American Tower is an American operator of wireless communication equipment. The company has more than 170,000 transmission systems for data transmission and communication, mostly masts, in 17 countries worldwide.
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- Form 10-Q ---------------- (Mark One): [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended June 30, 2001. [_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. 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 (I.R.S. Employer Incorporation or Organization) 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) 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 [_] <TABLE> <CAPTION> Outstanding at August 1, Class of Common Stock 2001 - --------------------- ----------- <S> <C> Class A Common Stock................................................ 180,854,646 Class B Common Stock................................................ 8,001,769 Class C Common Stock................................................ 2,267,813 ----------- Total............................................................. 191,124,228 =========== </TABLE> - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
AMERICAN TOWER CORPORATION INDEX <TABLE> <CAPTION> Page No. -------- <S> <C> PART I. FINANCIAL INFORMATION Item 1. Unaudited Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000................................................. 1 Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2001 and 2000........................... 2 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and 2000...................................... 3 Notes to Condensed Consolidated Financial Statements............... 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................. 11 Item 3. Quantitative and Qualitative Disclosures about Market Risk..... 28 PART II. OTHER INFORMATION Item 1. Legal Proceedings.............................................. 30 Item 2. Changes in Securities and Use of Proceeds...................... 30 Item 4. Submission of Matters to a Vote of Security Holders............ 30 Item 5. Other Information.............................................. 31 Item 6. Exhibits and Reports on Form 8-K............................... 32 Signatures............................................................. 33 </TABLE>
PART I. FINANCIAL INFORMATION ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AMERICAN TOWER CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS--(Unaudited) (In Thousands, Except Share Data) <TABLE> <CAPTION> June 30, December 31, 2001 2000 ---------- ------------ <S> <C> <C> ASSETS CURRENT ASSETS: Cash and cash equivalents............................ $ 440,842 $ 82,038 Restricted cash and investments...................... 119,757 46,036 Short-term investments............................... 114,723 Accounts receivable, net of allowance for doubtful accounts of $28,450 and $19,809, respectively....... 197,842 194,011 Prepaid and other current assets..................... 64,442 42,377 Inventories.......................................... 61,401 47,872 Cost and earnings in excess of billings on uncompleted contracts and unbilled receivables...... 56,057 43,652 Deferred income taxes................................ 15,175 15,166 ---------- ---------- Total current assets............................... 1,070,239 471,152 ---------- ---------- Property and equipment, net........................... 2,912,155 2,296,670 Goodwill and other intangible assets, net............. 2,565,633 2,505,681 Deferred income taxes................................. 198,708 140,395 Other long-term assets................................ 255,663 246,781 ---------- ---------- Total............................................ $7,002,398 $5,660,679 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term obligations............. $ 10,921 $ 11,178 Accounts payable and accrued expenses................ 154,431 161,337 Accrued tower construction costs..................... 27,251 45,315 Accrued interest..................................... 65,877 31,708 Billings in excess of costs on uncompleted contracts and unearned revenue................................ 54,340 48,248 ---------- ---------- Total current liabilities.......................... 312,820 297,786 ---------- ---------- Long-term obligations................................. 3,579,567 2,457,045 Other long-term liabilities........................... 41,753 12,472 ---------- ---------- Total liabilities.................................. 3,934,140 2,767,303 ---------- ---------- Minority interest in subsidiaries..................... 6,015 16,346 ---------- ---------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred Stock; $0.01 par value; 20,000,000 shares authorized; no shares issued or outstanding......... Class A Common Stock; $0.01 par value; 500,000,000 shares authorized; 180,982,577 and 170,180,549 shares issued, 180,837,980 and 170,035,952 shares outstanding, respectively........................... 1,810 1,701 Class B Common Stock; $0.01 par value; 50,000,000 shares authorized; 8,018,435 and 8,095,005 shares issued and outstanding, respectively................ 80 81 Class C Common Stock; $0.01 par value; 10,000,000 shares authorized; 2,267,813 shares issued and outstanding......................................... 23 23 Additional paid-in capital........................... 3,551,063 3,174,622 Accumulated other comprehensive loss................. (15,889) Accumulated deficit.................................. (470,504) (295,057) Less: Treasury stock (144,597 shares at cost)........ (4,340) (4,340) ---------- ---------- Total stockholders' equity......................... 3,062,243 2,877,030 ---------- ---------- Total............................................ $7,002,398 $5,660,679 ========== ========== </TABLE> See notes to condensed consolidated financial statements. 1
AMERICAN TOWER CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS--Unaudited (In Thousands, Except Per Share Data) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, ------------------- -------------------- 2001 2000 2001 2000 --------- -------- --------- --------- <S> <C> <C> <C> <C> REVENUES: Rental and management............. $ 106,493 $ 63,233 $ 197,704 $ 116,940 Network development services...... 100,429 74,026 206,943 112,178 Satellite and fiber network access services......................... 56,046 29,788 120,789 53,446 --------- -------- --------- --------- Total operating revenues...... 262,968 167,047 525,436 282,564 --------- -------- --------- --------- OPERATING EXPENSES: Operating expenses excluding depreciation and amortization, development and corporate general and administrative expenses: Rental and management........... 51,547 31,290 97,137 59,782 Network development services.... 88,083 65,127 184,581 97,327 Satellite and fiber network access services................ 57,801 23,242 114,114 42,258 Depreciation and amortization..... 103,956 67,093 198,955 122,291 Development expense............... 2,557 4,196 5,302 5,184 Corporate general and administrative expense........... 6,407 3,084 11,534 6,515 --------- -------- --------- --------- Total operating expenses...... 310,351 194,032 611,623 333,357 --------- -------- --------- --------- LOSS FROM OPERATIONS................ (47,383) (26,985) (86,187) (50,793) --------- -------- --------- --------- OTHER INCOME (EXPENSE): Interest expense.................. (70,061) (38,437) (136,740) (70,587) Interest income and other, net.... 4,451 3,851 12,858 6,437 Interest income, TV Azteca, net... 3,582 3,155 7,120 5,463 Loss on investment in US Wireless......................... (22,226) (22,226) Note conversion expense........... (16,968) (16,968) Minority interest in net (earnings) losses of subsidiaries..................... 61 (22) 3 (58) --------- -------- --------- --------- Total other expense........... (84,193) (48,421) (138,985) (75,713) --------- -------- --------- --------- LOSS BEFORE INCOME TAXES AND EX- TRAORDINARY LOSSES................. (131,576) (75,406) (225,172) (126,506) INCOME TAX BENEFIT.................. 27,636 16,774 49,725 30,214 --------- -------- --------- --------- LOSS BEFORE EXTRAORDINARY LOSSES.... (103,940) (58,632) (175,447) (96,292) EXTRAORDINARY LOSSES ON EXTINGUISHMENT OF DEBT, NET OF INCOME TAX BENEFIT OF $2,892............................. (4,338) --------- -------- --------- --------- NET LOSS............................ $(103,940) $(58,632) $(175,447) $(100,630) ========= ======== ========= ========= BASIC AND DILUTED LOSS PER COMMON SHARE AMOUNTS Loss before extraordinary losses.. $ (0.54) $ (0.36) $ (0.93) $ (0.60) Extraordinary losses.............. (0.03) --------- -------- --------- --------- NET LOSS............................ $ (0.54) $ (0.36) $ (0.93) $ (0.63) ========= ======== ========= ========= WEIGHTED AVERAGE COMMON SHARES OUT- STANDING........................... 190,755 161,021 188,976 158,768 ========= ======== ========= ========= </TABLE> See notes to condensed consolidated financial statements. 2
AMERICAN TOWER CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS--Unaudited (In Thousands) <TABLE> <CAPTION> Six Months Ended June 30, --------------------- 2001 2000 --------- ---------- <S> <C> <C> CASH FLOWS USED FOR OPERATING ACTIVITIES Net loss.............................................. $(175,447) $ (100,630) Non-cash items reflected in statement of operations (primarily depreciation and amortization)............ 193,400 108,622 Increase in current assets............................ (53,142) (114,629) Increase in current liabilities....................... 294 63,929 --------- ---------- Cash used for operating activities...................... (34,895) (42,708) --------- ---------- CASH FLOWS USED FOR INVESTING ACTIVITIES: Payments for purchase of property and equipment and construction activities.............................. (301,435) (196,151) Payments for acquisitions, net of cash acquired....... (505,823) (1,005,206) Deposits, investments and other....................... (145,647) (87,931) --------- ---------- Cash used for investing activities...................... (952,905) (1,289,288) --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under credit facilities.................... 165,000 1,377,500 Proceeds from senior notes offering................... 1,000,000 Proceeds from convertible notes offering.............. 450,000 Repayment of notes payable and credit facilities...... (75,181) (495,829) Net proceeds from equity offerings and stock options.. 365,684 531,054 Deferred financing costs, restricted cash and investments and other................................ (108,899) (37,183) --------- ---------- Cash provided by financing activities................... 1,346,604 1,825,542 --------- ---------- NET INCREASE IN CASH AND CASH EQUIVALENTS............... 358,804 493,546 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.......... 82,038 25,212 --------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD................ $ 440,842 $ 518,758 ========= ========== CASH PAID FOR INCOME TAXES.............................. $ 1,699 $ 1,271 ========= ========== CASH PAID FOR INTEREST.................................. $ 110,494 $ 45,664 ========= ========== NON-CASH TRANSACTIONS: Issuance of common stock, warrants and options for acquisitions......................................... $ 7,077 $ 119,197 Treasury stock transactions........................... 2,752 Note conversion transaction........................... 153,368 TV Azteca transaction................................. 25,819 Capital leases........................................ 28,339 3,448 Note receivable converted to investment............... 7,687 </TABLE> See notes to condensed consolidated financial statements. 3
AMERICAN TOWER CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Unaudited 1. Basis of Presentation and Accounting Policies The accompanying condensed consolidated financial statements have been prepared by American Tower Corporation (the Company) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The financial information included herein is unaudited; however, the Company believes such information and the disclosures are adequate to make the information presented not misleading and reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair presentation of financial position and results of operations for such periods. Results of interim periods may not be indicative of results for the full year. These condensed consolidated financial statements and related notes should be read in conjunction with the Company's 2000 Annual Report on Form 10-K. Use of Estimates--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results may differ from those estimates, and such differences could be material to the accompanying condensed consolidated financial statements. Loss Per Common Share--Basic and diluted loss per common share has been computed by dividing the Company's net loss by the weighted average number of common shares outstanding during the period. Diluted per share amounts are computed by adjusting the weighted average number of common shares for dilutive potential common shares outstanding during the period, if any. In computing diluted per share amounts, the Company uses the treasury stock method, whereby unexercised options and warrants are assumed to be exercised at the beginning of the period or at issuance, if later. The assumed proceeds are then used to purchase common shares at the average market price during the period. Shares issuable upon exercise of options, warrants and other dilutive securities have been excluded from the computation of diluted loss per common share as the effect is anti-dilutive. Had options, warrants and other dilutive securities been included in the computation, weighted average shares for the diluted computation would have increased by approximately 32.5 million and 42.3 million for the three months ended June 30, 2001 and 2000, respectively, and 34.2 million and 41.6 million for the six months ended June 30, 2001 and 2000, respectively. Short-Term Investments--Amounts included in short-term investments include commercial paper, certificates of deposit and marketable debt securities with maturity dates in excess of three-months from the date of purchase. Commercial paper, certificates of deposit and marketable debt securities that the Company has the positive intent and ability to hold to maturity are classified as "held-to-maturity" and reported at cost. Marketable debt securities that are not classified as held-to-maturity are classified as "available-for-sale" and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of other comprehensive income. Recent Accounting Pronouncements--On January 1, 2001, the Company adopted the provisions of SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities". This statement establishes accounting and reporting standards for derivative instruments. Specifically, it requires that an entity recognize all derivatives as either assets or liabilities on the balance sheet at fair value. The accounting for changes in the fair market value of a derivative (that is unrealized gains or losses) is recorded as a component of an entity's net income or other comprehensive income, depending upon designation (as defined in the statement). Such adoption resulted in a charge to other comprehensive income of $7.9 million, net of tax, from the cumulative effect of adopting this standard. The Company is exposed to interest rate risk relating to variable interest rates on its credit facilities. As part of its overall strategy to manage the level of exposure to the risk of interest rate fluctuations, the Company uses interest rate swaps, caps and collars, which qualify and are designated as cash flow hedges. The Company also uses swaptions to manage interest rate risk, which have not been designated as cash flow hedges. During the six months ended June 30, 2001, the Company recorded an unrealized loss, excluding the charge for the cumulative effect of adopting SFAS No. 133, of approximately $7.9 million (net of a tax benefit of 4
AMERICAN TOWER CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Unaudited--(Continued) approximately $4.2 million) in other comprehensive loss for the change in fair value of cash flows hedges and amounts reclassifed into results of operations. Hedge ineffectiveness resulted in a loss of approximately $1.0 million for the six months ended June 30, 2001 and was recorded in "interest income and other, net". The Company records the changes in fair value of its derivative instruments that are not accounted for as hedges in "interest income and other, net". At June 30, 2001 the fair value of the Company's derivative instruments represented a liability of approximately $25.8 million and is included in "other long-term liabilities". The Company estimates that approximately $7.0 million of net derivative losses included in other comprehensive loss will be reclassified into the statement of operations within the next twelve months. In June 2001, SFAS No. 141, "Business Combinations" was approved by the Financial Accounting Standards Board (FASB). SFAS No.141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Goodwill and certain intangible assets will remain on the balance sheet and not be amortized. On an annual basis, and when there is reason to suspect that their values have been diminished or impaired, these assets must be tested for impairment, and write-downs may be necessary. The Company has not determined the impact, if any, that this statement will have on its consolidated financial position or results of operations. In June 2001, SFAS No. 142, "Goodwill and Other intangible Assets" was approved by the FASB. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of this statement. The Company is required to implement SFAS No. 142 on January 1, 2002 and it has not determined the impact that this statement will have on its consolidated financial position or results of operations. Reclassifications--Certain reclassifications have been made to the 2000 condensed consolidated financial statements and related notes to conform to the 2001 presentation. 2. Income Taxes The Company provides for income taxes at the end of each interim period based on the estimated effective tax rate for the full fiscal year. Cumulative adjustments to the Company's estimate are recorded in the interim period in which a change in the estimated annual effective rate is determined. 3. Inventories Inventories are stated at the lower of cost or market, with cost being determined on the first-in, first-out (FIFO) basis. The components of inventories are as follows (in thousands): <TABLE> <CAPTION> June 30, 2001 December 31, 2000 ------------- ----------------- <S> <C> <C> Finished goods.................................. $ 35,392 $25,947 Raw materials................................... 23,378 20,887 Work in process................................. 2,631 1,038 -------- ------- Total......................................... $ 61,401 $47,872 ======== ======= </TABLE> 4. Acquisitions General--The acquisitions consummated during the six month period ended June 30, 2001 have been accounted for by the purchase method of accounting. The purchase prices have been allocated to the net assets acquired, principally intangible and tangible assets, and the liabilities assumed based on their estimated fair values at the date of acquisition. The excess of purchase price over the estimated fair value of the net assets 5
AMERICAN TOWER CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Unaudited--(Continued) acquired has been recorded as goodwill and other intangible assets. For certain acquisitions, the condensed consolidated financial statements reflect the preliminary allocation of purchase prices, as the appraisals of assets acquired have not been finalized. The Company does not expect any changes in depreciation and amortization as a result of such appraisals to be material to the Company's consolidated results of operations. During the six month period ended June 30, 2001, the Company acquired various communication sites and related businesses and satellite and fiber network access service assets for an aggregate preliminary purchase price of approximately $512.3 million. The total purchase price includes the payment of $505.2 million in cash and the issuance of 342,069 shares of Class A common stock valued at approximately $7.1 million. Included in the above are amounts paid by the Company in connection with our agreement with ALLTEL. The following summarizes the ALLTEL transaction to date. ALLTEL transaction--In December 2000, the Company entered into an agreement to acquire the rights from ALLTEL to up to 2,193 communications towers through a fifteen-year sublease agreement. Under the agreement, the Company will sublease these towers for cash consideration of up to $657.9 million. ALLTEL also granted the Company the option to sublease approximately 200 additional towers (to be selected by the Company on a site-by-site basis) for cash consideration of up to $300,000 per tower. Under the agreement, the Company has the option to purchase the towers at the end of the fifteen-year term. In the second quarter of 2001, the Company subleased 869 towers and paid ALLTEL $260.7 million in cash. In addition, early in the third quarter, the Company subleased 435 towers and paid ALLTEL $130.5 million in cash. The remaining closings are expected to occur during the balance of 2001. The following unaudited pro forma summary for the six months ended June 30, 2001 and 2000 presents the condensed consolidated results of operations as if all of the acquisitions closing prior to June 30, 2001 (as referred to above) had occurred as of January 1, 2000, after giving effect to certain adjustments, including depreciation and amortization and interest expense on debt incurred to fund the acquisitions. These unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisitions been made as of January 1, 2000 or of results which may occur in the future. <TABLE> <CAPTION> Six Months Six Months Ended Ended June 30, June 30, 2001 2000 ---------- ---------- In thousands, except per share data: <S> <C> <C> Revenues........................................... $ 536,003 $ 298,346 Net loss before extraordinary losses............... $(184,573) $(114,863) Net loss........................................... $(184,573) $(119,201) Basic and diluted loss per common share before extraordinary losses.............................. $ (0.98) $ (0.72) Basic and diluted loss per common share............ $ (0.98) $ (0.75) </TABLE> As of January 1, 2000 the Company had recorded a liability of approximately $1.2 million related primarily to contractual obligations assumed in its acquisition of towers from AT&T. During the six month period ended June 30, 2001 the Company recorded an additional liability of approximately $7.4 million related to contractual obligations assumed in connection with its acquisition of Interpacket Networks, Inc. During the six months ended June 30, 2001 the Company recorded charges against these liabilities of approximately $1.9 million. In addition, the Company reversed approximately $1.9 million related to these liabilities against goodwill and other intangible assets. As of June 30, 2000 the Company has a remaining liability of approximately $4.8 million all of which is related to contractual obligations assumed in the Interpacket Networks, Inc. acquisition. 6
Since July 1, 2001 (excluding the ALLTEL transaction discussed above), the Company has consummated several acquisitions for an aggregate preliminary purchase price of $5.5 million. In addition, the Company is party to various agreements, including the remaining portions of the ALLTEL transaction (not disclosed above), relating to the acquisition of assets and businesses from third parties for an estimated aggregate cost of approximately $329.1 million. Such transactions are subject to the satisfaction of customary closing conditions, which are expected to be met during the balance of 2001. The Company is also pursuing the acquisition of other properties and businesses in new and existing locations, although we have not entered into any definitive material agreements with respect to such acquisitions. 5. Business Segments The Company operates in three business segments; rental and management (RM), network development services (Services), and satellite and fiber network access services (SFNA). The RM segment provides for leasing and subleasing of antennae sites on multi-tenant towers and the leasing of other properties for a diverse range of customers primarily in the wireless communications and broadcast industries. The Services segment offers a broad range of network development services, including radio frequency engineering, network design, site acquisition, construction, zoning and other regulatory approvals, component part sales and antennae installation. The SFNA segment offers satellite and fiber network services to telecommunications companies, internet service providers, broadcasters and maritime customers, both domestic and international. The accounting policies applied in compiling segment information below are similar to those described in the Company's 2000 Annual Report on Form 10-K. In evaluating financial performance, management focuses on operating profit (loss), excluding depreciation and amortization, development and corporate general and administrative expenses. This measure of operating profit (loss) is also before interest income and other, net, interest expense, loss on investment in US Wireless, note conversion expense, minority interest in net earnings of subsidiaries, income taxes and extraordinary losses. For reporting purposes, the RM segment includes interest income-TV Azteca, net. The Company's reportable segments are strategic business units that offer different services. They are managed separately because each segment requires different resources, skill sets and marketing strategies. All reported segment revenues are generated from external customers. Summarized financial information concerning the Company's reportable segments as of and for the three and six months ended June 30, 2001 and 2000 is shown in the following table (in thousands). The "Other" column below represents amounts excluded from specific segments such as income taxes, extraordinary losses, corporate general and administrative expense, development expense, depreciation and amortization, loss on investment in US Wireless, note conversion expense, minority interest in net earnings of subsidiaries and interest. In addition, "Other" includes corporate assets such as cash and cash equivalents, short-term investments, restricted cash and investments, tangible and intangible assets and income tax accounts which have not been allocated to specific segments. <TABLE> <CAPTION> Three Months Ended June 30, RM Services SFNA Other Total - ----------------------- ---------- -------- -------- ----------- ---------- <S> <C> <C> <C> <C> <C> 2001 Revenues............... $ 106,493 $100,429 $ 56,046 $ 262,968 Operating profit (loss) ...................... 58,528 12,346 (1,755) $ (173,059) (103,940) Assets................. 4,533,458 774,161 656,386 1,038,393 7,002,398 2000 Revenues............... $ 63,233 $ 74,026 $ 29,788 $ 167,047 Operating profit (loss)................ 35,098 8,899 6,546 $ (109,175) (58,632) Assets................. 3,144,124 522,926 307,161 1,114,133 5,088,344 </TABLE> 7
AMERICAN TOWER CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Unaudited--(Continued) <TABLE> <CAPTION> Six Months Ended June 30, RM Services SFNA Other Total - ------------------------- ---------- -------- -------- ----------- ---------- <S> <C> <C> <C> <C> <C> 2001 Revenues................. $ 197,704 $206,943 $120,789 $ 525,436 Operating profit (loss) ........................ 107,687 22,362 6,675 $ (312,171) (175,447) Assets................... 4,533,458 774,161 656,386 1,038,393 7,002,398 2000 Revenues................. $ 116,940 $112,178 $ 53,446 $ 282,564 Operating profit (loss).. 62,621 14,851 11,188 $ (189,290) (100,630) Assets................... 3,144,124 522,926 307,161 1,114,133 5,088,344 </TABLE> 6. Financing Transactions Equity offering--In January 2001, the Company completed a public offering of 10.0 million shares of its Class A common stock at $36.50 per share. The net proceeds of the offering (after deduction of offering expenses) were approximately $360.8 million. Proceeds from the offering have and will be used to finance the construction of towers, fund pending and future acquisitions and for general corporate purposes. 9 3/8% Senior Notes offering--In January 2001, the Company completed a private notes placement of $1.0 billion 9 3/8% Senior Notes (Senior Notes), issued at 100% of their face amount. The Senior Notes mature on February 1, 2009. The Senior Notes rank equally with the Company's convertible notes and rank junior to all indebtedness of its subsidiaries including amounts outstanding under the Company's credit facilities. Interest on the Senior Notes is payable semiannually on February 1 and August 1, commencing on August 1, 2001. The indenture governing the Senior Notes contains certain restrictive convenants including restrictions on the Company's ability to incur more debt, guarantee debt, pay dividends and make certain investments. Proceeds from the Senior Notes placement have and will be used to finance construction of towers, fund pending and future acquisitions and for general corporate purposes. The amount outstanding under the Senior Notes was $1.0 billion as of June 30, 2001 and is included in long-term obligations in the accompanying June 30, 2001 condensed consolidated balance sheet. Mexican credit facility--In February 2001, the Company's Mexican subsidiary consummated a loan agreement that provides for borrowings of $95.0 million (U.S. Dollars). If additional lenders are made party to the agreement, the size of the facility may increase to $140.0 million. The Company has committed to loan its Mexican subsidiary up to $45.0 million if additional lenders are not made party to the agreement. The Company's committment will be reduced on a dollar-for-dollar basis if additional lenders join the loan agreement. This facility requires the maintenance of various covenants and ratios and is guaranteed and collateralized by all of the assets of the Mexican subsidiary. Interest rates on the loan are determined at the Mexican subsidiary's option at either LIBOR plus margin or the Base Rate plus margin (each as defined in the agreement). The loan will be due in 2003. The amount outstanding under the Mexican credit facility was approximately $95.0 million as of June 30, 2001 and is included in long-term obligations in the accompanying June 30, 2001 condensed consolidated balance sheet. 7. Information Presented Pursuant to the Indenture for the Senior Notes The following table sets forth information that is presented solely to address certain reporting requirements contained in the indenture for the Senior Notes. This information presents certain financial data of the Company on a consolidated basis and on a restricted group basis, as defined in the indenture governing the Senior Notes. All of the Company's subsidiaries are part of the restricted group, except its wholly owned subsidiary, Verestar and its subsidiaries, whose operations constitute all of our satellite and fiber network access services business segment. 8
AMERICAN TOWER CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Unaudited--(Continued) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, 2001 June 30, 2001 ----------------------- ----------------------- Restricted Restricted Consolidated Group (1) Consolidated Group (1) ------------ ---------- ------------ ---------- Statement of Operations Data (in thousands): <S> <C> <C> <C> <C> Operating revenues............ $ 262,968 $ 206,922 $ 525,436 $ 404,647 ---------- ---------- --------- --------- Operating expenses: Operating expenses excluding depreciation and amortization, development and corporate general and administrative expenses...... 197,431 139,630 395,832 281,718 Depreciation and amortization................. 103,956 86,186 198,955 167,031 Development expense........... 2,557 2,146 5,302 4,602 Corporate general and administrative expense....... 6,407 6,407 11,534 11,534 ---------- ---------- --------- --------- Total operating expenses.... 310,351 234,369 611,623 464,885 ---------- ---------- --------- --------- Loss from operations.......... (47,383) (27,447) (86,187) (60,238) Interest expense.............. (70,061) (67,390) (136,740) (131,471) Interest income and other, net.......................... 4,451 4,585 12,858 13,008 Interest income, TV Azteca, net of interest expense of $291 and $583 for the three and six months ended June 30, 2001, respectively .......... 3,582 3,582 7,120 7,120 Loss on investment in US Wireless..................... (22,226) (22,226) (22,226) (22,226) Minority interest in net earning of subsidiaries...... 61 61 3 3 ---------- ---------- --------- --------- Loss before income taxes and extraordinary losses......... $ (131,576) $ (108,835) $(225,172) $(193,804) ========== ========== ========= ========= <CAPTION> June 30, 2001 ----------------------- Restricted Consolidated Group ------------ ---------- Balance Sheet Data (in thousands): <S> <C> <C> <C> <C> Cash and cash equivalents..... $ 440,842 $ 423,713 Restricted cash and investments.................. 119,757 119,757 Property and equipment, net... 2,912,155 2,616,516 Total assets.................. 7,002,398 6,346,012 Long-term obligations, including current portion.... 3,590,488 3,472,512 Net debt(2)................... 3,029,889 2,929,042 Total stockholders' equity.... 3,062,243 3,062,243 </TABLE> - -------- (1) Corporate overhead allocable to Verestar and interest expense related to intercompany borrowings by Verestar (unrestricted subsidiary) have not been excluded from results shown for the restricted group. (2) Net debt represents long-term obligations, including current portion, less cash and cash equivalents and restricted cash and investments. 9
AMERICAN TOWER CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Unaudited--(Continued) 8. Comprehensive Loss Other comprehensive loss consists primarily of unrealized gains on available for sale securities, derivative instruments accounted for as cash flow hedges and the impact of the Company's adoption of SFAS No. 133 discussed in note 1. The components of the Company's comprehensive loss are as follows (in thousands): <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, ------------------- -------------------- 2001 2000 2001 2000 --------- -------- --------- --------- <S> <C> <C> <C> <C> Net loss............................. $(103,940) $(58,632) $(175,447) $(100,630) Other comprehensive loss, net of tax: Unrealized gains on available for sale securities and other......... (156) (156) Derivative instruments accounted for as hedges..................... 266 (7,881) --------- -------- --------- --------- Comprehensive loss before cumulative effect adjustment................... (103,830) (58,632) (183,484) (100,630) Cumulative effect adjustment recorded upon the adoption of SFAS No. 133 (net of an income tax benefit of $4,227)............................. (7,852) --------- -------- --------- --------- Comprehensive loss................... $(103,830) $(58,632) $(191,336) $(100,630) ========= ======== ========= ========= </TABLE> 9. Litigation The Company periodically becomes involved in various claims and lawsuits that are incidental to its business. In the opinion of management, after consultation with counsel, there are no matters currently pending which would, in the event of adverse outcome, have a material impact on the Company's consolidated financial position, the results of its operations or liquidity. 10. Loss on Investment in US Wireless During the quarter ended June 30, 2001, the Company recorded an impairment charge of $22.2 million on its investment in US Wireless. The charge resulted from an assessment that a loss in value in the Company's preferred stock investment had occurred that was other than temporary. 11. Subsequent Event From the beginning of the third quarter of 2001 through August 14, 2001, the Company acquired a portion of its outstanding convertible notes. During this period, approximately $40.0 million in principal amount of the Company's convertible notes was converted into shares of Class A common stock. In addition, as of August 14, 2001, the conversion of another approximately $40.0 million in principal amount of the Company's convertible notes is pending, subject to the signing of a definitive agreement. All of these conversions are pursuant to exchange agreements which the Company negotiated with a limited number of noteholders. Pursuant to these exchange agreements, the Company has issued or will issue the number of shares of Class A common stock that these noteholders are entitled to receive based on the conversion price set forth in the applicable indenture, plus an additional number of shares of Class A common stock that the Company has agreed to issue in order to induce them to convert their holdings prior to the first scheduled redemption date. The Company expects to record in the third quarter a non-cash charge equal to the fair market value of these additional shares. The Company expects to negotiate similar exchanges for its outstanding convertible notes during the third quarter and from time to time in the future, subject to market conditions. To the extent that inducement shares are issued by the Company as part of any future exchanges, the Company expects to record additional non-cash charges. 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q contains forward-looking statements relating to our goals, beliefs, plans or current expectations and other statements that are not of historical facts. For example, when we use words such as "project," "believe," "anticipate," "expect," "estimate," "intend," "should," "would," "could" or "may," or other words that convey uncertainty of future events or outcome, we are making forward-looking statements. We refer you to the caption entitled "Factors that May Affect Future Results" below for important factors that could cause actual results to differ materially from those indicated by our forward-looking statements made herein. Forward-looking statements represent management's current expectations and are inherently uncertain. We do not undertake any obligation to update forward-looking statements made by us. We are a leading wireless and broadcast communications infrastructure company operating in three business segments. . Rental and management. We operate the largest network of wireless communications towers in North America and are the largest independent operator of broadcast towers in North America, based on number of towers. . Network development services. We provide comprehensive network development services and components for wireless service providers and broadcasters. . Satellite and fiber network access services. Our Verestar subsidiary is a leading provider of integrated satellite and fiber network access services based upon the number of teleport antennae and facilities. We provide these services to telecommunications companies, Internet service providers, broadcasters and maritime customers, both domestic and international. Results of Operations As of June 30, 2001, the Company owned and/or operated approximately 12,900 communications sites, as compared to approximately 9,500 communications sites as of June 30, 2000. The acquisitions consummated in 2001 and 2000 have significantly affected operations for the three and six months ended June 30, 2001, as compared to the three and six months ended June 30, 2000. See the notes to the condensed consolidated financial statements and the Company's Annual Report on Form 10-K for a description of the acquisitions consummated in 2001 and 2000. 11
Three Months Ended June 30, 2001 and 2000 (dollars in thousands)--Unaudited <TABLE> <CAPTION> Three Months Ended June 30, Amount of Percentage ------------------- Increase Increase 2001 2000 (Decrease) (Decrease) --------- -------- ---------- ---------- <S> <C> <C> <C> <C> Revenues: Rental and management............... $ 106,493 $ 63,233 $43,260 68% Network development services........ 100,429 74,026 26,403 36 Satellite and fiber network access services........................... 56,046 29,788 26,258 88 --------- -------- ------- Total revenues...................... 262,968 167,047 95,921 57 --------- -------- ------- Operating Expenses: Rental and management............... 51,547 31,290 20,257 65 Network development services........ 88,083 65,127 22,956 35 Satellite and fiber network access services........................... 57,801 23,242 34,559 149 --------- -------- ------- Total operating expenses excluding depreciation and amortization, development and corporate general and administrative expenses........ 197,431 119,659 77,772 65 --------- -------- ------- Depreciation and amortization....... 103,956 67,093 36,863 55 Development expense................. 2,557 4,196 (1,639) (39) Corporate general and administrative expense............................ 6,407 3,084 3,323 108 Interest expense.................... 70,061 38,437 31,624 82 Interest income and other, net...... 4,451 3,851 600 16 Interest income, TV Azteca, net of $291 and $297 of interest expense, respectively ...................... 3,582 3,155 427 14 Loss on investment in US Wireless... 22,226 22,226 N/A Note conversion expense............. 16,968 (16,968) N/A Minority interest in net losses (earnings) of subsidiaries......... 61 (22) (83) (377) Income tax benefit.................. 27,636 16,774 10,862 65 --------- -------- ------- Net loss............................ $(103,940) $(58,632) $45,308 77% ========= ======== ======= </TABLE> Rental and Management Revenue Rental and management revenue for the three months ended June 30, 2001 was $106.5 million, an increase of $43.3 million from the three months ended June 30, 2000. The increase resulted primarily from two factors: the acquisition and construction of additional towers from July 1, 2000 to June 30, 2001 and increased leasing activity on new and existing towers. From July 1, 2000 to June 30, 2001, we continued to implement our growth strategy by aggressively acquiring and building new towers. During that period we acquired more than 1,800 towers and constructed more than 1,700 towers. Additionally, during that same period, we added more than 4,000 tenants to both newly acquired/constructed and existing towers. This acquisition, construction and leasing activity has not only significantly increased revenue, but has also increased the scope, depth and strength of our national and international tower network, providing us with a much larger base of tower revenue for the three months ended June 30, 2001 as compared to the three months ended June 30, 2000. In the long term, we believe that our leasing revenues are likely to grow at a more rapid rate than revenues from other segments of our business because of increasing utilization of existing tower capacity, recent and pending acquisitions and build-to-suit and other construction activities. Network Development Services Revenue Network development services revenue for the three months ended June 30, 2001 was $100.4 million, an increase of $26.4 million from the three months ended June 30, 2000. The significant growth in revenues during the three months ended June 30, 2001 as compared to the three months ended June 30, 2000 resulted primarily from a strategic acquisition and increased demand and volume for our turn-key services. 12
During the fourth quarter of 2000, we acquired a tower lighting systems company that helped expand our in-house service capabilities. This acquisition provided significant additional revenues for the three months ended June 30, 2001. In addition, increased demand for other core turn-key services driven by several large national contracts and increased carrier build outs provided a significant increase in revenue for the three months ended June 30, 2001. These increases were partially offset by a decrease in sales of component parts driven by the loss in business from a key customer who has become insolvent and the general economic slow-down in the telecommunications industry. Satellite and Fiber Network Access Services Revenue Satellite and fiber network access services revenue for the three months ended June 30, 2001 was $56.0 million, an increase of $26.3 million from the three months ended June 30, 2000. The majority of the increase resulted from the consummation of several key acquisitions that occurred in 2001 and 2000 including: General Telecom, U.S. Electrodynamics, Publicom, Interpacket Networks and a Satellite Network Access Point (SNAP) facility from Swisscom. These acquisitions significantly increased our service capabilities, revenue base, and geographical scope of customers, leading to significant incremental revenues in 2001. This increase in revenue was partially offset by the non- renewal of several key customers and a decrease in demand for services in Latin America. Rental and Management Expense Rental and management expense for the three months ended June 30, 2001 was $51.5 million, an increase of $20.3 million from the three months ended June 30, 2000. The majority of the increase resulted from incremental operating expenses incurred in the three months ended June 30, 2001 for the approximately 3,500 towers that were acquired or constructed from July 1, 2000 to June 30, 2001 as discussed above. The remaining increase reflects increased bad debt expense and higher operating expenses for the three months ended June 30, 2001 related to towers that existed as of June 30, 2000. Network Development Services Expense Network development services expense for the three months ended June 30, 2001 was $88.1 million, an increase of $23.0 million from the three months ended June 30, 2000. The significant increase in expense is primarily due to the consummation of a strategic acquisition, overall increases in the volume of services work performed, increases in the overhead costs necessary to support both internal construction and external sales and increased bad debt expense. Satellite and Fiber Network Access Services Expense Satellite and fiber network access services expense for the three months ended June 30, 2001 was $57.8 million, an increase of $34.6 million from the three months ended June 30, 2000. The primary reason for the increase was the strategic acquisitions discussed above. Other components of the increase include the building of infrastructure to help manage the growth of this segment, increased overhead related to the development of new product lines and increased bad debt expense. Depreciation and Amortization Depreciation and amortization for the three months ended June 30, 2001 was $104.0 million, an increase of $36.9 million from the three months ended June 30, 2000. The principal component of the increase is an increase in depreciation expense of $24.3 million. This is primarily a result of the Company's purchase and acquisition of approximately $1.3 billion of property and equipment from July 1, 2000 to June 30, 2001. The other component of the increase is the increased amortization of $12.6 million, resulting from our recording and amortizing approximately $557.7 million of goodwill and other intangible assets related to acquisitions consummated from July 1, 2000 to June 30, 2001. 13
Development Expense Development expense for the three months ended June 30, 2001 was $2.6 million, a decrease of $1.6 million from the three months ended June 30, 2000. The decrease resulted primarily from reduced expenses incurred related to acquisition integration and tower site inspections and related data gathering in the three months ended June 30, 2001. Corporate General and Administrative Expense Corporate general and administrative expense for the three months ended June 30, 2001 was $6.4 million, an increase of $3.3 million from the three months ended June 30, 2000. The majority of the increase is a result of higher personnel and other administrative costs, as well as information technology costs associated with supporting our increasing number of towers, expanding revenue base and growth strategy. Interest Expense Interest expense for the three months ended June 30, 2001 was $70.1 million, an increase of $31.6 million from the three months ended June 30, 2000. The increase resulted primarily from interest expense on our credit facilities and senior notes in aggregate of $28.9 million. The remaining component of the increase represents increases in interest on other notes payable and capital leases, as well as additional deferred financing amortization. Interest Income and Other, net Interest income and other, net for the three months ended June 30, 2001, was $4.5 million, an increase of $0.6 million from the three months ended June 30, 2000. The increase is primarily related to an increase in interest earned on invested cash on hand of approximately $7.3 million offset by losses on equity investments and decreases in the fair value of derivative instruments not accounted for as hedges. Interest Income, TV Azteca, net Interest income, TV Azteca, net for the three months ended June 30, 2001 was $3.6 million, an increase of $0.4 million from the three months ended June 30, 2000. The increase results from interest earned on the entire principal amount of the note, $119.0 million, for the three months ended June 30, 2001 as compared to interest earned on a portion of the total principal amount of the note for the three months ended June 30, 2000. Loss on Investment in US Wireless During the three months ended June 30, 2001, the Company recorded an impairment charge of $22.2 million on its investment in US Wireless. The charge resulted from an assessment that a loss in value on our preferred stock investment had occurred that was other than temporary. Note Conversion Expense During the three months ended June 30, 2000, the Company acquired a portion of its 6.25% and 2.25% convertible notes in exchange for shares of its Class A common stock. As a consequence of those negotiated exchanges with certain of its noteholders, the Company recorded note conversion expense of $17.0 million. The note conversion expense represents the fair value of incremental stock issued as an inducement to noteholders to convert their holdings prior to the first scheduled redemption date. There were no such exchanges during the three months ended June 30, 2001. In August 2001, the Company entered into additional negotiated exchanges and expects to negotiate similar transactions from time to time. Income Tax Benefit The income tax benefit for the three months ended June 30, 2001 was $27.6 million, an increase of $10.9 million from the three months ended June 30, 2000. The primary reason for the increase is a result of the increase in our loss before income taxes and extraordinary losses partially offset by an increase in amortization of non-deductible goodwill arising from stock acquisitions. The effective tax rate differs in both periods from the statutory rate primarily due to the effect of non-deductible items, principally the amortization of intangible assets, on certain stock acquisitions for which we have recorded no tax benefit. In assessing the realizability of the deferred tax asset, we analyzed our forecast of future taxable income and potential tax planning strategies and concluded that recoverability of the net deferred tax asset is more likely than not. 14
Six Months Ended June 30, 2001 and 2000 (dollars in thousands)--Unaudited <TABLE> <CAPTION> Six Months Ended June 30, Amount of Percentage -------------------- Increase Increase 2001 2000 (Decrease) (Decrease) --------- --------- ---------- ---------- <S> <C> <C> <C> <C> Revenues: Rental and management.............. $ 197,704 $ 116,940 $80,764 69% Network development services....... 206,943 112,178 94,765 85 Satellite and fiber network access services.......................... 120,789 53,446 67,343 126 --------- --------- ------- Total revenues..................... 525,436 282,564 242,872 86 --------- --------- ------- Operating Expenses: Rental and management.............. 97,137 59,782 37,355 63 Network development services....... 184,581 97,327 87,254 90 Satellite and fiber network access services.......................... 114,114 42,258 71,856 170 --------- --------- ------- Total operating expenses excluding depreciation and amortization, development and corporate general and administrative expenses....... 395,832 199,367 196,465 99 --------- --------- ------- Depreciation and amortization...... 198,955 122,291 76,664 63 Development expense................ 5,302 5,184 118 2 Corporate general and administra- tive expense...................... 11,534 6,515 5,019 77 Interest expense................... 136,740 70,587 66,153 94 Interest income and other, net..... 12,858 6,437 6,421 100 Interest income, TV Azteca, net of $583 and $487 of interest expense, respectively ..................... 7,120 5,463 1,657 30 Loss on investment in US Wireless.. 22,226 22,226 N/A Note conversion expense............ 16,968 (16,968) N/A Minority interest in net losses (earnings) of subsidiaries........ 3 (58) (61) (105) Income tax benefit................. 49,725 30,214 19,511 65 Extraordinary losses on extinquishment of debt............ 4,338 (4,338) N/A --------- --------- ------- Net loss........................... $(175,447) $(100,630) $74,817 75% ========= ========= ======= </TABLE> Rental and Management Revenue Rental and management revenue for the six months ended June 30, 2001 was $197.7 million, an increase of $80.8 million from the six months ended June 30, 2000. The increase resulted primarily from two factors: the acquisition and construction of additional towers from July 1, 2000 to June 30, 2001 and increased leasing activity on new and existing towers. From July 1, 2000 to June 30, 2001, we continued to implement our growth strategy by aggressively acquiring and building new towers. During that period we acquired more than 1,800 towers and constructed more than 1,700 towers. Additionally, during that same period, we added more than 4,000 additional tenants to both newly acquired/constructed and existing towers. This acquisition, construction and leasing activity has not only significantly increased revenue, but has also increased the scope, depth and strength of our national and international tower network, providing us with a much larger base of tower revenue for the six months ended June 30, 2001 as compared to the six months ended June 30, 2000. In the long term, we believe that our leasing revenues are likely to grow at a more rapid rate than revenues from other segments of our business because of increasing utilization of existing tower capacity, recent and pending acquisitions and build-to-suit and other construction activities. Network Development Services Revenue Network development services revenue for the six months ended June 30, 2001 was $206.9 million, an increase of $94.8 million from the six months ended June 30, 2000. The significant growth in revenues during the six months ended June 30, 2001 as compared to the six months ended June 30, 2000 resulted primarily from strategic acquisitions and increased demand and volume for our turn-key services offset (to a lesser extent) by a decrease in sales in component parts. During 2000, we acquired several companies that expanded our in-house service capabilities to include: radio frequency engineering and design, steel fabrication, broadcast tower erection and the manufacture and sale 15
of tower lighting systems. These acquisitions have provided significant increases in revenues for the six months ended June 30, 2001. In addition, increased demand for turn-key services (driven by several large national contracts and increased carrier build outs) also provided a significant increase in revenue for the six months ended June 30, 2001. Satellite and Fiber Network Access Services Revenue Satellite and fiber network access services revenue for the six months ended June 30, 2001 was $120.8 million, an increase of $67.3 million from the six months ended June 30, 2000. The majority of the increase resulted from the consummation of several key acquisitions that occurred in 2001 and 2000 including: General Telecom, U.S. Electrodynamics, Publicom, Interpacket Networks and a SNAP facility from Swisscom. These acquisitions significantly increased our service capabilities, revenue base and geographical scope of customers, leading to significant incremental revenues in 2001. This increase in revenue was partially offset by the non-renewal of several key customers and a decrease in demand for services in Latin America. Rental and Management Expense Rental and management expense for the six months ended June 30, 2001 was $97.1 million, an increase of $37.4 million from the six months ended June 30, 2000. The majority of the increase resulted from incremental operating expenses incurred in the six months ended June 30, 2001 for approximately 3,500 towers that were acquired or constructed from July 1, 2000 to June 30, 2001 as discussed above. The remaining increase reflects increased bad debt expense and higher operating expenses for the six months ended June 30, 2001 related to towers that existed as of June 30, 2000. Network Development Services Expense Network development services expense for the six months ended June 30, 2001 was $184.6 million, an increase of $87.3 million from the six months ended June 30, 2000. The majority of the increase in expense is due to the consummation of strategic acquisitions, overall increases in the volume of services work performed, increases in the overhead costs necessary to support both internal construction and external sales and increased bad debt expense. Satellite and Fiber Network Access Services Expense Satellite and fiber network access services expense for the six months ended June 30, 2001 was $114.1 million, an increase of $71.9 million from the six months ended June 30, 2000. The primary reason for the increase was the strategic acquisitions discussed above. Other components of the increase include the building of infrastructure to help manage the growth of this segment, increased overhead related to new product lines and increased bad debt expense. Depreciation and Amortization Depreciation and amortization for the six months ended June 30, 2001 was $199.0 million, an increase of $76.7 million from the six months ended June 30, 2000. The principal component of the increase is an increase in depreciation expense of $43.1 million. This is primarily a result of the Company's purchase and acquisition of approximately $1.3 billion of property and equipment from July 1, 2000 to June 30, 2001. The other component of the increase is the increased amortization of $33.6 million, resulting from our recording and amortizing approximately $557.7 million of goodwill and other intangible assets related to acquisitions consummated from July 1, 2000 to June 30, 2001. 16
Development Expense Development expense for the six months ended June 30, 2001 was $5.3 million, an increase of $0.1 million from the six months ended June 30, 2000. The increase resulted from abandoned acquisition costs, personnel costs and tower site inspection and related data gathering costs incurred in the six months ended June 30, 2001, partially offset by a decrease in acquisition integration expenses for the same period. Corporate General and Administrative Expense Corporate general and administrative expense for the six months ended June 30, 2001 was $11.5 million, an increase of $5.0 million from the six months ended June 30, 2000. The majority of the increase is a result of higher personnel and other administrative costs, as well as information technology costs associated with supporting our increasing number of towers, expanding revenue base and growth strategy. Interest Expense Interest expense for the six months ended June 30, 2001 was $136.7 million, an increase of $66.2 million from the six months ended June 30, 2000. The increase resulted primarily from interest expense on our credit facilities and senior notes in aggregate of $60.4 million. The remaining component of the increase primarily represents interest on capital leases, as well as additional deferred financing amortization. Interest Income and Other, net Interest income and other, net for the six months ended June 30, 2001, was $12.9 million, an increase of $6.4 million from the six months ended June 30, 2000. The increase resulted primarily from interest earned on invested cash on hand offset by losses on equity investments and decreases in the fair value of derivative instruments not accounted for as hedges. Interest Income, TV Azteca, net Interest income, TV Azteca, net for the six months ended June 30, 2001 was $7.1 million, an increase of $1.7 million from the six months ended June 30, 2001. The increase results from interest earned on the entire principal amount of the note, $119.0 million, during the six months ended June 30, 2001 as compared to less than the entire principal amount of the note for a portion of the six months ended June 30, 2000. Loss on Investment in US Wireless During the six months ended June 30, 2001, the Company incurred an impairment charge of $22.2 million on its investment in US Wireless. The change resulted from an assessment that a loss in value on our preferred stock investment had occurred that was other than temporary. Note Conversion Expense During the six months ended June 30, 2000, the Company acquired a portion of its 6.25% and 2.25% convertible notes in exchange for shares of its Class A common stock. As a consequence of those negotiated exchanges with certain of its noteholders, the Company recorded note conversion expense of $17.0 million. The note conversion expense represents the fair value of incremental stock issued as an inducement to noteholders to convert their holdings prior to the first scheduled redemption date. There were no such exchanges during the six months ended June 30, 2001. In August 2001, the Company entered into additional negotiated exchanges and expects to negotiate similar transactions from time to time. Income Tax Benefit The income tax benefit for the six months ended June 30, 2001 was $49.7 million, an increase of $19.5 million from the six months ended June 30, 2000. The primary reason for the increase is a result of the increase in our loss before income taxes and extraordinary losses partially offset by an increase in amortization of non-deductible goodwill arising from stock acquisitions. The effective tax rate differs in both periods from the statutory rate primarily due to the effect of non-deductible items, principally the amortization of intangible assets, on certain stock acquisitions for which we have recorded no tax benefit. 17
In assessing the realizability of the deferred tax asset, we analyzed our forecast of future taxable income and potential tax planning strategies and concluded that recoverability of the net deferred tax asset is more likely than not. Extraordinary Losses on Extinguishment of Debt, net The Company incurred extraordinary losses on the extinguishment of debt, net in the first quarter 2000 of $4.3 million. The losses were incurred as a result of an amendment and restatement of our primary credit facility ($3.0 million, net of a tax benefit of $2.0 million) and our early retirement of debt assumed as part of the UNISite, Inc. merger ($1.3 million, net of a tax benefit of $1.0 million). Liquidity and Capital Resources Our liquidity needs arise from our acquisition-related activities, debt service, working capital needs and capital expenditures associated principally with our tower construction program. As of June 30, 2001, we had approximately $440.8 million in cash and cash equivalents, working capital of approximately $757.4 million and approximately $400.0 million of available borrowings under our credit facilities. Historically, we have met our operational liquidity needs primarily with internally generated funds and bank borrowings and have financed our acquisitions and our construction program with a combination of capital funds from sales of our equity and debt securities and bank borrowings. We expect that this trend will continue in 2001. Our 2001 capital budget provides for expenditures of approximately $600.0 million, ($301.0 million of which has already been incurred as of June 30, 2001) which includes towers to be built under existing build-to-suit agreements. In addition, based on the transactions executed to date, we expect to close in 2001 on transactions pending as of June 30, 2001 of approximately $465.1 million. Lastly, we believe that debt service requirements will be significant for the remainder of 2001 and into the forseeable future. We believe our current cash and cash equivalents and anticipated borrowing capacity under our credit facilities will be sufficient to meet these cash requirements. If we were to effect one or possibly two major new acquisitions in the next twelve months, we would likely require additional funds from external sources. For the six months ended June 30, 2001, cash flows used for operating activities were $34.9 million, as compared to cash flows used for operating activities of $42.7 million for the six months ended June 30, 2000. The change is primarily related to increased cash generated from operations (exclusive of changes in working capital). For the six months ended June 30, 2001, cash flows used for investing activities were $952.9 million, as compared to $1.3 billion for the six months ended June 30, 2000. The decrease in 2001 is primarily due to a decrease in cash expended for mergers and acquisitions of approximately $499.3 million offset by an increase in property and equipment expenditures. For the six months ended June 30, 2001, cash flows provided by financing activities were $1.4 billion as compared to $1.8 billion for the six months ended June 30, 2000. The decrease is primarily related to a reduction in net cash inflows from bank borrowings and external debt and equity offerings in aggregate. As of June 30, 2001, we had outstanding the indebtedness of $3.6 billion, certain of which is described below under "Credit Facilities" and "Equity Offering and Note Placement". As of June 30, 2001, we had outstanding $212.7 million principal amount of our 6.25% convertible notes due October 15, 2009, $262.3 million principal amount of our 2.25% convertible notes due October 15, 2009, $450.0 million principal amount of our 5% convertible notes due February 1, 2010 and other debt of approximately $220.5 million. We may need to raise cash from external sources to meet our debt service obligations and to pay the principal amounts of our indebtedness when due. Credit Facilities. Our credit facilities provide us with a borrowing capacity of up to $2.0 billion, with the option to increase the capacity up to an additional $500.0 million, subject to lender approval. Borrowings under the credit facilities are subject to certain borrowing base restrictions, such as operating cash flow and tower construction cost levels. Our credit facilities currently include a $650.0 million credit facility which was fully 18
available (subject to the borrowing base restrictions) on June 30, 2001, maturing on June 30, 2007, an $850.0 million multi-draw Term Loan A, which was fully drawn on June 30, 2001, maturing on June 30, 2007, and a $500.0 million Term Loan B, which was fully drawn on June 30, 2001 maturing on December 31, 2007. The credit facilities are scheduled to amortize quarterly commencing in March 2003. We are currently in the process of negotiating the terms of an additional $500.0 million of borrowings under our credit facilities as discussed in the preceding paragraph, although no agreements have been executed. If an agreement is reached, we expect the additional borrowing to occur during the third quarter of 2001. We cannot, however, assure you we will negotiate and close any additional borrowings. Our credit facilities contain certain financial and operational covenants and other restrictions with which the borrower subsidiaries and restricted subsidiaries must comply, whether or not there are any borrowings outstanding. The parent company is also restricted with respect to indebtedness. We and the restricted subsidiaries have guaranteed all of the loans. We have secured the loans by liens on substantially all assets of the borrower subsidiaries and the restricted subsidiaries and substantially all outstanding capital stock and other debt and equity interests of all of our direct and indirect subsidiaries. Under our credit facilities, we are also required to maintain an interest reserve for our convertible notes and our senior notes. These funds can only be used to make scheduled interest payments on our outstanding convertible notes and senior notes. As of June 30, 2001 we had approximately $119.8 million of restricted cash and investments related to such interest reserve. In February 2001, our Mexican subsidiary, American Tower Corporation de Mexico, S. de R.L. de C.V., which we refer to as ATC Mexico, and two of its subsidiaries consummated a loan agreement with a group of banks providing a credit facility of an initial aggregate amount of $95.0 million. If additional lenders are made party to the agreement, the size of the facility may increase to $140.0 million. We have committed to ATC Mexico to loan up to $45.0 million if additional lenders are not made party to the agreement. Our commitment will be reduced on a dollar-for-dollar basis if additional lenders join the ATC Mexico loan agreement. This loan agreement requires maintenance of various financial covenants and ratios and is guaranteed and collateralized by substantially all of the assets of ATC Mexico and the assets of its subsidiaries. All amounts borrowed under the loan agreement are due on September 30, 2003. The lenders' commitment to make loans under the loan agreement expires on March 31, 2002. As of June 30, 2001, an aggregate of $95.0 million was outstanding under the loan agreement. Equity Offering and Note Placement. In January 2001, we completed a public offering of 10.0 million shares of our Class A common stock for total net proceeds of approximately $360.8 million. We also completed a private placement of $1.0 billion of senior notes that mature in February 2009 for total net proceeds of $969.0 million. These notes require semi-annual interest payments and contain certain financial and operational covenants and other restrictions similar to those in our credit facilities. We have used and will use the proceeds from these two transactions to finance the construction of towers, fund pending and future acquisitions and for general corporate purposes. ATC Separation--We continue to be obligated under the ATC Separation agreement for certain tax liabilities to CBS Corporation and American Radio Systems. As of June 30, 2001 no matters covered under this indemnification have been brought to our attention. Acquisitions and Construction. We expect that the consummated acquisitions and current and future construction activities will have a material impact on liquidity. We believe that the acquisitions, once integrated, will have a favorable impact on liquidity and will offset the initial effects of the funding requirements. We also believe that the construction activitites may initially have an adverse effect on our future liquidity as newly constructed towers will initially decrease overall liquidity. However, as such sites become fully operational and 19
achieve higher utilization, we expect that they will generate tower cash flow and, in the long-term, increase liquidity. As of June 30, 2001, we were a party to various agreements relating to the acquisition of assets or businesses from various third parties and were involved in the construction of numerous towers, pursuant to build-to-suit agreements and for other purposes (see note 4 of the condensed consolidated financial statements). Economic Conditions. The slow down in the economy could reduce consumer demand for wireless services, thereby causing providers to delay implementation of new systems and technologies. We believe that the economic slow down in 2001 has harmed, and may continue to harm, the financial condition of some wireless service providers. Convertible Note Exchanges. From the beginning of the third quarter of 2001 through August 14, 2001, the Company acquired a portion of its outstanding convertible notes. During this period, approximately $40.0 million in principal amount of the Company's convertible notes was converted into shares of Class A common stock. In addition, as of August 14, 2001, the conversion of another approximately $40.0 million in principal amount of the Company's convertible notes is pending, subject to the signing of a definitive agreement. All of these conversions are pursuant to exchange agreements which the Company negotiated with a limited number of noteholders. Pursuant to these exchange agreements, the Company has issued or will issue the number of shares of Class A common stock that these noteholders are entitled to receive based on the conversion price set forth in the applicable indenture, plus an additional number of shares of Class A common stock that the Company has agreed to issue in order to induce them to convert their holdings prior to the first scheduled redemption date. The Company expects to record in the third quarter a non-cash charge equal to the fair market value of these additional shares. The Company expects to negotiate similar exchanges for its outstanding convertible notes during the third quarter and from time to time in the future, subject to market conditions. To the extent that inducement shares are issued by the Company as part of any future exchanges, the Company expects to record additional non-cash charges. Recent Accounting Pronouncements--On January 1, 2001, the Company adopted the provisions of SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities". This statement establishes accounting and reporting standards for derivative instruments. Specifically, it requires that an entity recognize all derivatives as either assets or liabilities on the balance sheet at fair value. The accounting for changes in the fair market value of a derivative (that is unrealized gains or losses) is recorded as a component of an entity's net income or other comprehensive income, depending upon designation (as defined in the statement). Such adoption resulted in a charge to other comprehensive income of $7.9 million, net of tax, from the cumulative effect of adopting this standard. The Company is exposed to interest rate risk relating to variable interest rates on its credit facilities. As part of its overall strategy to manage the level of exposure to the risk of interest rate fluctuations, the Company uses interest rate swaps, caps and collars, which qualify and are designated as cash flow hedges. The Company also uses swaptions to manage interest rate risk, which have not been designated as cash flow hedges. During the six months ended June 30, 2001, the Company recorded an unrealized loss, excluding the charge for the cumulative effect of adopting SFAS No. 133, of approximately $7.9 million (net of a tax benefit of approximately $4.2 million) in other comprehensive loss for the change in fair value of cash flows hedges and amounts reclassified into results of operations. Hedge ineffectiveness resulted in a loss of approximately $1.0 million for the six months ended June 30, 2001 and was recorded in "interest income and other, net". The Company records the changes in fair value of its derivative instruments that are not accounted for as hedges in "interest income and other, net". At June 30, 2001 the fair value of the Company's derivative instruments represented a liability of approximately $25.8 million and is included in "other long-term liabilities". In June 2001, SFAS No. 141, "Business Combinations" was approved by the Financial Accounting Standards Board (FASB). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Goodwill and certain intangible assets will remain on the balance sheet and not be amortized. On an annual basis, and when there is reason to suspect that their values have been diminished or impaired, these assets must be tested for impairment, and write-downs may be necessary. The Company has not determined the impact, if any, that this statement will have on its consolidated financial position or results of operations. 20
In June 2001, SFAS No. 142, "Goodwill and Other intangible Assets" was approved by the FASB. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of this statement. The Company is required to implement SFAS No. 142 on January 1, 2002 and it has not determined the impact that this statement will have on its consolidated financial position or results of operations. Factors That May Affect Future Results We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. The following discussion highlights some of the risks that may affect future operating results. Decrease in demand for tower space would materially and adversely affect our operating results and we cannot control that demand Many of the factors affecting the demand for tower space, and to a lesser extent our services business, affect our operating results. Those factors include: . consumer demand for wireless services; . the financial condition of wireless service providers and their preference for owning rather than leasing antenna sites; . the growth rate of wireless communications or of a particular wireless segment; . the number of wireless service providers in a particular segment, nationally or locally; . governmental licensing of broadcast rights; . increased use of roaming and resale arrangements by wireless service providers. These arrangements 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 nonlicensed providers to enter the wireless marketplace. Wireless service providers might consider such roaming and resale arrangements as superior to constructing their own facilities or leasing antenna space from us; . zoning, environmental and other government regulations; . any new legislation, or interpretation of existing federal communications laws, that would give wireless service providers the right to place their antennae on public utility poles and other structures at regulated rates; and . technological changes. The demand for antenna space is dependent, to a significantly lesser extent, on the needs of television and radio broadcasters. Among other things, technological advances, including the development of satellite-delivered radio, may reduce the need for tower-based broadcast transmission. We could also be affected adversely should the development of digital television be delayed or impaired, or if demand for it were to be less than anticipated because of delays, disappointing technical performance or cost to the consumer. A significant general slow down in the economy could negatively affect the foregoing factors influencing demand for tower space and tower related services. For example, such a slow down could reduce consumer demand for wireless services, thereby causing providers to delay implementation of new systems and technologies. We believe that the economic slow down in 2001 has already harmed, and may continue to harm, the financial condition of some wireless service providers. Our substantial leverage and debt service obligations may adversely affect our cash flow and our ability to make payments on our senior notes As of June 30, 2001 we had outstanding $3.6 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 in respect of our indebtedness. We may also obtain additional long-term debt and working capital lines of credit to meet future financing needs. This would have the effect of increasing our total leverage. 21
Our substantial leverage could have significant negative consequences, including: . increasing our vulnerability to general adverse economic and industry conditions; . limiting our ability to obtain additional financing; . requiring the dedication of a substantial portion of our cash flow from operations to service our indebtedness, thereby reducing the amount of our cash flow available for other purposes, including capital expenditures; . requiring us to sell debt or equity securities or to sell some of our core assets, possibly on unfavorable terms, to meet payment obligations; . limiting our flexibility in planning for, or reacting to, changes in our business and the industries in which we compete; and . placing us at a possible competitive disadvantage with less leveraged competitors and competitors that may have better access to capital resources. A significant portion of our outstanding indebtedness bears interest at floating rates. As a result, our interest payment obligations on such indebtedness will increase if interest rates increase. Restrictive covenants in our domestic credit facilities and our senior notes could adversely affect our business by limiting flexibility The indenture for our senior notes and our domestic credit facilities contain restrictive covenants that limit our ability to take various actions and engage in various types of transactions. These restrictions include: . paying dividends and making distributions or other restricted payments; . incurring more debt, guaranteeing indebtedness and issuing preferred stock; . issuing stock of some types of subsidiaries; . making specified types of investments; . creating liens; . entering into transactions with affiliates; . entering into sale-leaseback transactions; and . merging, consolidating or selling assets. These covenants could have an adverse effect on our business by limiting our ability to take advantage of financing, merger and acquisition or other corporate opportunities. Build-to-suit construction projects and major acquisitions from wireless service providers increase our dependence on a limited number of customers, the loss of which could materially decrease revenues, and may also involve less favorable terms Our focus on major build-to-suit projects for wireless service providers and related acquisitions entail several unique risks. First is our greater dependence on a limited number of customers and the risk that customer losses could materially decrease revenues. Another risk is that our agreements with these wireless service providers have lease and control terms that are more favorable to them than the terms we give our tenants generally. In addition, although we have the benefit of an anchor tenant in build-to-suit projects, we may not be able to find a sufficient number of additional tenants. In fact, one reason wireless service providers may prefer build-to-suit arrangements is to share or escape the costs of an undesirable site. A site may be undesirable because it has high construction costs or may be considered a poor location by other providers. Our construction program increases our exposure to risks that could increase costs and adversely affect our earnings and growth Our construction activities involve substantial risks. These risks include: . increasing our debt and the amount of payments required on it; 22
. increasing competition for construction sites and experienced tower construction companies, resulting in significantly higher costs and failure to meet time schedules; . failing to meet time schedules, which could result in our paying significant penalties to prospective tenants, particularly in build-to- suit situations; and . possible lack of sufficient experienced personnel to manage an expanded construction program. If we are unable to construct or acquire new towers at the pace, in the locations and at the costs we desire, our business would be adversely affected Our growth strategy depends in part on our ability to construct and acquire towers in locations and on a time schedule that meets the requirements of our customers. If our tower construction and acquisition projects fail to meet the requirements of our customers, or fail to meet their requirements at our projected costs, our business would be adversely affected. If we are unable to build new towers where and when our customers require them, or where and when we believe the best opportunity to add tenants exists, we could fail to meet our contractual obligations under build-to-suit agreements, thereby incurring substantial penalties and possibly contract terminations. In addition, we could lose opportunities to lease space on our towers. Our ability to construct a tower at a location, on a schedule, and at a cost we project can be affected by a number of factors beyond our control, including: . zoning, and local permitting requirements and national regulatory approvals; . environmental opposition; . availability of skilled construction personnel and construction equipment; . adverse weather conditions; and . increased competition for tower sites, construction materials and labor. Increasing competition in the satellite and fiber network access services market may slow Verestar's growth and adversely affect its business In the satellite and fiber network access services market, Verestar competes with other satellite communications companies that provide similar services, as well as other communications service providers. Some of Verestar's existing and potential competitors consist of companies from whom Verestar currently leases satellite and fiber network access in connection with the provision of Verestar's services to its customers. Increased competition could result in Verestar being forced to reduce the fees it charges for its services and may limit Verestar's ability to obtain, on economical terms, services that are critical to its business. We anticipate that Verestar's competitors may develop or acquire services that provide functionality that is similar to that provided by Verestar's services and that those competitive services may be offered at significantly lower prices or bundled with other services. Many of the existing and potential competitors have financial and other resources significantly greater than those available to Verestar. If we cannot keep raising capital, our growth will be impeded Without additional capital, we would need to curtail our acquisition and construction programs that are essential for our long-term success. We expect to use borrowed funds to satisfy a substantial portion of our capital needs. However, we must continue to satisfy financial ratios and to comply with financial and other covenants in order to do so. If our revenues and cash flow do not meet expectations, we may lose our ability to borrow money or to do so on terms we consider to be favorable. Conditions in the capital markets also will affect our ability to borrow, as well as the terms of those borrowings. All of these factors could also make it difficult or impossible for us otherwise to raise capital, particularly on terms we would consider favorable. If we cannot successfully integrate acquired sites or businesses or manage our operations as we grow, our business will be adversely affected and our growth may slow or stop A significant part of our growth strategy is the continued pursuit of strategic acquisitions of independent tower operators and consolidators, wireless service providers and service and teleport businesses. We cannot 23
assure you, however, that we will be able to integrate successfully acquired businesses and assets into our existing business. Our growth has placed, and will continue to place, a significant strain on our management and our operating and financial systems. Successful integration of these and any future acquisitions will depend primarily on our ability to manage these assets and combined operations and, with respect to the services and satellite and fiber network access services businesses, to integrate new management and employees into our existing operations. If our chief executive officer left, we would be adversely affected because we rely on his reputation and expertise, and because of our relatively small senior management team The loss of our chief executive officer, Steven B. Dodge, has a greater likelihood of having a material adverse effect upon us than it would on most other companies of our size because of our comparatively smaller executive group and our reliance on Mr. Dodge's expertise. Our growth strategy is highly dependent on the efforts of Mr. Dodge. Our ability to raise capital also depends significantly on the reputation of Mr. Dodge. You should be aware that we have not entered into an employment agreement with Mr. Dodge. The tower industry is relatively new and does not have a large group of seasoned executives from which we could recruit a replacement for Mr. Dodge. Expanding operations into foreign countries could create expropriation, governmental regulation, funds inaccessibility, foreign exchange exposure and management problems Our expansion into Mexico and Brazil, and other possible foreign operations in the future, could result in adverse financial consequences and operational problems not experienced in the United States. We have made a substantial loan to a Mexican company and have acquired and are constructing a sizable number of towers in that country. We also acquired the rights to 156 communications towers in Brazil and entered into a build-to-suit agreement for an additional 400 towers in that country. As a result of acquisitions by Verestar, we have network operation centers in Europe, Asia, South America and Africa. We may also engage in comparable transactions in other countries in the future. Among the risks of foreign operations are governmental expropriation and regulation, inability to repatriate earnings or other funds, currency fluctuations, difficulty in recruiting trained personnel, and language and cultural differences, all of which could adversely affect these operations. New technologies could make our tower antenna leasing services less desirable to potential tenants and result in decreasing revenues The development and implementation of signal combining technologies, which permit one antenna to service two different transmission frequencies and, thereby, two customers, may reduce the need for tower-based broadcast transmission and hence demand for our antenna space. Mobile satellite systems and other new technologies could compete with land- based wireless communications systems, thereby reducing the demand for tower lease space and other services we provide. The Federal Communications Commission has granted license applications for several low-earth orbiting satellite systems that are intended to provide mobile voice or data services. In addition, the emergence of new technologies could reduce the need for tower-based transmission and reception and have an adverse effect on our operations. The growth in delivery of video services by direct broadcast satellites could also adversely affect demand for our antenna space. We could have liability under environmental laws As the owner, lessee and operator of real property and facilities, we are subject to federal, state and local and foreign environmental laws relating to the management, use, storage, disposal, emission and remediation of, and exposure to, hazardous and non-hazardous substances, materials and waste. We are also subject to related registration, permitting, record keeping and financial assurance requirements. See "Legal Proceedings" for a 24
description of a civil complaint filed against us by the District Attorney for the County of Santa Clara, California regarding certain alleged recordkeeping, registration, hazardous materials management and filing violations under California environmental laws. Various environmental laws require us to investigate, remove or remediate soil and groundwater contaminated by hazardous substances or wastes on property we own or lease or which is associated with tower operations, and may subject us to penalties and fines for violations of those environmental laws. Some of those laws impose cleanup responsibility and liability without regard to whether the owner, lessee or operator of the property or facility knew of or was responsible for the contamination, or whether operations at the property have been discontinued or the property has been transferred. The owner, lessee or operator of contaminated property also may be subject to common law claims by third parties based on damages and costs resulting from off-site migration of the contamination. In connection with our former and current ownership, lease or operation of our properties, we may be liable for those types of environmental costs. Fines or penalties resulting from any failure to comply with those environmental laws and addressing claims or obligations arising under them could have a material adverse effect on our financial condition, results of operations and liquidity. Our business is subject to government regulations and changes in current or future laws or regulations could harm our business We are subject to federal, state and local and foreign regulation of our business. Both the FCC and the FAA regulate towers used for wireless communications and radio and television antennae. In addition, the FCC separately licenses and regulates wireless communication devices and television and radio stations operating from towers. Similar regulations exist in Mexico and other foreign jurisdictions regarding wireless communications and the operation of communications towers. Failure to comply with applicable requirements may lead to monetary penalties and other sanctions, including being disqualified from holding licenses for our Verestar business or registrations for our towers and may require us to indemnify our customers against any such failure to comply. New regulations may impose additional costly burdens on us, which may affect our revenues and cause delays in our growth. In January 2001, the FCC concluded investigations of several operators of communications towers, including us. The FCC sent us a Notice of Apparent Liability for Forfeiture ("NAL") preliminarily determining that we had failed to file specified informational forms, had failed to properly post specified information at various tower sites and on one occasion had failed to properly light a tower. The FCC also ordered an additional review of our overall procedures for and degree of compliance with the FCC's regulations. We have reached a settlement with the FCC regarding the compliance issues arising out of the Notice of Apparent Liability in the form of a Consent Decree. As part of the Consent Decree, the FCC has rescinded the NAL and terminated the further investigation ordered in the NAL. We have agreed to make a voluntary contribution of $0.3 million to the U.S. Treasury and to maintain an active compliance plan. Such payment will be made in September 2001. The construction and reconstruction of a substantial number of antennae needed to deliver digital television service to our customers may require state and local regulatory approvals. The FCC has indicated that it may adopt preemptive guidelines. If adopted, these regulations may be more or less restrictive than existing state and local regulations and may increase our construction costs. 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. If a connection between radio emissions and possible negative health effects, including cancer, were established, our operations, costs and revenues would be materially and adversely affected. We do not maintain any significant insurance with respect to these matters. 25
Control by our principal stockholders could deter mergers where you could get more than current market price for your stock Steven B. Dodge, together with his affiliates, owned approximately 26% of our total voting power as of February 28, 2001. Control by Mr. Dodge and others may discourage a merger or other takeover of our company in which holders of common stock might be paid a premium for their shares over then- current market prices. Mr. Dodge, together with a limited number of our directors, may be able to control or block the vote on mergers and other matters submitted to the common stockholders. Information Presented Pursuant to the Indenture for the Senior Notes The following table sets forth information that is presented solely to address certain reporting requirements contained in the indenture for our senior notes. This information presents certain financial data for us on a consolidated basis and on a restricted group basis, which means only for American Tower and its subsidiaries that comprise the restricted group under the indenture. All of our subsidiaries are part of this restricted group, except Verestar and its subsidiaries, whose operations constitute all of our satellite and fiber network access services business segment. This restricted group data is not intended to represent an alternative measure of operating results, financial position or cash flow from operations, as determined in accordance with generally accepted accounting principles. <TABLE> <CAPTION> Three months ended Six months ended June 30, 2001 June 30, 2001 -------------------------- ----------------------- Restricted Restricted Consolidated Group (1) Consolidated Group(1) ------------ ------------ ------------ ---------- <S> <C> <C> <C> <C> Statement of Operations Data (in thousands): Operating revenues........ $ 262,968 $ 206,922 $ 525,436 $ 404,647 ----------- ------------ --------- --------- Operating expenses: Operating expenses........ 197,431 139,630 395,832 281,718 Depreciation and amortization............. 103,956 86,186 198,955 167,031 Development expense....... 2,557 2,146 5,302 4,602 Corporate general and administrative expense... 6,407 6,407 11,534 11,534 ----------- ------------ --------- --------- Total operating expense................ 310,351 234,369 611,623 464,885 ----------- ------------ --------- --------- Loss from operations...... (47,383) (27,447) (86,187) (60,238) Interest expense.......... (70,061) (67,390) (136,740) (131,471) Interest income and other, net...................... 4,451 4,585 12,858 13,008 Interest income, TV Azteca................... 3,582 3,582 7,120 7,120 Loss on investment in US Wireless................. (22,226) (22,226) (22,226) (22,226) Minority interest in net earnings of subsidiaries............. 61 61 3 3 ----------- ------------ --------- --------- Loss before income taxes and extraordinary losses................... $ (131,576) $ (108,835) $(225,172) $(193,804) =========== ============ ========= ========= </TABLE> <TABLE> <CAPTION> June 30, 2001 ------------------------------ Consolidated Restricted Group ------------- ---------------- <S> <C> <C> Balance Sheet Data (in thousands): Cash and cash equivalents...................... $ 440,842 $ 423,713 Restricted cash and investments................ 119,757 119,757 Property and equipment, net.................... 2,912,155 2,616,516 Total assets................................... 7,002,398 6,346,012 Long-term obligations, including current portion....................................... 3,590,488 3,472,512 Net debt(2).................................... 3,029,889 2,929,042 Total stockholders' equity..................... 3,062,243 3,062,243 </TABLE> - -------- (1) Corporate overhead allocable to Verestar and interest expense related to intercompany borrowings by Verestar (unrestricted subsidiary) have not been excluded from results shown for the restricted group. (2) Net debt represents long-term obligations, including current portion, less cash and cash equivalents and restricted cash and investments. 26
Tower Cash Flow, Adjusted Consolidated Cash Flow and Non-Tower Cash Flow for the Company and its restricted subsidiaries, as defined in the indenture for our senior notes, are as follows: <TABLE> <S> <C> Tower Cash Flow, for the three months ended June 30, 2001........ $ 58,528 =========== Consolidated Cash Flow, for the twelve months ended June 30, 2001............................................................ $ 240,648 Less: Tower Cash Flow, for the twelve months ended June 30, 2001.......................................................... (196,658) Plus: four times Tower Cash Flow, for the three months ended June 30, 2001................................................. 234,112 ----------- Adjusted Consolidated Cash Flow, for the twelve months ended June 30, 2001........................................................ $ 278,102 =========== Non-Tower Cash Flow, for the twelve months ended June 30, 2001... $ 30,090 =========== </TABLE> 27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk from changes in interest rates on our long- term debt obligations. We attempt to reduce these risks by utilizing derivative financial instruments, namely interest rate caps, swaps, collars and swaptions pursuant to our policies. All derivative financial instruments are for purposes other than trading. For the six months ended June 30, 2001, we increased our borrowings under our credit facilities by approximately $95.0 million. In addition, we completed a private placement of $1.0 billion of our senior notes issued at 100% of their face amount. The proceeds from the above have and will be used to finance construction and acquisitions. In the short- term, we invested any unused proceeds in marketable debt securities, commercial paper and cash and cash equivalents. Lastly, in June 2001 we entered into an interest rate collar agreement with a total notional amount of $47.5 million expiring in June 2003. The following table provides information as of June 30, 2001 about our market risk exposure associated with changing interest rates. For long-term debt obligations, the table presents principal cash flows and related average interest rates by contractual maturity dates. For interest rate caps, swaps, collars and swaptions, the table presents notional principal amounts and weighted-average interest rates by contractual maturity dates. Twelve Month Period Ended June 30, Principal Payments and Interest Rate Detail by Contractual Maturity Dates (in thousands) <TABLE> <CAPTION> Long-Term Debt 2002 2003 2004 2005 2006 Thereafter Total Fair Value - -------------- ---------- ---------- -------- -------- -------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Fixed Rate Debt(a)...... $ $ $ $ $ $1,925,011 $1,925,011 $1,789,329 Average Interest Rate(a)................ 7.55% Variable Rate Debt (a).. $ $ 28,000 $219,000 $217,500 $249,375 $ 731,125 $1,445,000 $1,445,000 Aggregate Notional Amounts Associated with Interest Rate Caps, Swaps, Collars and Swaptions in Place during the Twelve Month Period Ended June 30, and Interest Rate Detail by Contractual Maturity Dates (in thousands) <CAPTION> Interest Rate CAPS - ------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> Notional Amount......... $ 364,980(c) Cap Rate................ 9.00% <CAPTION> Interest Rate SWAPS - ------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Notional Amount......... $ 395,000(d) $ 365,000(e) $ (15,428) Weighted- Average Fixed Rate Payable(b)............. 6.69% 6.67% <CAPTION> Interest Rate COLLARS - --------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Notional Amount......... $ 512,500(f) $ 327,500(g) $ (12,773) Weighted- Average Below Floor Rate Payable, Above Cap Rate Receivable(b)..... 6.14%-8.54% 5.75%-8.01% <CAPTION> Interest Rate SWAPTIONS - ----------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Notional Amount......... $ 290,000(h) $ 2,365 Weighted-Average Rate(b) 6.56% </TABLE> - ------- (a) June 30, 2001 variable rate debt consists of our domestic and Mexican credit facilities ($1.45 billion) and fixed rate debt consists of the 2.25% and 6.25% convertible notes ($475.0 million), the 5.0% convertible notes ($450.0 million) and the senior notes ($1.0 billion). Interest on the credit facilities is payable in accordance with the applicable London Interbank Offering Rate (LIBOR) agreement or quarterly and accrues at our option either at LIBOR plus margin (as defined) or the Base Rate plus margin (as defined). The average interest rate in effect at June 30, 2001 for the credit facilities was 7.24%. For the six months ended June 30, 2001, the weighted average interest rate under the credit facilities was 8.58%. The 2.25% and 6.25% convertible notes each bear interest (after giving effect to the accretion of the original discount on the 2.25% convertible notes) at 6.25%, which is payable semiannually on April 15 and October 15 of each year. The 5.0% convertible notes bear interest at 5.0% which is payable semiannually on February 15 and August 15 of each year. The senior notes bear interest at 9 3/8% which is payable semiannually on February 1 and August 1 of each year beginning August 1, 2001. (b) Represents the weighted-average fixed range of interest based on contract notional amount as a percentage of total notional amounts in a given year. (c) Includes notional amounts of $364,980 that will expire in February 2002. (d) Includes notional amounts of $30,000 that will expire in March 2002. (e) Includes notional amounts of $75,000 and $290,000 that will expire in January and February 2003, respectively. (f) Includes notional amount of $185,000 that will expire in May 2002. (g) Includes notional amounts of $95,000, $185,000 and $47,500 that will expire in July 2002 and May and June 2003, respectively. (h) Includes notional amounts of $290,000 that will expire in August 2001. 28
As discussed above, we maintain a portion of our cash and cash equivalents and short-term investments in financial instruments that are subject to interest rate risks. Due to the relatively short duration of such instruments, fluctuations in interest rates should not materially affect our financial condition or results of operations. The effect of foreign currency fluctuations on our foreign operations, which include Mexico and Brazil, have not been significant to date. This has been the case in Mexico primarily because most contracts are denominated in U.S. dollars, and in Brazil because we are in the early stages of developing our network. Accordingly, foreign currency risk has not been material for the six months ended June 30, 2001. 29
PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As previously disclosed by the Company in its Quarterly Report on Form 10-Q for the quarter ended March 31, 2001, on April 23, 2001 the District Attorney for the County of Santa Clara, California filed a civil complaint against the Company in the Superior Court of California. The complaint alleges record keeping, registration, hazardous materials management and filing violations under California environmental laws. The complaint does not allege any contamination of the environment occurred as a result of the alleged violations. The Company has taken measures to ensure that these sites are in compliance with appliance California environmental laws and believes that they are currently in compliance with such laws. On May 23, 2001, the Company filed an answer to the complaint formally denying the allegations. The Company believes that the resolution of the violations alleged in the complaint will not have a material adverse effect on its financial condition or results of operations. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On March 1, 2001, the Company consummated its acquisition of Vancomm, Inc. pursuant to which it issued to the former stockholders of Vancomm 43,890 shares of Class A Common Stock as consideration for the acquisition. On March 12, 2001, the Company issued 100,000 shares of Class A common stock to J.P. Morgan Partners (23A SBIC), LLC in exchange for 78,432 shares of Class B common stock, $0.01 par value per share, of America Connect, Inc. On June 29, 2001, the Company consummated its acquisition of Site Advantage, Inc. pursuant to which it issued 298,170 shares of Class A Common Stock to the former stockholders of Site Advantage, Inc. as consideration, in part, for the acquisition. The Company issued all the shares referred to in the foregoing paragraphs in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933. As a basis for doing so, the Company relied on the following facts: (1) the Company offered the securities to a limited number of offerees without any general solicitation, (2) the Company obtained representations from the purchasers regarding their financial suitability and investment intent and (3) the Company issued all of the securities with restrictive legends on the certificates to limit resales. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The 2001 Annual Meeting of Stockholders was held on Thursday, May 17, 2001, to consider and act upon the following matters, all of which were approved and adopted. The results of the stockholder voting were as follows: 1. To elect eight (8) Directors including two "Class A" directors to be elected by the holders of Class A common stock, voting separately as a class, for the ensuing year or until their successors are elected and qualified. <TABLE> <CAPTION> Votes Cast Votes For Withheld ----------- --------- <S> <C> <C> Steven B. Dodge........................................ 221,851,565 7,657,484 Thomas H. Stoner....................................... 228,390,272 1,118,777 Arnold L. Chavkin...................................... 228,232,411 1,276,638 Alan L. Box............................................ 221,853,815 7,655,234 J. Michael Gearon, Jr.................................. 220,918,915 7,590,134 David W. Garrison...................................... 222,002,514 7,506,535 Fred R. Lummis*........................................ 152,322,070 1,274,779 Maggie Wilderotter*.................................... 152,478,190 1,118,658 </TABLE> - -------- * In accordance with the Company's Restated Certificate of Incorporation, the holders of Class A common stock, exclusive of all other stockholders, are entitled to elect two of the Company's directors. Mr. Lummis and Ms. Wilderotter were nominated as the Class A directors and elected by the holders of the Class A common stock. 30
2. To approve an evergreen amendment to the Company's 1997 Stock Option Plan, as amended and restated, to provide for automatic annual increases in the number of shares of the Company's Class A common stock available for issuance thereunder. <TABLE> <CAPTION> Broker Votes Cast For Votes Against Votes Withheld Non- Votes -------------- ------------- -------------- ---------- <S> <C> <C> <C> 148,322,087 53,512,184 219,344 27,455,434 </TABLE> 3. To ratify the selection by the Board of Directors of Deloitte & Touche LLP as the Company's independent auditors for 2001. <TABLE> <CAPTION> Broker Non- Votes Cast For Votes Against Votes Withheld Votes -------------- ------------- -------------- ----------- <S> <C> <C> <C> 226,025,491 3,378,326 105,232 0 </TABLE> ITEM 5. OTHER INFORMATION The following information updates the status of the ALLTEL transaction as previously disclosed by us in Current Reports on Form 8-K filed on December 20, 2000, April 17, 2001, June 11, 2001 and July 9, 2001 and in a Quarterly Report on Form 10-Q filed by us on May 15, 2001. On August 1, 2001, we closed on the sublease of 181 towers pursuant to our agreement with ALLTEL. These towers were used by ALLTEL primarily in connection with its business of providing consumer wireless services. We plan to lease space on the towers to third parties. In connection with this closing, we paid consideration of approximately $54.3 million in cash. The amount of consideration and the terms of the agreement were based upon arms- length negotiations between unaffiliated parties. There are no material relationships between us and ALLTEL or any of its respective affiliates, officers or directors. We financed the transaction through available cash-on- hand, including proceeds from our January 2001 equity and debt financings. For more information about our agreement with ALLTEL, see our Current Reports on Form 8-K filed on December 20, 2000, April 17, 2001, June 11, 2001 and July 9, 2001; our Quarterly Report on Form 10-Q filed May 15, 2001; note 4 to the condensed consolidated financial statements set forth herein; and the exhibits incorporated by reference into this Quarterly Report on Form 10-Q. 31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. Listed below are the exhibits which are filed as part of this Form 10-Q (according to the number assigned to them in Item 601 of Regulation S-K). <TABLE> <CAPTION> Exhibit No. Description of Exhibit ----------- ---------------------- <C> <S> 10.1* Amended and Restated American Tower Systems Corporation 1997 Stock Option Plan, as amended May 17, 2001. 10.2 Amended and Restated Registration Rights Agreement, dated as of February 25, 1999, by and among ATC and each of the Parties named therein. </TABLE> - -------- * Compensatory Plan (b) Reports on Form 8-K. During the quarter ended June 30, 2001, the Registrant filed with the Commission the following Current Reports on Form 8-K: 1.Form 8-K (Item 2) filed on April 17, 2001. 2.Form 8-K (Item 2) filed on June 11, 2001. 3.Form 8-K (Items 5 and 7) filed on June 22, 2001. 32
SIGNATURES Pursuant to the requirements 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. American Tower Corporation By: /s/ Joseph L. Winn Date: August 14, 2001 ---------------------------------- Joseph L. Winn Chief Financial Officer and Treasurer (Duly Authorized Officer) Date: August 14, 2001 By: /s/ Justin D. Benincasa ---------------------------------- Justin D. Benincasa Senior Vice President and Corporate Controller (Duly Authorized Officer) 33