberTower share price of $5.88 and $5.23, respectively) and is included in available-for-sale securities on our consolidated balance sheet. As of January 31, 2007, the unrealized gain included in accumulated other comprehensive income totaled $2.1 million. See notes 1 and 6 to our consolidated financial statements. See “Item 1A. Risk Factors.”
Financing Activities
For 2004, 2005 and 2006, our net cash provided by (used for) financing activities was $(1.7) billion, $(445.6) million and $678.9 million, respectively. These amounts are largely due to (1) financing transactions we have completed in an effort to simplify our capital structure at attractive rates while maintaining our targeted leverage ratio and (2) purchases of our own stock, as we continue to invest in opportunities we believe will drive long-term shareholder value. As a result of these financing activities and those occurring in the beginning of 2007, we have significantly increased our debt and future interest expense obligations. We expect interest expense and amortization of deferred financing costs of between approximately $348 million to $353 million for the full year 2007. We expect to generate sufficient cash flow from operations to fund our interest expense obligations. The following is a summary of the significant financing transactions we completed in 2006 and the beginning of 2007.
2006 Tower Revenue Notes. We issued $1.55 billion of 2006 Tower Revenue Notes through certain of our subsidiaries (“Issuers”) in November 2006 as additional debt securities under the existing indenture pursuant to which the 2005 Tower Revenue Notes were issued in 2005. The 2006 Tower Revenue Notes have a weighted average fixed interest rate of approximately 5.71% (see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing Activities—Interest Rate Swaps” below) and 78.6% of the outstanding balance was rated investment grade. The 2005 Tower Revenue Notes and the 2006 Tower Revenue Notes are secured by the personal property, license agreements, revenues or distributions related to substantially all of our U.S. (including Puerto Rico) towers as of the date of issuance of the
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2006 Tower Revenue Notes. The 2006 Tower Revenue Notes require interest payments monthly, have an anticipated repayment date of November 2011 and may be voluntarily prepaid after two years from issuance upon payment of applicable prepayment consideration. If the 2006 Tower Revenue Notes are not paid in full by the anticipated repayment date of November 2011, then adverse consequences occur including additional interest on the 2005 Tower Revenue Notes, the 2006 Tower Revenue Notes and any other notes issued under the Amended Indenture (collectively, “Notes”) and the application of the Issuers’ excess cash flow to repay principal of the Notes.
If the Issuers’ debt service coverage ratio (“DSCR”) falls below 1.75 times as of the end of any calendar quarter, then all excess cash flow of the Issuers will be deposited in a reserve account instead of being released to us (with the exception of funds required to meet the debt service requirements of CCIC and our subsidiaries) until the DSCR exceeds such level for two consecutive quarters. All funds on deposit in the reserve account along with future excess cash flows of the Issuers will be applied to prepay the Notes with applicable prepayment consideration. If the Issuers’ DSCR falls below 1.45 times as of the end of any calendar quarter, then the Issuers will be required to make principal payments out of their excess cash flow until the DSCR exceeds such level and funds will not be available to CCIC.
See note 7 to our consolidated financial statements for further discussion of the 2006 Tower Revenue Notes and the amendments to the indenture pursuant to which the 2005 Tower Revenue Notes were issued.
Proceeds from the 2006 Tower Revenue Notes were primarily used to repay the 2006 Credit Facility and to fund most of the Cash Consideration of the Global Signal Merger. A summary of the use of proceeds from the issuance of the 2006 Tower Revenue Notes is as follows:
| (In thousands of dollars) | |||
| 2006 Credit Facility repayment, (see below) |
$ | 1,014,195 | |
| Global Signal Cash Consideration |
493,345 | ||
| Swap termination payments (see below) |
15,274 | ||
| Fund reserve accounts |
4,321 | ||
| Underwriting fees and expenses |
20,608 | ||
| Third party deal expenses |
2,257 | ||
| $ | 1,550,000 | ||
2006 Credit Facility. On June 1, 2006, we entered into the now terminated 2006 Credit Facility, a $1.25 billion credit facility with a syndicate of lenders, consisting of a $1.0 billion term loan (“2006 Term Loan”) and a $250 million revolver. A portion of the proceeds of the 2006 Term Loan were used to repay the 2005 Credit Facility, under which $295 million was outstanding at the time of repayment, and to fund the acquisition of Mountain Union for approximately $305 million. The remaining proceeds of the 2006 Credit Facility were utilized to purchase our common stock. On November 29, 2006, we terminated the 2006 Credit Facility and repaid the remaining approximate $1.0 billion outstanding balance of the 2006 Term Loan. The termination of the 2006 Credit Facility resulted in a loss of $4.7 million, consisting of the write-off of unamortized deferred financing costs and a termination fee of $0.6 million.
2006 Mortgage Loan. At the closing of the Global Signal Merger in January 2007, the 2006 Mortgage Loan remained outstanding as obligations of certain of the Global Signal entities we acquired. The 2006 Mortgage Loan was completed by the Global Signal entities in February 2006 through three wholly-owned special purpose entities (all of which are now indirect subsidiaries of ours), Global Signal Acquisitions II LLC, Global Signal Acquisitions LLC and Pinnacle Towers LLC and its thirteen subsidiaries (“2006 Borrowers”) who borrowed $1.55 billion under three mortgage loans made payable to Global Signal Trust III which issued $1.55 billion in commercial mortgage pass through certificates. We will consolidate our subsidiaries, but will not consolidate Global Signal Trust III into our financial statements. The 2006 Mortgage Loan has a weighted average fixed interest rate of approximately 5.69% and 92.1% was rated investment grade. We will record a fair value adjustment of $3.1 million to decrease the value of the 2006 Mortgage Loan to fair value as part of the preliminary allocation of the purchase price of the Global Signal Merger. The effective interest rate after giving effect to the fair value purchase price adjustment is approximately 5.74%.
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The 2006 Mortgage Loan requires monthly interest payments until its contractual repayment date in February 2011. The 2006 Mortgage Loan is secured by, among other things, (1) mortgage liens on the 2006 Borrowers’ interests (fee, leasehold or easement) in over 80% of their respective communications sites, (2) a security interest in substantially all of the 2006 Borrowers’ personal property and fixtures and (3) a pledge of the capital stock (or equivalent equity interests) of each of the 2006 Borrowers.
On a monthly basis, the excess cash flows from the 2006 Borrowers, after the payment of principal, interest, reserves and expenses, are distributed to us. If the DSCR, defined in the 2006 Mortgage Loan as the net cash flow for the towers for the immediately preceding 12 calendar month period divided by the amount of interest that we will be required to pay over the succeeding 12 months on the 2006 Mortgage Loan, as of the end of any calendar quarter falls to 1.35 times or lower, then all excess cash flow of the 2006 Borrowers will be deposited into a reserve account instead of being released to us. The funds in the reserve account will not be released to us until the DSCR exceeds 1.35 times for two consecutive calendar quarters. If the DSCR falls below 1.20 times as of the end of any calendar quarter, then all funds on deposit in the reserve account along with future excess cash flows of the 2006 Borrowers will be applied to prepay the 2006 Mortgage Loan with applicable prepayment consideration.
The 2006 Borrowers may not prepay the 2006 Mortgage Loan in whole or in part at any time prior to February 28, 2008, except in limited circumstances (such as the occurrence of certain casualty and condemnation events relating to the towers securing the 2006 Mortgage Loan). Thereafter, prepayment is permitted upon payment of any applicable prepayment consideration. If the prepayment occurs within three months of the February 2011 monthly payment date, no prepayment consideration is due.
The 2006 Mortgage Loan documents include covenants customary for mortgage loans subject to rated securitizations. Among other things, the 2006 Borrowers are prohibited from incurring additional indebtedness or further encumbering their assets.
2004 Mortgage Loan. At the closing of the Global Signal Merger in January 2007, the 2004 Mortgage Loan remained outstanding as obligations of certain of the Global Signal entities we acquired. The 2004 Mortgage Loan was completed by Global Signal in December 2004 through the special purpose entities (all of which are now indirect subsidiaries of ours), Pinnacle Towers Acquisitions Holdings LLC and five of its direct and indirect subsidiaries (“2004 Borrowers”) which borrowed $293.8 million under a mortgage loan made payable to Global Signal Trust II which issued $293.8 million in commercial mortgage pass through certificates. We will consolidate our subsidiaries, but will not consolidate Global Signal Trust II into our financial statements. The principal amount of the 2004 Mortgage Loan is divided into seven classes, each having a different level of seniority. The 2004 Mortgage Loan has a weighted average fixed interest rate of approximately 4.74% and 86.7% was rated investment grade. We will record a fair value adjustment of $9.1 million to decrease the value of the 2004 Mortgage Loan to fair value as part of the preliminary allocation of the purchase price of the Global Signal Merger. The effective interest rate after giving effect to the fair value purchase price adjustment is approximately 5.78%.
The 2004 Mortgage Loan requires monthly interest payments until its maturity in December 2009 when the unpaid principal balance will be due. The 2004 Mortgage Loan is secured by, among other things, (1) mortgage liens on the 2004 Borrowers’ interests (fee, leasehold or easement) in substantially all of their communications sites, (2) a security interest in substantially all of the 2004 Borrowers’ personal property and fixtures and (3) a pledge of the capital stock (or equivalent equity interests) of each of the 2004 Borrowers.
On a monthly basis, the excess cash flows from the 2004 Borrowers, after the payment of principal, interest, reserves and expenses, are distributed to us. If the DSCR, defined in the 2004 Mortgage Loan as the net cash flow for the towers for the immediately preceding 12 calendar month period divided by the amount of interest that we will be required to pay over the succeeding 12 months on the 2004 Mortgage Loan, as of the end of any calendar quarter falls to 1.30 times or lower, then all excess cash flow of the 2004 Borrowers will be deposited into a reserve account instead of being released to us. The funds in the reserve account will not be released to us until the DSCR exceeds 1.30 times for two consecutive calendar quarters. If the DSCR falls below 1.15 times as of the end of any calendar quarter, then all funds on deposit in the reserve account along with future excess cash flows of the 2004 Borrowers will be applied to prepay the 2004 Mortgage Loan.
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Prepayment of the 2004 Mortgage Loan is permitted upon payment of any applicable prepayment consideration. If the prepayment occurs within three months of the December 2009 monthly payment date, no prepayment consideration is due.
The 2004 Mortgage Loan documents include covenants customary for mortgage loans subject to rated securitizations. Among other things, the 2004 Borrowers are prohibited from incurring additional indebtedness or further encumbering their assets.
2007 Revolver and 2007 Term Loan. On January 9, 2007, CCOC entered into the 2007 Credit Agreement with a syndicate of lenders, pursuant to which such lenders agreed to provide the 2007 Revolver in the amount of $250.0 million, which matures in January 2008. The proceeds of the 2007 Revolver may be used for general corporate purposes, which may include the financing of capital expenditures, acquisitions and purchases of our securities. Availability under the 2007 Revolver at any time will be determined by certain financial ratios. On January 26, 2007, CCOC entered into a term loan joinder pursuant to which lenders agreed to provide CCOC with the 2007 Term Loan under the existing 2007 Credit Agreement. The 2007 Term Loan matures in January 2014. The proceeds of the 2007 Term Loan were used for the January 2007 Stock Purchase.
Borrowings under the 2007 Revolver and 2007 Term Loan bear interest at a rate per annum, at CCOC’s election, equal to the prime rate of The Royal Bank of Scotland plc plus a credit spread or LIBOR plus a credit spread. Interest on prime rate loans is due monthly, while interest on LIBOR loans is due at the end of the interest period (one, two, three or six months) for which such LIBOR rate is in effect.
The 2007 Revolver and 2007 Term Loan are secured by a pledge of certain equity interests of certain of our subsidiaries as well as a security interest in CCOC’s deposit accounts and securities accounts. The 2007 Revolver and 2007 Term Loan are guaranteed by CCIC. The 2007 Revolver and 2007 Term Loan contain customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults and cross-defaults to other indebtedness.
The 2007 Revolver and 2007 Term Loan require CCIC, CCOC and certain of its subsidiaries to maintain compliance with certain financial covenants and places certain restrictions on our ability or certain of our subsidiaries to, among other things, incur debt and liens, purchase our securities, make capital expenditures, dispose of assets, undertake transactions with affiliates, make other investments and pay dividends.
Interest Rate Swaps. We have used, and may continue to use when we deem prudent, interest rate swap agreements to manage and reduce our interest rate risk. On March 1, 2006, we entered into interest rate swaps (“March 2006 Interest Rate Swaps”), comprised of three five-year forward starting interest rate swap agreements with a combined notional amount of $1.9 billion, to fix our interest cash outflows, in contemplation of the expected future June 2010 refinancing of the $1.9 billion 2005 Tower Revenue Notes issued in June 2005. On December 15, 2006, we entered into two interest rate swaps (“December 2006 Interest Rate Swaps”) with a combined notional amount of $1.55 billion, to fix our interest cash outflows, in contemplation of the expected future November 2011 refinancing of the $1.55 billion 2006 Tower Revenue Notes issued in November 2006.
In 2006, the termination of the interest rate swaps entered into in January 2006 (“January 2006 Interest Rate Swaps”), the interest rate swaps entered into in June 2006 (“June 2006 Interest Rate Swaps”), and the interest rate swaps entered into in August 2006 (“August 2006 Interest Rate Swaps”), and resultant net cash settlement payments totaling $9.4 million were recorded as a charge to accumulated other comprehensive income, which will be amortized as an increase in interest expense over a five year period. The effective interest rate on the 2006 Tower Revenue Notes is approximately 5.83%, inclusive of the approximate 0.12% increase in the effective interest rate relating to the January 2006 Interest Rate Swaps, June 2006 Interest Rate Swap and August 2006 Interest Rate Swap and exclusive of the amortization of the deferred financing costs. See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” and note 7 to our consolidated financial statements.
In February 2007, we entered into interest rate swaps (“$1.55 Billion 2007 Interest Rate Swaps”), comprised of two five-year forward starting interest rate swap agreements with a combined notional amount of $1.55 billion, to fix our interest cash outflows, in contemplation of the expected future February 2011 refinancing of the $1.55 billion 2006 Mortgage Loan. In February 2007, we entered into interest rate swaps (“$294 Million 2007 Interest Rate Swaps”), comprised of two five-year forward starting interest rate swap agreements with a combined notional amount of $293.8 million, to fix our interest cash outflows, in contemplation of the expected future December 2009 refinancing of the $293.8 million 2004 Mortgage Loan . See note 20 to our consolidated financial statements.
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Redemption of Notes. On August 1, 2006, we redeemed the outstanding 10 3/4% Senior Notes and 9 3/8% Senior Notes. We utilized approximately $12.7 million to redeem the $11.7 million in outstanding principal amount of the redeemed notes, including accrued interest of $0.6 million. The redemptions resulted in losses of $0.4 million for 2006.
Common Stock Activity. A summary of common stock activity for the year ended December 31, 2006 is as follows:
| Year Ended December 31, 2006 |
|||
| (In thousands) | |||
| Shares outstanding at beginning of period |
214,189 | ||
| Restricted stock awards granted |
1,219 | ||
| Common stock purchased in the open market |
(15,867 | ) | |
| Stock options exercised |
2,542 | ||
| Other activity |
(2 | ) | |
| Shares outstanding at end of period |
202,081 | ||
During 2004, 2005 and 2006, we purchased 3.4 million, 16.0 million and 15.9 million shares of our common stock, respectively, exclusive of shares of common stock purchased from the dividend paying agent following the issuance of the Convertible Preferred Stock dividend. We utilized $47.1 million, $310.1 million and $518.0 million in cash, respectively, to affect these purchases and paid an average price of $13.83, $19.44 and $32.64, respectively. We may choose to continue purchases of common stock in the future. On January 12, 2007, we issued approximately 98.1 million shares of common stock in the Global Signal Merger. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—General Overview—Acquisition of Global Signal.” On January 26, 2007, we purchased 17.7 million shares of common stock in a private transaction. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—General Overview—Current Year Highlights and Recent Developments.”
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.
Financing Restrictions. Our debt obligations require our subsidiaries to maintain certain financial covenants and place restrictions on the ability of our subsidiaries to, among other things, incur debt and liens, undertake transactions with affiliates or related persons, dispose of towers, or make distributions of property, securities, or equity, or make distributions of cash if certain covenants are breached. See note 7 of our consolidated financial statements for discussion of debt covenants.
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Restricted Cash. Pursuant to the indenture agreement governing the 2005 Tower Revenue Notes and 2006 Tower Revenue Notes, all rental cash receipts of the issuers of the 2005 Tower Revenue Notes and 2006 Tower Revenue Notes and their subsidiaries are restricted and held by the indenture trustee (“Indenture Trustee”) each month. The monies in excess of required reserve balances are subsequently released to us on the 15th calendar day following month end. In addition, all rental cash receipts of the entities who issued the 2004 Mortgage Loan and the 2006 Mortgage Loan are restricted and held in reserve. The restricted cash related to the 2004 Mortgage Loan and 2006 Mortgage Loan is released to us when the amount exceeds pre-established funding levels.
Contractual Cash Obligations
The following table summarizes our contractual cash obligations as of December 31, 2006, Post-Merger and after giving effect to the 2007 Term Loan:
| Years Ending December 31, | |||||||||||||||||||||
| Contractual Obligations (e) (h) (i) |
2007 | 2008 | 2009 | 2010 | 2011 | Thereafter | Totals | ||||||||||||||
| (In thousands of dollars) | |||||||||||||||||||||
| Long-term debt (a) (f) (g) |
$ | 4,500 | $ | 6,000 | $ | 299,825 | $ | 1,969,839 | $ | 3,106,000 | $ | 571,551 | $ | 5,957,715 | |||||||
| Interest payments on long-term debt (a) (f) (g) |
315,345 | 325,095 | 325,095 | 267,626 | 138,520 | 39,011 | 1,410,692 | ||||||||||||||
| Capital lease obligations |
2,454 | 1,731 | 1,336 | 443 | 386 | 356 | 6,706 | ||||||||||||||
| Operating lease obligations (b) |
183,781 | 168,209 | 155,410 | 140,961 | 134,145 | 1,470,656 | 2,253,162 | ||||||||||||||
| Sprint property tax commitment (c) |
13,670 | 14,043 | 14,422 | 14,809 | 15,234 | 229,018 | 301,196 | ||||||||||||||
| Redeemable preferred stock (d) |
— | — | — | — | — | 318,050 | 318,050 | ||||||||||||||
| Purchase commitments (j) |
30,892 | — | — | — | — | — | 30,892 | ||||||||||||||
| $ | 550,642 | $ | 515,078 | $ | 796,088 | $ | 2,393,678 | $ | 3,394,285 | $ | 2,628,642 | $ | 10,278,413 | ||||||||
| (a) | The 2005 Tower Revenue Notes and 2006 Tower Revenue Notes are presented assuming payment in full is expected to occur on the anticipated repayment date in June 2010 and November 2011, respectively. See note 7 to our consolidated financial statements. |
| (b) | Amounts relate primarily to ground lease obligations for the land on which our towers reside, and are based on the assumption that payments will be made through the end of the period for which we hold renewal rights. |
| (c) | Reflects our commitment which remained effective at the closing of the Global Signal Merger to reimburse Sprint Nextel for property taxes on the Sprint sites acquired by Global Signal at an average rate of approximately $2,095 per site for 2007 escalated at 3% annually over the remaining life of the underlying ground lease assuming all renewal options are exercised. |
| (d) | Amounts are exclusive of 6.25% Convertible Preferred Stock dividends, which may be paid in cash or shares of common stock. See note 10 to our consolidated financial statements. |
| (e) | Pursuant to our ground leases we have a legal obligation to perform certain asset retirement activities, including requirements upon lease termination to remove towers or remediate the land upon which our towers reside. The cash obligations disclosed in the above table, as of December 31, 2006, Post-Merger, are exclusive of estimated expected future cash outlays for asset retirement obligations of nearly $1.0 billion. As of December 31, 2006, Post-Merger, the present value of these asset retirement obligations was approximately $28.2 million. |
| (f) | Inclusive of the 2004 Mortgage Loan and the 2006 Mortgage Loan that remained outstanding at the closing of the Global Signal Merger and are presented assuming payment in full on the anticipated repayment dates of December 2009 and February 2011, respectively. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing Activities.” |
| (g) | Reflects the 2007 Term Loan’s quarterly principal installments of $1.5 million and the remaining outstanding amount due in January 2014. In addition, we have an undrawn 2007 Revolver in the amount of $250.0 million. Interest payments on the floating rate are based on estimated rates in effect during the first quarter of 2007. |
| (h) | In addition to the obligations disclosed in the above table, our several interest rate swap agreements will require cash settlement to or from us on the effective date of the forward starting interest rate swaps. See “Item 7A. Quantitative and Qualitative Disclosures about Market Risk”. |
| (i) | In addition to the obligations disclosed in the above table, we are obligated under letters of credit to various landlords, insurers and other parties in connection with certain contingent retirement obligations under various tower land leases and certain other contractual obligations. The letters of credit were issued through one of CCUSA’s lenders in amounts aggregating $12.0 million and expire on various dates through February 2008. At the closing of the Global Signal Merger, letters of credit and bonds in amounts aggregating $1.5 million that expire on various dates through 2008 remained outstanding as obligations of the Global Signal entities we acquired. |
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| (j) | The Global Signal entities on the date of the Global Signal Merger had purchase agreements to acquire 193 tracts of land under our towers for $30.9 million. |
The following table summarizes the remaining terms to expiration (including renewal terms at our option) of the ground leases, subleases, or licenses for the land on which our CCUSA towers reside as of December 31, 2006.
| Remaining Term, In Years |
Number of Towers | Percent of Total CCUSA Towers as of December 31, 2006 |
|||
| 15+ years |
5,366 | 46.6 | % | ||
| 14 – 15 years |
1,232 | 10.7 | % | ||
| 12 – 13 years |
832 | 7.2 | % | ||
| 10 – 11 years |
511 | 4.4 | % | ||
| 8 – 9 years |
442 | 3.8 | % | ||
| 6 – 7 years |
341 | 3.0 | % | ||
| 4 – 5 years |
201 | 1.8 | % | ||
| 2 – 3 years |
165 | 1.4 | % | ||
| 0 – 1 year |
114 | 1.0 | % | ||
| 9,204 | 79.9 | % | |||
In addition to the towers discussed in the above table, we also acquired 10,749 towers through the Global Signal Merger, of which we lease, sublease or license the land on which 8,407 of these towers reside. Approximately 2% of the towers acquired through the Global Signal Merger have a remaining term of less than one year.
Portfolio Extension Program. In 2004, we began the Portfolio Extension Program through which we seek to (1) renegotiate and extend the terms of the ground leases, subleases and licenses relating to the land on which our CCUSA towers are located or (2) purchase the land on which such towers reside. Global Signal had an ongoing initiative similar to our Portfolio Extension Program, which we expect to continue after the Global Signal Merger. See “Item 1A. Risk Factors—We Generally Lease or Sublease the Land Under Our Towers and May Not Be Able to Extend These Leases.”
Factors Affecting Sources of Liquidity
The factors that are likely to determine our subsidiaries’ ability to comply with their current and future debt covenants are:
| (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 result 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.
As a holding company, CCIC will require distributions or dividends from our subsidiaries, or will be forced to use our remaining cash balances, to fund the holding company’s debt obligations (including the 4% Convertible Senior Notes) and the guarantee of the 2007 Term Loan and the 2007 Revolver, including interest payments on the notes. The terms of the current indebtedness of our subsidiaries allow the ability to distribute cash to CCIC unless they experience a deterioration of financial performance. In addition, there can be no assurance that our subsidiaries will generate sufficient cash from their operations to make any permitted distributions pursuant to our current or future indebtedness. As a result, we could be required to apply a portion of our remaining cash to fund interest payments on the notes. If we do not retain sufficient funds or raise additional funds from any future financing, we may not be able to make our interest payments on the notes.
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Our ability to make scheduled payments of principal of, or to pay interest on, our debt obligations, and our ability to refinance any such debt obligations, will depend on our future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. See “Item 1A. Risk Factors.”
Accounting and Reporting Matters
Related Party Transactions
We had revenues from Verizon Wireless of $131.7 million for 2004. Verizon Wireless was a majority owned subsidiary of Verizon, our former partner in Crown Atlantic and Crown Castle GT. On November 4, 2004, we entered into an agreement with a subsidiary of Verizon to acquire Verizon’s remaining 37.245% equity interest in Crown Atlantic.
In January 2007, we purchased 17.7 million shares of common stock for $600.0 million in cash from Fortress, Greenhill and Abrams Capital. See “Item 1. Business—2006 Highlights and Recent Developments.”
See also note 14 to our consolidated financial statements.
Critical Accounting Policies
The following is a discussion of the accounting policies 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.
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 10 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 this accounting method, a portion of the revenue recognized in a given period represents cash collected in other periods. For 2004, 2005 and 2006, the non-cash portion of our site rental revenues amounted to approximately $19.2 million, $16.1 million and $20.5 million, respectively. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Overview.”
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 not 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
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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.
Valuation of Long-Lived Assets. We review the carrying values of property and equipment 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.
Depreciation expense for our property and equipment is computed using the straight-line method over the estimated useful lives of our various classes of 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 underlying ground lease (including optional renewals). See note 1 to our consolidated financial statements.
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 2006, 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 leasing business could result in an impairment of goodwill 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.
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 arrive 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 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 notes 8 and 20 to our consolidated financial statements.
Allowance for Doubtful Accounts Receivable. As part of our normal accounting procedures, we must evaluate our outstanding accounts receivable to estimate whether they will be collected. This is a subjective process that involves making judgments about our customers’ ability and willingness to pay these accounts. An allowance for doubtful accounts is recorded as an offset to accounts receivable in order to present a net balance that we believe will be collected. In estimating the appropriate balance for this allowance, we consider (1) specific reserves for accounts we believe may prove to be uncollectible and (2) additional reserves, based on historical collections, for the
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remainder of our accounts. Additions to the allowance for doubtful accounts are charged to costs of operations, and deductions from the allowance are recorded when specific accounts receivable are written off as uncollectible. If our estimate of uncollectible accounts should prove to be inaccurate at some future date, the results of operations for the period could be materially affected by any necessary correction to the allowance for doubtful accounts.
Impact of Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123 (“SFAS 123(R)”) (revised 2004), Share-Based Payment. SFAS 123(R) requires that the cost resulting from all share-based payment transactions be recognized in the financial statements based on fair value. SFAS 123(R) clarifies and expands SFAS 123’s guidance in several areas, including measuring fair value, classifying an award as equity or as a liability, and attributing compensation cost to reporting periods. SFAS 123(R) also requires that forfeitures of awards be estimated when granted, while SFAS 123 allowed forfeitures to be accounted for as they occur. SFAS 123(R) also requires additional disclosures about stock-based compensation awards. We adopted the provisions of SFAS 123(R) on January 1, 2006. On January 1, 2003, we adopted the fair value method of accounting for stock-based compensation using the prospective method of transition under Statement of Financial Accounting Standards No. 148 (“SFAS 148”), Accounting for Stock-Based Compensation – Transition and Disclosure. SFAS 123(R) requires the use of a modified version of prospective application under which compensation cost is recognized on or after the required effective date for (1) awards granted, modified, repurchased or cancelled after that date and (2) the unvested portion of awards outstanding on that date based on their grant-date fair values. In October and November 2005 and February 2006, the FASB released Financial Staff Position (“FSP”) FSP 123(R)-2, Practical Accommodation to the Application of Grant Date as Defined in FASB Statement No 123(R), FSP 123 (R)-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards and FSP 123 (R)-4, Classification of Options and Similar Instruments Issued as Employee Compensation that Allow for Cash Settlement upon the Occurrence of a Contingent Event. The FSP’s clarify certain accounting provisions set forth in SFAS 123(R). The adoption of SFAS 123(R) and the FSP’s increased our stock-based compensation charges by $0.5 million for 2006. See notes 1 and 12 to our consolidated financial statements.
In March 2005, the SEC staff issued guidance on SFAS 123(R). Staff Accounting Bulletin No. 107 (“SAB 107”), was issued to assist preparers by simplifying some of the implementation challenges of SFAS 123(R) while enhancing the information that investors receive. SAB 107 creates a framework that is premised on two overarching themes: (a) considerable judgment will be required by preparers to successfully implement SFAS 123(R), specifically when valuing employee stock options; and (b) reasonable individuals, acting in good faith, may conclude differently on the fair value of employee stock options. Key topics covered by SAB 107 include: (a) valuation models—SAB 107 reinforces the flexibility allowed by SFAS 123(R) to choose an option-pricing model that meets the standard’s fair value measurement objective; (b) expected volatility—SAB 107 provides guidance on when it would be appropriate to rely exclusively on either historical or implied volatility in estimating expected volatility; and (c) expected term—the new guidance includes examples and some simplified approaches to determining the expected term under certain circumstances. We applied the principles of SAB 107 in conjunction with our adoption of SFAS 123(R).
In March 2005, the FASB issued FIN 47, which clarifies the term conditional asset retirement obligation as used in Statement of Financial Accounting Standards No. 143 (“SFAS 143”), Accounting for Asset Retirement Obligations. SFAS 143 requires a liability to be recorded if the fair value of the obligation can be reasonably estimated. The types of asset retirement obligations that are covered by FIN 47 are those for which an entity has a legal obligation to perform an asset retirement activity, but the timing and (or) method of settling the obligation are conditional on a future event that may or may not be within the control of the entity. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than fiscal years ending after December 15, 2005. We adopted FIN 47 on December 31, 2005. The adoption of FIN 47 resulted in the recognition of liabilities amounting to $14.0 million for contingent retirement obligations under certain tower site land leases, asset retirement costs amounting to $4.9 million, and the recognition of a charge for the cumulative effect of the change in accounting principle amounting to $9.0 million. At December 31, 2005 and 2006, liabilities for contingent retirement obligations amounted to $16.7 million and $18.5 million, respectively. See notes 1 and 15 of our consolidated financial statements.
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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. We expect to record an increase in retained earnings and a decrease in contingent tax liabilities through a cumulative effect adjustment of between approximately $4.0 million and $6.0 million upon adoption of FIN 48. 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. SFAS 157 is effective in the beginning of our 2008 fiscal year and the provisions will be applied prospectively. We believe the impact of the adoption of SFAS 157 will not have a material impact on our consolidated financial statements.
In September 2006, the SEC staff issued SAB 108, which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 requires the use of both the “iron curtain” and “rollover” approach in quantifying the materiality of misstatements. SAB 108 provides transitional guidance for the correction of errors in prior periods. We adopted SAB 108 as of September 30, 2006. Upon initial application of SAB 108, we evaluated the uncorrected financial statement misstatements that were previously considered immaterial under the “rollover” approach using the dual methodology required by SAB 108. The adoption of SAB 108 did not have a material impact on our consolidated financial statements. See note 1 to our consolidated financial statements for a further discussion.
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. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Comparison of Years Ended December 31, 2006 and 2005—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 Signal, 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:
| • | it is the primary measure used by our management to evaluate the economic productivity of our operations, including the efficiency of our employees and the profitability associated with their performance, the realization of contract revenue under our long-term contracts, our ability to obtain and maintain our customers and our ability to operate our leasing and licensing business effectively; |
| • | it is the primary measure of profit and loss used by management for purposes of making decisions about allocating resources to, and assessing the performance of, our operating segments; |
| • | it is similar to the measure of current financial performance generally used in our debt covenant calculations; |
| • | although specific definitions may vary, it is widely used in the wireless tower sector to measure operating performance without regard to items such as depreciation, amortization and accretion, which can vary depending upon accounting methods and the book value of assets; and |
| • | we believe it helps investors meaningfully evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (primarily interest charges from our outstanding debt) and asset base (primarily depreciation, amortization and accretion) from our operating results. |
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Our management uses Adjusted EBITDA:
| • | with respect to compliance with our debt covenants, which require us to maintain certain financial ratios including, or similar to, Adjusted EBITDA; |
| • | as the primary measure of profit and loss for purposes of making decisions about allocating resources to, and assessing the performance of, our operating segments; |
| • | as a measurement of operating performance because it assists us in comparing our operating performance on a consistent basis as it removes the impact of our capital structure (primarily interest charges from our outstanding debt) and asset base (primarily depreciation, amortization and accretion) from our operating results; |
| • | in presentations to our Board of Directors to enable it to have the same measurement of operating performance used by management; |
| • | for planning purposes, including preparation of our annual operating budget; and |
| • | as a valuation measure in strategic analyses in connection with the purchase and sale of assets. |
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).
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
As a result of our international operating, investing and financing activities, we are exposed to market risks, which include changes in interest rates, foreign currency exchange rates and equity security prices which may adversely affect our results of operations and financial position. In attempting to minimize the risks or costs associated with such activities, we seek to manage exposure to changes in interest rates where economically prudent to do so. 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. The majority of our financial instruments, however, are long-term fixed interest rate instruments. As of December 31, 2006, after giving consideration to the Global Signal Merger and the 2007 Term Loan, we had $600.0 million of floating rate indebtedness, or approximately 10.1% of total long-term debt. 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 $6.0 million.
We have used, and may continue to use when we deem prudent, interest rate swap agreements to manage and reduce our interest rate risk. Through the use of interest rate swap agreements, we have effectively locked in the interest rate on the rollover of (1) $1.9 billion 2005 Tower Revenue Notes to June 2015 (2) $1.55 billion 2006 Tower Revenue Notes to November 2016 (3) $1.55 billion 2006 Mortgage Loan to February 2016 and (4) $293.8 million 2004 Mortgage Loan to December 2014. See the tables below. The forward starting interest rate swaps are exclusive of any credit spread that would be incremental to the interest rate of the anticipated financings.
During 2005 and 2006 we terminated certain interest rate swaps relating to the 2005 Tower Revenue Notes and 2006 Tower Revenue Notes, respectively. The effective interest rate on the 2005 Tower Revenue Notes and 2006 Tower Revenue Notes 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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The following tables provide information about our market risk related to changes in interest rates. The future minimum principal payment obligations and weighted average interest rates on our existing long-term debt are presented as of December 31, 2006, Post-Merger and after giving effect to the 2007 Term Loan. The forward starting interest rate swaps are presented as of December 31, 2006, Post-Merger.
| Future Minimum Principal Payment Obligations by Expected Year of Maturity | ||||||||||||||||||||||||
| Interest Rate(a) |
Outstanding Principal Balance |
2007 | 2008 | 2009 | 2010 | 2011 | Thereafter | |||||||||||||||||
| (In thousands of dollars) | ||||||||||||||||||||||||
| Fixed rate debt: |
||||||||||||||||||||||||
| 2006 Tower Revenue Notes (b) |
5.71 | % | $ | 1,550,000 | $ | — | $ | — | $ | — | $ | — | $ | 1,550,000 | $ | — | ||||||||
| 2005 Tower Revenue Notes (b) |
4.89 | % | 1,900,000 | — | — | — | 1,900,000 | — | — | |||||||||||||||
| 2004 Mortgage Loan (c) |
4.74 | % | 293,825 | — | — | 293,825 | — | — | — | |||||||||||||||
| 2006 Mortgage Loan (c) |
5.69 | % | 1,550,000 | — | — | — | — | 1,550,000 | — | |||||||||||||||
| 4% Convertible Senior Notes |
4.00 | % | 63,839 | — | — | — | 63,839 | — | — | |||||||||||||||
| 7.5% Senior Notes |
7.50 | % | 51 | — | — | — | — | — | 51 | |||||||||||||||
| Total fixed rate debt |
5.34 | % | $ | 5,357,715 | $ | — | $ | — | $ | 293,825 | $ | 1,963,839 | $ | 3,100,000 | $ | 51 | ||||||||
| Variable rate debt: |
||||||||||||||||||||||||
| 2007 Term Loan (d) |
6.50 | % | $ | 600,000 | $ | 4,500 | $ | 6,000 | $ | 6,000 | $ | 6,000 | $ | 6,000 | $ | 571,500 | ||||||||
| Total variable rate debt |
6.50 | % | $ | 600,000 | $ | 4,500 | $ | 6,000 | $ | 6,000 | $ | 6,000 | $ | 6,000 | $ | 571,500 | ||||||||
| Total debt |
5.46 | % | $ | 5,957,715 | $ | 4,500 | $ | 6,000 | $ | 299,825 | $ | 1,969,839 | $ | 3,106,000 | $ | 571,551 | ||||||||
| (a) | Interest rate reflects the weighted average stated coupon rate for fixed rate debt. |
| (b) | 2005 Tower Revenue Notes and 2006 Tower Revenue Notes are presented assuming payment in full is expected to occur on the Anticipated Repayment Date in June 2010 and November 2011, respectively. |
| (c) | Represents debt assumed as a result of the Global Signal Merger. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing Activities.” |
| (d) | The interest rate of 6.5% for the 2007 Term Loan represents the estimated rate in effect during the first quarter of 2007. |
| Forward Starting Interest Rate Swaps |
Combined Notional |
Fair Value at December 31, |
Forward Start Date | Forward End Date | Pay Fixed Rate |
Receive Variable Rate | ||||||||||
| (In thousands of dollars) | ||||||||||||||||
| Variable to fixed: |
||||||||||||||||
| March 2006 Interest Rate Swaps |
$ | 1,900,000 | $ | (2,194 | ) | June 2010 | June 2015 | 5.18 | % | LIBOR | ||||||
| December 2006 Interest Rate Swaps |
1,550,000 | 4,394 | November 2011 | November 2016 | 5.14 | % | LIBOR | |||||||||
| $1.55 Billion 2007 Interest Rate Swaps (a) |
1,550,000 | N/A | February 2011 | February 2016 | 5.26 | % | LIBOR | |||||||||
| $294 Million 2007 Interest Rate Swaps (b) |
293,825 | N/A | December 2009 | December 2014 | 5.13 | % | LIBOR | |||||||||
| Total |
$ | 5,293,825 | $ | 2,200 | ||||||||||||
| (a) | In February 2007, we entered into the $1.55 Billion 2007 Interest Rate Swaps comprised of two five-year forward starting interest rate swap agreements with a combined notional amount of $1.55 billion, to fix our interest cash outflows, in contemplation of the expected future February 2011 refinancing of the $1.55 billion 2006 Mortgage Loan. |
| (b) | In February 2007, we entered into the $294 Million 2007 Interest Rate Swaps comprised of two five-year forward starting interest rate swap agreements with a combined notional amount of $293.8 million, to fix our interest cash outflows, in contemplation of the expected future December 2009 refinancing of the $293.8 million 2004 Mortgage Loan. |
Foreign Currency Risk
Post-Merger, we conduct business in Australia, Canada and United Kingdom, which exposes us to fluctuations in foreign currency exchange rates. The 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. The average monthly exchange rate used to translate the 2005 financial statements for CCAL fluctuated between a low of 0.7353 and a high of 0.7848. The average monthly exchange rate used to translate the 2006 financial
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statements for CCAL fluctuated between a low of 0.7266 and a high of 0.7858. We do not currently believe our exposure to fluctuations in foreign currency exchange rates is material, based on the immateriality of (1) the fair value of financial instruments subject to currency exchange risk and (2) the amount of the translation loss due to a hypothetical 10% unfavorable change in currency exchange rates that would be adjusted to accumulated other comprehensive income. In February 2007, CCOC extended an undrawn commitment to provide a $400.0 million Australian Dollar (approximately $317 million U.S. Dollars) revolving credit facility to CCAL. We anticipate that a portion of the credit facility may be drawn during the second quarter of 2007, which may increase our foreign currency risk in the future.
Equity 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. As of December 31, 2006, a 20% hypothetical adverse change in the FiberTower equity price would result in an approximate $31.0 million decrease in the fair value of our available-for-sale equity investments with an offsetting adjustment to accumulated other comprehensive income, subject to the required evaluation of impairment charges relating to a decline in value that is determined to be other-than-temporary. See note 6 to our consolidated financial statements and “Item 1A. Risk Factors.”
| Ite m 8. | Financial Statements and Supplementary Data |
Crown Castle International Corp. and Subsidiaries
Index to Consolidated Financial Statements
| Page | ||
| Report of KPMG LLP, Independent Registered Public Accounting Firm |
66 | |
| 67 | ||
| 68 | ||
| 69 | ||
| 70 | ||
| 71 |
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
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, 2005 and 2006, and the related consolidated statements of operations and comprehensive income (loss), cash flows and stockholders’ equity for each of the years in the three-year period ended December 31, 2006. In connection with our audits of the consolidated financial statements, we have also 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, 2005 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, 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 Note 1 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.”
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Crown Castle International Corp.’s internal control over financial reporting as of December 31, 2006, based on criteria established in “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 28, 2007 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
KPMG LLP
Pittsburgh, Pennsylvania
February 28, 2007
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C ROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands of dollars, except share amounts)
| December 31, | ||||||||
| 2005 | 2006 | |||||||
| ASSETS | ||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 65,408 | $ | 592,716 | ||||
| Restricted cash (note 1) |
91,939 | 115,503 | ||||||
| Receivables: |
||||||||
| Trade, net of allowance for doubtful accounts of $2,968 and $3,410, respectively |
13,054 | 23,024 | ||||||
| Other |
3,776 | 7,750 | ||||||
| Deferred site rental receivable |
9,307 | 13,429 | ||||||
| Prepaid leases |
30,426 | 36,597 | ||||||
| Prepaid expenses and other current assets |
7,385 | 11,008 | ||||||
| Total current assets |
221,295 | 800,027 | ||||||
| Restricted cash (note 1) |
3,814 | 5,000 | ||||||
| Deferred site rental receivable |
87,392 | 98,527 | ||||||
| Available-for-sale securities |
— | 154,955 | ||||||
| Property and equipment, net |
3,294,333 | 3,246,446 | ||||||
| Goodwill |
340,412 | 391,448 | ||||||
| Other intangible assets, net |
70,872 | 225,295 | ||||||
| Deferred financing costs and other assets, net of accumulated amortization of $5,083 and $10,896, respectively |
113,199 | 84,470 | ||||||
| $ | 4,131,317 | $ | 5,006,168 | |||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 12,230 | $ | 18,545 | ||||
| Accrued interest |
8,281 | 13,100 | ||||||
| Accrued compensation and related benefits |
17,534 | 18,289 | ||||||
| Accrued estimated property taxes |
6,668 | 10,768 | ||||||
| Deferred revenue |
87,286 | 102,701 | ||||||
| Other accrued liabilities |
37,215 | 37,392 | ||||||
| Short-term debt |
295,000 | — | ||||||
| Total current liabilities |
464,214 | 200,795 | ||||||
| Long-term debt |
1,975,686 | 3,513,890 | ||||||
| Deferred ground lease payable |
118,747 | 135,661 | ||||||
| Other liabilities |
55,559 | 57,618 | ||||||
| Total liabilities |
2,614,206 | 3,907,964 | ||||||
| Commitments and contingencies (note 15) |
||||||||
| Minority interests |
26,792 | 29,052 | ||||||
| Redeemable preferred stock, $0.1 par value; 20,000,000 shares authorized; shares issued and outstanding: December 31, 2005 and 2006—6,361,000; stated net of unamortized issue costs; mandatory redemption and aggregate liquidation value of $318,050 |
311,943 | 312,871 | ||||||
| Stockholders’ equity: |
||||||||
| Common stock, $.01 par value; 690,000,000 shares authorized; shares issued and outstanding: December 31, 2005—214,188,524 and December 31, 2006—202,080,546 |
2,142 | 2,021 | ||||||
| Additional paid-in capital (see note 1 for revisions) |
3,256,196 | 2,873,858 | ||||||
| Accumulated other comprehensive income (loss) |
41,937 | 65,000 | ||||||
| Accumulated deficit (see note 1 for revisions) |
(2,121,899 | ) | (2,184,598 | ) | ||||
| Total stockholders’ equity |
1,178,376 | 756,281 | ||||||
| $ | 4,131,317 | $ | 5,006,168 | |||||
See notes to consolidated financial statements.
67
Table of Contents
Index to Financial Statements
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands of dollars, except per share amounts)
| Years Ended December 31, | ||||||||||||
| 2004 | 2005 | 2006 | ||||||||||
| Net revenues: |
||||||||||||
| Site rental |
$ | 538,309 | $ | 597,125 | $ | 696,724 | ||||||
| Network services and other |
65,893 | 79,634 | 91,497 | |||||||||
| Operating expenses: |
604,202 | 676,759 | 788,221 | |||||||||
| Costs of operations (exclusive of depreciation, amortization and accretion): |
||||||||||||
| Site rental |
184,273 | 197,355 | 212,454 | |||||||||
| Network services and other |
46,752 | 54,630 | 60,507 | |||||||||
| General and administrative |
99,738 | 109,612 | 95,751 | |||||||||
| Corporate development |
1,455 | 4,298 | 8,781 | |||||||||
| Restructuring charges (credits) |
939 | 2,615 | (391 | ) | ||||||||
| Asset write-down charges |
7,652 | 2,925 | 2,945 | |||||||||
| Integration costs |
— | — | 1,503 | |||||||||
| Depreciation, amortization and accretion |
284,991 | 281,118 | 285,244 | |||||||||
| Operating income (loss) |
(21,598 | ) | 24,206 | 121,427 | ||||||||
| Losses on purchases and redemptions of debt |
(78,036 | ) | (283,797 | ) | (5,843 | ) | ||||||
| Interest and other income (expense) |
(228 | ) | 1,354 | (1,629 | ) | |||||||
| Interest expense and amortization of deferred financing costs |
(206,770 | ) | (133,806 | ) | (162,328 | ) | ||||||
| Income (loss) from continuing operations before income taxes, minority interests and cumulative effect of change in accounting principle |
(306,632 | ) | (392,043 | ) | (48,373 | ) | ||||||
| Benefit (provision) for income taxes |
5,370 | (3,225 | ) | (843 | ) | |||||||
| Minority interests |
398 | 3,525 | 1,666 | |||||||||
| Income (loss) from continuing operations before cumulative effect of change in accounting principle |
(300,864 | ) | (391,743 | ) | (47,550 | ) | ||||||
| Discontinued operations (notes 1 and 3): |
||||||||||||
| Income (loss) from discontinued operations, net of tax |
40,578 | (1,953 | ) | — | ||||||||
| Net gain (loss) on disposal of discontinued operations, net of tax |
494,110 | 2,801 | 5,657 | |||||||||
| Income (loss) from discontinued operations, net of tax |
534,688 | 848 | 5,657 | |||||||||
| Income (loss) before cumulative effect of change in accounting principle |
233,824 | (390,895 | ) | (41,893 | ) | |||||||
| Cumulative effect of change in accounting principle for asset retirement obligations |
— | (9,031 | ) | — | ||||||||
| Net income (loss) |
233,824 | (399,926 | ) | (41,893 | ) | |||||||
| Dividends on preferred stock, net of losses on purchases of preferred stock |
(38,618 | ) | (49,356 | ) | (20,806 | ) | ||||||
| Net income (loss) after deduction of dividends on preferred stock, net of losses on purchases of preferred stock |
$ | 195,206 | $ | (449,282 | ) | $ | (62,699 | ) | ||||
| Net income (loss) |
$ | 233,824 | $ | (399,926 | ) | $ | (41,893 | ) | ||||
| Other comprehensive income (loss): |
||||||||||||
| Unrealized gains (losses), on available-for-sale securities, net of tax |
— | — | 19,247 | |||||||||
| Derivative instruments, net of tax: |
||||||||||||
| Net change in fair value of cash flow hedging instruments |
75 | (5,705 | ) | (6,843 | ) | |||||||
| Amounts reclassified into results of operations |
3,179 | 1,643 | 969 | |||||||||
| Foreign currency translation adjustments |
25,540 | (9,922 | ) | 9,690 | ||||||||
| Less: reclassification adjustment for foreign currency translation adjustments included in net income (loss) |
(232,893 | ) | — | — | ||||||||
| Minimum pension liability adjustment |
11,513 | — | — | |||||||||
| Comprehensive income (loss) |
$ | 41,238 | $ | (413,910 | ) | $ | (18,830 | ) | ||||
| Per common share – basic and diluted: |
||||||||||||
| Income (loss) from continuing operations before cumulative effect of change in accounting principle |
$ | (1.54 | ) | $ | (2.02 | ) | $ | (0.33 | ) | |||
| Income (loss) from discontinued operations |
2.42 | — | 0.03 | |||||||||
| Cumulative effect of change in accounting principle |
— | (0.04 | ) | — | ||||||||
| Net income (loss) |
$ | 0.88 | $ | (2.06 | ) | $ | (0.30 | ) | ||||
| Weighted average common shares outstanding – basic and diluted (in thousands) |
221,693 | 217,759 | 207,245 | |||||||||
See notes to consolidated financial statements.
68
Table of Contents
Index to Financial Statements
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands of dollars)
| Years Ended December 31, | ||||||||||||
| 2004 | 2005 | 2006 | ||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income (loss) |
$ | 233,824 | $ | (399,926 | ) | $ | (41,893 | ) | ||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||||||
| Depreciation, amortization and accretion |
284,991 | 281,118 | 285,244 | |||||||||
| Losses on purchases and redemptions of long-term debt |
77,659 | 283,797 | 5,843 | |||||||||
| Amortization of deferred financing costs and discounts on long-term debt |
9,512 | 6,174 | 8,600 | |||||||||
| Stock-based compensation charges |
15,230 | 24,760 | 16,718 | |||||||||
| Asset write-down charges |
7,652 | 2,925 | 2,945 | |||||||||
| Minority interests |
(398 | ) | (3,525 | ) | (1,666 | ) | ||||||
| Equity in losses and write-downs of unconsolidated affiliates |
5,945 | 4,674 | 9,531 | |||||||||
| (Income) loss from discontinued operations |
(534,688 | ) | (848 | ) | (5,657 | ) | ||||||
| Cumulative effect of change in accounting principle |
— | 9,031 | — | |||||||||
| Cash flow hedges (income) expense |
3,179 | 1,643 | 969 | |||||||||
| Changes in assets and liabilities, excluding the effects of acquisitions: |
||||||||||||
| Increase (decrease) in accrued interest |
(5,755 | ) | (35,027 | ) | 4,819 | |||||||
| Increase (decrease) in accounts payable |
2,386 | 149 | 4,768 | |||||||||
| Increase (decrease) in deferred rental revenues, deferred ground lease payable and other liabilities |
10,181 | 33,767 | 25,248 | |||||||||
| Decrease (increase) in receivables |
20,557 | 11,221 | (13,067 | ) | ||||||||
| Decrease (increase) in prepaid expenses, deferred site rental receivable and other assets |
(8,774 | ) | (15,021 | ) | (26,643 | ) | ||||||
| Net cash provided by (used for) operating activities |
121,501 | 204,912 | 275,759 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Maturities of investments |
517,500 | — | — | |||||||||
| Purchases of investments |
(490,900 | ) | — | — | ||||||||
| Proceeds from investments and disposition of property and equipment |
3,237 | 2,827 | 2,282 | |||||||||
| Acquisitions of assets and minority interests in joint ventures |
(295,000 | ) | (147,255 | ) | (303,611 | ) | ||||||
| Capital expenditures |
(42,918 | ) | (64,678 | ) | (124,820 | ) | ||||||
| Investments, loans and other |
(11,119 | ) | (55,034 | ) | (6,350 | ) | ||||||
| Net cash provided by (used for) investing activities |
(319,200 | ) | (264,140 | ) | (432,499 | ) | ||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from issuance of long-term debt |
— | 1,900,000 | 2,550,000 | |||||||||
| Proceeds from issuance of capital stock |
32,094 | 59,054 | 45,540 | |||||||||
| Principal payments on long-term debt |
(1,289,750 | ) | — | (1,000,585 | ) | |||||||
| Purchases and redemptions of long-term debt |
(353,958 | ) | (1,848,222 | ) | (12,108 | ) | ||||||
| Purchases of capital stock |
(59,364 | ) | (314,889 | ) | (518,028 | ) | ||||||
| Purchases and redemption of preferred stock |
— | (200,000 | ) | — | ||||||||
| Borrowings under revolving credit agreements |
— | 295,000 | — | |||||||||
| Payments under revolving credit agreements |
(15,000 | ) | (180,000 | ) | (295,000 | ) | ||||||
| Incurrence of financing costs |
(444 | ) | (32,405 | ) | (36,918 | ) | ||||||
| Initial funding of restricted cash |
— | (48,873 | ) | (4,321 | ) | |||||||
| Net (increase) decrease in restricted cash |
— | (46,880 | ) | (20,429 | ) | |||||||
| Cash flow hedges receipts (payments) |
(3,179 | ) | (6,797 | ) | (9,360 | ) | ||||||
| Dividends on preferred stock |
— | (21,624 | ) | (19,877 | ) | |||||||
| Net cash provided by (used for) financing activities |
(1,689,601 | ) | (445,636 | ) | 678,914 | |||||||
| Effect of exchange rate changes on cash | ||||||||||||