FORM 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One):

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

For the fiscal year ended December 31, 2007

 

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

For the transition period from              to             

Commission File Number: 001-14195

 

 

American Tower Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   65-0723837

(State or other jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

116 Huntington Avenue

Boston, Massachusetts 02116

(Address of principal executive offices)

Telephone Number (617) 375-7500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each Class

 

Name of exchange on which registered

Class A Common Stock, $0.01 par value   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K.    x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

 

Large accelerated filer  x   Accelerated filer  ¨   Non-accelerated filer  ¨   Smaller reporting company  ¨

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

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of June 30, 2007 was approximately $17.4 billion, based on the closing price of the registrant’s Class A Common Stock as reported on the New York Stock Exchange as of the last business day of the registrant’s most recently completed second quarter.

As of February 29, 2008, there were 395,748,826 shares of Class A Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement (the “Definitive Proxy Statement”) to be filed with the Securities and Exchange Commission relative to the Company’s 2008 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report.

 

 

 


Table of Contents

AMERICAN TOWER CORPORATION

TABLE OF CONTENTS

FORM 10-K ANNUAL REPORT

FISCAL YEAR ENDED DECEMBER 31, 2007

 

          Page

Special Note Regarding Forward-Looking Statements

   ii

PART I

     

ITEM 1.

  

Business

   1
  

Overview

   1
  

Strategy

   1
  

The Company

   3
  

Products and Services

   4
  

Recent Developments

   6
  

Regulatory Matters

   7
  

Competition and Customer Demand

   9
  

Employees

   10
  

Available Information

   10

ITEM 1A.

  

Risk Factors

   10

ITEM 1B.

  

Unresolved Staff Comments

   18

ITEM 2.

  

Properties

   19

ITEM 3.

  

Legal Proceedings

   20

ITEM 4.

  

Submission of Matters to a Vote of Security Holders

   21

PART II

     
ITEM 5.   

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

   22
  

Dividends

   22
  

Performance Graph

   23
  

Recent Sales of Unregistered Securities

   23
  

Issuer Purchases of Equity Securities

   25

ITEM 6.

  

Selected Financial Data

   26

ITEM 7.

  

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

   28
  

Executive Overview

   28
  

Results of Operations: Years Ended December 31, 2007 and 2006

   30
  

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

   35
  

Stock Option Review and Related Matters

   38
  

Liquidity and Capital Resources

   39
  

Critical Accounting Policies and Estimates

   50
  

Recent Accounting Pronouncements

   55
  

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

   56

ITEM 7A.

  

Quantitative and Qualitative Disclosures About Market Risk

   58

ITEM 8.

  

Financial Statements and Supplementary Data

   60

ITEM 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   60

 

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AMERICAN TOWER CORPORATION

TABLE OF CONTENTS—(Continued)

FORM 10-K ANNUAL REPORT

FISCAL YEAR ENDED DECEMBER 31, 2007

 

          Page

ITEM 9A.

  

Controls and Procedures

   60
  

Disclosure Controls and Procedures

   60
  

Management’s Annual Report on Internal Control over Financial Reporting

   60
  

Report of Independent Registered Public Accounting Firm

   62
  

Changes in Internal Control over Financial Reporting

   63

ITEM 9B.

  

Other Information

   64

PART III

     

ITEM 10.

  

Directors, Executive Officers and Corporate Governance

   65

ITEM 11.

  

Executive Compensation

   67

ITEM 12.

  

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

   67

ITEM 13.

  

Certain Relationships and Related Transactions, and Director Independence

   67

ITEM 14.

  

Principal Accounting Fees and Services

   67

PART IV

     

ITEM 15.

  

Exhibits, Financial Statement Schedules

   67

Signatures

   68

Index to Consolidated Financial Statements

   F-1

Index to Exhibits

   EX-1

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report contains statements about future events and expectations, or forward-looking statements, all of which are inherently uncertain. We have based those forward-looking statements on our current expectations and projections about future results. When we use words such as “anticipates,” “intends,” “plans,” “believes,” “estimates,” “expects,” or similar expressions, we do so to identify forward-looking statements. Examples of forward-looking statements include statements we make regarding future prospects of growth in the communications site leasing industry, the level of future expenditures by companies in this industry and other trends in this industry, the effects of consolidation among companies in our industry and among our customers, our ability to maintain or increase our market share, our future operating results, our future purchases under our stock repurchase programs, our future capital expenditure levels, our future financing transactions and our plans to fund our future liquidity needs. These statements are based on our management’s beliefs and assumptions, which in turn are based on currently available information. These assumptions could prove inaccurate. These forward-looking statements may be found under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” as well as in this Annual Report generally.

You should keep in mind that any forward-looking statement we make in this Annual Report or elsewhere speaks only as of the date on which we make it. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. In any event, these and other important factors, including those set forth in Item 1A of this Annual Report under the caption “Risk Factors,” may cause actual results to differ materially from those indicated by our forward-looking statements. We have no duty to, and do not intend to, update or revise the forward-looking statements we make in this Annual Report, except as may be required by law. In light of these risks and uncertainties, you should keep in mind that the future events or circumstances described in any forward-looking statement we make in this Annual Report or elsewhere might not occur.

 

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PART I

 

ITEM 1. BUSINESS

Overview

We are a leading wireless and broadcast communications infrastructure company with a portfolio of over 22,800 communications sites, including wireless communications towers, broadcast communications towers and distributed antenna systems. Our portfolio of wireless and broadcast tower sites consists of towers that we own and towers that we operate pursuant to long-term lease arrangements, including, as of December 31, 2007, approximately 19,500 tower sites in the United States and approximately 3,200 in Mexico and Brazil. Our portfolio also includes approximately 150 in-building distributed antenna systems that we operate in malls and casino/hotel resorts in the United States. In addition to the communications sites in our portfolio, we manage rooftop and tower sites for third parties in the United States, Mexico and Brazil. Our primary business is leasing antenna space on multi-tenant communications sites to wireless service providers and radio and television broadcast companies. This segment of our business, which we refer to as our rental and management segment, accounted for approximately 98% of our total revenues for the years ended December 31, 2007, 2006 and 2005.

Our communications site portfolio provides us with a recurring base of leasing revenues from our existing customers and growth potential due to the capacity to add more tenants and equipment to these sites. Our broad network of communications sites enables us to address the needs of national, regional, local and emerging wireless service providers. Through our network development services segment, we also offer services that directly support our site leasing operations and the addition of new tenants and equipment on our sites. We intend to capitalize on the increasing use of wireless communications services by actively marketing space available for lease on our existing sites and selectively developing or acquiring new sites that meet our return on investment criteria.

We believe our strategy of focusing operations on our rental and management segment has made our consolidated operating cash flows more stable, will provide us with continuing growth and will enhance our returns on invested capital because of the following characteristics of our core leasing business:

 

   

Long-term tenant leases with contractual escalators. In general, a lease with a wireless carrier has an initial term of five to ten years with multiple five-year renewal terms thereafter, and lease payments typically increase 3% to 5% per year.

 

   

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

 

   

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

 

   

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

Strategy

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

 

   

In the United States, the number of wireless service subscribers increased from 158.7 million to 243.4 million between December 2003 and June 2007, representing an increase of approximately 53% and market penetration of approximately 80%. During the same period, the number of cell sites (i.e., the number of antennas and related equipment in commercial operation, not the number of towers on

 

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which that equipment is located) increased approximately 29% from approximately 163,000 cell sites to approximately 210,400. In addition, wireless minutes of use, an indicator of demand for wireless services, reached approximately 2.1 trillion in the United States for 2006, an increase of over 31% from the prior year, and the industry is on pace to report strong growth for 2007.

 

   

In Mexico, the number of wireless service subscribers increased from 30.1 million to 68.3 million between December 2003 and December 2007, representing an increase of approximately 127% and market penetration of approximately 64%. In Brazil, the number of wireless service subscribers increased from 46.5 million to 121.0 million between December 2003 and December 2007, representing an increase of approximately 160% and market penetration of approximately 64%.

We believe the growth in the number of wireless service subscribers and the minutes of use per subscriber will require wireless carriers to add new cell sites, and new equipment to existing cell sites, to maintain the performance of their networks in the areas they currently cover and to extend service to areas where coverage does not yet exist. As wireless carriers continue to add subscribers and seek to limit churn, we also anticipate they will focus on network quality as a competitive necessity and will invest in upgrades to their networks. In addition, we believe that as wireless data services, such as email, internet access and video, are deployed on a widespread basis, the deployment of these technologies may require wireless carriers to further increase the cell density of their existing networks, may require new technology and equipment, and may increase the demand for geographic expansion of their network coverage. To meet this demand, we believe wireless carriers will continue to outsource their communications site infrastructure needs as a means of accelerating access to their markets and more efficiently deploying their capital, rather than constructing and operating their own communications sites and maintaining their own communications site service and development capabilities.

We believe that our existing portfolio of communications sites, our tower-related services offerings and our management team position us to benefit from these trends and to play an increasing role in addressing the needs of wireless service providers and broadcasters. The key elements of our strategy include:

 

   

Maximize Use of Existing Site Capacity. We believe that our highest returns will be achieved by leasing additional space on our existing communications sites. We anticipate that our revenues and operating profit from our rental and management segment will continue to grow because many of our communications sites are attractively located for wireless service providers and have capacity available for additional antenna space that we can offer to customers at low incremental costs to us. Because the costs of operating a site are largely fixed, increasing utilization significantly improves operating margins. We will continue to target our sales and marketing activities to increase utilization of, and investment return on, our existing communications sites.

 

   

Grow Our Operations Using Selective Criteria for Acquisitions and New Development. Given the relatively fixed cost structure of our site leasing business, we believe that adding new communications sites to our portfolio in existing markets will allow us to grow revenues with only modest increases in administrative and operating expenses. We seek to acquire, construct and redevelop towers and install in-building distributed antenna systems when our initial and long-term return on investment criteria are met. We similarly evaluate expansion opportunities into new international markets. In evaluating new international markets for expansion, we consider countries that have a relatively stable political climate, an expanding macro economic environment, a growing, competitive wireless communications industry, and multiple wireless carriers that are willing to outsource their communications site infrastructure to us.

 

   

Continue Our Focus on Customer Service and Processes. Because speed to market and reliable network performance are critical components to the success of wireless service providers, our ability to assist customers in meeting their goals contributes to our success. We intend to continue to focus on customer service, for example, by reducing cycle times for key functions, such as lease processing and tower structural analysis. We are also continuing our efforts to improve customer access to information regarding our communications sites to allow faster and easier site selection and qualification by our

 

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customers. We believe that by improving our speed, accuracy and quality, we will be able to increase our competitiveness and revenue generation.

 

   

Build On Our Customer Relationships. Our understanding of the network needs of our customers and our ability to convey effectively how we can satisfy those needs are key to our efforts to add new antenna leases, cross-sell our services and identify desirable new site development projects. We are building on our relationships with our major wireless carrier customers to gain more familiarity with their evolving network plans so we can identify opportunities where our nationwide portfolio of sites and experienced personnel can be used to satisfy their needs. We are also working with smaller and emerging wireless carriers and network operators as they define their coverage and network needs and expand into new markets. In addition, we are also seeking opportunities to build relationships with new market participants who have obtained or may obtain licenses in recent auctions of wireless spectrum by the U.S. Federal Communications Commission (“FCC”), including the Advanced Wireless Service Auction 66 in late 2006 and the 700 MHz Auction 73 that began in January 2008. We believe we are well positioned to be a preferred partner to our customers because of the size, scope and location of our portfolio of communications sites and our proven operating experience.

 

   

Participate in Industry Consolidation. We continue to believe there are benefits to consolidation among tower companies. More extensive networks will be better positioned to provide more comprehensive service to customers and to support the infrastructure requirements of future generations of wireless communications technologies. We believe that our 2005 merger with SpectraSite, Inc., an owner and operator of approximately 7,800 wireless and broadcast towers and in-building distributed antenna systems in the United States, resulted in improved cost structure efficiencies and that combining with one or more other tower companies should yield similar results. Accordingly, we continue to be interested in participating in the consolidation of our industry on terms that are consistent with these perceived benefits and that create long-term value for our stockholders.

The Company

American Tower Corporation was created as a subsidiary of American Radio Systems Corporation in 1995 to own, manage, develop and lease communications and broadcast tower sites, and was spun off into a free-standing public company in 1998. Since inception, we have grown our communications site portfolio through acquisitions, long-term lease arrangements, development and construction, and through mergers with and acquisitions of other tower operators, increasing the size of our portfolio to over 22,800 communications sites.

American Tower Corporation is a holding company, and we conduct our operations in the United States and internationally through our directly and indirectly owned subsidiaries. Our principal United States operating subsidiaries are American Towers, Inc. (“ATI”) and SpectraSite Communications, LLC (“SpectraSite”). We conduct our international operations through our subsidiary, American Tower International, Inc., which in turn conducts operations through its international operating subsidiaries. Our international operations consist primarily of our operations in Mexico and Brazil, which we conduct in Mexico through ATC Mexico Holding Corp. (“ATC Mexico”) and in Brazil through ATC South America Holding Corp. (“ATC South America”).

We operate in two business segments: rental and management and network development services. For more information about our business segments, as well as financial information about the geographic areas in which we operate, see Item 7 of this Annual Report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and note 14 to our consolidated financial statements included in this Annual Report.

 

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Products and Services

Rental and Management

Our primary business is our communications site leasing business, which we conduct through our rental and management segment. This segment accounted for approximately 98% of our total revenues for the years ended December 31, 2007, 2006 and 2005.

Wireless Communications Towers. We are a leading owner and operator of wireless communications towers in the United States, Mexico and Brazil, based on number of towers and revenue. Our network in the United States includes over 19,200 wireless communications towers and spans 49 states and the District of Columbia. In addition, approximately 91% of our U.S. network provides coverage in the top 100 markets or core areas such as high traffic interstate corridors. Our network in Mexico includes approximately 2,300 wireless communications towers in highly populated areas, including Mexico City, Monterrey, Guadalajara and Acapulco. Our network in Brazil consists of over 700 wireless communications towers, which are concentrated in southern Brazil in major metropolitan areas, including Sao Paulo, Rio de Janeiro, Brasilia and Curitiba. Approximately 91% of our rental and management segment revenue was attributable to our wireless communications towers in the United States, Mexico and Brazil for the years ended December 31, 2007, 2006 and 2005. In addition, we market and manage approximately 200 wireless tower sites for third parties in the United States, Mexico and Brazil. For the years ended December 31, 2007, 2006 and 2005, less than 1% of our rental and management segment revenue was attributable to these managed sites.

We lease antenna space on our wireless communications towers to customers in a diverse range of wireless industries, including personal communications services, cellular, enhanced specialized mobile radio, paging and fixed microwave. Our major domestic wireless customers include ALLTEL, AT&T Mobility (formerly Cingular Wireless), Sprint Nextel, T-Mobile USA and Verizon Wireless. Our major international wireless customers include Grupo Iusacell (Iusacell Celular and Unefon in Mexico), Nextel International in Mexico and Brazil, Telefonica Moviles (Movistar in Mexico and Vivo in Brazil), America Moviles (Telcel in Mexico and Claro in Brazil) and Telecom Italia Mobile (TIM) in Brazil. For the year ended December 31, 2007, we had three customers that each accounted for 10% or more of our total revenues. AT&T Mobility, Sprint Nextel (including Sprint Nextel affiliates) and Verizon Wireless accounted for approximately 21%, 20% and 11%, respectively, of our 2007 total revenues. Approximately 70% of our total revenues for the year ended December 31, 2007 were derived from six customers. As a result, we are subject to certain risks, as set forth in Item 1A of this Annual Report under the caption “Risk Factors—A substantial portion of our revenue is derived from a small number of customers” and “—Due to the long-term expectations of revenue from tenant leases, the tower industry is sensitive to the credit worthiness of its tenants.” In addition, we are subject to risks related to our international operations, as set forth under the caption “Risk Factors—Our foreign operations are subject to economic, political and other risks that could adversely affect our revenues or financial position.”

The number of antennas that our towers can accommodate varies depending on the tower’s location, height, and structural capacity at certain wind speeds. An antenna’s height on a tower and the tower’s location determine the line-of-sight of the antenna with the horizon and, coupled with the specific band of radio frequency, power and technology used by the carrier, determine the distance a signal can be transmitted. We believe that a significant majority of our towers have the capacity to add additional tenants.

Our leases with wireless communications providers in the United States generally have initial terms of five to ten years. In Mexico and Brazil, our typical tenant leases have an initial term of ten years. In most cases, our tenant leases have multiple renewal terms at the option of the tenant. Wireless carriers generally renew their leases with us because suitable alternative sites may not exist or be available and repositioning a site in an existing carrier’s network is expensive and often requires reconfiguring several other sites in the carrier’s network, which may impact the quality of the carrier’s coverage and may require the carrier to obtain other governmental permits. Most of our tenant leases have escalation provisions that periodically increase the rent due

 

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under the lease. These automatic increases are typically annual and are based on a fixed percentage, inflation or a fixed percentage plus inflation.

Annual rental payments vary considerably depending upon:

 

   

tower location;

 

   

number and weight of the customer’s antennas on the tower and the size of its transmission lines;

 

   

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

 

   

existing tower capacity;

 

   

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

 

   

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

 

   

type and amount of frequency transmitted by the customer.

Broadcast Communications Towers. We are one of the largest independent owners and operators of broadcast towers in the United States and Mexico. We own over 200 broadcast towers in the United States and have exclusive rights to approximately 200 in Mexico. Broadcast towers generally are taller and structurally more complex than wireless communications towers, require unique engineering skills and are more costly to build. We lease antenna space on our broadcast towers primarily to radio and television broadcast companies. In leasing antenna space, we generally receive monthly fees from customers, with initial lease periods ranging from ten to twenty years. For the years ended December 31, 2007, 2006 and 2005, approximately 7% of our rental and management segment revenue was attributable to our broadcast communications towers in the United States and Mexico.

Distributed Antenna Systems. We are a leading provider of in-building neutral host distributed antenna systems in the United States, with approximately 150 in-building systems in operation in retail shopping malls and casino/hotel resorts. We obtain rights to install and operate in-building distributed antenna systems by entering into contracts with property owners, and we grant rights to wireless service providers to attach their equipment to our in-building system for a fee under licenses that typically have an initial non-cancelable term of at least ten years. In 2007, we also started offering outdoor distributed antenna systems to our customers. For the years ended December 31, 2007, 2006 and 2005, less than 1% of our rental and management segment revenue was attributable to our in-building neutral host distributed antenna systems.

Rooftop Management. We also provide management services to property owners in the United States with respect to rooftops that are capable of hosting wireless communications equipment. We obtain rights to manage a rooftop by entering into contracts with property owners pursuant to which we receive a percentage of occupancy or license fees paid by the wireless carriers. For the years ended December 31, 2007, 2006 and 2005, approximately 1% of our rental and management segment revenue was attributable to our managed rooftop sites.

Network Development Services

We offer tower-related services, including site acquisition, zoning and permitting services and structural analysis services, through our network development services segment. This segment accounted for approximately 2% of our total revenues for the years ended December 31, 2007, 2006 and 2005.

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

 

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Structural Analysis. We offer structural analysis services to wireless carriers in connection with the installation of communications equipment on towers. Our team of engineers can evaluate whether a tower can support the additional burden of the new equipment or if augmentation is needed, which enables our customers to better assess potential tower sites before making an installation decision. In January 2007, we acquired a structural analysis engineering firm to increase our structural analysis capabilities. We believe that this acquisition enables us to provide higher quality service to our existing customers by, among other things, reducing cycle times related to tower structural analysis, as well as provide opportunities to offer structural analysis services to third parties.

Recent Developments

Growth and Expansion

In 2007, we continued to focus on our strategy of growing our operations using selective criteria for acquisitions and new development. During the year ended December 31, 2007, we grew our communications site portfolio through acquisitions and construction activities, including the acquisition of 293 towers for an aggregate of $36.9 million and the construction of 152 towers and installation of 17 in-building distributed antenna systems for an aggregate of $30.7 million. During 2007, we also continued to evaluate opportunities to acquire larger tower portfolios. Based on our experiences with our 2005 merger with SpectraSite, Inc. (as discussed in note 4 to our consolidated financial statements included in this Annual Report), we believe that we can effectively acquire and integrate large numbers of tower assets into our communications site portfolio. Accordingly, we intend to continue to assess and seek out opportunities for additional growth in 2008.

During 2007, we also took additional steps to position ourselves for expansion into new international markets. In September 2007, we announced that we had established an office in Delhi, India, and that we had hired a new executive officer to pursue opportunities to extend our wireless communications site leasing business into India and Southeast Asia. In November 2007, we announced that we had hired a new executive officer to focus on international business development. We also continue to seek out opportunities to expand our existing operations in Mexico and Brazil, as well as into other countries in Central America and South America. We believe that there are a number of markets that meet our criteria for international expansion, and we will endeavor to expand our international operations in 2008.

Financing Transactions

During the year ended December 31, 2007, we improved our financial position by raising capital to refinance and repurchase a portion of our outstanding indebtedness, which increased our flexibility and our ability to return value to our stockholders. Significant transactions included those set forth below. For more information about our financing transactions, see Item 7 of this Annual Report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and note 3 to our consolidated financial statements included in this Annual Report.

Securitization. In May 2007, we completed a securitization transaction (the “Securitization”) involving assets related to 5,295 broadcast and wireless communications towers owned by two of our special purpose subsidiaries, through a private offering of $1.75 billion of Commercial Mortgage Pass-Through Certificates, Series 2007-1. We used the net proceeds from the Securitization primarily to repay outstanding indebtedness under our credit facilities and to fund a tender offer and consent solicitation for our ATI 7.25% senior subordinated notes due 2011 (“ATI 7.25% Notes”).

Credit Facilities. During the year ended December 31, 2007, we refinanced our credit facilities, including the repayment and termination of the senior secured credit facilities of our principal operating subsidiaries. In May 2007, we used a portion of the net proceeds from the Securitization to repay and terminate the credit facilities of SpectraSite and to repay a portion of the credit facilities at the American Tower operating company

 

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(“AMT OpCo”) level. In June 2007, we implemented our new $1.25 billion senior unsecured revolving credit facility of American Tower Corporation (the “Revolving Credit Facility”), which we drew down in part to repay and terminate the AMT OpCo credit facilities.

7.00% Notes Offering. In October 2007, we completed an institutional private placement of $500.0 million aggregate principal amount of our 7.00% senior unsecured notes due 2017 (“7.00% Notes”). We used the net proceeds from the offering of the 7.00% Notes primarily to repay outstanding indebtedness under our credit facilities.

Repurchases and Conversions of Debt Securities. During the year ended December 31, 2007, we repurchased or converted approximately $606.8 million face amount of our outstanding debt securities, including the repurchase of $192.5 million principal amount of our 5.0% convertible notes due 2010 (“5.0% Notes”), the repurchase of $324.8 million principal amount of the ATI 7.25% Notes and the conversion of $89.5 million principal amount of our 3.25% convertible notes due August 15, 2012 (“3.25% Notes”) into shares of our Class A common stock.

Stock Repurchase Programs. During the year ended December 31, 2007, we continued to repurchase shares of our Class A common stock pursuant to our publicly announced stock repurchase programs. In February 2007, we completed our $750.0 million stock repurchase program, originally announced in November 2005. During the year ended December 31, 2007, we repurchased 8.8 million shares of our Class A common stock for an aggregate of $351.0 million pursuant to this program. In February 2007, our Board of Directors approved a new stock repurchase program for the repurchase of up to $1.5 billion of our Class A common stock through February 2008. During the year ended December 31, 2007, we repurchased 31.1 million shares of our Class A common stock for an aggregate of $1.3 billion pursuant to this program. Subsequent to December 31, 2007, we repurchased an additional 4.3 million shares of our Class A common stock for an aggregate of $163.7 million under this program.

In February 2008, our Board of Directors approved a new stock repurchase program, pursuant to which we are authorized to purchase up to an additional $1.5 billion of our Class A common stock, as further described in Item 7 of this Annual Report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and note 13 to our consolidated financial statements included in this Annual Report.

Regulatory Matters

Towers and Antennas. Both the FCC and the Federal Aviation Administration (“FAA”) regulate towers used for wireless communications and radio and television broadcasting. These regulations govern the siting, lighting, marking and maintenance of towers. Depending on factors such as tower height and proximity to public airfields, the construction of new towers or modifications to existing towers may require pre-approval by the FAA. Towers requiring FAA approval must be registered with the FCC and must be painted and lighted in accordance with the FAA’s standards. The FAA review and the FCC registration processes are prerequisites to use of the tower by FCC licensees, as well as our other customers. Tower owners are responsible for notifying the FAA of any tower lighting outages or malfunctions and for timely repairing lighting outages or malfunctions. Tower owners also must notify the FCC when ownership of a tower changes. We generally indemnify our customers against non-compliance with applicable standards. Non-compliance with applicable tower-related requirements may lead to monetary penalties.

The FCC considers the construction of a new tower or the addition of a new antenna to an existing site (including building rooftops and water towers) to be a federal undertaking subject to prior environmental review and approval under the National Environmental Policy Act of 1969 (“NEPA”), which obligates federal agencies to evaluate the environmental impacts of undertakings to determine whether they may significantly affect the environment. The FCC has issued regulations implementing NEPA as well as the National Historic Preservation

 

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Act and the Endangered Species Act. These regulations obligate each FCC applicant or licensee to investigate potential environmental and other effects of operations and to disclose any significant impacts in an environmental assessment prior to constructing a tower or adding a new antenna to a site. If a tower or new antenna may have a significant impact on the environment, FCC approval of the tower or antenna could be significantly delayed.

The Telecommunications Act of 1996 amended the Communications Act of 1934 by limiting state and local zoning authorities’ jurisdiction over the construction, modification and placement of wireless communications towers. The law preserves local zoning authority but prohibits any action that would discriminate between different providers of wireless services or ban altogether the construction, modification or placement of communications towers. It also prohibits state or local restrictions based on the environmental effects of radio frequency emissions to the extent the facilities comply with FCC regulations. The Telecommunications Act of 1996 also requires the federal government to help licensees of wireless communications services gain access to preferred sites for their facilities. This may require that federal agencies and departments work directly with licensees to make federal property available for towers.

We are subject to local and county zoning restrictions and restrictive covenants imposed by local authorities or community developers. These regulations vary greatly, but typically require tower owners and/or licensees to obtain approval from local officials or community standards organizations prior to tower construction or the addition of a new antenna to an existing tower. Local zoning authorities and community residents often are opposed to construction in their communities, which can delay or prevent new tower construction, new antenna installation or site upgrade projects, thereby limiting our ability to respond to customer demand. In addition, zoning regulations can increase costs associated with new tower construction and the addition of new antennas to a site. Existing regulatory policies may adversely affect the associated timing or cost of such projects and additional regulations may be adopted which increase delays or result in additional costs to us. These factors could adversely affect our construction activities and operations.

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

Environmental Matters. Our operations, like those of other companies engaged in similar businesses, are subject to various federal, state and local and foreign environmental and occupational safety and health laws and regulations, including those relating to the management, use, storage, disposal, emission and remediation of, and exposure to, hazardous and non-hazardous substances, materials, and wastes, and the siting of our towers. As an owner, lessee and/or operator of real property and facilities, we may have liability under those laws for the costs of investigation, removal or remediation of soil and groundwater contaminated by hazardous substances or wastes. Certain of these laws impose cleanup responsibility and liability without regard to whether we, as the owner, lessee or operator, knew of or were responsible for the contamination, and whether or not we have discontinued operations or sold the property. We may also be subject to common law claims by third parties based on damages and costs resulting from off-site migration of contamination.

Under new FCC rules, our customers will be required to provide backup power at each communications site in their networks, including for antennas and other equipment located on our sites. As a result, our customers may seek to maintain generators or batteries at our sites, or we may offer to provide backup power to our customers. These backup power supplies are subject to the environmental regulations discussed above, which could impose responsibility and liability on us related to the environmental impact of the use generators, batteries and other related equipment at our sites.

We, and our customers, also may be required to obtain permits, comply with regulatory requirements, and make certain informational filings related to hazardous substances used at our sites. Violations of these types of regulations could subject us to fines and/or criminal sanctions.

 

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In November 2005, we entered into a Facilities Audit Agreement with the United States Environmental Protection Agency (“EPA”) pursuant to the EPA’s voluntary audit and disclosure policy. Pursuant to the Facilities Audit Agreement, we audited the tower sites in our portfolio as of July 2005 (i.e., legacy American Tower sites, but not SpectraSite sites) for compliance with the notice and record-keeping requirements under the Emergency Protection and Community Right to Know Act (“EPCRA”), the Clean Air Act, the Clean Water Act and the Resource Conservation and Recovery Act. The Facilities Audit Agreement provides for stipulated penalties for violations under EPCRA and, for violations under the remaining statutes, we will pay a penalty based on our economic benefit of non-compliance. We do not expect that the aggregate penalties payable under the Facilities Audit Agreement will be material to our financial condition or results of operations.

Health and Safety. We are subject to the Occupational Safety and Health Act and similar guidelines regarding employee protection from radio frequency exposure. Our field personnel are subject to regulation by the Occupational Safety and Health Administration (“OSHA”) and equivalent state agencies concerning health and safety matters.

Competition and Customer Demand

Rental and Management

Our rental and management segment competes with other national and regional tower companies, such as Crown Castle International Corp. and SBA Communications Corporation, as well as wireless carriers and broadcasters that own and operate their own tower networks and lease tower space to third parties, numerous independent tower owners and the owners of non-communications tower sites, including rooftops, utility towers, water towers and other alternative structures. We believe that site location and capacity, price and quality of service have been and will continue to be the most significant competitive factors affecting owners, operators and managers of communications sites.

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

In addition, any increase in the use of network sharing or roaming or resale arrangements by wireless service providers also could adversely affect customer demand for tower space. These arrangements, which are essentially extensions of traditional roaming agreements, enable a provider to serve customers outside its license area, to give licensed providers the right to enter into arrangements to serve overlapping license areas, and to permit non-licensed providers to enter the wireless marketplace. Consolidation among wireless carriers could have a similar impact on customer demand for our tower sites because the existing networks of several wireless carriers overlap. In addition, if wireless carriers share their sites or swap their sites with other carriers to a significant degree, it could reduce demand for our tower sites.

Network Development Services

Our network development services segment competes with a variety of companies offering individual, or combinations of, competing services. The field of competitors includes site acquisition consultants, zoning consultants, real estate firms, right-of-way consulting firms, structural engineering firms, tower owners/managers, telecommunications equipment vendors who can provide turnkey site development services through multiple subcontractors, and our customers’ internal staffs. We believe that our customers base their decisions on network development services on various criteria, including a company’s experience, local reputation, price, and time for completion of a project.

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

 

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Employees

As of December 31, 2007, we employed 1,124 full-time individuals and consider our employee relations to be satisfactory.

Available Information

Our Internet website address is www.americantower.com. Information contained on our website is not incorporated by reference into this Annual Report, and you should not consider information contained on our website as part of this Annual Report. You may access, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, plus amendments to such reports as filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), through the Investors portion of our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”).

We have adopted a written code of conduct that applies to all of our employees and directors, including, but not limited to, our principal executive officer, principal financial officer, and principal accounting officer or controller, or persons performing similar functions. The code of conduct, our corporate governance guidelines, and the charters of the audit, compensation, and nominating and corporate governance committees of our Board of Directors, are available at the Investors portion of our website. In the event we amend, or provide any waivers from, the provisions of our code of conduct, we intend to disclose these events on our website as required by the regulations of the New York Stock Exchange and applicable law.

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

 

ITEM 1A.    RISK FACTORS

Decrease in demand for tower space would materially and adversely affect our operating results and we cannot control that demand.

Many of the factors affecting the demand for wireless communications tower space, and to a lesser extent our network development services business, could adversely affect our operating results. Those factors include:

 

   

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

 

   

the financial condition of wireless service providers;

 

   

the ability and willingness of wireless service providers to maintain or increase capital expenditures;

 

   

the growth rate of wireless communications or of a particular wireless segment;

 

   

governmental licensing of spectrum;

 

   

mergers or consolidations among wireless service providers;

 

   

increased use of network sharing, roaming or resale arrangements by wireless service providers;

 

   

delays or changes in the deployment of 3G or other technologies;

 

   

zoning, environmental, health or other government regulations; and

 

   

technological changes.

The demand for broadcast antenna space is dependent on the needs of television and radio broadcasters. Among other things, technological advances, including the development of satellite-delivered radio and video

 

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services, may reduce the need for tower-based broadcast transmission. In addition, our broadcast tower division could be affected adversely as a result of the shift from analog-based transmissions to digital-based transmissions, which is scheduled to occur by February 2009.

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

Significant consolidation among our wireless service provider customers may result in the decommissioning of certain existing communication sites, because certain portions of their networks may be redundant, and a reduction in future capital expenditures in the aggregate, because their expansion plans may be similar. For example, in connection with the recent combinations of Cingular and AT&T Wireless (to form AT&T Mobility) and Sprint PCS and Nextel (to form Sprint Nextel) in the United States, and of Iusacell Celular and Unefon (now under the common ownership of Grupo Iusacell) in Mexico, the combined companies have or are considering rationalizing their duplicative networks, which has led and may continue to lead to the decommissioning of certain communications sites. In addition, these and other customers could determine not to renew leases with us as a result. Our future results may be negatively impacted if a significant number of these contracts are terminated, and our ongoing contractual revenues would be reduced as a result. Similar consequences might occur if wireless service providers engage in extensive sharing, roaming or resale arrangements as an alternative to leasing our antenna space.

Substantial leverage and debt service obligations may adversely affect us.

We have a substantial amount of indebtedness. As of December 31, 2007, we had approximately $4.3 billion of consolidated debt. Our substantial level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay when due the principal of, interest on, or other amounts due with respect to our indebtedness. In addition, we draw down our Revolving Credit Facility in the ordinary course, which has the effect of increasing our indebtedness. We are also permitted, subject to certain restrictions under our existing indebtedness, to obtain additional long-term debt and working capital lines of credit to meet future financing needs. This would have the effect of increasing our total leverage.

Our substantial leverage could have significant negative consequences on our financial condition and results of operations, including:

 

   

impairing our ability to meet one or more of the financial ratio covenants contained in our debt agreements or to generate cash sufficient to pay interest or principal, which could result in an acceleration of some or all of our outstanding debt and the loss of towers subject to the Securitization in the event that an uncured default occurs;

 

   

increasing our vulnerability to general adverse economic and industry conditions;

 

   

limiting our ability to obtain additional debt or equity financing;

 

   

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

 

   

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

 

   

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

 

   

limiting our ability to repurchase our Class A common stock; and

 

   

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

 

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Restrictive covenants in the loan agreement for our Revolving Credit Facility, the indentures governing our debt securities, and the loan agreement related to our Securitization could adversely affect our business by limiting flexibility.

The loan agreement for our Revolving Credit Facility and the indentures governing the terms of our debt securities contain restrictive covenants, as well as requirements to comply with certain leverage and other financial maintenance tests. These covenants and requirements limit our ability to take various actions, including incurring additional debt, guaranteeing indebtedness and engaging in various types of transactions, including mergers, acquisitions and sales of assets. These covenants could place us at a disadvantage compared to some of our competitors, who may have fewer restrictive covenants and may not be required to operate under these restrictions. Further, these covenants could have an adverse effect on our business by limiting our ability to take advantage of financing, new tower development, mergers and acquisitions or other opportunities.

In addition, the loan agreement related to our Securitization includes operating covenants and other restrictions customary for loans subject to rated securitizations. Among other things, our subsidiaries that are borrowers under the loan agreement for the Securitization are prohibited from incurring other indebtedness for borrowed money or further encumbering their assets. A failure to comply with the covenants in the loan agreement could prevent the borrowers from taking certain actions with respect to the towers subject to the Securitization, and could prevent the borrowers from distributing any excess cash from the operation of such towers to us. If the borrowers were to default on the loan, the servicer on the loan could seek to foreclose upon or otherwise convert the ownership of the towers subject to the Securitization, in which case we could lose such towers and the revenue associated with such towers.

In addition, reporting and information covenants in our loan agreements and indentures require that we provide financial and operating information within certain time periods. If we are unable to timely provide the required information, we would be in breach of these covenants. For more information regarding the covenants and requirements discussed above, please see Item 7 of this Annual Report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Factors Affecting Sources of Liquidity” and note 3 to our consolidated financial statements included in this Annual Report.

We have identified a material weakness in our internal control over financial reporting that, until remediated, could result in a material misstatement in our financial statements.

We identified a material weakness in our internal control over financial reporting because we failed to maintain effective controls over the accounting for income taxes. We are in the process of actively addressing and remediating this material weakness, but this process will take some time. Accordingly, until we remediate this weakness, this weakness could result in a misstatement of our tax-related accounts that could result in a material misstatement to our interim or annual financial statements. If we are unable to effectively remediate this material weakness and to conclude that our internal control over financial reporting is effective in any future period, we could lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price. In addition, we will incur costs and expenses, including the hiring of additional personnel and expanding technical resources in the income tax accounting function, in connection with remediating this material weakness. For more information regarding the material weakness identified, please see Item 9A of this Annual Report under the caption “Management’s Annual Report on Internal Control over Financial Reporting” and notes 2, 9 and 16 to our consolidated financial statements included in this Annual Report.

We could suffer adverse tax and other financial consequences if taxing authorities do not agree with our tax positions, or we are unable to utilize our net operating losses.

As a result of our ability to carry forward U.S. federal and state net operating losses (“NOLs”), the applicable tax years remain open to examination until three years after the applicable loss carryforwards have been used or expired. We are currently subject to a number of tax examinations by taxing authorities in the U.S, Mexico and Brazil for several different tax years. We also have significant deferred tax assets related to these

 

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NOLs in U.S. federal and state taxing jurisdictions and in Mexico. We expect that we will continue to be subject to tax examinations in the future. We apply the principles contained in Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109 (“FIN 48”) and recognize tax benefits of uncertain tax positions when we believe the positions are more likely than not of being sustained upon a challenge by the relevant tax authority. We believe our judgments in this area are reasonable and correct, but there is no guarantee that we will be successful if challenged by a tax authority. If there are tax benefits that we have recognized under FIN 48 that are challenged successfully by a taxing authority, we may be required to pay additional taxes or we may seek to enter into settlements with the taxing authorities, which could require significant payments or otherwise have a material adverse effect on our results of operations or financial condition.

In addition, we may be limited in our ability to utilize our NOLs to offset future taxable income and thereby reduce our otherwise payable income taxes. We have substantial federal and state NOLs, including significant portions obtained through acquisitions, as well as those generated through our historic business operations. In addition, we have disposed of some entities and restructured other entities in conjunction with financing transactions and other business activities. We apply the principles contained in FIN 48 to our NOLs and, to the extent we believe that a position with respect to an NOL is not more likely than not to be sustained, we do not record the related deferred tax asset. In addition, for NOLs that meet the recognition threshold of FIN 48, we assess the recoverability of the NOL and establish a valuation allowance against the deferred tax asset related to the NOL if recoverability is questionable. Given the uncertainty surrounding the recoverability of certain of our NOLs, we have established a valuation allowance to offset the related deferred tax asset so as to reflect what we believe to be the recoverable portion of our NOLs. Our ability to utilize our NOLs is also dependent, in part, upon us having sufficient future earnings to utilize our NOLs before they expire. If market conditions change materially and we determine that we will be unable to generate sufficient taxable income in the future to utilize our NOLs, we could be required to record an additional valuation allowance. We review our FIN 48 position and the valuation allowance for our NOLs periodically and make adjustments from time to time, which can result in an increase or decrease to the net deferred tax asset related to our NOLs. Our NOLs are also subject to review and potential disallowance upon audit by the taxing authorities of the jurisdictions where the NOLs were incurred, and future changes in tax laws or interpretations of such tax laws could limit materially our ability to utilize our NOLs. If we are unable to use our NOLs or use of our NOLs is limited, we may have to make significant payments or otherwise record charges or reduce our deferred tax assets, which could have a material adverse effect on our results of operations or financial condition.

Due to the long-term expectations of revenue from tenant leases, the tower industry is sensitive to the creditworthiness of its tenants.

Due to the long-term nature of our tenant leases, we, like others in the tower industry, are dependent on the continued financial strength of our tenants. Many wireless service providers operate with substantial leverage. In the past, we have had customers that have filed for bankruptcy, although to date these bankruptcies have not had a material adverse effect on our business or revenues. In addition, many of our customers rely on capital raising activities to fund their operations and capital expenditures. If these customers are unable to raise adequate capital to fund their business plans, they may reduce their spending, which could adversely affect demand for our tower sites and our network development services business. If one or more of our significant customers experience financial difficulties or file for bankruptcy, it could result in uncollectible accounts receivable and our loss of significant customers and anticipated lease revenues, which could have a material adverse effect on our results of operations or financial condition.

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

Our business operations in Mexico and Brazil, and our expansion into additional international markets, could result in adverse financial consequences and operational problems not experienced in the United States.

 

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For the year ended December 31, 2007, approximately 13% of our consolidated revenues were generated by our international operations. We anticipate that our revenues from our international operations may grow in the future. Accordingly, our business is subject to risks associated with doing business internationally, including:

 

   

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

 

   

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

 

   

expropriation and governmental regulation restricting foreign ownership;

 

   

difficulty in recruiting and retaining trained personnel; and

 

   

language and cultural differences.

In addition, we face risks associated with changes in foreign currency exchange rates, including those arising from our operations, investments and financing transactions related to our international business. While most of the contracts for our operations in Mexico are denominated in the U.S. dollar, many are denominated in the Mexican Peso, and contracts for our operations in Brazil are denominated in the Brazilian Real. We have not historically engaged in significant hedging activities relating to our non-U.S. dollar operations, and we may suffer future losses as a result of adverse changes in currency exchange rates.

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

A substantial portion of our total operating revenues is derived from a small number of customers. For the year ended December 31, 2007:

 

   

Six customers accounted for approximately 70% of our revenues;

 

   

AT&T Mobility accounted for approximately 21% of our revenues;

 

   

Sprint Nextel (including Sprint Nextel affiliates) accounted for approximately 20% of our revenues; and

 

   

Verizon Wireless accounted for approximately 11% of our revenues.

Our largest international customer is Iusacell Celular, which completed its merger with Unefon, our second largest customer in Mexico, during the first half of 2007. Iusacell and Unefon are under common control with TV Azteca. The combined Iusacell/Unefon accounted for approximately 5% of our total revenues for the year ended December 31, 2007. In addition, for the year ended December 31, 2007, we received $14.2 million in net interest income from TV Azteca.

If any of these customers is unwilling or unable to perform its obligations under our agreements with them, our revenues, results of operations, financial condition and liquidity could be adversely affected. In the ordinary course of our business, we do occasionally experience disputes with our customers, generally regarding the interpretation of terms in our agreements. Although we have historically resolved these disputes in a manner that did not have a material adverse effect on our Company or our customer relationships, it is possible that such disputes could lead to a termination of our agreements with customers or a material modification of the terms of those agreements, either of which could have a material adverse effect on our business, results of operations and financial condition. If we are forced to resolve any of these disputes through litigation, our relationship with the applicable customer could be terminated or damaged, which could lead to decreased revenues or increased costs, resulting in a corresponding adverse effect on our business, results of operations and financial condition.

We anticipate that we may need additional financing to fund our stock repurchase programs, to refinance our existing indebtedness and to fund future growth and expansion initiatives.

In order to fund our stock repurchase programs, refinance our existing indebtedness and fund future growth and expansion initiatives, we may need to raise additional capital through financing activities. We believe our

 

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cash generated by operations for the year ending December 31, 2008 will be sufficient to fund our cash needs for operations, capital expenditures and cash debt service (interest and principal repayments) obligations for 2008. Depending on the timing and amount of our stock repurchases, the excess cash generated by our operations and our existing liquidity may not be sufficient to fund all of our other initiatives, as well as our stock repurchase programs. Accordingly, we anticipate that we may need to obtain additional sources of capital. Depending on market conditions, we may seek to raise capital through credit facilities or debt or equity offerings. However, such additional financing may be unavailable, may be prohibitively expensive, or may be restricted by the terms of our outstanding indebtedness. If we are unable to raise capital when our needs arise, we may not be able to fund our stock repurchase programs, refinance our existing indebtedness or fund future growth and expansion initiatives.

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

The development and implementation of new technologies designed to enhance the efficiency of wireless networks could reduce the use and need for tower-based wireless services transmission and reception and have the effect of decreasing demand for tower space. Examples of such technologies include technologies that enhance spectral capacity, such as lower-rate vocoders, which can increase the capacity at existing sites and reduce the number of additional sites a given carrier needs to serve any given subscriber base. In addition, the emergence of new technologies could reduce the need for tower-based broadcast services transmission and reception. For example, the growth in delivery of radio and video services by direct broadcast satellites could adversely affect demand for our antenna space. The development and implementation of any of these and similar technologies to any significant degree could have a material adverse effect on our operations.

We could have liability under environmental laws.

Our operations, like those of other companies engaged in similar businesses, are subject to the requirements of various federal, state and local and foreign environmental and occupational safety and health laws and regulations, including those relating to the management, use, storage, disposal, emission and remediation of, and exposure to, hazardous and non-hazardous substances, materials and wastes. As the owner, lessee or operator of many thousands of real estate sites underlying our towers, we may be liable for substantial costs of remediating soil and groundwater contaminated by hazardous materials, without regard to whether we, as the owner, lessee or operator, knew of or were responsible for the contamination. Many of these laws and regulations contain information reporting and record keeping requirements. We cannot assure you that we are at all times in complete compliance with all environmental requirements. We may be subject to potentially significant fines or penalties if we fail to comply with any of these requirements. The current cost of complying with these laws (including amounts we expect to pay the EPA pursuant to the Facilities Audit Agreement) is not material to our financial condition or results of operations. However, the requirements of these laws and regulations are complex, change frequently, and could become more stringent in the future. It is possible that these requirements will change or that liabilities will arise in the future in a manner that could have a material adverse effect on our business, financial condition and results of operations.

Our business is subject to government regulations and changes in current or future laws or regulations could restrict our ability to operate our business as we currently do.

Our business, and that of our customers, is subject to federal, state, local and foreign regulation, including by the FAA, the FCC, the EPA and OSHA. Both the FCC and the FAA regulate towers used for wireless communications and radio and television broadcasting and the FCC separately regulates transmitting devices operating on towers. Similar regulations exist in Mexico, Brazil and other foreign countries regarding wireless communications and the operation of communications towers. Local zoning authorities and community organizations are often opposed to construction in their communities and these regulations can delay, prevent or increase the cost of new tower construction, modifications, additions of new antennas to a site, or site upgrades,

 

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thereby limiting our ability to respond to customer demands and requirements. Existing regulatory policies may adversely affect the associated timing or cost of such projects and additional regulations may be adopted which increase delays or result in additional costs to us, or that prevent such projects in certain locations. These factors could adversely affect our operations.

Increasing competition in the tower industry may create pricing pressures that may adversely affect us.

Our industry is highly competitive, and our customers have numerous alternatives for leasing antenna space. Some of our competitors, such as national wireless carriers that allow collocation on their towers, are larger and have greater financial resources than we do, while other competitors are in a weaker financial condition or may have lower return on investment criteria than we do.

Our competition includes:

 

   

national and regional tower companies;

 

   

wireless carriers that own towers and lease antenna space to other carriers;

 

   

site development companies that purchase antenna space on existing towers for wireless carriers and manage new tower construction; and

 

   

alternative site structures (e.g., building rooftops, billboards and utility poles).

Competitive pricing pressures for tenants on towers from these competitors could adversely affect our lease rates and services income. In addition, we may not be able to renew existing customer leases or enter into new customer leases, resulting in a material adverse impact on our results of operations and growth rate. Increasing competition could also make the acquisition of high quality tower assets more costly.

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

Our real property interests relating to our towers consist primarily of leasehold and sub-leasehold interests, fee interests, easements, licenses and rights-of-way. A loss of these interests at a particular tower site may interfere with our ability to operate a tower and generate revenues. For various reasons, we may not always have the ability to access, analyze and verify all information regarding titles and other issues prior to completing an acquisition of communications sites, which can affect our rights to access and operate a site. From time to time we also experience disputes with landowners regarding the terms of ground agreements for land under a tower, which can affect our ability to access and operate a tower site. Further, for various reasons, landowners may not want to renew their ground agreements with us, or they may transfer their land interests to third parties, including ground lease aggregators, which could affect our ability to renew ground agreements on commercially viable terms. Approximately 84% of the communications sites in our portfolio as of December 31, 2007 are located on land we do not own. Approximately 87% of the ground agreements for these sites have a final expiration date of 2017 and beyond. Our inability to protect our rights to the land under our towers may have a material adverse effect on us.

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

Our communications site portfolio includes towers that we operate pursuant to lease and sublease agreements that include a purchase option at the end of each lease period. If we are unable or choose not to exercise our rights to purchase towers under these agreements at the end of the applicable period, our cash flows derived from such towers would be eliminated. For example, our SpectraSite subsidiary has entered into lease or sublease agreements with affiliates of SBC Communications, a predecessor entity to AT&T Mobility, with respect to approximately 2,500 towers pursuant to which SpectraSite has the option to purchase the sites upon the

 

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expiration of the lease or sublease beginning in 2013. The aggregate purchase option price for the AT&T Mobility towers was approximately $341.2 million as of December 31, 2007, and will accrete at a rate of 10% per year to the applicable expiration of the lease or sublease of a site. In addition, we have entered into a similar agreement with ALLTEL Communications, Inc. (“ALLTEL”) with respect to approximately 1,800 towers, for which we have an option to purchase the sites upon the expiration of the lease or sublease beginning in 2016. The aggregate purchase option price for the ALLTEL towers was approximately $59.6 million as of December 31, 2007, and will accrete at a rate of 3% per year through the expiration of the lease or sublease period. At ALLTEL’s option, at the expiration of the sublease period, the purchase price will be payable in cash or with 769 shares of our Class A common stock per tower. We may not have the required available capital to exercise our right to purchase these or other leased or subleased towers at the end of the applicable period. Even if we do have available capital, we may choose not to exercise our right to purchase such towers for business or other reasons. In the event that we do not exercise these purchase rights, or are otherwise unable to acquire an interest that would allow us to continue to operate these towers after the applicable period, we will lose the cash flows derived from such towers, which may have a material adverse effect on our business. In the event that we decide to exercise these purchase rights, the benefits of the acquisitions of such towers may not exceed the associated acquisition, compliance and integration costs, and our financial results could be adversely affected.

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

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

Our costs could increase and our revenues could decrease due to perceived health risks from radio emissions, especially if these perceived risks are substantiated.

Public perception of possible health risks associated with cellular and other wireless communications media could slow the growth of wireless companies, which could in turn slow our growth. In particular, negative public perception of, and regulations regarding, these perceived health risks could slow the market acceptance of wireless communications services and increase opposition to the development and expansion of tower sites. The potential connection between radio frequency emissions and certain negative health effects has been the subject of substantial study by the scientific community in recent years, and numerous health-related lawsuits have been filed against wireless carriers and wireless device manufacturers. If a scientific study or court decision resulted in a finding that radio frequency emissions posed health risks to consumers, it could negatively impact the market for wireless services, as well as our wireless carrier customers, which would adversely affect our operations, costs and revenues. We do not maintain any significant insurance with respect to these matters.

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

In May 2006, we announced that our Board of Directors had established a special committee of independent directors to conduct a review of our stock option granting practices and related accounting. Subsequent to the

 

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formation of the special committee, we received an informal letter of inquiry from the SEC, a subpoena from the office of the United States Attorney for the Eastern District of New York, information document requests from the Internal Revenue Service and requests for information from the Department of Labor, each requesting documents and information related to our stock option grants and practices. We are cooperating with these governmental authorities to provide the requested documents and information. These governmental proceedings are ongoing, and the time period necessary to resolve these proceedings is uncertain and could require significant additional management and financial resources. Significant legal and accounting expenses related to these matters have been incurred to date, and we will continue to incur expenses in the future. Depending on the outcomes of these proceedings, we and members of our senior management could be subject to regulatory fines, penalties, enforcement actions or other liability, which could have a material adverse impact on our financial condition and results of operations and liquidity. In addition, as a result of the special committee’s findings, we restated our historical financial statements to, among other things, record changes for stock-based compensation expense (and related tax effects) relating to certain past stock option grants.

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

We and certain current and former directors and officers are defendants in a purported federal securities class action and two consolidated shareholder derivative actions relating to our historical stock option granting practices and related accounting. In December 2007, we announced that we had reached a settlement in principle regarding the class action. The settlement, which was preliminarily approved by the court in February 2008, provides for a payment by us of $14 million and would lead to a dismissal of all claims against all defendants in the litigation. We have reached agreements with our insurers related to the settlement, pursuant to which we expect to receive approximately $12.5 million in insurance proceeds. We will satisfy our obligations under the settlement agreement by making the required payment to an escrow account controlled by the plaintiffs. However, the settlement will not be final until the court disposes of any objections to, or appeals of, the settlement by members of the plaintiff class. The consolidated shareholder derivative actions filed in Massachusetts state court and in federal district court in Massachusetts were dismissed in October 2007 and February 2008, respectively. The decision of the Massachusetts state court has since been appealed by the plaintiffs. If the appeal is successful or the class action settlement is overturned, then the litigation would continue. In those circumstances, the outcomes of the class action and derivative actions could not be predicted by us with certainty and are dependent upon many factors beyond our control. If these actions are successful, however, they could have a material adverse impact on our financial position, results of operations and liquidity. These matters and any other related lawsuits that may be filed could also result in substantial costs to us and a diversion of our management’s attention and resources, which could have a negative impact on our financial condition and results of operations. For more information regarding the litigation related to our historical stock option granting practices, please see “Legal Proceedings” below and note 9 to our consolidated financial statements included in this Annual Report.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

None.

 

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ITEM 2.    PROPERTIES

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

 

Location

  

Function

   Size (square feet)    Property Interest

Boston, MA

   Corporate Headquarters, US Tower Division Headquarters and American Tower International Headquarters    19,600    Leased

Southborough, MA

   Information Technology Data Center    13,900    Leased

Woburn, MA

   US Tower Division, Lease Administration, Site Leasing Management and Broadcast Division Headquarters    57,800    Owned(1)

Atlanta, GA

   US Tower Division, Accounting Services Headquarters    21,400    Leased

Cary, North Carolina

   US Tower Division, New Site Development, Site Operations and Structural Engineering Services Headquarters    17,500    Leased

Mexico City, Mexico

   Mexico Headquarters    11,000    Leased

Sao Paulo, Brazil

   Brazil Headquarters    5,200    Leased

 

(1) The facility in Woburn contains a total of 163,000 square feet of space. Approximately 57,100 square feet of space is occupied by our lease administration office and our broadcast division, and we lease the remaining space to unaffiliated tenants.

In addition to the principal offices set forth above, we maintain 15 regional area offices in the United States through which we operate our tower leasing and services businesses. We believe that our owned and leased facilities are suitable and adequate to meet our anticipated needs. We have also established an office in Delhi, India to pursue business opportunities in India and Southeast Asia, and we have an international business development group based in London, England.

Our interests in our communications sites are comprised of a variety of ownership interests, including leases created by long-term ground lease agreements, easements, licenses or rights-of-way granted by government entities. Pursuant to the loan agreement for the Securitization, the tower sites subject to the Securitization are subject to mortgages, deeds of trust and deeds to secure the loan. A typical tower site consists of a compound enclosing the tower site, a tower structure, and one or more equipment shelters that house a variety of transmitting, receiving and switching equipment. There are three principal types of towers: guyed, self-supporting lattice, and monopole.

 

   

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

 

   

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

 

   

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

 

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Of the approximately 22,800 communications sites in our portfolio as of December 31, 2007, approximately 84% are located on land we do not own. Ground agreements for land underlying our towers generally have an initial term of five years with three or four additional automatic renewal periods of five years, for a total of twenty to twenty-five years. As a result, approximately 87% of the ground agreements for our sites have a final expiration date of 2017 and beyond.

ITEM 3.    LEGAL PROCEEDINGS

As previously reported, our wholly owned subsidiary, Verestar, Inc. (“Verestar”), filed for protection under Chapter 11 of the federal bankruptcy laws in December 2003 in the U.S. Bankruptcy Court for the Southern District of New York (“Bankruptcy Court”). In June 2004, the Bankruptcy Court approved a stipulation between Verestar and the Official Committee of Unsecured Creditors appointed in the bankruptcy proceeding (the “Committee”) that permitted the Committee to file claims against us and/or our affiliates on behalf of Verestar. In connection therewith, in July 2005, the Committee filed a complaint in the U.S. District Court for the Southern District of New York against us and certain of our and Verestar’s current and former officers, directors and advisors, and also filed a complaint in the Bankruptcy Court against us. The cases were consolidated, and in September 2006, the Bankruptcy Court approved the parties’ decision to mediate the Verestar bankruptcy proceedings and related litigation and stayed all aspects of the case pending the completion of mediation. In July 2007, we participated in mediation with the Committee and reached agreement on terms for a proposed settlement. In October 2007, we finalized a settlement agreement with the Committee, pursuant to which we agreed to pay $32.0 million and the parties agreed to a mutual release of all claims existing prior to the execution of the settlement agreement. The release of claims applies to all of the defendants, including us, as well as our and Verestar’s current and former officers, directors and advisors named in the litigation. In November 2007, following approval by the Bankruptcy Court, the settlement agreement became effective, and the litigation was dismissed. We paid the $32.0 million settlement amount in November 2007 and are in discussions with our insurers concerning the amount of their contribution to the settlement.

In addition, we are subject to a number of pending legal and governmental proceedings regarding our historical stock option granting practices and related accounting, as set forth below.

On May 18, 2006, we received a letter of informal inquiry from the SEC Division of Enforcement requesting documents related to our stock option grants and stock option practices. The inquiry is focused on stock options granted to senior management and members of our Board of Directors during the period 1997 to 2006. We continue to cooperate with the SEC to provide the requested information and documents. We have become aware that a former officer of the Company has received a “Wells” notice from the SEC which affords such individual the opportunity to make a submission to the SEC with respect to contemplated civil enforcement recommendations against such individual for certain violations of the federal securities laws.

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

On May 26, 2006, a securities class action was filed in United States District Court for the District of Massachusetts against us and certain of our current officers by John S. Greenebaum for monetary relief. Specifically, the complaint named us, James D. Taiclet, Jr. and Bradley E. Singer as defendants and alleged that the defendants violated federal securities laws in connection with public statements made relating to our stock option practices and related accounting. The complaint asserted claims under Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5. In December 2006, the court appointed the Steamship Trade Association-International Longshoreman’s Association Pension Fund as the lead plaintiff. In March 2007, plaintiffs filed an amended consolidated complaint, which included additional current and former officers and directors of the Company as defendants. In December 2007, we announced that we had reached a settlement in principle regarding the securities class action. The settlement, which was preliminarily approved by the court in

 

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February 2008, provides for a payment by us of $14.0 million and would lead to a dismissal of all claims against all defendants in the litigation. We have reached agreements with our insurers related to the settlement, pursuant to which we expect to receive approximately $12.5 million in insurance proceeds. We will satisfy our obligations under the settlement agreement by making the required payment to an escrow account controlled by the plaintiffs. We expect to pay the settlement amount, and receive the associated insurance proceeds, in the first half of 2008.

On May 24, 2006 and June 14, 2006, two shareholder derivative lawsuits were filed in Suffolk County Superior Court in Massachusetts by Eric Johnston and Robert L. Garber, respectively. The lawsuits were filed against certain of our current and former officers and directors for alleged breaches of fiduciary duties and unjust enrichment in connection with our historical stock option granting practices. The lawsuits also named us as a nominal defendant. The lawsuits sought to recover the damages sustained by us and disgorgement of all profits received with respect to the alleged backdated stock options. In October 2006, these two lawsuits were consolidated, and in October 2007, the court dismissed the complaint, without leave to amend, due to the plaintiffs’ failure to make a demand upon our Board of Directors before initiating their lawsuits. In December 2007, the plaintiffs filed an appeal of that decision, which remains pending.

On June 13, 2006, June 22, 2006 and August 23, 2006, three shareholder derivative lawsuits were filed in United States District Court for the District of Massachusetts by New South Wales Treasury Corporation, as Trustee for the Alpha International Managers Trust, Frank C. Kalil and Don Holland, and Leslie Cramer, respectively. The lawsuits were filed against certain of our current and former officers and directors for alleged breaches of fiduciary duties, waste of corporate assets, gross mismanagement and unjust enrichment in connection with our historical stock option granting practices. The lawsuits also named us as a nominal defendant. In December 2006, the court consolidated these three lawsuits and appointed New South Wales Treasury Corporation as the lead plaintiff. In February 2007, the plaintiffs filed an amended consolidated complaint. In February 2008, the court dismissed the complaint due to the plaintiffs’ failure to make a demand on our Board of Directors before initiating their lawsuits. In December 2007, the plaintiffs also made a demand on our Board of Directors, which is being assessed by a special litigation committee of our Board of Directors.

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

In August 2007, we received a request for information from the Department of Labor with respect to our retirement savings plan, including documents related to our historical stock option grants and our historical stock option administrative practices, in particular materials related to certain stock options granted between 2005 and 2007. We have provided documents and information in response to the request and continue to cooperate with the Department of Labor in this matter.

As discussed in Item 1 of this Annual Report under the caption “Regulatory Matters,” we entered into a Facilities Audit Agreement with the EPA that provides for payment of penalties as a result of non-compliance with certain notice and record-keeping requirements. We do not expect that the aggregate penalties payable under the Facilities Audit Agreement will be material to our financial condition or results of operations.

We periodically become involved in various claims and lawsuits that are incidental to our business. In the opinion of management, after consultation with counsel, other than the litigation discussed above and in note 9 to our consolidated financial statements included in this Annual Report related to our historical stock option granting practices, there are no matters currently pending that would, in the event of an adverse outcome, have a material impact on our consolidated financial position, results of operations or liquidity.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

 

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PART II

 

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

The following table presents reported quarterly high and low per share sale prices of our Class A common stock on the New York Stock Exchange (“NYSE”) for the years 2007 and 2006.

 

2007

   High    Low

Quarter ended March 31

   $ 41.31    $ 36.63

Quarter ended June 30

     43.84      37.64

Quarter ended September 30

     45.45      36.34

Quarter ended December 31

     46.53      40.08

2006

   High    Low

Quarter ended March 31

   $ 32.68    $ 26.66

Quarter ended June 30

     35.75      27.35

Quarter ended September 30

     36.92      29.98

Quarter ended December 31

     38.74      35.21

On February 29, 2008, the closing price of our Class A common stock was $38.44 per share as reported on the NYSE. As of February 29, 2008, we had 395,748,826 outstanding shares of Class A common stock and 528 registered holders.

Dividends

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

The loan agreement for our Revolving Credit Facility and the indentures governing the terms of our 7.50% Notes and 7.125% Notes contain covenants that restrict our ability to pay dividends unless certain financial covenants are satisfied. In addition, while SpectraSite and its subsidiaries are classified as unrestricted subsidiaries under the indentures for our 7.50% Notes and 7.125% Notes, certain of SpectraSite’s subsidiaries are subject to restrictions on the amount of cash that they can distribute to us under the loan agreement related to our Securitization. For more information about the restrictions under the loan agreement for the Revolving Credit Facility, our notes indentures and the loan agreement related to the Securitization, see Item 7 of this Annual Report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Factors Affecting Sources of Liquidity” and note 3 to our consolidated financial statements included in this Annual Report.

 

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Performance Graph

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

The following graph compares the cumulative total stockholder return on our Class A common stock with the cumulative total return of the S&P 500 Index, the Russell Midcap Index and the Dow Jones US Telecommunications Equipment Index. The performance graph assumes that on December 31, 2002, $100 was invested in each of our Class A common stock, the S&P 500 Index, the Russell Midcap Index and the Dow Jones US Telecommunications Equipment Index. The cumulative return shown in the graph assumes reinvestment of all dividends. The performance of our Class A common stock reflected below is not necessarily indicative of future performance.

LOGO

 

     Cumulative Total Returns
     12/31/2002    12/31/2003    12/31/2004    12/30/2005    12/29/2006    12/30/2007

American Tower Corporation

   $ 100.00    $ 306.52    $ 521.25    $ 767.71    $ 1,059.09    $ 1,206.80

S&P 500 Index

     100.00      128.68      142.69      149.70      173.34      182.87

Russell MidCap Index

     100.00      140.06      168.38      189.68      218.63      230.87

Dow Jones US Telecommunications Equipment Index

     100.00      180.18      187.06      189.66      220.88      228.12

Recent Sales of Unregistered Securities

During the three months ended December 31, 2007, we issued an aggregate of 32,820 shares of our Class A common stock upon the exercise of 4,580 warrants assumed in our merger with SpectraSite, Inc. In August 2005,

 

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in connection with the merger, we assumed approximately 1.0 million warrants to purchase shares of SpectraSite, Inc. common stock. Upon completion of the merger, each warrant to purchase shares of SpectraSite, Inc. common stock automatically converted into a warrant to purchase 7.15 shares of Class A common stock at an exercise price of $32 per warrant. Net proceeds from these warrant exercises were $146,880. The shares were issued in reliance on the exemption from registration set forth in Sections 3(a)(9) and 3(a)(10) of the Securities Act of 1933, as amended, and Section 1145 of the United States Code. No underwriters were engaged in connection with such issuances.

During the three months ended December 31, 2007, we issued an aggregate of 14,091 shares of our Class A common stock upon the exercise of 1,000 warrants. The warrants were originally issued in January 2003 as part of an offering of 808,000 units, each consisting of $1,000 principal amount at maturity of ATI 12.25% senior subordinated discount notes due 2008 (“ATI 12.25% Notes”) and a warrant to purchase 14.0953 shares of our Class A common stock. The warrants have an exercise price of $0.01 per share and will expire on August 1, 2008. These warrants were exercised pursuant to a cashless net exercise pursuant to the warrant agreement, and as a result, there were no net proceeds from these warrant exercises. The shares were issued in reliance on the exemption from registration set forth in Sections 3(a)(9) and 3(a)(10) of the Securities Act of 1933, as amended. No underwriters were engaged in connection with such issuances.

During the three months ended December 31, 2007, we issued an aggregate of 48 shares of our Class A common stock upon conversion of $1,000 principal amount of our 3.00% convertible notes due August 15, 2012 (“3.00% Notes”). Pursuant to the terms of the indenture, holders of the 3.00% Notes receive 48.7805 shares of our Class A common stock for every $1,000 principal amount of notes converted. All shares were issued in reliance on the exemption from registration set forth in Section 3(a)(9) of the Securities Act of 1933, as amended. No underwriters were engaged in connection with such issuances.

During the three months ended December 31, 2007, we issued an aggregate of 1,349,832 shares of our Class A common stock upon conversion of $16.5 million principal amount of our 3.25% Notes. Pursuant to the terms of the indenture, holders of the 3.25% Notes receive 81.808 shares of our Class A common stock for every $1,000 principal amount of notes converted. All shares were issued in reliance on the exemption from registration set forth in Section 3(a)(9) of the Securities Act of 1933, as amended. No underwriters were engaged in connection with such issuances. In connection with the conversion, we paid an aggregate of $0.5 million, calculated based on the accrued and unpaid interest on the notes and the discounted value of the future interest payments on the notes.

Subsequent to December 31, 2007, we issued unregistered shares of our Class A common stock pursuant to warrant exercises and conversions of convertible notes, as set forth in Item 9B of this Annual Report under the caption “Other Information.”

 

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Issuer Purchases of Equity Securities

During the three months ended December 31, 2007, we repurchased 8,895,570 shares of our Class A common stock for an aggregate of $385.1 million pursuant to the $1.5 billion stock repurchase program publicly announced in February 2007, as follows:

 

Period

   Total Number
of Shares
Purchased(1)
   Average
Price Paid
per Share
   Total Number of Shares
Purchased as Part of Publicly
Announced Plans or Programs
   Approximate Dollar Value of Shares
that May Yet be Purchased Under
the Plans or Programs
                    (In millions)

October 2007

   3,493,426    $ 43.30    3,493,426    $ 449.9

November 2007

   2,891,719    $ 44.16    2,891,719    $ 322.2

December 2007

   2,510,425    $ 44.20    2,510,425    $ 216.2
               

Total Fourth Quarter

   8,895,570    $ 43.27    8,895,570    $ 216.2
               

 

(1) Issuer repurchases pursuant to the $1.5 billion stock repurchase program publicly announced in February 2007. Under this program, our management was authorized through February 2008 to purchase shares from time to time through open market purchases or privately negotiated transactions at prevailing prices as permitted by securities laws and other legal requirements, and subject to market conditions and other factors. To facilitate repurchases, we typically made purchases pursuant to trading plans under Rule 10b5-1 of the Exchange Act, which allow us to repurchase shares during periods when we otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods.

Subsequent to December 31, 2007, we repurchased 4.3 million shares of our Class A common stock for an aggregate of $163.7 million pursuant to this program.

In February 2008, our Board of Directors approved a new stock repurchase program, pursuant to which we are authorized to purchase up to an additional $1.5 billion of our Class A common stock. Purchases under this stock repurchase program are subject to us having available cash to fund repurchases, as further described in Item 1A of this Annual Report under the caption “Risk Factors—We anticipate that we may need additional financing to fund our stock repurchase programs, to refinance our existing indebtedness and to fund future growth and expansion initiatives” and Item 7 of this Annual Report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

 

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ITEM 6. SELECTED FINANCIAL DATA

You should read the selected financial data in conjunction with our “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our audited consolidated financial statements and the related notes to those consolidated financial statements included in this Annual Report.

Our continuing operations are reported in two segments: rental and management and network development services. In accordance with generally accepted accounting principles, the consolidated statements of operations for all periods presented in this “Selected Financial Data” have been adjusted to reflect certain businesses as discontinued operations (see note 1 to our consolidated financial statements included in this Annual Report).

Year-to-year comparisons are significantly affected by our acquisitions, dispositions and, to a lesser extent, construction of towers. Our August 2005 merger with SpectraSite, Inc. (as discussed in note 4 to our consolidated financial statements included in this Annual Report) significantly impacts the comparability of reported results between periods.

 

     Year Ended December 31,  
     2007     2006     2005     2004     2003  
     (In thousands, except per share data)  

Statements of Operations Data:

          

Revenues:

          

Rental and management

   $ 1,425,975     $ 1,294,068     $ 929,762     $ 684,422     $ 619,697  

Network development services

     30,619       23,317       15,024       22,238       12,796  
                                        

Total operating revenues

     1,456,594       1,317,385       944,786       706,660       632,493  
                                        

Operating expenses:

          

Costs of operations (exclusive of items shown separately below)

          

Rental and management

     343,450       332,246       247,781       195,242       192,380  

Network development services

     16,172       11,291       8,346       16,220       7,419  

Depreciation, amortization and accretion

     522,928       528,051       411,254       329,449       330,414  

Selling, general, administrative and development expense

     186,483       159,324       108,059       83,094       83,492  

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

     9,198       2,572       34,232       23,876       31,656  
                                        

Total operating expenses

     1,078,231       1,033,484       809,672       647,881       645,361  
                                        

Operating income (loss)

     378,363       283,901       135,114       58,779       (12,868 )

Interest income, TV Azteca, net

     14,207       14,208       14,232       14,316       14,222  

Interest income

     10,848       9,002       4,402       4,844       5,255  

Interest expense

     (235,824 )     (215,643 )     (222,419 )     (262,237 )     (279,783 )

Loss on retirement of long-term obligations

     (35,429 )     (27,223 )     (67,110 )     (138,016 )     (46,197 )

Other income (expense)

     20,675       6,619       227       (2,798 )     (8,598 )
                                        

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

     152,840       70,864       (135,554 )     (325,112 )     (327,969 )

Income tax (provision) benefit

     (59,809 )     (41,768 )     (5,714 )     83,338       85,567  

Minority interest in net earnings of subsidiaries

     (338 )     (784 )     (575 )     (2,366 )     (3,703 )

Income (loss) on equity method investments

     19       26       (2,078 )     (2,915 )     (21,221 )
                                        

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

   $ 92,712     $ 28,338     $ (143,921 )   $ (247,055 )   $ (267,326 )
                                        

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

   $ 0.22     $ 0.06     $ (0.47 )   $ (1.10 )   $ (1.28 )
                                        

Weighted average common shares outstanding(1)

          

Basic

     413,167       424,525       302,510       224,336       208,098  
                                        

Diluted

     426,079       436,217       302,510       224,336       208,098  
                                        

Other Operating Data:

          

Ratio of earnings to fixed charges(2)

     1.50 x     1.25 x     —         —         —    

 

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     As of December 31,
     2007    2006    2005    2004    2003
     (In thousands)

Balance Sheet Data:

              

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

   $ 86,807    $ 281,264    $ 112,701    $ 215,557    $ 275,501

Property and equipment, net

     3,045,186      3,218,124      3,460,526      2,273,356      2,483,324

Total assets

     8,130,457      8,613,219      8,786,854      5,107,696      5,310,906

Long-term obligations, including current portion

     4,285,284      3,543,016      3,613,429      3,293,614      3,359,731

Total stockholders’ equity

     3,022,092      4,384,916      4,541,821      1,490,767      1,629,621

 

(1) Basic income (loss) per common share from continuing operations represents income (loss) from continuing operations divided by the weighted average number of common shares outstanding during the period. Diluted income per common share from continuing operations for the years ended December 31, 2007 and 2006 represents income from continuing operations divided by the weighted average number of common shares outstanding during the period and any dilutive common share equivalents, including shares issuable upon exercise of stock options and warrants, as determined under the treasury stock method, and upon conversion of our convertible notes, as determined under the if-converted method. Diluted loss per common share from continuing operations amounts for periods prior to 2006 have excluded shares issuable upon exercise of stock options and warrants and upon conversion of our convertible notes, as their effect is anti-dilutive.

 

(2) For the purpose of this calculation, “earnings” consists of income (loss) from continuing operations before income taxes, minority interest in net earnings of subsidiaries, income (loss) on equity method investments and fixed charges (excluding interest capitalized and amortization of interest capitalized. “Fixed charges” consist of interest expense, including amounts capitalized, amortization of debt discount and related issuance costs and the component of rental expense associated with operating leases believed by management to be representative of the interest factor thereon. We had an excess (deficiency) in earnings to fixed charges in each period as follows (in thousands): 2007–$155,462; 2006–$72,813; 2005–$(133,464); 2004–$(322,806); and 2003–$(326,154).

 

(3) As of December 31, 2007, includes approximately $53.7 million in restricted cash on deposit in reserve accounts related to the Certificates issued in our Securitization transaction. As of December 31, 2006, 2005 and 2004, amounts include cash and cash equivalents only. As of December 31, 2003, includes approximately $170.0 million of restricted funds that were held in escrow to pay, repurchase, redeem or retire certain of our outstanding debt through January 2004.

 

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

The discussion and analysis of our financial condition and results of operations that follows are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and the related disclosures in our financial statements. Actual results may differ significantly from these estimates under different assumptions or conditions. This discussion should be read in conjunction with our consolidated financial statements and the accompanying notes thereto and the information set forth under the caption “Critical Accounting Policies and Estimates” beginning at page 50.

Our continuing operations are reported in two segments, rental and management and network development services. Management focuses on segment gross margin and segment operating profit as a means to measure operating performance in these business segments. We define segment gross margin as segment revenue less segment operating expenses excluding depreciation, amortization and accretion; selling, general, administrative and development expense; and impairments, net loss on sale of long-lived assets, restructuring and merger related expense. We define segment operating profit as segment gross margin less selling, general, administrative and development expense attributable to the segment, excluding stock-based compensation expense and corporate expenses. Segment gross margin and segment operating profit for the rental and management segment also include interest income, TV Azteca, net (see note 14 to our consolidated financial statements included herein). These measures of segment gross margin and segment operating profit are also before interest income, interest expense, loss on retirement of long-term obligations, other income (expense), minority interest in net earnings of subsidiaries, income on equity method investments, income taxes and discontinued operations.

Executive Overview

Our principal operating segment is our rental and management segment, which accounted for approximately 98% of our total revenues and approximately 99% of our segment operating profit for the years ended December 31, 2007 and 2006. The primary factors affecting the stability and growth of our revenues and cash flows for this segment are our recurring revenues from existing tenant leases and the contractual escalators in those leases, leasing additional space on our existing towers, acquiring and building additional tower sites and the degree to which any of our existing customer leases are cancelled. We continue to believe that our leasing revenue is likely to increase due to the growing use of wireless communications services and our ability to utilize existing tower capacity. In addition, we believe the majority of our leasing activity will continue to come from customers providing wireless broadband-services.

The majority of our tenant leases with wireless carriers are for an initial term of five to ten years, with multiple five-year renewal terms thereafter. Accordingly, nearly all of the revenue generated by our rental and management segment as of the end of December 2007 is recurring revenue that we should continue to receive in future periods. In addition, most of our leases have provisions that periodically increase the rent due under the lease. These contractual escalators are typically annual and are based on a fixed percentage (generally three to five percent), inflation, or a fixed percentage plus inflation. Revenue generated by rate increases based on fixed escalation clauses is recognized on a straight-line basis over the non-cancelable term of the applicable agreement. We also routinely seek to extend our tenant leases with our customers, which has the effect of increasing the non-cancelable term of the agreement and creating additional stability for our revenues and cash flows.

The revenues generated by our rental and management segment also may be affected by cancellations of existing customer leases. As discussed above, most of our tenant leases with wireless carriers and broadcasters are multi-year contracts, which typically may not be cancelled or, in some instances, may be cancelled only upon payment of a termination fee. Accordingly, lease cancellations historically have not had a material adverse effect on the revenues generated by our rental and management segment. During the year ended December 31, 2007, tenant leases representing less than 2% of our total revenues were cancelled.

 

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A significant majority of our revenue growth in the year ended December 31, 2007 was attributable to incremental revenue generated by our existing communications sites. During 2007, incremental revenue attributable to those sites that existed during the entire period between January 1, 2006 and December 31, 2007, was approximately $118.3 million, which reflects revenue increases from adding new tenants to those sites, existing tenants adding more equipment to those sites, the effects of straight-line accounting treatment of contractual escalators in our tenant leases and favorable currency exchange rate changes, offset by lease cancellations.

Our ability to lease additional space on our sites is a function of the rate at which wireless carriers deploy capital to improve and expand their wireless networks and, to a lesser extent, the location of and available capacity on our existing sites. This rate, in turn, is influenced by the growth of wireless communications services and related infrastructure, the financial performance of our customers and their access to capital, and general economic conditions. We believe leasing additional space on our existing sites will contribute the substantial majority of our year-over-year revenue growth in 2008.

We also generate revenues by building and acquiring new communications sites. We constructed or acquired 462 and 325 sites in the years ended December 31, 2007 and 2006, respectively. Because of the nature of our recurring revenues described above, our results of operations only reflect revenues generated on these sites following the respective dates of their construction or acquisition, which affects year-over-year comparisons. During 2007, incremental revenue attributable to these approximately 790 sites that were built or acquired between January 1, 2006 and December 31, 2007, was approximately $13.6 million.

We completed our merger with SpectraSite, Inc., an owner and operator of approximately 7,800 wireless and broadcast towers and in-building distributed antenna systems in the United States, in August 2005. As a result, our results of operations for the years ended December 31, 2007 and 2006 differ significantly from our results of operations for the year ended December 31, 2005, because our results of operations for the year ended December 31, 2005 include SpectraSite, Inc. for only the five month period following the merger, whereas our results of operations for the years ended December 31, 2007 and 2006, include SpectraSite, Inc. for each full year period.

Our rental and management segment operating expenses include our direct tower level expenses and consist primarily of ground rent, property taxes, repairs and maintenance and utilities. These segment level expenses exclude all segment and corporate, selling, general, administrative and development expenses, which are aggregated into one line item entitled selling, general, administrative and development expense. Our segment level selling, general and administrative expenses consist of expenses to support our rental and management and network development services segments, such as sales and property management functions. In general, our segment level selling, general and administrative expenses do not significantly increase as a result of adding incremental customers to our sites and increase only modestly year over year. As a result, leasing space to new customers on our existing sites provides significant incremental cash flow. Our profit margin growth is, therefore, directly related to the number of new tenants added to our existing tower sites and the related rental revenue generated in a particular period.

 

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Results of Operations

Years Ended December 31, 2007 and 2006

 

     Year Ended
December 31,
    Amount of
Increase
(Decrease)
    Percent
Increase
(Decrease)
 
     2007     2006      
     (In thousands)  

REVENUES:

  

Rental and management

   $ 1,425,975     $ 1,294,068     $ 131,907     10 %

Network development services

     30,619       23,317       7,302     31  
                          

Total revenues

     1,456,594       1,317,385       139,209     11  
                          

OPERATING EXPENSES:

        

Costs of operations (exclusive of items shown separately below)

        

Rental and management

     343,450       332,246       11,204     3  

Network development services

     16,172       11,291       4,881     43  

Depreciation, amortization and accretion

     522,928       528,051       (5,123 )   (1 )

Selling, general, administrative and development expense (including $54,603 and $39,502 of stock-based compensation expense, respectively)

     186,483       159,324       27,159     17  

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

     9,198       2,572       6,626     258  
                          

Total operating expenses

     1,078,231       1,033,484       44,747     4  
                          

OTHER INCOME (EXPENSE):

        

Interest income, TV Azteca, net of interest expense $1,490 and $1,491

     14,207       14,208       (1 )  

Interest income

     10,848       9,002       1,846     21  

Interest expense

     (235,824 )     (215,643 )     20,181     9  

Loss on retirement of long-term obligations

     (35,429 )     (27,223 )     8,206     30  

Other income

     20,675       6,619       14,056     212  

Income tax provision

     (59,809 )     (41,768 )     18,041     43  

Minority interest in net earnings of subsidiaries

     (338 )     (784 )     (446 )   (57 )

Income on equity method investments

     19       26       (7 )   (27 )

Loss from discontinued operations, net

     (36,396 )     (854 )     35,542     4,162  
                          

Net income

   $ 56,316     $ 27,484     $ 28,832     105 %
                          

Total Revenues

Total revenues for the year ended December 31, 2007 were $1,456.6 million, an increase of $139.2 million from the year ended December 31, 2006. Approximately $131.9 million of the increase was attributable to an increase in rental and management revenue. The balance of the increase resulted from an increase in network development services revenue of $7.3 million.

Rental and Management Revenue

Rental and management revenue for the year ended December 31, 2007 was $1,426.0 million, an increase of $131.9 million from the year ended December 31, 2006. Approximately $118.3 million of the increase resulted from incremental revenue generated by communications sites that existed during the entire period between January 1, 2006 and December 31, 2007, which reflects revenue increases from adding new tenants to those sites, existing tenants adding more equipment to those sites, contractual escalators, net of straight-line accounting

 

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treatment, favorable currency exchange rates and the net increase in straight-line revenue from extending the renewal dates of thousands of our tenant leases, partially offset by lease cancellations. Approximately $13.6 million of the increase resulted from approximately 790 communications sites acquired and/or constructed subsequent to January 1, 2006. We believe that our rental and management revenue will grow as we continue to utilize existing site capacity. We anticipate that the majority of our new leasing activity will continue to come from wireless service providers.

Network Development Services Revenue

Network development services revenue for the year ended December 31, 2007 was $30.6 million, an increase of $7.3 million from the year ended December 31, 2006. The increase was primarily attributable to revenues generated by our structural analysis services, related in part to our January 2007 acquisition of a structural analysis engineering firm, which enabled us to increase our structural analysis capabilities. As we continue to focus on and grow our site leasing business, however, we anticipate that our network development services revenue will continue to represent a small percentage of our total revenues.

Total Operating Expenses

Total operating expenses for the year ended December 31, 2007 were $1,078.2 million, an increase of $44.7 million from the year ended December 31, 2006. The increase was attributable to an increase in selling, general, administrative and development expense of $27.2 million, an increase in expenses within our rental and management segment of $11.2 million, an increase in expenses within our network development services segment of $4.9 million and an increase in impairments, net loss on sale of long-lived assets, restructuring and merger related expense of $6.6 million. These increases were offset by a decrease in depreciation, amortization and accretion expense of $5.1 million.

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

Rental and management expense for the year ended December 31, 2007 was $343.5 million, an increase of $11.2 million from the year ended December 31, 2006. Approximately $7.5 million of the increase was attributable to communications sites which existed during the period between January 1, 2006 and December 31, 2007, and approximately $3.7 million of the increase was related to approximately 790 sites acquired and/or constructed subsequent to January 1, 2006. The increase in expenses related to existing towers as of January 1, 2006 resulted primarily from increases in ground rent.

Rental and management segment gross margin for the year ended December 31, 2007 was $1,096.7 million, an increase of $120.7 million from the year ended December 31, 2006. The increase resulted from the additional rental and management revenue described above, partially offset by the increase in rental and management expense.

Rental and management segment operating profit for the year ended December 31, 2007 was $1,030.8 million, an increase of $115.9 million from the year ended December 31, 2006. This was comprised of the $120.7 million increase in rental and management segment gross margin described above, net of an increase of $4.8 million in selling, general, administrative and development expenses related to the rental and management segment.

Network Development Services Expense

Network development services expense for the year ended December 31, 2007 was $16.2 million, an increase of $4.9 million from the year ended December 31, 2006. The majority of the increase correlates to the growth in services performed as noted above.

 

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Depreciation, Amortization and Accretion

Depreciation, amortization and accretion expense for the year ended December 31, 2007 was $522.9 million, a decrease of $5.1 million from the year ended December 31, 2006. The decrease was primarily attributable to the finalization in June 2006 of the purchase price allocation related to long-lived assets acquired in connection with the SpectraSite merger, which resulted in decreases in the fair values of certain intangible assets and changes in the estimated useful lives of certain tangible and intangible assets.

As discussed in note 1 to our consolidated financial statements included herein, we are in the process of reviewing the estimated useful lives of our tower assets. We now have over ten years of operating history, and we are considering whether we should modify our current estimates for asset lives based on our historical operating experience. We have retained an independent consultant to assist us in completing this review, and we received a report from the consultant in the first quarter of 2008, which we are in the process of analyzing. If we conclude that a revision in the estimated useful lives of our tower assets is appropriate, we will account for any changes in the useful lives as a change in accounting estimate under Statement of Financial Accounting Standards (“SFAS”) No. 154 “Accounting Changes and Error Corrections,” which will be recorded prospectively beginning in the period of change. Based on preliminary information obtained to date, we expect that our estimated asset lives may be extended, which would result in prospective decreases in depreciation and amortization, and such changes could be material to future depreciation and amortization and our consolidated results of operations.

Selling, General, Administrative and Development Expense

Selling, general, administrative and development expense for the year ended December 31, 2007 was $186.5 million, an increase of $27.2 million from the year ended December 31, 2006. The increase was primarily attributable to an increase of $15.1 million in stock-based compensation expense and a decrease of $2.3 million in costs associated with the legal and governmental proceedings related to the review of our historical stock option granting practices and related accounting, and other related costs. See “—Stock Option Review and Related Matters” below. Stock-based compensation expense included $7.6 million related to the modification of certain stock option awards for two members of senior management who terminated their employment during the year ended December 31, 2007. The remaining $14.4 million net increase was primarily the result of increases in employee compensation expenses other than stock-based compensation expense, primarily related to administrative, information technology and business development activities.

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

Impairments, net loss on sale of long-lived assets, restructuring and merger related expense for the year ended December 31, 2007 was $9.2 million, an increase of $6.6 million from the year ended December 31, 2006. The increase was primarily due to a $3.1 million increase in impairments and net loss on sale of long-lived assets.

Interest Income

Interest income for the year ended December 31, 2007 was $10.8 million, an increase of $1.8 million from the year ended December 31, 2006. The increase was primarily attributable to an increase in average interest-earning cash balances.

Interest Expense

Interest expense for the year ended December 31, 2007 was $235.8 million, an increase of $20.2 million from the year ended December 31, 2006. The increase was primarily attributable to an approximately 9% increase in our average outstanding debt, as a result of the debt financing activities described in “Liquidity and Capital Resources” below and note 3 to our consolidated financial statements included herein.

 

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Loss on Retirement of Long-Term Obligations

During the year ended December 31, 2007, approximately $89.5 million principal amount of our 3.25% Notes were converted into shares of our Class A common stock, and we repurchased pursuant to tender offers approximately $192.5 million principal amount of our 5.0% Notes and $324.8 million principal amount of our ATI 7.25% Notes. We also repaid all amounts outstanding under the credit facilities of SpectraSite and at the AMT OpCo level and terminated all commitments thereunder. In addition, we repaid all amounts outstanding under our $500.0 million senior unsecured term loan credit facility and terminated the loan. As a result of these transactions, we recorded a charge of $35.4 million related to amounts paid in excess of the carrying value and the write-off of related deferred financing fees.

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

For more information regarding our financing activities, see “—Liquidity and Capital Resources—Refinancing Activities and Repurchases of Debt” below.

Other Income

Other income for the year ended December 31, 2007 was $20.7 million, an increase of $14.1 million from the year ended December 31, 2006. The increase was primarily attributable to an increase of $5.5 million of gains recognized on the sale of our common stock investment in FiberTower Corporation and an increase of $6.2 million in gains recognized from the mark to market and subsequent settlement of certain interest rate swap agreements.

Income Tax Provision

The income tax provision for the year ended December 31, 2007 was $59.8 million, as compared to $41.8 million for the year ended December 31, 2006, representing an increase of $18.0 million from the prior year period. The effective tax rate was 39.1% for the year ended December 31, 2007, as compared to 58.9% for the year ended December 31, 2006.

The effective tax rate on income from continuing operations for the year ended December 31, 2007 differs from the federal statutory rate primarily due to the reversal of $27.6 million of valuation allowances on net state deferred tax assets offset by a $7.6 million deferred tax liability recorded in the three months ended December 31, 2007 related to unrealized foreign currency gains on intercompany loans with our Brazilian subsidiary. These items are described in note 2 to our consolidated financial statements included herein. Other differences from the federal statutory rate include other foreign items, settlement of tax reserves, non-deductible stock-based compensation expense, additional tax reserves and state taxes. The effective tax rate on income from continuing operations for the year ended December 31, 2006 differs from the federal statutory rate due primarily to adjustments to foreign items, non-deductible losses on conversions of our 3.25% Notes and state taxes.

In the year ended December 31, 2007, we also received a federal income tax refund from the IRS of approximately $65.0 million, plus $15.0 million in interest. The refund resulted from claims by us filed with the IRS in June 2003 and October 2003, which related to the carry back of net operating losses.

 

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During the three months ended December 31, 2007, we recorded adjustments to the income tax provision for amounts that should have been recorded in prior reporting periods. The adjustments were identified in connection with our year-end tax analyses and audit of the consolidated financial statements and relate primarily to our cumulative deferred tax assets and liabilities. Recording these out-of-period adjustments for the three months ended December 31, 2007 had the effect of increasing the income tax provision by $7.9 million and decreasing income from continuing operations by approximately $4.8 million (inclusive of certain non-tax related adjustments) (see note 16 to our consolidated financial statements included in this Annual Report).

Loss from Discontinued Operations, Net

The loss from discontinued operations, net for the year ended December 31, 2007 included $37.8 million of net losses related to Verestar and $1.4 million in net gains related to litigation and insurance settlements that were settled for less than the original estimates.

The loss from discontinued operations for the year ended December 31, 2007 is primarily due to the settlement of the Verestar bankruptcy proceedings and related litigation described in note 9 to our consolidated financial statements included herein and the related tax effects. In November 2007, following approval by the bankruptcy court, the Verestar settlement agreement became effective, we paid the $32.0 million settlement amount and the litigation was dismissed.

In connection with the approval of the settlement agreement by the bankruptcy court and the dismissal of the bankruptcy proceedings and related litigation, we determined that the benefits from certain of Verestar’s net operating losses would more likely than not be recoverable by us. We had not previously recorded these tax benefits related to net operating losses generated from the operations of Verestar and used by us because our ability to realize such benefits was potentially impacted by the bankruptcy proceedings and related litigation that had yet to be resolved. Accordingly, in November 2007, we recorded $5.6 million of additional tax benefits related to Verestar. We also recorded a tax provision of $10.7 million in loss from discontinued operations, net during the three months ended December 31, 2007 to write off deferred tax assets associated with Verestar that should have been written off in 2002 and removed from the consolidated balance sheet when Verestar was deconsolidated upon its bankruptcy filing in December 2003 (see note 9 to our consolidated financial statements included in this Annual Report).

 

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Years Ended December 31, 2006 and 2005

 

     Year Ended
December 31,
    Amount of
Increase
(Decrease)
    Percent
Increase
(Decrease)
 
     2006     2005      
     (In thousands)  

REVENUES:

        

Rental and management

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

Network development services

     23,317       15,024       8,293     55  
                          

Total revenues

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

OPERATING EXPENSES:

        

Costs of operations (exclusive of items shown separately below)

        

Rental and management

     332,246       247,781       84,465     34  

Network development services

     11,291       8,346       2,945     35  

Depreciation, amortization and accretion

     528,051       411,254       116,797     28  

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

     159,324       108,059       51,265     47  

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

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

Total operating expenses

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

OTHER INCOME (EXPENSE):

        

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

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

Interest income

     9,002       4,402       4,600     104  

Interest expense

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

Loss on retirement of long-term obligations

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

Other income

     6,619       227       6,392     2,816  

Income tax provision

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

Minority interest in net earnings of subsidiaries

     (784 )     (575 )     209     36  

Income (loss) on equity method investments

     26       (2,078 )     2,104     101  

Loss from discontinued operations, net

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

Cumulative effect of change in accounting principle, net

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

Net income (loss)

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

Total Revenues

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

Rental and Management Revenue

Rental and management revenue for the year ended December 31, 2006 was $1,294.1 million, an increase of $364.3 million from the year ended December 31, 2005. Approximately $274.2 million of the increase was attributable to revenues generated by SpectraSite. Approximately $79.1 million of the increase resulted from

 

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incremental revenue generated by communications sites that existed during the entire period between January 1, 2005 and December 31, 2006, which reflects revenue increases from adding new tenants to those sites, existing tenants adding more equipment to those sites, the effects of straight-line accounting treatment of contractual escalators in our tenant leases and favorable currency exchange rates, offset by lease cancellations. Approximately $11.0 million of the increase resulted from revenue generated by the approximately 614 communications sites acquired and/or constructed subsequent to January 1, 2005, other than in connection with the SpectraSite merger.

Network Development Services Revenue

Network development services revenue for the year ended December 31, 2006 was $23.3 million, an increase of $8.3 million from year ended December 31, 2005. The increase was primarily attributable to revenues generated by our structural analysis services due to the increased business associated with our significantly larger communications site portfolio, primarily as a result of sites acquired from SpectraSite.

Total Operating Expenses

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

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

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

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

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

Network Development Services Expense

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

 

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Depreciation, Amortization and Accretion

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

Selling, General, Administrative and Development Expense

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

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

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

Interest Expense

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

Loss on Retirement of Long-Term Obligations

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

During the year ended December 31, 2005, we redeemed $274.9 million principal amount of our 9 3/8% senior notes due 2009 (“9 3/8% Notes”), repurchased $177.8 million accreted value of our ATI 12.25% Notes and converted $57.1 million principal amount of our 3.25% Notes. In addition, we refinanced the AMT OpCo and SpectraSite credit facilities. As a result of these transactions, we recorded a $67.1 million charge primarily

 

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related to the write-off of deferred financing fees and amounts paid in excess of the carrying value. For more information regarding our financing activities, see “—Liquidity and Capital Resources—Refinancing Activities and Repurchases of Debt” below.

Other Income

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

Income Tax Provision

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

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

Loss from Discontinued Operations, Net

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

Stock Option Review and Related Matters

During the year ended December 31, 2006, our Board of Directors established a special committee of independent directors to conduct a review of our historical stock option granting practices and related accounting, as described in our Annual Report on Form 10-K for the year ended December 31, 2006. The special committee found, among other things, that in the past, we had granted options to purchase shares of our Class A common stock with exercise prices different from the market price of our stock on the date of grant. As a result of the special committee’s findings, we restated our historical financial statements to, among other things, record charges for stock-based compensation expense related to certain option grants and to account for the tax-related consequences.

In December 2006, our Board of Directors approved a remediation plan recommended by the special committee to address the issues raised by its findings. As part of the remediation plan, we took steps to eliminate any excess benefit received by our current officers and members of the Board of Directors from options having been granted to them with exercise prices below the market price on the legal grant date. For outstanding options, this was accomplished by amending each option to increase the exercise price to the fair market value on the legal grant date, without any compensation to the optionholder. In December 2006, eight of our senior officers and Directors amended the exercise prices of options to purchase an aggregate of 985,511 shares, thereby

 

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eliminating an aggregate excess benefit of approximately $6.5 million. For options that had been exercised, this was accomplished by compensating the Company for the amount of the excess benefit received upon exercise, after reduction for any taxes paid by the individual. In January 2007, five of the Company’s senior officers surrendered vested in-the-money options to purchase an aggregate of 23,269 shares, thereby surrendering an aggregate excess benefit of approximately $0.6 million (net of approximately $0.4 million in taxes paid by such individuals). In addition, we took similar steps to eliminate any excess benefit received by certain former officers from the grant to them of options with exercise prices below fair market value on the legal grant date. In December 2006, January 2007 and April 2007, three former officers amended the exercise prices of options to purchase an aggregate of 1,423,330 shares, thereby eliminating an aggregate excess benefit of approximately $4.3 million, and surrendered vested in-the-money options to purchase an aggregate of 52,212 shares, thereby surrendering an aggregate excess benefit, net of taxes paid by such individuals, of approximately $3.2 million.

In addition, we determined that under Section 409A of the Internal Revenue Code (“Section 409A”), options that were granted with exercise prices below the market price of the underlying stock on the date of grant and that vest after December 31, 2004 would likely be subject to unfavorable tax consequences that did not apply at the time of grant. In order to compensate our non-executive employees who previously exercised affected options and already incurred taxes and penalties under Section 409A, we paid approximately $1.1 million on behalf of such individuals for these taxes during the year ended December 31, 2007. In order to remedy the unfavorable personal tax consequences of Section 409A on holders of outstanding options, we conducted a tender offer in December 2006 for the affected options, pursuant to which we offered to amend the affected options to increase the option exercise price to the market price on the revised grant date, and to give the option holders (excluding officers and Directors) a cash payment for the difference in option exercise price between the amended option and the original price. We accounted for the financial impact of the tender offer as a stock option modification under SFAS No. 123R resulting in an increase to stock-based compensation expense and additional paid-in capital of $0.3 million in our consolidated financial statements for the year ended December 31, 2006 and an additional $1.2 million recognized for the year ended December 31, 2007. Following completion of the tender offer, in January 2007, we paid an aggregate of approximately $3.9 million in cash to holders of options that were amended in the tender offer.

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

Liquidity and Capital Resources

Overview

During the years ended December 31, 2007 and 2006, we improved our financial position by raising capital to refinance and repurchase a portion of our outstanding indebtedness, which increased our financial flexibility and our ability to return value to our stockholders. Our significant 2007 transactions included the following:

 

   

The completion of our Securitization involving assets related to the 5,295 broadcast and wireless communications towers owned by two of our special purpose subsidiaries, through a private offering of $1.75 billion of Commercial Mortgage Pass-Through Certificates, Series 2007-1. We used the net proceeds from the Securitization primarily to repay outstanding indebtedness under our credit facilities and to fund a tender offer and consent solicitation for our ATI 7.25% Notes.

 

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The refinancing of our credit facilities, including the repayment and termination of the senior secured credit facilities of our principal operating subsidiaries. We used a portion of the net proceeds from the Securitization to repay and terminate the credit facilities of SpectraSite and to repay a portion of the AMT OpCo credit facilities. We then implemented our new $1.25 billion Revolving Credit Facility, which we drew down in part to repay and terminate the AMT OpCo credit facilities.

 

   

The completion of an institutional private placement of $500.0 million aggregate principal amount of our 7.00% Notes. We used the net proceeds from the offering of the 7.00% Notes primarily to repay outstanding indebtedness under our credit facilities.

 

   

The repurchase or conversion of approximately $606.8 million face amount of our outstanding debt securities, including the repurchase of $192.5 million principal amount of our 5.0% Notes, the repurchase of $324.8 million principal amount of our ATI 7.25% Notes and the conversion of $89.5 million principal amount of our 3.25% Notes into shares of our Class A common stock.

 

   

The repurchase of approximately 39.9 million shares of our Class A common stock for an aggregate of $1.6 billion under our stock repurchase programs.

As of December 31, 2007, we had total outstanding indebtedness of approximately $4.3 billion. We generated sufficient cash flow from operations to fund our capital expenditures and cash interest obligations in 2007. We believe our cash generated by operations for the year ending December 31, 2008 also will be sufficient to fund our capital expenditures and our cash debt service (interest and principal repayments) obligations for 2008. For information about our outstanding indebtedness, see “—Contractual Obligations” below. Our debt service obligations as of December 31, 2007 are set forth under “—Uses of Cash—Contractual Obligations” below, which reflects an aggregate of $252.0 million of cash payments to be made in 2008. During 2008, we expect that we will raise additional capital to fund stock repurchases, repurchase existing debt and for other general corporate purposes.

Uses of Cash

Stock Repurchase Programs. During the year ended December 31, 2007, we continued to repurchase shares of our Class A common stock pursuant to our publicly announced stock repurchase programs, as described below.

In February 2007, we completed our $750.0 million stock repurchase program, originally announced in November 2005. Pursuant to this repurchase program, we repurchased 8.8 million shares of our Class A common stock for an aggregate of $351.0 million during the year ended December 31, 2007.

In February 2007, our Board of Directors approved a new stock repurchase program for the repurchase of up to $1.5 billion of our Class A common stock through February 2008. During the year ended December 31, 2007, we repurchased 31.1 million shares of our Class A common stock for an aggregate of $1.3 billion pursuant to this program. Subsequent to December 31, 2007, we repurchased an additional 4.3 million shares of our Class A common stock for an aggregate of $163.7 million. As of February 29, 2008, we had repurchased a total of 35.3 million shares of our Class A common stock for an aggregate of $1.45 billion pursuant to this stock repurchase program.

In February 2008, our Board of Directors approved a new stock repurchase program, pursuant to which we are authorized to purchase up to an additional $1.5 billion of our Class A common stock. We expect to fund repurchases through a combination of cash on hand, cash generated by operations, borrowings under our Revolving Credit Facility and future financing transactions. Purchases under this stock repurchase program are subject to us having available cash to fund repurchases. Under the program, we are authorized to purchase shares from time to time through open market purchases or privately negotiated transactions at prevailing prices as permitted by securities laws and other legal requirements, and subject to market conditions and other factors. To facilitate repurchases, we plan to make purchases pursuant to trading plans under Rule 10b5-1 of the Exchange Act, which allow us to repurchase shares during periods when we otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods.

 

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For more information regarding our stock repurchase programs, please see Item 5 of this Annual Report under the caption “Issuer Purchases of Equity Securities” and note 13 to our consolidated financial statements herein.

Tower Maintenance and Improvements, Tower Construction and In-Building System Installation, and Tower and Land Acquisition. During the year ended December 31, 2007, payments for purchases of property and equipment and construction activities totaled $154.4 million, including $66.5 million of capital expenditures related to the maintenance, improvement and augmentation of our existing communication sites, $30.7 million spent in connection with the construction of 152 towers and the installation of 17 in-building distributed antenna systems, $44.4 million spent to acquire land under our towers that was subject to ground agreements (including leases), and $12.7 million spent on information technology improvements. In addition, during the year ended December 31, 2007, we spent $36.9 million to acquire 293 towers and $7.1 million to acquire the assets of a structural analysis engineering firm. We plan to continue to allocate our available capital among investment alternatives that meet our return criteria. Accordingly, we may continue to acquire communications sites, acquire land under our towers, build or install new communications sites and redevelop or improve existing communications sites when the expected returns on such investments meet our investment criteria. We anticipate that in 2008 we will construct approximately 300 to 400 new sites, including in-building systems, and we expect that our 2008 total capital expenditures will be between approximately $185.0 million and $215.0 million, including between $40.0 million and $60.0 million of ground lease purchases.

Refinancing and Repurchases of Debt. In order to extend the maturity dates of our indebtedness, lower our cost of debt and improve our financial flexibility, we use our available liquidity to refinance and repurchase our outstanding indebtedness. During the year ended December 31, 2007, we used approximately $545.8 million in cash to repurchase or convert approximately $606.8 million face amount of our outstanding debt securities, including the repurchase of $192.5 million principal amount of our 5.0% Notes, the repurchase of $324.8 million principal amount of our ATI 7.25% Notes and the conversion of $89.5 million principal amount of our 3.25% Notes into shares of our Class A common stock. During the year ended December 31, 2007, we also implemented the Revolving Credit Facility and a new senior unsecured term loan credit facility (the “Term Loan”). All amounts outstanding under the credit facilities at our principal operating subsidiaries were repaid and then terminated during the year ended December 31, 2007. In October 2007, we also repaid and terminated the Term Loan. For more information about our financing activities, see “—Refinancing Activities and Repurchases of Debt” below.

Expenses Related to Stock Option Review and Related Matters. In connection with the review of our historical stock option granting practices, the restatement of our historical financial statements and the related legal and governmental proceedings, we have incurred significant legal, accounting and auditing expenses, and we expect to continue to incur legal expenditures in the future. For more information regarding the review of our historical stock option granting practices and the related proceedings, please see “—Stock Option Review and Related Matters” above and note 9 to our consolidated financial statements included in this Annual Report. During the year ended December 31, 2007, we incurred approximately $13.8 million in costs associated with legal and governmental proceedings related to the review of our historical stock option granting practices and related accounting, and other related costs. Depending on the outcomes of these proceedings, we and members of our senior management could be subject to regulatory fines, penalties, enforcement actions or other liability. In December 2007, we announced that we had reached a settlement in principle regarding the securities class action related to our historical stock option granting practices. The settlement, which was preliminarily approved by the court in February 2008, provides for a payment by us of $14.0 million and would lead to a dismissal of all claims against all defendants in the litigation. We have reached agreements with our insurers related to the settlement, pursuant to which we expect to receive approximately $12.5 million in insurance proceeds. We expect to pay the settlement amount, and receive the associated insurance proceeds, in the first half of 2008. For more information regarding the litigation related to our historical stock option granting practices, please see “Legal Proceedings” above and note 9 to our consolidated financial statements included in this Annual Report.

 

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Verestar. As discussed in note 9 to our consolidated financial statements included in this Annual Report, in October 2007, we finalized a settlement agreement related to the bankruptcy proceedings and related litigation of our Verestar subsidiary, pursuant to which we agreed to pay $32.0 million and the parties agreed to a mutual release of all claims existing prior to the execution of the settlement agreement. In November 2007, following approval by the Bankruptcy Court, the settlement agreement became effective, and the litigation was dismissed. We paid the $32.0 million settlement amount in November 2007 and are in discussions with our insurers concerning the amount of their contribution to the settlement.

Contractual Obligations. Our contractual obligations relate primarily to the Commercial Mortgage Pass-Through Certificates, Series 2007-1 issued in the Securitization, borrowings under our Revolving Credit Facility, our outstanding notes and our operating leases related to the ground under our towers. The following table sets forth information relating to our contractual obligations payable in cash as of December 31, 2007 (in thousands):

 

    Payments Due by Period

Contractual Obligations

  2008   2009   2010   2011   2012   Thereafter   Total

Commercial Mortgage Pass-Through Certificates, Series 2007-1

            $ 1,750,000   $ 1,750,000

Revolving Credit Facility(1)

          $ 825,000       825,000

7.25% senior subordinated notes

        $ 288         288

7.50% senior notes

            225,000       225,000

7.125% senior notes

            500,000       500,000

7.00% senior notes

              500,000     500,000

5.0% convertible notes

      $ 59,683           59,683

3.25% convertible notes

        18,333           18,333

3.00% convertible notes

            344,979       344,979

2.25% convertible notes

  $ 42               42
                                         

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

  $ 42     $ 78,016   $ 288   $ 1,894,979   $ 2,250,000   $ 4,223,325
                                         

Cash interest expense(1)

    246,000     246,000     243,000     243,000     194,000     290,000     1,462,000

Capital lease payments (including interest) and other notes payable

    5,996     5,448     4,961     24,166     3,416     193,193     237,180
                                         

Total debt service obligations

  $ 252,038   $ 251,448   $ 325,977   $ 267,454   $ 2,092,395   $ 2,733,193   $ 5,922,505
                                         

Operating lease payments(2)

    217,969     215,763     208,548     199,024     190,272     2,451,496     3,483,072

Other long-term liabilities(3)(4)

    155     172     177     182     187     189,290     190,163
                                         

Total

  $ 470,162   $ 467,383   $ 534,702   $ 466,660   $ 2,282,854   $ 5,373,979   $ 9,595,740
                                         

 

(1)

For more information regarding the Revolving Credit Facility, see “—Sources of Cash” below. Interest rates for the Revolving Credit Facility are determined at our option and range between 0.40% and 1.25% above the applicable London Interbank Offering Rate (LIBOR) for LIBOR based borrowings or between 0.00% and 0.25% above the defined base rate for base rate borrowings, in each case based on our debt ratings. A quarterly commitment fee on the undrawn portion of the Revolving Credit Facility is required, ranging from 0.08% to 0.25% per annum, based on our debt ratings. As discussed in Item 7A. “Quantitative and

 

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Qualitative Disclosures About Market Risk,” we have entered into swap agreements to manage exposure to variable rate interest obligations under the Revolving Credit Facility. As a result of these swap agreements, the effective weighted average interest rate in effect at December 31, 2007 for the Revolving Credit Facility was 5.52%. For projections of our cash interest expense related to the Revolving Credit Facility, we have assumed the LIBOR rate before the margin, as defined in the loan agreement for the Revolving Credit Facility, is 4.83% through its maturity on June 7, 2012.

 

(2) Operating lease payments include payments to be made under non-cancelable initial terms, as well as payments for certain renewal periods at our option because failure to renew could result in a loss of the applicable tower site and related revenues from tenant leases, thereby making it reasonably assured that we will renew the lease.

 

(3) Primarily represents our asset retirement obligations and excludes certain other long-term liabilities included in our consolidated balance sheet, primarily our straight-line rent liability for which cash payments are included in operating lease payments and unearned revenue that is not payable in cash.

 

(4) Other long-term liabilities exclude $29.6 million of liabilities for unrecognized tax positions and $30.7 million of accrued income tax related interest and penalties included in our consolidated balance sheet as we are uncertain as to when and if the amounts may be settled. Settlement of such amounts could require the use of cash flows generated from operations. As discussed in notes 1 and 2 to the consolidated financial statements, we adopted FIN 48 as of January 1, 2007 which resulted in the classification of uncertain tax positions as non-current income tax liabilities. We expect the unrecognized tax benefits to change over the next 12 months if certain tax matters ultimately settle with the applicable taxing jurisdiction during this timeframe. However, based on the status of these items and the amount of uncertainty associated with the outcome and timing of audit settlements, we are currently unable to estimate the impact of the amount of such changes, if any, to previously recorded uncertain tax positions.

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

Sources of Cash

American Tower Corporation is a holding company, and our cash flows are derived primarily from distributions from our operating subsidiaries or funds raised through credit facilities and debt and equity offerings. Under the loan agreement for the Revolving Credit Facility and the indentures for our 7.50% Notes, 7.125% Notes and 7.00% Notes, our subsidiaries are classified as either restricted subsidiaries or unrestricted subsidiaries. With regard to the indentures for our 7.50% Notes and 7.125% Notes (which generally contain more restrictions than the loan agreement for the Revolving Credit Facility or the indenture for our 7.00% Notes), most of our operating subsidiaries other than SpectraSite are designated as restricted subsidiaries. This means, among other things, that those subsidiaries, like American Tower Corporation itself, are subject to those indentures’ restrictions on the amount of cash that they can distribute to unrestricted subsidiaries or otherwise pay out of the restricted group. In addition, while SpectraSite and its subsidiaries are classified as unrestricted subsidiaries under the indentures for our 7.50% Notes and 7.125% Notes, certain of SpectraSite’s subsidiaries are subject to restrictions on the amount of cash that they can distribute to us under the loan agreement for the Securitization, as discussed below.

Total Liquidity at December 31, 2007. As of December 31, 2007, we had approximately $444.4 million of total liquidity, comprised of approximately $33.1 million in cash and cash equivalents and the ability to borrow approximately $411.3 million under our Revolving Credit Facility.

Cash Generated by Operations. For the years ended December 31, 2007, 2006 and 2005, our cash provided by operating activities was $692.7 million, $620.7 million and $397.2 million, respectively. Cash provided by operating activities for the year ended December 31, 2007 includes approximately $80.0 million received in connection with our federal income tax refund, as discussed in note 2 to our consolidated financial statements

 

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herein, as well as a reduction of approximately $49.8 million of net cash receipts related to towers included in the Securitization, which are classified as restricted cash, and a reduction of $32.0 million related to the payment of the Verestar settlement amount. Each of our rental and management and network development services segments are expected to generate cash flows from operations during 2008 in excess of their cash needs for operations and expenditures for tower construction, improvements and acquisitions. (See “—Results of Operations” above.) We expect to use the excess cash generated by operations principally to service our debt and to fund capital expenditures, tower acquisitions and repurchases of our Class A common stock.

Revolving Credit Facility. In June 2007, we refinanced our existing $1.6 billion AMT OpCo senior secured credit facilities with the new $1.25 billion Revolving Credit Facility. We borrowed $1.0 billion under the Revolving Credit Facility and together with cash on hand, used the funds to repay all amounts outstanding under the existing AMT OpCo credit facilities plus accrued interest thereon and other costs and expenses related thereto.

During the year ended December 31, 2007, we drew down and repaid amounts under the Revolving Credit Facility in the ordinary course, and also repaid $450.0 million of borrowings under the Revolving Credit Facility using net proceeds from our Term Loan, as discussed below. As of December 31, 2007, we had the ability to borrow approximately $411.3 million under our Revolving Credit Facility. As of February 29, 2008, we had drawn down an additional $150.0 million, and reduced our undrawn letters of credit to $11.9 million. Accordingly, as of February 29, 2008, we had the ability to borrow approximately $263.1 million under our Revolving Credit Facility.

The Revolving Credit Facility has a term of five years and matures on June 8, 2012. Any outstanding principal and accrued but unpaid interest will be due and payable in full at maturity. The Revolving Credit Facility does not require amortization of principal and may be paid prior to maturity in whole or in part at our option without penalty or premium. The Revolving Credit Facility allows us to use borrowings for working capital needs and other general corporate purposes of us and our subsidiaries (including, without limitation, to refinance or repurchase other indebtedness and, provided certain conditions are met, to repurchase our equity securities, in each case without additional lender approval).

For more information regarding our Revolving Credit Facility, please see “—Factors Affecting Sources of Liquidity” below and note 3 to our consolidated financial statements herein.

Term Loan Credit Facility. In August 2007, we entered into a new $500.0 million Term Loan. In connection with that transaction, we received $498.5 million of net proceeds from the Term Loan, which we used to repay $450.0 million of borrowings under the Revolving Credit Facility and for general corporate purposes. In October 2007, we completed an institutional private placement of $500.0 million aggregate principal amount of our 7.00% Notes, as discussed below, and used the net proceeds, together with cash on hand, to repay all of the outstanding indebtedness incurred under the Term Loan in accordance with the mandatory prepayment requirement. We terminated the Term Loan upon repayment.

For more information regarding the Term Loan, please see note 3 to our consolidated financial statements herein.

Previous Credit Facilities. During the year ended December 31, 2007, we also maintained two credit facilities at our principal operating subsidiaries, the SpectraSite credit facilities and the AMT OpCo credit facilities. We repaid and terminated the SpectraSite credit facilities and the AMT OpCo credit facilities in May and June 2007, respectively.

For more information regarding the SpectraSite credit facilities and the AMT OpCo credit facilities, please see note 3 to our consolidated financial statements herein.

 

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Proceeds from the Sale of Equity Securities. We receive proceeds from sales of our equity securities pursuant to our employee stock purchase plan, upon exercise of stock options granted under our equity incentive plans and upon exercise of warrants to purchase our equity securities. For the year ended December 31, 2007, we received an aggregate of approximately $124.1 million in proceeds from sales of shares pursuant to our employee stock purchase plan, upon exercises of stock options and upon exercises of warrants.

Proceeds from the Sale of Assets. During the year ended December 31, 2007, we received $22.2 million in aggregate net proceeds related to sales of non-core assets, including $5.1 million from sales of tower assets and buildings and $17.1 million from sales of short-term available-for-sale securities.

Refinancing Activities and Repurchases of Debt

Securitization. In May 2007, we completed the Securitization involving assets related to 5,295 broadcast and wireless communications towers (the “Towers”) owned by two of our special purpose subsidiaries, through a private offering of $1.75 billion of Commercial Mortgage Pass-Through Certificates, Series 2007-1 (the “Certificates”).

The Certificates were issued by American Tower Trust I (the “Trust”), a trust established by American Tower Depositor Sub, LLC (the “Depositor”), one of our indirect wholly owned special purpose subsidiaries. The assets of the Trust consist of a recourse loan (the “Loan”) initially made by the Depositor to American Tower Asset Sub, LLC and American Tower Asset Sub II, LLC (the “Borrowers”), pursuant to a Loan and Security Agreement among the foregoing parties dated as of May 4, 2007 (the “Loan Agreement”). The Borrowers are special purpose entities formed solely for the purpose of holding the Towers subject to the Securitization.

As indicated in the table below, the Certificates were issued in seven separate classes. Each of the Class B, Class C, Class D, Class E and Class F Certificates are subordinated in right of payment to any other class of Certificates which has an earlier alphabetical designation. The Certificates were issued with terms identical to the Loan except for the Class A-FL Certificates, which bear interest at a floating rate while the related component of the Loan bears interest at a fixed rate, as described below. The various classes of Certificates were issued with a weighted average interest rate of approximately 5.61%. The Certificates have an expected life of approximately seven years with a final repayment date in April 2037.

 

Class

     Initial Class
Principal Balance
     Interest Rate     

Rating

(Moody’s/Fitch/S&P)

Class A-FX

     $ 872,000,000      5.4197%      Aaa/AAA/AAA

Class A-FL

     $ 150,000,000      LIBOR+0.1900(a)      Aaa/AAA/AAA

Class B

     $ 215,000,000      5.5370%      Aa2/AA/AA

Class C

     $ 110,000,000      5.6151%      A2/A/A

Class D

     $ 275,000,000      5.9568%      Baa2/BBB/BBB

Class E

     $ 55,000,000      6.2493%      Baa3/BBB-/BBB-

Class F

     $ 73,000,000      6.6388%      Baa3/BBB-/BB+

 

(a) The Class A-FL Certificates bear interest at a floating rate based on LIBOR, but interest on the related component of the Loan is computed at a fixed rate equal to the interest rate on the Class A-FX Certificates. Holders of the Class A-FL Certificates have the benefit of an interest rate swap agreement between the Trust and Morgan Stanley Capital Services Inc. Neither we nor the Borrowers have any obligations or liability with respect to this interest rate swap agreement.

We used the net proceeds from the Securitization to repay all amounts outstanding under the SpectraSite credit facilities, including approximately $765.0 million in principal, plus accrued interest thereon and other costs and expenses related thereto, as well as to repay approximately $250.0 million drawn under the revolving loan component of the AMT OpCo credit facilities. An additional $349.5 million of the proceeds was used to fund our

 

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tender offer and consent solicitation for our ATI 7.25% Notes, and the remainder was used for general corporate purposes. We also funded $14.3 million in cash reserve accounts with proceeds from the Securitization as required under the Loan Agreement.

The Loan will be paid by the Borrowers solely from the cash flows generated by the Towers. These funds in turn will be used by or on behalf of the Trust to service the payment of interest on the Certificates and for any other payments required by the Loan Agreement. The Borrowers are required to make monthly payments of interest on the Loan. Subject to certain limited exceptions, no payments of principal will be required to be made prior to the anticipated repayment date for the Loan in April 2014. On a monthly basis, after payment of all required amounts under the Loan Agreement and subject to certain exceptions, the excess cash flows generated from the operation of the Towers are released to the Borrowers, which can then be distributed to, and used by, us.

The Borrowers may not prepay the Loan in whole or in part at any time prior to May 2009, except in limited circumstances, including the occurrence of certain casualty and condemnation events relating to the Towers and certain dispositions of Towers. Thereafter, prepayment is permitted provided it is accompanied by applicable prepayment consideration. If the prepayment occurs within nine months of the anticipated repayment date, no prepayment consideration is due. The entire unpaid principal balance of the Loan components will be due in April 2037. The Loan may be defeased in whole or in part at any time.

The Loan is secured by (1) mortgages, deeds of trust and deeds to secure debt on substantially all of the Towers and their operating cash flows, (2) a security interest in substantially all of the Borrowers’ personal property and fixtures and (3) the Borrowers’ rights under the Management Agreement dated as of May 4, 2007 with SpectraSite, as manager. American Tower Holding Sub, LLC, whose only material assets are its equity interests in each of the Borrowers, and American Tower Guarantor Sub, LLC, whose only material asset is its equity interest in American Tower Holding Sub, LLC, each have guaranteed repayment of the Loan and pledged their equity interests in their respective subsidiary or subsidiaries as security for such payment obligations. American Tower Guarantor Sub, LLC, American Tower Holding Sub, LLC, the Depositor and the Borrowers each were formed as special purpose entities solely for purposes of the Securitization, and the assets and credit of these entities are not available to satisfy the debts and other obligations of us or any other person, except as set forth in the Loan Agreement.

Under the Loan Agreement, the Borrowers are required to maintain reserve accounts, including for debt service payments, ground rents, real estate and personal property taxes, insurance premiums and management fees, and to reserve a portion of advance rents from tenants on the Towers. Based on the terms of the Loan Agreement, all rental cash receipts received each month are restricted and held by the Trustee. The $53.7 million held in the reserve accounts as of December 31, 2007 is classified as restricted cash on the accompanying consolidated balance sheet.

For more information regarding the Securitization, please see “—Factors Affecting Sources of Liquidity” below and note 3 to our consolidated financial statements herein.

7.00% Senior Notes Offering. In October 2007, we completed an institutional private placement of $500.0 million aggregate principal amount of our 7.00% Notes. The net proceeds from the offering were approximately $493.5 million, which we used, together with cash on hand, to repay all of the outstanding indebtedness incurred under our $500.0 million Term Loan. We terminated the Term Loan upon repayment.

The 7.00% Notes mature on October 15, 2017, and interest is payable semiannually in arrears on April 15 and October 15 of each year, commencing on April 15, 2008, to the persons in whose names the notes are registered at the close of business on the preceding April 1 and October 1, respectively. We may redeem the 7.00% Notes at any time. The redemption price on the 7.00% Notes is 100% of the principal amount, plus a make-whole premium, together with accrued interest to the redemption date. Interest on the notes will accrue from the date of issuance and will be computed on the basis of a 360-day year comprised of twelve 30-day months.

 

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If we undergo a change of control and ratings decline, each as defined in the indenture for the 7.00% Notes, we may be required to repurchase all of the 7.00% Notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest, if any, and additional interest, if any, to but not including the date of repurchase. The 7.00% Notes rank equally with all of our other senior unsecured debt and are structurally subordinated to all existing and future indebtedness and other obligations of our subsidiaries. The indenture contains certain covenants that restrict our ability to incur more subsidiary debt or permit subsidiaries to provide guarantees; create liens; and merge, consolidate or sell assets. These covenants are subject to a number of exceptions, including that our restricted subsidiaries may incur certain indebtedness, and that we and our subsidiaries may incur liens securing indebtedness, if the aggregate amount of such indebtedness and such liens shall not exceed 3.5x Adjusted EBITDA as defined in the indenture.

For more information regarding the 7.00% Notes, please see note 3 to our consolidated financial statements herein.

3.25% Convertible Notes Conversions. During the year ended December 31, 2007, we issued an aggregate of 7,324,760 shares of our Class A common stock upon conversion of approximately $89.5 million principal amount of 3.25% Notes. Pursuant to the terms of the indenture, the holders of the 3.25% Notes are entitled to receive 81.808 shares of Class A common stock for every $1,000 principal amount of notes converted. In connection with the conversion, we paid such holders an aggregate of approximately $3.7 million, calculated based on the accrued and unpaid interest on the notes as of the date of conversion and the discounted value of the future interest payments on the notes. As of December 31, 2007, $18.3 million principal amount of 3.25% Notes remained outstanding.

5.0% Convertible Notes Tender Offer. In February 2007, we conducted a cash tender offer for our outstanding 5.0% Notes. The tender offer was intended to satisfy the rights granted to each noteholder under the indenture for the 5.0% Notes to require us to repurchase on February 20, 2007 all or any part of such holder’s 5.0% Notes at a price equal to the issue price plus accrued and unpaid interest, if any, up to but excluding February 20, 2007. Under the terms of the 5.0% Notes, we had the option to pay for the 5.0% Notes with cash, Class A common stock, or a combination of cash and stock. We elected to pay for the 5.0% Notes solely with cash. Pursuant to the tender offer, we repurchased an aggregate of $192.5 million principal amount of 5.0% Notes for an aggregate of $192.6 million. Upon completion of this tender offer and as of December 31, 2007, $59.7 million principal amount of 5.0% Notes remained outstanding.

ATI 7.25% Notes Tender Offer and Consent Solicitation. In April 2007, we commenced a cash tender offer and consent solicitation with respect to our outstanding ATI 7.25% Notes. In May 2007, we received tenders and consents of approximately 99.9% or $324.8 million of the $325.1 million principal amount of ATI 7.25% Notes outstanding, and elected to accept for payment all ATI 7.25% Notes that had been properly tendered and not withdrawn, together with the related consents. Accordingly, we paid $349.5 million, including approximately $10.2 million in accrued and unpaid interest, to holders of ATI 7.25% Notes using net proceeds from the Securitization discussed above. In connection with the tender offer and consent solicitation, we entered into a supplemental indenture effecting certain amendments to the indenture for the notes to eliminate most of the restrictive covenants and certain events of default and to eliminate or modify related provisions. As of December 31, 2007, $0.3 million principal amount of ATI 7.25% Notes remained outstanding.

Termination of Interest Rate Swap Agreements. During the year ended December 31, 2007, we received cash of approximately $20.1 million upon net settlement of certain of our assets and liabilities under interest rate swap agreements held as of December 31, 2006 and entered into during the first half of 2007, as discussed below. In addition, we paid $8.0 million related to a treasury rate lock agreement entered into and settled during the three months ended September 30, 2007, as discussed below. We received $3.1 million in cash upon settlement of the assets and liabilities under ten forward starting interest rate swap agreements with an aggregate notional amount of $1.4 billion, which were designated as cash flow hedges to manage exposure to variability in cash flows relating to forecasted interest payments in connection with the Certificates issued in the Securitization in

 

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May 2007. As a result, the settlement gain of $2.0 million, net of a tax benefit of $1.1 million, is being recognized as a reduction in interest expense over the five-year period for which the interest rate swaps were designated as hedges. We also received $17.0 million in cash upon settlement of our assets and liabilities under 13 additional interest rate swap agreements with an aggregate notional amount of $850.0 million that managed exposure to variability of interest rates under the SpectraSite credit facilities and AMT OpCo credit facilities. We recognized a net gain on these terminations of $8.1 million, which is included in other income in the accompanying consolidated statement of operations for the year ended December 31, 2007. We paid $8.0 million in cash upon settlement of a treasury rate lock agreement with an aggregate notional amount of $250.0 million entered into in anticipation of the issuance of fixed rate debt. We terminated this treasury rate lock agreement during the year ended December 31, 2007 in connection with the pricing of our 7.00% Notes and are recognizing the settlement amount, net of tax as an increase in interest expense over the 10-year term of the 7.00% Notes.

Factors Affecting Sources of Liquidity

Internally Generated Funds. Because the majority of our tenant leases are multi-year contracts, a significant majority of the revenues generated by our rental and management segment as of the end of 2007 is recurring revenue that we should continue to receive in future periods. Accordingly, a key factor affecting our ability to generate cash flow from operating activities is to maintain this recurring revenue and to convert it to operating profit by minimizing operating costs and fully achieving our operating efficiencies. In addition, our ability to increase cash flow from operating activities is dependent upon the demand for antenna space on wireless and broadcast communications towers and for related services and our ability to increase the utilization of our existing towers.

Restrictions Under Revolving Credit Facility. The loan agreement for the Revolving Credit Facility contains certain financial ratios and operating covenants and other restrictions applicable to us and all of our subsidiaries designated as restricted subsidiaries on a consolidated basis. These include limitations on additional debt, distributions and dividends, guaranties, sales of assets and liens, as well as the following three financial maintenance tests:

 

   

a consolidated total leverage ratio (Total Debt to Adjusted EBITDA) of not greater than 6.00 to 1.00;

 

   

a consolidated senior secured leverage ratio (Senior Secured Debt to Adjusted EBITDA) of not greater than 3.00 to 1.00; and

 

   

an interest coverage ratio (Adjusted EBITDA to Interest Expense) of not less than 2.50 to 1.00.

As of December 31, 2007, we were in compliance with each of the foregoing financial tests.

The loan agreement also contains reporting and information covenants that require us to provide financial and operating information within certain time periods. If we are unable to timely provide the required information, we would be in breach of these covenants. Any failure to comply with the financial maintenance tests and operating covenants of the loan agreement for the Revolving Credit Facility would not only prevent us from being able to borrow additional funds under the facility, but would constitute a default, which could result in, among other things, the amounts outstanding, including all accrued interest and unpaid fees, becoming immediately due and payable.

Restrictions Under Loan Agreement Relating to our Securitization. The loan agreement related to our Securitization includes operating covenants and other restrictions customary for loans subject to rated securitizations. Among other things, our two special purpose subsidiaries that are borrowers are prohibited from incurring other indebtedness for borrowed money or further encumbering their assets. The organizational documents of the borrowers contain provisions consistent with rating agency securitization criteria for special purpose entities, including the requirement that the borrowers maintain at least two independent directors. The loan agreement also contains certain covenants that require the borrowers to provide the trustee with regular

 

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financial reports and operating budgets, promptly notify the trustee of events of default and material breaches under the loan agreement and other agreements related to the towers subject to the Securitization, and allow the trustee reasonable access to the towers, including the right to conduct site investigations.

Failure to comply with the covenants in the loan agreement related to the Securitization could prevent the borrowers from taking certain actions with respect to the towers, and could prevent the borrowers from distributing any excess cash from the operation of the towers to us. If the borrowers were to default on the loan related to the Securitization, the trustee could seek to foreclose upon or otherwise convert the ownership of the towers subject to the Securitization, in which case we could lose the towers and the revenue associated with the towers.

Restrictions Under Notes Indentures. The indentures governing the terms of our 7.50% Notes and 7.125% Notes also contain certain restrictive covenants with which we and the restricted subsidiaries under these indentures must comply. These include restrictions on our ability to incur additional debt, guarantee debt, pay dividends and make other distributions and make certain investments. With the exception of SpectraSite and its subsidiaries, most of our operating subsidiaries are designated as restricted subsidiaries under these note indentures. In addition, certain of SpectraSite’s subsidiaries are subject to restrictions on the amount of cash that they can distribute to us under the loan agreement for the Securitization, as discussed above. Any failure to comply with these covenants would constitute a default. Specifically, these indentures restrict us from incurring additional debt or issuing certain types of preferred stock unless our consolidated debt is not greater than 7.5 times our adjusted consolidated cash flow. The indentures also contain reporting and information covenants that require us to provide financial and operating information within certain time periods. If we are unable to timely provide the required information, we would be in breach of these covenants.

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

As of December 31, 2007, our annual consolidated cash debt service obligations (principal and interest) for each of the next five years and thereafter are approximately: $252.0 million, $251.4 million, $326.0 million, $267.5 million, $2.1 billion and $2.7 billion, respectively. In addition, as a holding company, we depend on distributions from our operating subsidiaries or funds raised through credit facilities and debt and equity offerings to fund our debt obligations. Although the agreements governing the terms of the loan agreement related to the Securitization permit certain of SpectraSite’s subsidiaries to make distributions to us, such terms also significantly limit their ability to distribute cash to us. Accordingly, if we do not receive sufficient funds from our subsidiaries to meet our debt service obligations, we may be required to refinance or renegotiate the terms of our debt, and there is no assurance we will succeed in such efforts.

Our ability to make scheduled payments of principal and interest on our debt obligations, will depend on our future financial performance, which is subject to many factors beyond our control, as outlined above in Item 1A of this Annual Report under the caption “Risk Factors.” In addition, our ability to raise capital in the future may depend on our credit ratings from commercial rating agencies, which are dependent on our expected financial performance, the liquidity factors discussed above, and the rating agencies’ outlook for our industry. There can be no assurance that we will be able to complete such financings or, if such financings are completed, that the terms will be commercially reasonable.

 

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Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, as well as related disclosures of contingent assets and liabilities. We evaluate our policies and estimates on an ongoing basis, including those related to income taxes, asset retirement obligations, stock-based compensation, impairment of assets, revenue recognition and estimated useful lives of assets. Management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We have reviewed our policies and estimates to determine our critical accounting policies for the year ended December 31, 2007. Of the critical accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2006, we no longer consider the purchase price allocation as a critical accounting policy or estimate, as the SpectraSite purchase price allocation was finalized in June 2006. As discussed below, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109” (“FIN 48”) as of January 1, 2007, which requires significant judgment in determining what constitutes an individual tax position as well as assessing the outcome of each tax position. Changes in judgment as to recognition or measurement of tax positions can materially affect the estimate of the effective tax rate and consequently, affect our operating results. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. Accordingly, we have added additional considerations related to FIN 48 and our state deferred tax valuation allowances in our critical accounting policy related to income taxes, as noted in the following paragraphs. In addition, we have added estimated useful lives of assets as a critical accounting policy for the year ended December 31, 2007. Except for the deletion of the purchase price allocation, adoption of FIN 48 and changes in our deferred state tax valuation allowances, and the addition of estimated useful lives of assets during the year ended December 31, 2007, we have not made any changes to the policies in place at December 31, 2006.

We have identified the following policies as critical to an understanding of our results of operations and financial condition. This is not a comprehensive list of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. For a discussion of our other accounting policies, see note 1 to our consolidated financial statements included in this Annual Report, beginning on page F-8.

 

   

Income Taxes. FIN 48 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures. The cumulative effect of applying this interpretation was recorded as an increase of $25.8 million to accumulated deficit, an increase of $9.2 million to prepaid and other current assets and an increase of $17.1 million to long-term deferred tax assets, with a corresponding increase in other long-term liabilities of $52.1 million in the consolidated balance sheet as of January 1, 2007.

We recognize tax liabilities in accordance with FIN 48, and we adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which they are determined. If the tax

 

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liabilities relate to tax uncertainties existing at the date of the acquisition of a business, the adjustment of such tax liabilities will result in an adjustment to the goodwill recorded at the date of acquisition.

We expect the unrecognized tax benefits to change over the next 12 months if certain tax matters ultimately settle with the applicable taxing jurisdiction during this timeframe. However, based on the status of these items and the amount of uncertainty associated with the outcome and timing of audit settlements, we are currently unable to estimate the impact of the amount of such changes, if any, to previously recorded uncertain tax positions and have classified approximately $29.6 million as other long-term liabilities in the consolidated balance sheet as of December 31, 2007. We also classified approximately $30.7 million of accrued income tax-related interest and penalties as other long-term liabilities in the consolidated balance sheet as of December 31, 2007.

SFAS No. 109 “Accounting For Income Taxes,” requires that companies record a valuation allowance when it is “more likely than not that some portion or all of the deferred tax assets will not be realized.” We periodically review our deferred tax assets, and we record a valuation allowance to reduce our net deferred tax asset to the amount that management believes is more likely than not to be realized. During the year ended December 31, 2007, we completed an analysis of the valuation allowances on our state deferred tax assets. We undertook this analysis as a result of several factors, including the fact that we had experienced several successive quarters of net income, we had restructured certain of our legal entities (primarily related to the Securitization), and we had completed a number of capital raising and debt refinancing transactions during the year ended December 31, 2007. We had previously recorded a full valuation allowance on our net state deferred tax assets, as we considered that it was more likely than not that the deferred tax assets would not be realized. However, upon completion of our analysis during the year ended December 31, 2007, we concluded that it was more likely than not that a portion of these net state deferred tax assets would be realized. As a result, we recognized approximately $27.6 million of additional state deferred tax assets (net of a federal tax provision), which were recorded as an income tax benefit and a corresponding increase in long-term deferred income taxes in the consolidated financial statements for the year ended December 31, 2007. We will continue to assess the realization of our deferred tax assets and liabilities on an ongoing basis.

As of December 31, 2007, we have provided a valuation allowance of approximately $88.2 million, including approximately $33.3 million attributable to SpectraSite, primarily related to certain net operating loss and capital loss carryforwards assumed as of the acquisition date. The balance of the valuation allowance primarily relates to state net operating loss carryforwards, capital losses and foreign items. We have not provided a valuation allowance for the remaining deferred tax assets, primarily our federal net operating loss carryforwards, as we believe that we will have sufficient time to realize these federal net operating loss carryforwards during the twenty-year tax carryforward period. Valuation allowances may be reversed if related deferred tax assets are deemed realizable based on changes in facts and circumstances relevant to the assets’ recoverability. Approximately $12.7 million of the SpectraSite valuation allowances as of December 31, 2007 will be recorded as a reduction to goodwill if the underlying deferred tax assets are utilized. In April 2007, we recovered a portion of our deferred tax asset when we received a federal income tax refund of approximately $65.0 million, plus $15.0 million in interest related to the carry back of certain federal net operating losses, as described in note 2 to our consolidated financial statements included in this Annual Report.

 

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The recoverability of our remaining net deferred tax asset has been assessed utilizing projections based on our current operations. The projections show a significant decrease in depreciation in the later years of the carryforward period as a result of a significant portion of our assets being fully depreciated during the first fifteen years of the carryforward period. Accordingly, the recoverability of our net deferred tax asset is not dependent on material improvements to operations, material asset sales or other non-routine transactions. Based on our current outlook of future taxable income during the carryforward period, management believes that our net deferred tax asset will be realized. The realization of our deferred tax assets will be dependent upon our ability to generate approximately $1.3 billion and $1.8 billion in federal and state taxable income, respectively, from January 1, 2008 to December 31, 2027. If we are unable to generate sufficient taxable income in the future or carry back losses as described above, we will be required to reduce our net deferred tax asset through a charge to income tax expense.

Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management is not aware of any such changes that would have a material effect on our consolidated results of operations, cash flows or financial position.

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our international operations.

From time to time, we are subject to examination by various tax authorities in jurisdictions in which we have significant business operations, and we regularly assess the likelihood of additional assessments in each of the tax jurisdictions resulting from these examinations. During the year ended December 31, 2005, we recorded a $29.5 million income tax provision to reflect a reduction in management’s estimate of the net realizable value of our federal tax refund claims as described in note 2 to our consolidated financial statements included in this Annual Report. We believe that adequate provisions have been made for income taxes for all periods through December 31, 2007.

Depending on the resolution of the Verestar bankruptcy proceedings described in note 9 to our consolidated financial statements included in this Annual Report, we may be entitled to a worthless stock or bad debt deduction for our investment in Verestar. We will record any income tax benefit for these potential deductions when the plan of liquidation is finalized and approved by the Bankruptcy Court.

 

   

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

During the years ended December 31, 2007 and 2006, we updated our assumptions used in estimating our aggregate asset retirement obligation, which resulted in a net decrease in the estimated obligation of $3.8 million and $0.7 million, respectively. The primary reasons for the decrease in 2007 was a result of changes in timing of certain settlement date assumptions, and the purchase of land underlying ground leases. During the year ended December 31, 2005, we also adopted the provisions of FIN 47 and recognized a $35.5 million charge (net of an $11.7 million tax benefit) as a cumulative effect of a change in accounting principle in the consolidated statement of operations for the year ended December 31, 2005. The adoption of FIN 47 primarily resulted in the acceleration of our settlement date assumptions, as FIN 47 precludes us from considering non-contractual lease renewal periods in determining our settlement date assumptions. Fair value estimates of liabilities for asset retirement

 

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

 

   

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

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

 

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Prior to January 1, 2006, we measured compensation expense for our stock-based employee compensation plans using the intrinsic value method prescribed by APB No. 25. Under the intrinsic value method, compensation expense associated with fixed awards is the excess, if any, of the quoted market price of the stock at the accounting measurement date over the amount an employee must pay to acquire the stock. Under APB No. 25, compensation expense is measured as of the date an award has received approval by relevant authority, the number of shares and exercise price are fixed and allocation to specific individuals has occurred. Generally, this occurs on the date the grant is approved by the compensation committee of our Board of Directors, or, if grant authority has been delegated to management, when the shares are allocated to specific individuals. The stock-based compensation expense for an award is recognized over the vesting period using the ratable method, whereby an equal amount of expense is recognized for each year of vesting. The actual accounting measurement dates determined in the course of our recent review of our historical stock option granting practices are based on a review of supporting approval documentation and other extrinsic evidence of awards.

During the year ended December 31, 2005, we re-evaluated the assumptions used to estimate the fair value of stock options issued to employees and related disclosure of pro forma expense required under SFAS No. 123. As a result, we lowered our expected volatility assumption for options granted after July 1, 2005 to approximately 30% and increased the expected life of option grants to 6.25 years using the simplified method permitted by SEC Staff Accounting Bulletin (“SAB”) No. 107, “Share-Based Payment” (“SAB No. 107”). We made this change based on a number of factors, including our execution of our strategic plans to sell non-core businesses, reduce leverage and our merger with SpectraSite, Inc. We had previously based our volatility assumptions on historical volatility since inception, which included periods when our capital structure was more highly leveraged than current levels and expected levels for the foreseeable future. Our estimate of future volatility is based on our consideration of all available information, including historical volatility, implied volatility of publicly traded options, our current capital structure and our publicly announced future business plans.

 

   

Impairment of Assets.

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

Goodwill—Assets Not Subject to Amortization: We perform our annual goodwill impairment test on December 1 of each year and when events or circumstances indicate that the asset might be impaired. In December 2007, 2006 and 2005, we completed our annual impairment testing related to the goodwill of our rental and management segment and determined that goodwill was not impaired. Fair value estimates are based on our historical and projected operating results and market information, changes to which could affect those fair value estimates. Our December 2007 and 2006 annual impairment testing included approximately $1.6 billion of goodwill acquired in our merger with SpectraSite, Inc.

 

   

Revenue Recognition. Rental and management revenues are recognized on a monthly basis under lease or management agreements when earned, regardless of whether the payments from the customer are

 

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received in equal monthly amounts. Fixed escalation clauses present in non-cancelable lease agreements, excluding those tied to the Consumer Price Index (“CPI”) or other inflation-based indices, and other incentives present in lease agreements with our customers are recognized on a straight-line basis over the terms of the applicable leases. Straight-line revenues for the years ended December 31, 2007, 2006 and 2005 approximated $69.7 million, $58.3 million and $30.3 million, respectively. Amounts billed up-front for certain services provided in connection with the execution of lease agreements are initially deferred and recognized as revenue over the terms of the applicable leases. Amounts billed or received prior to being earned are deferred and reflected in unearned revenue in the consolidated balance sheets until such time as the earnings process is complete.

 

   

Estimated Useful Lives of Assets. As described in note 1 to our consolidated financial statements included herein, we are in the process of reviewing the estimated useful lives of our tower assets. We now have over ten years of operating history, and we are considering whether we should modify our current estimates for asset lives based on our historical operating experience. We have retained an independent consultant to assist us in completing this review, and we received a report from the consultant in the first quarter of 2008, which we are in the process of analyzing. We currently depreciate towers on leased land on a straight-line basis over the shorter of the term of the underlying ground lease (including renewal options) or the estimated useful life of the tower, which we have historically estimated to be 15 years. Additionally, certain of our intangible assets are amortized on a similar basis as our tower assets, as the estimated useful lives of such intangibles correlate to the useful life of the towers. If we conclude a revision in the estimated useful lives of our tower assets is appropriate, we will account for any changes in the useful lives as a change in accounting estimate under SFAS No. 154 “Accounting Changes and Error Corrections,” which will be recorded prospectively beginning in the period of change. Based on preliminary information obtained to date, we expect that our estimated asset lives may be extended which would result in prospective decreases in depreciation and amortization, and such changes could be material to future depreciation and amortization and our consolidated results of operations.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements” (“SFAS No. 157”). This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, expands disclosures about fair value measurements and does not require any new fair value measurements. This statement requires quantitative disclosures about fair value measurements for each major category of assets and liabilities measured at fair value on a recurring and non-recurring basis during a period. SFAS No. 157 is effective for us as of January 1, 2008; however in February 2008, the FASB issued a Staff Position that defers the effective date to January 1, 2009 for all nonfinancial assets and liabilities, except those that are recognized or disclosed in the financial statements on a recurring basis (that is, at least annually). SFAS No. 157 is still effective for us on January 1, 2008 for financial assets and liabilities. We are in the process of evaluating the impact that SFAS No. 157 will have on our consolidated results of operations and financial position, but it is likely that we will be required to provide additional disclosures in financial statements issued after the effective date.

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

 

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In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS No. 141R changes the accounting for acquisitions specifically eliminating the step acquisition model, changes the recognition of contingent consideration from being recognized when it is probable to being recognized at the time of acquisition, disallows the capitalization of transaction costs, changes when restructurings related to acquisitions can be recognized and also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS No. 141R is effective for us as of January 1, 2009. We are in the process of evaluating the impact the adoption of SFAS No. 141R will have on acquisitions that are made after the effective date in our consolidated results of operations and financial position.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51” (“SFAS No. 160”). SFAS No. 160 establishes parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for us as of January 1, 2009. We are in the process of evaluating the impact the adoption of SFAS No. 160 will have on our consolidated results of operations and financial position.

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

The following table sets forth information that is presented solely to address certain tower cash flow reporting requirements contained in the indentures for our 7.50% Notes and 7.125% Notes. The indentures governing our 7.50% Notes and 7.125% Notes contain restrictive covenants with which we and certain subsidiaries under these indentures must comply. These include restrictions on our ability to incur additional debt, guarantee debt, pay dividends and make other distributions and make certain investments. Any failure to comply with these covenants would constitute a default, which could result in the acceleration of the principal amount and accrued and unpaid interest on all our outstanding 7.50% Notes and 7.125% Notes. In order for the holders of these notes to assess our compliance with certain of these covenants, the indentures require us to disclose in the periodic reports we file with the SEC our Tower Cash Flow, Adjusted Consolidated Cash Flow and Non-Tower Cash Flow (each as defined in the indentures). Under the indentures, our ability to make certain types of restricted payments is limited by the amount of Adjusted Consolidated Cash Flow that we generate, which is determined based on our Tower Cash Flow and Non-Tower Cash Flow. In addition, the indentures for our 7.50% Notes and 7.125% Notes restrict us from incurring additional debt or issuing certain types of preferred stock if on a pro forma basis the issuance of such debt and preferred stock would cause our consolidated debt to be greater than 7.5 times our Adjusted Consolidated Cash Flow. As of December 31, 2007, the ratio of our consolidated debt to Adjusted Consolidated Cash Flow was approximately 3.6. For more information about the restrictions under our notes indentures, see note 3 to our consolidated financial statements included in this Annual Report and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Factors Affecting Sources of Liquidity.”

Tower Cash Flow, Adjusted Consolidated Cash Flow and Non-Tower Cash Flow are considered non-GAAP financial measures. We are required to provide these financial metrics by the indentures for our 7.50% Notes and 7.125% Notes, and we have included them below because we consider the indentures for these notes to be material agreements, the covenants related to Tower Cash Flow, Adjusted Consolidated Cash Flow and Non-Tower Cash Flow to be material terms of the indentures, and information about compliance with such covenants to be material to an investor’s understanding of our financial results and the impact of those results on our liquidity.

 

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

 

Tower Cash Flow, for the three months ended December 31, 2007

   $ 177,724  
        

Consolidated Cash Flow, for the twelve months ended December 31, 2007

   $ 668,123  

Less: Tower Cash Flow, for the twelve months ended December 31, 2007

     (683,200 )

Plus: four times Tower Cash Flow, for the three months ended December 31, 2007

     710,896  
        

Adjusted Consolidated Cash Flow, for the twelve months ended December 31, 2007

   $ 695,819  
        

Non-Tower Cash Flow, for the twelve months ended December 31, 2007

   $ (48,012 )
        

 

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ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk from changes in interest rates on long-term debt obligations. We attempt to reduce these risks by utilizing derivative financial instruments, namely interest rate swaps and caps. During the year ended December 31, 2007, all derivative financial instruments were used for purposes other than trading. During 2007, we terminated all swaps and caps that existed at December 31, 2006 and entered into three new interest rate swaps in November 2007. We also entered into and subsequently terminated a treasury lock agreement in connection with the pricing of our 7.00% Notes.

During the year ended December 31, 2007, we repurchased or converted $606.8 million face amount of notes for $545.8 million in cash, including the conversion of $89.5 million principal amount of 3.25% Notes and $0.02 million principal amount of 3.00% Notes into shares of our Class A common stock, and the repurchase of $192.5 million principal amount of 5.0% Notes and $324.8 million principal amount of ATI 7.25% Notes. We also repaid and terminated the SpectraSite credit facilities and the AMT OpCo credit facilities in May 2007 and June 2007, respectively. In June 2007, we refinanced our existing $1.6 billion senior secured credit facilities at the AMT OpCo level with the new $1.25 billion Revolving Credit Facility. In August 2007, we entered into a new $500.0 million Term Loan, which was fully drawn in September 2007, and repaid and terminated in October 2007. As of December 31, 2007, $825.0 million was outstanding under the Revolving Credit Facility.

The following tables provide information as of December 31, 2007 and 2006 about our market risk exposure associated with changing interest rates. For long-term debt obligations, the tables present principal cash flows by maturity date and average interest rates related to outstanding obligations. For interest rate caps and swaps, the tables present notional principal amounts and weighted-average interest rates by contractual maturity dates.

As of December 31, 2007

Principal Payments and Interest Rate Detail by Contractual Maturity Dates

(In thousands, except percentages)

 

Long-Term Debt

   2008     2009     2010     2011     2012     Thereafter     Total    Fair Value  

Fixed Rate Debt(a)

   $ 1,817     $ 1,241     $ 78,828     $ 13,714     $ 1,069,998     $ 2,292,895     $ 3,458,493    $ 3,822,979  

Average Interest Rate(a)

     5.79 %     5.78 %     4.60 %     6.28 %     5.87 %     5.97 %     

Variable Rate Debt(a)

           $ 825,000       $ 825,000    $ 814,688  

Aggregate Notional Amounts Associated with Interest Rate Swaps in Place

As of December 31, 2007 and Interest Rate Detail by Contractual Maturity Dates

(In thousands, except percentages)

 

 

 

Interest Rate SWAPS

   2008     2009     2010     2011     2012     Thereafter     Total    Fair Value  

Notional Amount

     $ 150,000 (b)           $ 150,000    $ (369 )

Fixed Rate(c)

       3.95 %             

Notional Amount

       $ 100,000 (d)         $ 100,000    $ (571 )

Fixed Rate(c)

         4.08 %           

As of December 31, 2006

Principal Payments and Interest Rate Detail by Contractual Maturity Dates

(In thousands, except percentages)

 

 

 

Long-Term Debt

   2007     2008     2009     2010     2011     Thereafter     Total    Fair Value  

Fixed Rate Debt(a)

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

Average Interest Rate(a)

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

Variable Rate Debt(a)

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

 

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

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

(In thousands, except percentages)

Interest Rate CAPS

   2007     2008    2009     2010     2011    Thereafter     Total    Fair Value

Notional Amount

   $ 25,000 (e)               $ 25,000    $ 0

Cap Rate(c)

     8.00 %                 

Interest Rate SWAPS

   2007     2008    2009     2010     2011    Thereafter     Total    Fair Value

Notional Amount

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

Fixed Rate(c)

          3.88 %            

Notional Amount

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

Fixed Rate(c)

            4.78 %          

Notional Amount

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

Fixed Rate(c)

                 4.97 %     

 

(a) As of December 31, 2007, variable rate debt consists of our Revolving Credit Facility ($825.0 million drawn) included above based on the June 8, 2012 maturity date. As of December 31, 2007, fixed rate debt consists of: the Certificates issued in the Securitization ($1.75 billion); 2.25% convertible notes due 2009 (“2.25% Notes”) ($0.04 million); the 7.125% Notes ($500.0 million principal amount due at maturity; the balance as of December 31, 2007 is $502.2 million); the 5.0% Notes ($59.7 million); the 3.25% Notes ($18.3 million); the 7.50% Notes ($225.0 million); the ATI 7.25% Notes ($0.3 million); the 3.00% Notes ($345.0 million principal amount due at maturity; the balance as of December 31, 2007 is $344.6 million accreted value); the 7.00% Notes ($500.0 million) and other debt of $60.2 million. Interest on the Revolving Credit Facility is payable in accordance with the applicable London Interbank Offering Rate (“LIBOR”) agreement or quarterly and accrues at our option either at LIBOR plus margin (as defined) or the base rate plus margin (as defined). The weighted average interest rate in effect at December 31, 2007 for the Revolving Credit Facility was 5.52%. For the year ended December 31, 2007, the weighted average interest rate under our credit facilities was 6.15%.

 

   As of December 31, 2006, variable rate debt consists of the SpectraSite credit facilities and AMT OpCo credit facilities ($1,725.0 million drawn) and fixed rate debt consists of: the 2.25% Notes ($0.04 million); the 7.125% Notes ($500.0 million principal amount due at maturity; the balance as of December 31, 2006 is $503.5 million); the 5.0% Notes ($252.2 million); the 3.25% Notes ($107.9 million); the 7.50% Notes ($225.0 million); the ATI 7.25% Notes ($325.1 million); the 3.00% Notes ($345.0 million principal amount due at maturity; the balance as of December 31, 2006 is $344.5 million accreted value) and other debt of $59.8 million. Interest on our credit facilities is payable in accordance with the applicable LIBOR agreement or quarterly and accrues at our option either at LIBOR plus margin (as defined) or the base rate plus margin (as defined). The weighted average interest rate in effect at December 31, 2006 for our credit facilities was 5.30%. For the year ended December 31, 2006, the weighted average interest rate under our credit facilities was 5.92%.

 

(b) Includes notional amounts of $150.0 million that expire in December 2009.

 

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

 

(d) Includes notional amount of $100.0 million that expires in December 2010.

 

(e) Includes notional amount of $25.0 million that expired in September 2007.

 

(f) Includes notional amounts of $300.0 million that were terminated in June 2007, prior to expiration in December 2009.

 

(g) Includes notional amounts of $550.0 million that were terminated in June 2007, prior to expiration in October 2010.

 

(h) Includes notional amounts of $900.0 million for forward starting interest rate swaps that were terminated in May 2007, prior to expiration in July 2012.

Changes in interest rates can cause interest charges to fluctuate on our variable rate debt. Variable rate debt under our credit facilities as of December 31, 2007 and 2006, after giving effect to our interest rate swap agreements (excluding $900.0 million of forward starting interest rate swap agreements designated as cash flow hedges as of December 31, 2006) is comprised of $575.0 million and $875.0 million, respectively. A 10% increase, or approximately 53 basis points, in current interest rates would have caused an additional pre-tax charge to our net income and an increase in our cash outflows of $3.0 million and $4.6 million for the years ended December 31, 2007 and 2006, respectively.

 

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In January and February 2008, we entered into an aggregate of five additional interest rate swap agreements to manage exposure to variability in cash flows relating to forecasted interest payments under our Revolving Credit Facility. The swaps are designated as cash flow hedges, have an aggregate notional amount of $250.0 million, fixed interest rates ranging from 2.92% to 3.74% and expire in 2011.

We are exposed to market risk from changes in foreign currency exchange rates in connection with our foreign operations, including our rental and management segment divisions in Mexico and Brazil. We believe the exposure to the effects of foreign currency on our consolidated financial statements is limited as the U.S. dollar is the functional currency. For the years ended December 31, 2007 and 2006, the remeasurement gain from these operations approximated $2.7 million and $1.0 million, respectively.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Item 15(a).

 

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

None.

 

ITEM 9A.    CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We have established disclosure controls and procedures designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to the officers who certify our financial reports and to other members of senior management and the Board of Directors.

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of December 31, 2007. As discussed below, we determined that we had a material weakness in our internal control over financial reporting because we failed to maintain effective controls over the accounting for income taxes.

Management’s Annual Report on Internal Control over Financial Reporting

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

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2007. In making its assessment of internal control over financial reporting, our management used

 

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the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework. Based on this assessment management believes that, as of December 31, 2007, the Company did not maintain effective internal control over financial reporting because of the effect of material weakness in our internal control over financial reporting discussed below.

Public Company Accounting Oversight Board Auditing Standard No. 2 defines a material weakness as a significant deficiency, or combination of significant deficiencies, that results in there being a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Based upon this definition, our management concluded that, as of December 31, 2007, a material weakness existed in our internal control over financial reporting related to accounting for income taxes.

In concluding that we had a material weakness, we considered that we did not maintain effective controls over our accounting for income taxes with respect to determining, documenting, tracking and adjusting our deferred tax assets and liabilities on a timely basis. During the three months ended December 31, 2007, we recorded adjustments to the income tax provision for amounts that should have been recorded in prior reporting periods. The adjustments were identified in connection with our year-end tax analyses and relate primarily to our cumulative deferred tax assets and liabilities. The principal components of the adjustments resulted from (i) a deferred foreign tax liability from foreign currency fluctuations arising out of certain long-term intercompany loan transactions involving our Brazilian subsidiary and (ii) changes to certain deferred tax assets and liabilities, including those arising out of the discontinued operations of our Verestar subsidiary, which was discontinued in 2002, and deconsolidated upon filing for bankruptcy protection in 2003.

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

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

American Tower Corporation

Boston, Massachusetts

We have audited the internal control over financial reporting of American Tower Corporation and subsidiaries (the “Company”) as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

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

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

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

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment:

The Company did not maintain effective controls over accounting for income taxes with respect to determining, documenting, tracking and adjusting its deferred tax assets and liabilities on a timely basis.

This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements of the Company as of and for the year ended December 31, 2007, and this report does not affect our report on such financial statements.

 

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In our opinion, because of the effect of the material weakness identified above on the achievement of the control objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended December 31, 2007, and our report dated March 14, 2008 expressed an unqualified opinion on those financial statements and includes an explanatory paragraph relating to the Company’s adoption of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109” as of January 1, 2007.

/s/ DELOITTE & TOUCHE LLP

Boston, Massachusetts

March 14, 2008

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, identified in connection with the evaluation of our internal control that occurred during the fiscal quarter ended December 31, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Our management is in the process of actively addressing and remediating the material weakness in internal control over financial reporting described above. During 2008, we will undertake actions to remediate the material weakness identified, including the following:

 

   

Evaluating our organizational structure related to income tax accounting, as well as our design of income tax accounting processes and controls, to identify and implement new and improved processes, where warranted; and

 

   

Hiring additional personnel and expanding technical resources in the income tax accounting function to review our domestic and foreign transactions and their related tax impacts.

We believe that the steps outlined above will strengthen our internal control over financial reporting and address the material weakness described above. As part of our 2008 assessment of internal control over financial reporting, our management will test and evaluate these additional controls to be implemented to assess whether they are operating effectively.

In addition, we performed additional analyses and other post-closing procedures related to our income tax accounts to conclude that reasonable assurance exists regarding the reliability of financial reporting and the preparation of the consolidated financial statements included in this Annual Report on Form 10-K. Accordingly, management believes that the consolidated financial statements included in this filing fairly present, in all material respects, the Company’s financial position, results of operations and cash flows for the periods presented.

 

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ITEM 9B.    OTHER INFORMATION

Unregistered Sales of Equity Securities

During the period January 1, 2008 through February 29, 2008, we issued an aggregate of 79,684 shares of our Class A common stock upon the exercise of 12,396 warrants assumed in our merger with SpectraSite, Inc. In August 2005, in connection with the merger, we assumed approximately 1.0 million warrants to purchase shares of SpectraSite, Inc. common stock. Upon completion of the merger, each warrant to purchase shares of SpectraSite, Inc. common stock automatically converted into a warrant to purchase 7.15 shares of Class A common stock at an exercise price of $32 per warrant. As some of these warrants were exercised pursuant to a cashless net exercise pursuant to the warrant agreement, net proceeds from these warrant exercises were approximately $53,696. The shares were issued in reliance on the exemption from registration set forth in Sections 3(a)(9) and 3(a)(10) of the Securities Act of 1933, as amended, and Section 1145 of the United States Code. No underwriters were engaged in connection with such issuances.

During the period January 1, 2008 through February 29, 2008, we issued an aggregate of 180,231 shares of our Class A common stock upon the exercise of 12,790 warrants. The warrants were originally issued in January 2003 as part of an offering of 808,000 units, each consisting of $1,000 principal amount at maturity of ATI 12.25% Notes and a warrant to purchase 14.0953 shares of our Class A common stock. The warrants have an exercise price of $0.01 per share and will expire on August 1, 2008. These warrants were exercised pursuant to a cashless net exercise pursuant to the warrant agreement, and as a result, there were no net proceeds from these warrant exercises. The shares were issued in reliance on the exemption from registration set forth in Sections 3(a)(9) and 3(a)(10) of the Securities Act of 1933, as amended. No underwriters were engaged in connection with such issuances.

During the period January 1, 2008 through February 29, 2008, we issued an aggregate of 242 shares of our Class A common stock upon conversion of $5,000 principal amount of our 3.00% Notes. Pursuant to the terms of the indenture, holders of the 3.00% Notes receive 48.7805 shares of our Class A common stock for every $1,000 principal amount of notes converted. All shares were issued in reliance on the exemption from registration set forth in Section3(a)(9) of the Securities Act of 1933, as amended. No underwriters were engaged in connection with such issuances.

 

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PART III

 

ITEM 10.     DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Our executive officers and their respective ages and positions as of March 13, 2008 are set forth below:

 

James D. Taiclet, Jr.

   47    Chairman, President and Chief Executive Officer

Bradley E. Singer

   41    Chief Financial Officer and Treasurer

Jean A. Bua

   49    Executive Vice President, Finance and Corporate Controller

Edmund DiSanto

   55    Executive Vice President, Chief Administrative Officer and General Counsel

William H. Hess

   44    Executive Vice President, International Operations and President, Latin America

Steven C. Marshall

   47    Executive Vice President, International Business Development

Steven J. Moskowitz

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

Amit Sharma

   57    Executive Vice President and President, Asia

James D. Taiclet, Jr. is our Chairman, President and Chief Executive Officer. Mr. Taiclet joined us in September 2001 as President and Chief Operating Officer and was named our Chief Executive Officer in October 2003. Mr. Taiclet was elected to our Board of Directors in November 2003 and was named our Chairman in February 2004. Prior to joining us, Mr. Taiclet had been President of Honeywell Aerospace Services, a part of Honeywell International, since March 1999. From March 1996 until March 1999, Mr. Taiclet served as Vice President, Engine Services at Pratt & Whitney, a unit of United Technologies Corporation. Mr. Taiclet was also previously a consultant at McKinsey & Company, specializing in telecommunications and aerospace. Mr. Taiclet received a Masters in Public Affairs from Princeton University, where he was a Wilson Fellow, and is a distinguished graduate of the United States Air Force Academy.

Bradley E. Singer is our Chief Financial Officer and Treasurer. Mr. Singer joined us in September 2000 as Executive Vice President, Strategy, and was appointed Vice President and General Manager of the Southeast Region in November 2000, positions he held until July 2001. Mr. Singer was appointed Executive Vice President, Finance in July 2001 and was appointed to his current position in December 2001. Prior to joining us, Mr. Singer was an investment banker focusing on the telecommunications industry with Goldman, Sachs & Co., which he joined in 1997. Mr. Singer received an M.B.A. degree with distinction from Harvard University, and is a graduate of the University of Virginia.

Jean A. Bua is our Executive Vice President, Finance and Corporate Controller. Ms. Bua joined us in August 2005 as Senior Vice President, Finance and Corporate Controller and in February 2007, was named Executive Vice President, Finance and Corporate Controller. Prior to joining us, since 1996, Ms. Bua was with Iron Mountain, Inc., a global records management and data protection services company, where she most recently served as Senior Vice President, Chief Accounting Officer and Worldwide Controller. From 1993 to 1996, Ms. Bua was Corporate Controller for Duracraft Corporation, an international consumer products manufacturer. Prior to joining Duracraft, Ms. Bua was Assistant Controller for Keithley Instruments, a high-tech hardware and software company, from 1991 to 1993. Ms. Bua was also previously a management consultant for Ernst & Young and an auditor for KPMG. Ms. Bua is a Certified Public Accountant and holds an M.B.A. degree from the University of Rhode Island.

Edmund DiSanto is our Executive Vice President, Chief Administrative Officer and General Counsel. Mr. DiSanto joined us in April 2007. Prior to joining us, Mr. DiSanto was with Pratt & Whitney, a unit of United Technologies Corporation. Mr. DiSanto started with United Technologies in 1989, where he first served as Assistant General Counsel of its Carrier subsidiary, then corporate Executive Assistant to the Chairman and Chief Executive Officer, and from 1997, he held various legal and business roles at its Pratt & Whitney unit, including Deputy General Counsel and most recently, Vice President, Global Service Partners, Business Development. Prior to joining United Technologies, Mr. DiSanto served in a number of legal and related positions at United Dominion Industries and New England Electric Systems. Mr. DiSanto earned his J.D. degree from Boston College Law School and a Bachelor of Science from Northeastern University.

 

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

Steven C. Marshall is our Executive Vice President, International Business Development. Mr. Marshall joined us in November 2007. Prior to joining us, Mr. Marshall was with National Grid Plc, where he served in a number of leadership and business development positions since 1997. Between 2003 and 2007, Mr. Marshall was Chief Executive Officer, National Grid Wireless, where he led National Grid’s wireless tower infrastructure business in the United States and United Kingdom. In addition, during his tenure at National Grid, as well as at Costain Group Plc and Tootal Group Plc, he led operational and business development efforts in Latin America, India, Southeast Asia, Africa and the Middle East. Mr. Marshall earned his M.B.A. degree from Manchester Business School in Manchester, England and a Bachelor of Science with honors in Building and Civil Engineering from the Victoria University of Manchester, England.

Steven J. Moskowitz is our Executive Vice President and President, U.S. Tower Division. Mr. Moskowitz joined us in January 1998, initially as a Vice President and General Manager of our Northeast Region and was appointed Executive Vice President, Sales & Marketing, and Vice President and General Manager of our Northeast Region in March 1999. Mr. Moskowitz was named Executive Vice President of the U.S. Tower Division in January 2002 and named President in October 2003. Prior to joining us, Mr. Moskowitz had served as a Vice President, General Manager of Eastman Radio Sales, a national leader in media sales, since 1992. From 1985 to 1992, Mr. Moskowitz held various Vice President positions at Katz Media Group, the leading broadcast media representation firm in the United States. Mr. Moskowitz received his undergraduate degree from Temple University.

Amit Sharma is our Executive Vice President and President, Asia. Mr. Sharma joined us in September 2007. Prior to joining us, Mr. Sharma was with Motorola since 1992, where he led country teams in India and Southeast Asia, including as Country President, India and as Head of Strategy, Asia-Pacific. Mr. Sharma also served on Motorola’s Asia Pacific Board and a member of its senior leadership team. Prior to joining Motorola, Mr. Sharma was with GE Capital, serving as Vice President, Strategy and Business Development, and prior to that, with McKinsey, New York, serving as a core member of the firm’s Electronics and Marketing Practices. Mr. Sharma earned his M.B.A. degree in International Business from the Wharton School, University of Pennsylvania, where he was on the Dean’s List and the Director’s Honors List. Mr. Sharma also holds an MS in Computer Science from the Moore School, University of Pennsylvania, and a Bachelor of Technology in Mechanical Engineering from the Indian Institute of Technology.

The information under “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” from the Definitive Proxy Statement is incorporated herein by reference. Information required by this item pursuant to Item 407(c)(3) of SEC Regulation S-K relating to our procedures by which security holders may recommend nominees to our Board of Directors, and pursuant to Item 407(d)(4) and 407(d)(5) of SEC Regulation S-K relating to our audit committee financial experts and identification of the audit committee of our Board of Directors, is contained in the Definitive Proxy Statement under “Corporate Governance” and is incorporated herein by reference.

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

 

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ITEM 11.   EXECUTIVE COMPENSATION

The information under “Compensation and Other Information Concerning Directors and Officers” from the Definitive Proxy Statement is hereby incorporated by reference.

 

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information under “Security Ownership of Certain Beneficial Owners and Management” and “Securities Authorized for Issuance Under Equity Compensation Plans” from the Definitive Proxy Statement is incorporated herein by reference.

 

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

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

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

 

ITEM 14.   PRINCIPAL ACCOUNTING FEES AND SERVICES

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

PART IV

 

ITEM 15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

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

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

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

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

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 14th day of March, 2008.

 

AMERICAN TOWER CORPORATION

By:

 

/s/    JAMES D. TAICLET, JR.        

 

James D. Taiclet, Jr.

Chairman, President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Signature

  

Title

 

Date

/s/    JAMES D. TAICLET, JR.

James D. Taiclet, Jr.

  

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

  March 14, 2008

/s/    BRADLEY E. SINGER        

Bradley E. Singer

  

Chief Financial Officer and Treasurer (Principal Financial Officer)

  March 14, 2008

/s/    JEAN A. BUA        

Jean A. Bua

  

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

  March 14, 2008

/s/    RAYMOND P. DOLAN        

Raymond P. Dolan

   Director   March 14, 2008

/s/    RONALD M. DYKES        

Ronald M. Dykes

   Director   March 14, 2008

/s/    CAROLYN F. KATZ        

Carolyn F. Katz

   Director   March 14, 2008

/s/    GUSTAVO LARA CANTU        

Gustavo Lara Cantu

   Director   March 14, 2008

/s/    JOANN A. REED        

JoAnn A. Reed

   Director   March 14, 2008

/s/    PAMELA D. A. REEVE        

Pamela D. A. Reeve

   Director   March 14, 2008

/s/    DAVID E. SHARBUTT        

David E. Sharbutt

   Director   March 14, 2008

/s/    SAMME L. THOMPSON        

Samme L. Thompson

   Director   March 14, 2008

 

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AMERICAN TOWER CORPORATION AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page

Report of Independent Registered Public Accounting Firm

   F-2

Consolidated Balance Sheets as of December 31, 2007 and 2006

   F-3

Consolidated Statements of Operations for the Years Ended December 31, 2007, 2006 and 2005

   F-4

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2007, 2006 and 2005

  

F-5

Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005

   F-6

Notes to Consolidated Financial Statements

   F-7

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

American Tower Corporation

Boston, Massachusetts

We have audited the accompanying consolidated balance sheets of American Tower Corporation and subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2007 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to consolidated financial statements, the Company adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109,” as of January 1, 2007, FASB No. 123R “Share-Based Payment,” as of January 1, 2006, and FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations-an interpretation of FASB Statement No. 143,” as of December 31, 2005.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 14, 2008 expressed an adverse opinion on the Company's internal control over financial reporting because of a material weakness.

/s/ DELOITTE & TOUCHE LLP

Boston, Massachusetts

March 14, 2008

 

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AMERICAN TOWER CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

     December 31,  
     2007     2006  

ASSETS

    

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 33,123     $ 281,264  

Restricted cash

     53,684    

Short-term investments and available-for-sale securities

     7,224       22,986  

Accounts receivable, net of allowances

     40,316       29,368  

Prepaid and other current assets

     71,264       63,919  

Deferred income taxes

     40,063       88,485  
                

Total current assets

     245,674       486,022  
                

PROPERTY AND EQUIPMENT, net

     3,045,186       3,218,124  

GOODWILL

     2,188,312       2,189,767  

OTHER INTANGIBLE ASSETS, net

     1,686,434       1,820,876  

DEFERRED INCOME TAXES

     479,854       482,710  

NOTES RECEIVABLE AND OTHER LONG-TERM ASSETS

     484,997       415,720  
                

TOTAL

   $ 8,130,457     $ 8,613,219  
                

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

CURRENT LIABILITIES:

    

Accounts payable and accrued expenses

   $ 175,464     $ 187,634  

Accrued interest

     33,702       41,319  

Current portion of long-term obligations

     1,817       253,907  

Unearned revenue

     106,395       86,769  
                

Total current liabilities

     317,378       569,629  
                

LONG-TERM OBLIGATIONS

     4,283,467       3,289,109  

OTHER LONG-TERM LIABILITIES

     504,178       365,974  
                

Total liabilities

     5,105,023       4,224,712  
                

COMMITMENTS AND CONTINGENCIES

    

MINORITY INTEREST IN SUBSIDIARIES

     3,342       3,591  

STOCKHOLDERS’ EQUITY:

    

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

    

Class A Common Stock: $.01 par value; 1,000,000,000 shares authorized, 452,759,969 and 437,792,629 shares issued, and 399,518,542 and 424,672,267 shares outstanding, respectively

     4,527       4,378  

Additional paid-in capital

     7,772,382       7,502,472  

Accumulated deficit

     (2,703,373 )     (2,733,920 )

Accumulated other comprehensive (loss) income

     (3,626 )     16,079  

Treasury stock (53,241,427 and 13,120,362 shares at cost, respectively)

     (2,047,818 )     (404,093 )
                

Total stockholders’ equity

     3,022,092       4,384,916  
                

TOTAL

   $ 8,130,457     $ 8,613,219  
                

See notes to consolidated financial statements.

 

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AMERICAN TOWER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

 

    Year Ended December 31,  
    2007     2006     2005  

REVENUES:

     

Rental and management

  $ 1,425,975     $ 1,294,068     $ 929,762  

Network development services

    30,619       23,317       15,024  
                       

Total operating revenues

    1,456,594       1,317,385       944,786  
                       

OPERATING EXPENSES:

     

Costs of operations (exclusive of items shown separately below)

     

Rental and management

    343,450       332,246       247,781  

Network development services

    16,172       11,291       8,346  

Depreciation, amortization and accretion

    522,928       528,051       411,254  

Selling, general, administrative and development expense (including stock-based compensation expense of $54,603, $39,502 and $6,597, respectively)

    186,483       159,324       108,059  

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

    9,198       2,572       34,232  
                       

Total operating expenses

    1,078,231       1,033,484       809,672  
                       

OPERATING INCOME

    378,363       283,901       135,114  
                       

OTHER INCOME (EXPENSE):

     

Interest income, TV Azteca, net of interest expense of $1,490, $1,491 and $1,492, respectively

    14,207       14,208       14,232  

Interest income

    10,848       9,002       4,402  

Interest expense

    (235,824 )     (215,643 )     (222,419 )

Loss on retirement of long-term obligations

    (35,429 )     (27,223 )     (67,110 )

Other income

    20,675       6,619       227  
                       

Total other expense

    (225,523 )     (213,037 )     (270,668 )
                       

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

    152,840       70,864       (135,554 )

Income tax provision

    (59,809 )     (41,768 )     (5,714 )

Minority interest in net earnings of subsidiaries

    (338 )     (784 )     (575 )

Income (loss) on equity method investments

    19       26       (2,078 )
                       

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

    92,712       28,338       (143,921 )

LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAX (PROVISION) BENEFIT OF $(6,191), $444 and $1,030, RESPECTIVELY

    (36,396 )     (854 )     (1,913 )
                       

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

    56,316       27,484       (145,834 )

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

        (35,525 )
                       

NET INCOME (LOSS)

  $ 56,316     $ 27,484     $ (181,359 )
                       

NET INCOME (LOSS) PER COMMON SHARE AMOUNTS:

     

BASIC:

     

Income (loss) from continuing operations

  $ 0.22     $ 0.06     $ (0.47 )

Loss from discontinued operations

    (0.09 )       (0.01 )

Cumulative effect of change in accounting principle, net

        (0.12 )
                       

Net income (loss)

  $ 0.14     $ 0.06     $ (0.60 )
                       

DILUTED:

     

Income (loss) from continuing operations

  $ 0.22     $ 0.06     $ (0.47 )

Loss from discontinued operations

    (0.09 )       (0.01 )

Cumulative effect of change in accounting principle, net

        (0.12 )
                       

Net income (loss)

  $ 0.13     $ 0.06     $ (0.60 )
                       

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:

     

BASIC

    413,167       424,525       302,510  
                       

DILUTED

    426,079       436,217       302,510  
                       

See notes to consolidated financial statements.

 

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AMERICAN TOWER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Years Ended December 31, 2007, 2006, and 2005

(In thousands, except share data)

 

    Class A Common Stock   Treasury Stock     Additional
Paid-in
Capital
    Unearned
Compensation
    Accumulated
Other
Comprehensive
Income (Loss)
    Accumulated
Deficit
    Total
Stockholders’
Equity
    Total
Comprehensive
Income(Loss)
 
    Issued
Shares
  Amount   Shares     Amount              

BALANCE, DECEMBER 31, 2004

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

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

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

Stock option activity

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

Issuance of common stock upon exercise of warrants

  398,412     4         1,778             1,782    

Issuance of common stock – Stock Purchase Plans

  50,119     1         767             768    

Treasury stock activity

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

Unearned compensation – SpectraSite merger

            $ (4,861 )         (4,861 )  

Unearned compensation amortization– SpectraSite merger

              2,364           2,364    

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

              $ (803 )       (803 )     (803 )

3.25% convertible notes exchanged for common stock

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

ATC Mexico activity

  159,836     2         2,829             2,831    

ATC South America activity

            2,026             2,026    

Tax benefit from disposition of stock options

            66,193             66,193    

Net loss

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

Total comprehensive loss

                    $ (182,162 )
                                                                       

BALANCE, DECEMBER 31, 2005

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

Stock option activity

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

Issuance of common stock upon exercise of warrants

  14,532,874     145         220             365    

Issuance of common stock – Stock Purchase Plan

  53,210     1         1,329             1,330    

Treasury stock activity

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

Unearned compensation—SpectraSite merger

            (2,497 )     2,497          

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

                6,457         6,457       6,457  

Net unrealized gain on available-for-sale securities

                13,945         13,945       13,945  

Net realized gain on available-for-sale securities

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

Convertible notes exchanged for common stock

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

Tax benefit from disposition of stock options

            1,359             1,359    

Stock option tender offer accrual for cash payments

            (3,908 )           (3,908 )  

Net income

                  27,484       27,484       27,484  
                         

Total comprehensive income

                    $ 44,366  
                                                                       

BALANCE, DECEMBER 31, 2006

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

Stock option activity

  7,400,667     74         182,658             182,732    

Issuance of common stock upon exercise of warrants

  192,054     2         290             292    

Issuance of common stock – Stock Purchase Plan

  48,886           1,658             1,658    

Treasury stock activity

      (40,121,065 )     (1,643,725 )             (1,643,725 )  

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

                (3,244 )       (3,244 )     (3,244 )

Net realized loss on cash flow hedges, net of tax

                (6,162 )       (6,162 )     (6,162 )

Net unrealized loss on available-for-sale securities, net of tax

                (3,230 )       (3,230 )     (3,230 )

Net realized gain on available-for-sale securities, net of tax

                (7,069 )       (7,069 )     (7,069 )

Convertible notes exchanged for common stock

  7,325,733     73         88,012             88,085    

Cumulative effect of adoption of FIN 48

                  (25,769 )     (25,769 )  

Reduction in deferred tax asset related to spin off from American Radio Systems

            (2,708 )           (2,708 )  

Net income

                  56,316       56,316       56,316  
                         

Total comprehensive income

                    $ 36,611  
                                                                       

BALANCE, DECEMBER 31, 2007

  452,759,969   $ 4,527   (53,241,427 )   $ (2,047,818 )   $ 7,772,382       $ (3,626 )   $ (2,703,373 )   $ 3,022,092    
                                                                 

See notes to consolidated financial statements.

 

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Table of Contents

AMERICAN TOWER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

     Year Ended December 31,  
     2007     2006     2005  

CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:

      

Net income (loss)

   $ 56,316     $ 27,484     $ (181,359 )

Cumulative effect of change in accounting principle, net

         35,525  

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

      

Depreciation, amortization and accretion

     522,928       528,051       411,254  

Stock-based compensation expense

     54,603       39,502       15,930  

Other non-cash items reported in discontinued operations (primarily income tax provision (benefit))

     6,192       (444 )     (2,145 )

Increase in restricted cash

     (49,818 )    

Minority interest in net earnings of subsidiaries

     338       784       575  

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

     (9,470 )     (5,453 )     2,078  

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

     9,214       2,958       19,096  

Loss on retirement of long-term obligations

     34,826       27,223       67,110  

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

     7,789       9,719       45,214  

Provision for losses on accounts receivable

     2,470       5,175       8,492  

Deferred income taxes

     21,239       17,535       (11,029 )

Changes in assets and liabilities, net of acquisitions:

      

Accounts receivable

     (13,417 )     (182 )     7,570  

Prepaid and other assets

     65,704       (9,509 )     19,973  

Deferred rent asset

     (69,673 )     (58,306 )     (30,304 )

Accounts payable and accrued expenses

     (7,237 )     (10,620 )     (35,120 )

Accrued interest

     (7,617 )     3,844       (5,641 )

Unearned revenue

     19,625       9,114       5,179  

Deferred rent liability

     26,650       26,811       15,946  

Other long-term liabilities

     22,017       7,052       8,860  
                        

Cash provided by operating activities

     692,679       620,738       397,204  
                        

CASH FLOWS USED FOR INVESTING ACTIVITIES:

      

Payments for purchase of property and equipment and construction activities

     (154,381 )     (127,098 )     (88,637 )

Payments for acquisitions, net of cash acquired

     (43,962 )     (14,337 )     (7,479 )

Payments for acquisition of minority interests

       (22,944 )     (7,270 )

Cash acquired from SpectraSite merger, net of transaction costs paid

         16,696  

Proceeds from sales of available-for-sale securities and other long-term assets

     22,163       35,387       6,881  

Deposits, restricted cash, short-term investments and other

     (10,000 )     (120 )     (725 )
                        

Cash used for investing activities

     (186,180 )     (129,112 )     (80,534 )
                        

CASH FLOWS USED FOR FINANCING ACTIVITIES:

      

Proceeds from issuance of Certificates in securitization transaction

     1,750,000      

Proceeds from term loan credit facility

     500,000      

Borrowings under revolving credit facilities

     1,675,000       242,000       1,543,000  

Proceeds from issuance of senior notes

     500,422      

Repayment of notes payable, credit facilities and capital leases

     (3,612,240 )     (295,760 )     (1,949,444 )

Purchases of Class A common stock

     (1,642,821 )     (306,856 )     (68,927 )

Proceeds from stock options, warrants and stock purchase plan

     124,087       40,940       65,357  

Deferred financing costs and other financing activities

     (49,088 )     (3,387 )     (9,512 )
                        

Cash used for financing activities

     (754,640 )     (323,063 )     (419,526 )
                        

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

     (248,141 )     168,563       (102,856 )

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

     281,264       112,701       215,557  
                        

CASH AND CASH EQUIVALENTS, END OF YEAR

   $ 33,123     $ 281,264     $ 112,701  
                        

See notes to consolidated financial statements.

 

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Table of Contents

AMERICAN TOWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business—American Tower Corporation and subsidiaries (collectively, ATC or the Company) is an independent owner, operator and developer of wireless and broadcast communications sites in the United States, Mexico and Brazil. The Company’s primary business, as discussed in note 14, is the leasing of antenna space on multi-tenant communications sites to wireless service providers and radio and television broadcast companies. The Company also manages rooftop and tower sites for third parties, operates distributed antenna systems within buildings, and provides network development services that support its rental and management operations and the addition of new tenants and equipment on its sites.

The Company completed its merger with SpectraSite, Inc. in August 2005, as more fully described in note 4. The merger was approved by the stockholders of the Company and SpectraSite, Inc. on August 3, 2005, and the results of operations of SpectraSite have been included in the Company’s accompanying consolidated financial statements commencing on August 3, 2005.

ATC is a holding company that conducts its operations in the United States and internationally through its directly and indirectly owned subsidiaries. ATC’s principal United States operating subsidiaries are American Towers, Inc. (ATI) and SpectraSite Communications, LLC (SpectraSite). ATC conducts its international operations through its subsidiary, American Tower International, Inc., which in turn conducts operations through its international operating subsidiaries. The Company’s international operations consist primarily of its operations in Mexico and Brazil, which it conducts in Mexico through ATC Mexico Holding Corp. (ATC Mexico) and in Brazil through ATC South America Holding Corp. (ATC South America).

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

Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates, and such differences could be material to the accompanying consolidated financial statements. The significant estimates in the accompanying consolidated financial statements include income taxes, stock-based compensation, impairment of long-lived assets (including goodwill), asset retirement obligations, revenue recognition and estimated useful lives of assets.

The Company is in the process of reviewing the estimated useful lives of its tower assets. The Company now has over ten years of operating history, and it is considering whether it should modify its current estimates for asset lives based on its historical operating experience. The Company has retained an independent consultant to assist the Company in completing this review, and received a report from the consultant in the first quarter of 2008, which it is in the process of analyzing. The Company currently depreciates its towers on a straight-line basis over the shorter of the term of the underlying ground lease (including renewal options) or the estimated useful life of the tower, which the Company has historically estimated to be 15 years. Additionally, certain of the Company’s intangible assets are amortized on a similar basis to the tower assets, as the estimated useful lives of such intangibles correlate to the useful life of the towers. If the Company concludes that a revision in the estimated useful lives of its tower assets is appropriate, the Company will account for any changes in the useful lives as a change in accounting estimate under Statement of Financial Accounting Standards (SFAS) No. 154 “Accounting Changes and Error Corrections,” which will be recorded prospectively beginning in the period of change. Based on preliminary information obtained to date, the Company expects that its estimated asset lives may be extended

 

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Table of Contents

AMERICAN TOWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

which would result in prospective decreases in depreciation and amortization, and such changes could be material to future depreciation and amortization and the Company’s consolidated results of operations.

Revenue Recognition—Rental and management revenues are recognized on a monthly basis under lease or management agreements when earned. Fixed escalation clauses present in non-cancelable lease agreements, excluding those tied to the Consumer Price Index (CPI) or other inflation-based indices, and other incentives present in lease agreements with the Company’s customers are recognized on a straight-line basis over the terms of the applicable leases. Straight-line revenues for the years ended December 31, 2007, 2006 and 2005 approximated $69.7 million, $58.3 million and $30.3 million, respectively. The Company’s straight-line asset of approximately $279.7 million and $210.0 million is included in notes receivable and other long-term assets in the accompanying consolidated balance sheets as of December 31, 2007 and 2006, respectively. Amounts billed up-front for certain services provided in connection with the execution of lease agreements are initially deferred and recognized as revenue over the initial terms of the applicable leases. Amounts billed or received prior to being earned are deferred and reflected in unearned revenue in the accompanying consolidated balance sheets until such time as the earnings process is complete.

Network development services revenues are derived under contracts or arrangements with customers that provide for billings on a fixed price basis. Revenues are recognized as services are performed, excluding certain fees for services provided in connection with the execution of lease agreements which are initially deferred and recognized as revenue over the initial terms of the applicable leases.

Rent Expense—Many of the leases underlying the Company’s tower sites have fixed rent escalators, which provide for periodic increases in the amount of ground rent payable by the Company over time. The Company calculates straight-line ground rent expense for these leases based on the fixed non-cancelable term of the underlying ground lease plus all periods, if any, for which failure to renew the lease imposes an economic penalty to the Company such that renewal appears, at the inception of the lease, to be reasonably assured. Certain of the Company’s tenant leases require the Company to exercise available renewal options pursuant to the underlying ground lease, if the tenant exercises its renewal option. For towers with these types of tenant leases at the inception of the ground lease, the Company calculates its straight-line ground rent over the term of the ground lease, including all renewal options required to fulfill the tenant lease obligation.

Straight-line ground rent expense approximated $26.7 million, $26.8 million and $15.9 million, for the years ended December 31, 2007, 2006 and 2005, respectively. The Company’s straight-line rent liability of approximately $150.8 million and $124.1 million is included in other long-term liabilities in the accompanying consolidated balance sheets as of December 31, 2007 and 2006, respectively. The Company’s prepaid land rent of approximately $30.1 million and $27.3 million is included in prepaid and other current assets in the accompanying consolidated balance sheets as of December 31, 2007 and 2006, respectively.

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

Stock-Based Compensation—On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment,” (SFAS No. 123R), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including stock options and employee stock purchases under employee stock purchase plans. SFAS No. 123R supersedes the Company’s previous

 

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Table of Contents

AMERICAN TOWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25). Under SFAS No. 123R, companies are no longer permitted to account for share-based compensation transactions using the intrinsic value method in accordance with APB No. 25 described below. Instead, companies are required to account for such transactions using a fair value method and recognize the related expense associated with share-based payments in the statement of operations. The Company adopted SFAS No. 123R under the modified prospective method, pursuant to which compensation expense for all share-based payments granted or modified after the effective date is recognized based upon the requirements of SFAS No. 123R. Accordingly, prior period amounts have not been restated related to the adoption of SFAS No. 123R. SFAS No. 123R requires companies to recognize stock-based compensation awards granted to employees and directors as compensation expense on a fair value method. Under the fair value recognition provisions of SFAS No. 123R, stock-based compensation cost is measured at the accounting measurement date based on the fair value of the award and is recognized as expense over the service period, which generally represents the vesting period. The fair value of stock option grants is calculated using the Black-Scholes option pricing model and the unrecognized expense of unvested awards as of January 1, 2006 are being recognized under the same pricing model. The expense recognized over the service period is required to include an estimate of the awards that will be forfeited. Under APB No. 25, the Company previously recorded the impact of forfeitures as they occurred.

Under the terms of the Company’s 2007 Equity Incentive Plan described in note 13, the Company plans to grant awards of restricted stock units beginning in 2008. Under the fair value recognition provisions of SFAS No. 123R, the Company records stock-based compensation expense for restricted stock units based on the fair value of the restricted stock units as determined by the quoted closing market price of the Company’s Class A common stock at the date of grant. The expense is recognized over the service period and is required to include an estimate of awards that will be forfeited.

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

Prior to January 1, 2006, the Company complied with the provisions of APB No. 25 to account for equity grants and awards to employees, officers and directors and the disclosure-only provisions of SFAS No. 148 “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of SFAS No. 123,” which provided optional transition guidance for those companies electing to voluntarily adopt the accounting provisions of SFAS No. 123 “Accounting for Stock-Based Compensation” (SFAS No. 123). In accordance with APB No. 25, the Company recognized compensation expense based on the excess, if any, of the quoted market price of the stock at the accounting measurement date over the amount an employee must pay to acquire the stock. Under APB No. 25, compensation expense is measured as of the date an award has received approval by relevant authority, the number of shares and exercise price are fixed and allocation to specific individuals has

 

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Table of Contents

AMERICAN TOWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

occurred. Generally, this occurs on the date the grant is approved by the compensation committee of the Company’s Board of Directors, or, if grant authority has been delegated to management, when the shares are allocated to specific individuals. The stock-based compensation expense is recognized over the vesting period using the ratable method, whereby an equal amount of expense is recognized for each year of vesting.

Prior to January 1, 2006, the Company accounted for modifications to stock options under FIN 44 “Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB No. 25” (FIN 44). Modifications include, but are not limited to, acceleration of vesting and continued vesting while not providing substantive services. Compensation expense is recorded in the period of modification for the intrinsic value of the vested portion of the award, including vesting that occurs while not providing substantive services, on the date of modification. The intrinsic value of the option grant is the difference between the fair market value of the Company’s stock on the date of modification and the exercise price of the option grant. The Company valued stock options assumed in conjunction with business combinations accounted for using the purchase method at fair value on the date of acquisition using the Black-Scholes option-pricing model, in accordance with FIN 44. The fair value of assumed options is included as a component of the purchase price. The intrinsic value of unvested stock options is recorded as unearned stock-based compensation and amortized to expense over the remaining vesting period of the stock options using the straight-line method.

The Company’s stock-based compensation expense is included in selling, general, administrative and development expense for the years ended December 31, 2007, 2006 and 2005, as well as certain amounts associated with restructuring and merger related employee terminations that are reflected in impairments, net loss on sale of long-lived assets, restructuring and merger related expense for the year ended December 31, 2005. The Company’s stock-based compensation plans are described in note 13.

Loss on Retirement of Long-Term Obligations—Loss on retirement of long-term obligations primarily includes cash paid to retire debt in excess of its carrying value and non-cash charges related to the write-off of deferred financing fees. Loss on retirement of long-term obligations also includes gains from repurchasing or refinancing certain of the Company’s debt obligations.

Discount and Premium on Notes—The Company amortizes the discount on its convertible, senior and senior subordinated discount notes (including the allocated fair value of the related warrants) and the premium on its senior notes, using the effective interest method over the term of the obligation. Such amortization is reflected in interest expense in the accompanying consolidated statements of operations. (See note 3.)

Concentrations of Credit Risk—Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash and cash equivalents, notes receivable described in note 7, trade receivables and derivative instruments described in note 8. The Company mitigates its risk with respect to cash and cash equivalents and derivative instruments by maintaining its deposits and contracts at high quality financial institutions and monitoring the credit ratings of those institutions. The Company derives the largest portion of its revenues, corresponding trade receivables and the related deferred rent asset from a small number of customers in the telecommunications industry, and approximately 70% of its revenues are derived from six customers in the industry. In addition, the Company has concentrations of credit risk in certain geographic areas. (See notes 7, 8 and 14.)

The Company mitigates its concentrations of credit risk with respect to notes and trade receivables by actively monitoring the credit worthiness of its borrowers and customers. Accounts receivable are reported net of allowances of $7.6 million, $9.3 million and $15.1 million as of December 31, 2007, 2006 and 2005, respectively. Amounts charged against allowances, net of recoveries, for the years ended December 31, 2007,

 

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Table of Contents

AMERICAN TOWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

2006 and 2005 were $4.2 million, $11.0 million and $13.1 million, respectively. The fair value of accounts receivable acquired in the merger with SpectraSite, Inc. increased the allowances by $5.7 million as of the date of acquisition in August 2005.

Derivative Financial Instruments—The Company accounts for derivative financial instruments in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. All derivatives are recorded on the consolidated balance sheet at fair value and assets are reflected in notes receivable and other long-term assets and liabilities are reflected in other long-term liabilities in the accompanying consolidated balance sheets. If a derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in accumulated other comprehensive (loss) income and are recognized in the results of operations when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in the results of operations. For derivative instruments not designated as hedging instruments, changes in fair value are recognized in the results of operations in the period that the change occurs.

The Company uses derivative financial instruments as a means of managing interest-rate risk associated with its current debt or anticipated debt transactions that have a high probability of execution. The Company is exposed to interest rate risk relating to variable interest rates on its revolving credit facility described in note 3. The Company uses interest rate swaps as part of its overall strategy to manage the level of exposure to the risk of interest rate fluctuations under its variable rate credit facilities. The interest rate swap agreements effectively convert the interest payments for a portion of the debt from floating rate to fixed rate debt. The Company also enters into forward starting interest rate swap agreements and treasury lock agreements, which the Company designates as cash flow hedges, to manage exposure to variability in cash flows relating to forecasted interest payments in connection with the likely issuance of new fixed rate debt. Settlement gains and losses on terminations of these forward starting interest rate swap agreements are recorded in other comprehensive income (loss), net of taxes, and amortized to interest expense over the term of the newly issued debt.

The Company assesses, both at the inception of the hedge and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. The Company does not hold derivatives for trading purposes. (See note 8.)

Effective January 1, 2006, the Company adopted the provisions of Derivatives Implementation Group Issue B39, “Embedded Derivatives: Application of Paragraph 13(b) to Call Options That are Exercisable Only by the Debtor” (DIG Issue B39). Under DIG Issue B39, the carrying value of the call provision contained in the Company's 7.125% senior notes described in note 3 that qualified as an embedded derivative no longer required separate recognition or accounting and is combined with the carrying value of the underlying debt. Prior to January 1, 2006, the $3.1 million fair value of the liability had been recorded at fair value at the end of each reporting period with changes in fair value reflected in other income (expense) in the accompanying consolidated statement of operations. Effective January 1, 2006, the $3.1 million carrying value of the call provision was reclassified from other long-term liabilities to other long-term obligations in the consolidated balance sheet and the Company began to amortize the premium over the term of the call provision. During the years ended December 31, 2007 and 2006, the Company recorded $1.1 million as a reduction to interest expense in the accompanying consolidated statement of operations and the carrying value of the call provision was $0.9 million and $2.0 million as of December 31, 2007 and 2006, respectively, in the accompanying consolidated balance sheets.

Other Comprehensive (Loss) Income—Other comprehensive (loss) income refers to revenues, expenses, gains and losses that under accounting principles generally accepted in the United States of America are included in

 

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Table of Contents

AMERICAN TOWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

other comprehensive (loss) income, but are excluded from net income (loss), as these amounts are recorded directly as an adjustment to stockholders’ equity, net of tax. The Company’s other comprehensive (loss) income is comprised of realized and unrealized gains/losses on derivative cash flow hedges and short-term available-for-sale securities as summarized in the accompanying consolidated statement of stockholders’ equity.

Foreign Currency Remeasurement—The functional currency of the Company’s foreign subsidiaries in Mexico and Brazil is the U.S. dollar. Monetary assets and liabilities related to the Company’s operations in Mexico and Brazil are remeasured from the local currency into U.S. dollars at the rate of currency exchange at the end of the applicable fiscal reporting period. Non-monetary assets and liabilities are remeasured at historical exchange rates. Revenues and expenses are remeasured at average monthly exchange rates. All remeasurement gains and losses are included in the Company’s consolidated statement of operations, within the caption other income (expense). The net remeasurement gain for the years ended December 31, 2007, 2006 and 2005 approximated $2.7 million, $1.0 million and $0.4 million, respectively.

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

Restricted Cash—The Company classifies as restricted cash all cash pledged as collateral to secure obligations and all cash whose use is otherwise limited by contractual provisions, including cash on deposit in reserve accounts relating to the Commercial Mortgage Pass-Through Certificates, Series 2007-1 issued in the Company’s securitization transaction, as described in note 3.

Short-Term Investments and Available for Sale Securities—As of December 31, 2007, short-term investments and available-for-sale securities includes government bonds of approximately $6.3 million with remaining maturities (when purchased) in excess of three months and $0.9 million of available-for-sale securities. As of December 31, 2007 and 2006, the Company’s only short-term available-for-sale security was in FiberTower Corporation (FiberTower), which had a fair value of approximately $0.9 million (0.4 million shares of common stock at a price of $2.28 per share) and $23.0 million (3.9 million shares of common stock at a price of $5.88 per share), respectively. The Company complies with the provisions of SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities” (SFAS No. 115), and investments classified as available-for-sale are carried at fair value on the consolidated balance sheet. The net unrealized gains or losses on the available-for-sale securities, net of tax, are reported as accumulated other comprehensive (loss) income, unless such changes are deemed other than temporary. The Company periodically reviews the value of available-for-sale securities and will record impairment charges in the consolidated statement of operations and comprehensive (loss) income for any decline in value that is determined to be other-than-temporary. The Company does not have any investments classified as trading.

During the years ended December 31, 2007 and 2006, the Company sold 3.5 million shares of FiberTower for proceeds of $17.1 million and 1.6 million shares for proceeds of $8.6 million, respectively. Realized gains of $10.9 million and $5.4 million are included in other income (expense) in the accompanying consolidated statement of operations for the years ended December 31, 2007 and 2006, respectively. As of December 31, 2007 and 2006, the unrealized gains included in other comprehensive (loss) income, net of taxes totaled $0.1 million and $10.4 million, respectively.

Property and Equipment—Property and equipment are recorded at cost or at estimated fair value (in the case of acquired properties). Cost for self-constructed towers includes direct materials and labor, indirect costs associated with construction and capitalized interest. Approximately $0.7 million and $0.5 million of interest was capitalized for the years ended December 31, 2006 and 2005, respectively.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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

 

Equipment

   3-15 years

Buildings

   32 years

Building and land improvements

   15-32 years

Towers

   up to 15 years

Towers or assets acquired through capital leases are reflected in property and equipment at the present value of future minimum lease payments or the fair market value of the leased asset at the inception of the lease. Property and equipment, network location intangibles and assets held under capital lease related to tower acquisitions are amortized over their useful lives for a period up to fifteen years. Expenditures for repairs and maintenance are expensed as incurred. Betterments and improvements that extend an asset’s useful life or enhance capacity are capitalized.

Goodwill and Other Intangible Assets—The Company complies with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142) which requires that goodwill and intangible assets with indefinite lives no longer be amortized, but reviewed for impairment at least annually or whenever events or circumstances indicate the carrying value of an asset may not be recoverable, in accordance with SFAS No. 142. Intangible assets that are deemed to have a definite life are amortized over their useful lives. (See note 6.)

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

Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109” (FIN 48). FIN 48 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures. The cumulative effect of applying this interpretation has been recorded as an increase of $25.8 million to accumulated deficit, an increase of $9.2 million to prepaid and other current assets and an increase of $17.1 million to long-term deferred tax assets, with a corresponding increase in other long-term liabilities of $52.1 million in the consolidated balance sheet as of January 1, 2007. In conjunction with the adoption of FIN 48, the Company classified uncertain tax positions as non-current income tax liabilities unless expected to be

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

paid in one year. The Company reports penalties and tax-related interest expense as a component of the provision for income taxes and interest income from tax refunds as a component of other income in the consolidated statement of operations. (See note 2.)

Property Taxes—The Company’s accrued property and real estate tax liabilities of approximately $29.2 million and $29.1 million are included in accounts payable and accrued expenses in the accompanying consolidated balance sheets as of December 31, 2007 and 2006, respectively.

Sales of Subsidiary Stock—The Company complies with the provisions of SEC Staff Accounting Bulletin (SAB) No. 51, “Accounting for Sales of Stock by a Subsidiary” and records the difference between the Company’s carrying value of the interest in the subsidiary’s equity that was sold and the proceeds received for that interest to additional paid-in-capital. The Company records any gains or losses resulting from the sale of stock by a subsidiary as a component of stockholders’ equity. (See note 11.)

Treasury Stock—The Company records treasury stock purchases under the cost method, whereby the purchase price, including legal costs and commissions, is recorded in a contra equity account (treasury stock). The equity accounts from which the shares were originally issued are not adjusted for any treasury stock purchases. (See note 13.)

Earnings (Loss) Per Common Share- Basic and Diluted—Basic income from continuing operations per common share for the years ended December 31, 2007, 2006 and 2005 represents income from continuing operations divided by the weighted average number of common shares outstanding during the period. Diluted income from continuing operations per common share for the years ended December 31, 2007 and 2006 represents income from continuing operations divided by the weighted average number of common shares outstanding during the period and any dilutive common share equivalents, including shares issuable upon exercise of stock options and warrants as determined under the treasury stock method and upon conversion of the Company’s convertible notes, as determined under the if-converted method. For the years ended December 31, 2007 and 2006, the weighted average number of common shares outstanding excludes shares issuable upon conversion of the Company’s convertible notes of 18.5 million and 33.1 million, respectively, and shares issuable upon exercise of the Company’s stock options of 6.1 million and 5.1 million, respectively, as the effect would be anti-dilutive. For the year ended December 31, 2005, potential common shares, consisting of all shares issuable upon exercise of stock options and warrants and upon conversion of the Company’s convertible notes, of 72.9 million, have been excluded from the computation of diluted loss per common share, as the effect would be anti-dilutive.

The following table sets forth basic and diluted income (loss) from continuing operations per common share computational data for the years ended December 31, 2007, 2006 and 2005 (in thousands, except per share data):

 

     Years Ended December 31,  
     2007    2006    2005  

Basic weighted average common shares outstanding

     413,167      424,525      302,510  

Dilutive securities:

        

Stock options, warrants and convertible notes

     12,912      11,692   
                      

Diluted weighted average common shares outstanding

     426,079      436,217      302,510  
                      

Basic and dilutive income (loss) from continuing operations per common share

   $ 0.22    $ 0.06    $ (0.47 )
                      

 

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AMERICAN TOWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Litigation Costs—The Company periodically becomes involved in various claims and lawsuits that are incidental to its business. The Company regularly monitors the status of pending legal actions to evaluate both the magnitude and likelihood of any potential loss. The Company accrues for these potential losses when it is probable that a liability has been incurred and the amount of loss, or possible range of loss, can be reasonably estimated. Should the ultimate losses on contingencies and litigation vary from estimates, adjustments to those reserves may be required. The Company also incurs legal costs in connection with these matters and accounts for these expenses as incurred, net of anticipated insurance proceeds. With the exception of legal costs related to the Verestar bankruptcy, legal costs are reflected in selling, general, administrative and development expense in the accompanying consolidated statement of operations. Legal costs incurred in connection with the Company’s involvement in the Verestar bankruptcy proceedings are reflected within discontinued operations in the accompanying consolidated statement of operations. (See note 9.)

Impairments, Net Loss on Sale of Long-Lived Assets and Discontinued Operations—The Company reviews long-lived assets, including intangibles with definite lives, for impairment whenever events, changes in circumstances or the Company’s review of its tower portfolio indicate that the carrying amount of an asset may not be recoverable. The Company’s tower portfolio review includes sites for which the Company has no current tenant leases and towers for which expenses exceed revenues. The Company assesses recoverability by determining whether the net book value of the related assets will be recovered, either through projected undiscounted future cash flows or anticipated proceeds from sales of the assets. If the Company determines that the carrying value of an asset may not be recoverable, it measures any impairment based on the projected future discounted cash flows to be provided from the asset or the estimated sale proceeds, as compared to the asset’s carrying value.

The Company also complies with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (SFAS No. 144) regarding impairment assessments and decisions concerning discontinued operations. The Company records impairment losses in the period in which it identifies such impairments. (See note 12.) In December 2003, Verestar filed for protection under Chapter 11 of the federal bankruptcy laws. Under generally accepted accounting principles, consolidation is generally required for investments of more than 50% of the outstanding voting stock of an investee, except when control is not held by the majority owner. Under these rules, legal reorganization or bankruptcy represent conditions which can preclude consolidation in instances where control rests with the bankruptcy court, rather than the majority owner. Accordingly, due to the bankruptcy filing, the Company ceased to consolidate Verestar’s financial results beginning December 22, 2003. As described in note 9, the Company has incurred costs and related tax effects in connection with its involvement in the bankruptcy proceedings and related settlement of Verestar of $37.8 million, $0.9 million and $1.3 million, which are reflected within the net loss on disposal of discontinued operations in the accompanying consolidated statements of operations for the years ended December 31, 2007, 2006 and 2005, respectively. Loss from discontinued operations, net for the year ended December 31, 2007 also includes $1.4 million in gains, net of tax, related to litigation and insurance settlements that were settled for less than the Company’s original estimates. (See note 9.)

Notes Receivable and Other Long-Term Assets—Other long-term assets primarily represent the Company’s notes receivable described in note 7, including TV Azteca, the straight-line asset associated with non-cancelable tenant leases that contain fixed escalation clauses over the terms of the applicable leases, as well as investments, prepaid ground lease assets, long-term deposits, favorable leasehold interests and other long-term assets acquired in connection with the merger with SpectraSite, Inc.

Asset Retirement Obligations—The Company complies with the provisions of SFAS No. 143, “Accounting for Asset Retirement Obligations” (SFAS No. 143) and the provisions of FASB Interpretation No. 47 “Accounting for Conditional Asset Retirement Obligations” (FIN No. 47). Both pronouncements address the financial

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

accounting and reporting requirements for conditional obligations associated with the Company’s legal obligation to retire tangible long-lived assets and the related asset retirement costs.

The fair value of a liability for asset retirement obligations is recognized in the period in which it is incurred and can be reasonably estimated. Such asset retirement costs are capitalized as part of the carrying amount of the related long-lived asset and depreciated over the asset’s estimated useful life. Fair value estimates of liabilities for asset retirement obligations generally involve discounting of estimated future cash flows. Periodic accretion of such liabilities due to the passage of time is recorded as an operating expense. The Company has certain legal obligations related to tower assets which fall within the scope of SFAS No. 143 and FIN No. 47, principally obligations to remediate leased land on which certain of the Company’s tower assets are located. The significant assumptions used in estimating the Company’s aggregate asset retirement obligation are: timing of tower removals; cost of tower removals; timing and number of land lease renewals; expected inflation rates; and credit-adjusted risk-free interest rates that approximate the Company’s incremental borrowing rate. The adoption of FIN No. 47 primarily resulted in the acceleration of settlement date assumptions, as FIN No. 47 precludes the Company from considering non-contractual lease renewal periods in determining its settlement date assumptions.

The Company adopted the provisions of SFAS No. 143 as of January 1, 2003 and the provisions of FIN No. 47 as of December 31, 2005. Upon adoption of the provisions of FIN No. 47, the Company recognized a $35.5 million charge (net of an $11.7 million tax benefit) as a cumulative effect of a change in accounting principle in the consolidated statement of operations for the year ended December 31, 2005. In addition, the adoption of FIN No. 47 resulted in an increase to the tower assets included in property and equipment, net of $66.9 million and an increase in the asset retirement obligation of $114.0 million.

The Company’s asset retirement obligation is included in other long-term liabilities in the accompanying consolidated balance sheets. The changes in the carrying value of the Company’s asset retirement obligations for years ended December 31, 2007, 2006 and 2005 are as follows (in thousands):

 

     2007     2006     2005

Beginning balance as of January 1,

   $ 174,980     $ 164,222     $ 23,464

(Deductions), additions and revisions in estimated cash flows, net of settlements

     (3,776 )     (710 )     2,587

Accretion expense

     12,958       11,468       3,069

Liability assumed in merger with SpectraSite, Inc.

         21,126

Increase due to change in accounting principle

         113,976
                      

Balance as of December 31,

   $ 184,162     $ 174,980     $ 164,222
                      

Fair Value of Financial Instruments—The carrying values of the Company’s financial instruments, with the exception of long-term obligations, including current portion, reasonably approximate the related fair values as of December 31, 2007 and 2006. As of December 31, 2007, the carrying amount and fair value of long-term obligations, including current portion, were $4.3 billion and $4.6 billion, respectively. As of December 31, 2006, the carrying amount and fair value of long-term obligations, including current portion, were $3.5 billion and $4.1 billion, respectively. Fair values are based primarily on quoted market prices for those or similar instruments.

Retirement Plan—The Company has a 401(k) plan covering substantially all employees who meet certain age and employment requirements. The Company’s matching contribution is 50% up to a maximum 6% of a participant’s contributions. The Company contributed approximately $1.5 million, $1.5 million and $1.1 million to the plan for the years ended December 31, 2007, 2006 and 2005, respectively.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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

In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements” (SFAS No. 157). This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, expands disclosures about fair value measurements and does not require any new fair value measurements. This statement requires quantitative disclosures about fair value measurements for each major category of assets and liabilities measured at fair value on a recurring and non-recurring basis during a period. SFAS No. 157 is effective for the Company as of January 1, 2008; however in February 2008, the FASB issued a Staff Position that defers the effective date to January 1, 2009 for all nonfinancial assets and liabilities, except those that are recognized or disclosed in the financial statements on a recurring basis (that is, at least annually). SFAS No. 157 is still effective for the Company on January 1, 2008 for financial assets and liabilities. The Company is in the process of evaluating the impact that SFAS No. 157 will have on its consolidated results of operations and financial position, but it is likely that the Company will be required to provide additional disclosures in financial statements issued after the effective date.

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

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS No. 141R). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS No. 141R changes the accounting for acquisitions specifically eliminating the step acquisition model, changes the recognition of contingent consideration from being recognized when it is probable to being recognized at the time of acquisition, disallows the capitalization of transaction costs, changes when restructurings related to acquisitions can be recognized and also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS No. 141R is effective for the Company as of January 1, 2009. The Company is in the process of evaluating the impact the adoption of SFAS No. 141R will have on acquisitions that are made after the effective date in its consolidated results of operations and financial position.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51” (SFAS No. 160). SFAS 160 establishes parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for the Company as of January 1, 2009. The Company is in the process of evaluating the impact the adoption of SFAS No. 160 will have on its consolidated results of operations and financial position.

2.    INCOME TAXES

The Company files a consolidated United States federal tax return, which includes all of its wholly owned domestic subsidiaries, and the Company also files combined or consolidated returns in many different states. These returns reflect different combinations of the Company’s subsidiaries and are dependent on the connection each subsidiary has with a particular state. The Company and its subsidiaries have entered into a tax sharing agreement providing, among other things, that each of its subsidiaries pay for its share of income taxes based on the proportion of such subsidiaries’ tax liability on a separate return basis to the total tax liability on a consolidated basis. The following information pertains to the Company’s income taxes on a consolidated basis.

The income tax (provision) benefit from continuing operations was comprised of the following for the years ended December 31, (in thousands):

 

     2007     2006     2005  

Current:

      

Federal

   $ (911 )     —         —    

State

     (2,531 )     (2,517 )     (2,477 )

Foreign

     (35,127 )     (21,716 )     (14,278 )

Deferred:

      

Federal

     (61,513 )     (28,488 )     6,230  

State

     45,025       750       6,153  

Foreign

     (4,752 )     10,203       (1,342 )
                        

Income tax provision

   $ (59,809 )   $ (41,768 )   $ (5,714 )
                        

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The domestic and international components of income (loss) from continuing operations before income taxes, minority interest and loss on equity method investments were as follows for the years ended December 31, (in thousands):

 

     2007    2006    2005  

United States

   $ 118,922    $ 43,946    $ (148,641 )

International

     33,918      26,918      13,087  
                      

Total

   $ 152,840    $ 70,864    $ (135,554 )
                      

A reconciliation between the U.S. statutory rate from continuing operations and the effective rate was as follows for the years ended December 31,

 

<
     2007     2006     2005  

Statutory tax rate

   35 %   35 %   (35 )%