Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-K
-----------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
Commission File Number 000-24737
-----------------
CROWN CASTLE INTERNATIONAL CORP.
(Exact name of registrant as specified in its charter)
Delaware 76-0470458
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
510 Bering Drive 77057-1457
Suite 500 (Zip Code)
Houston, Texas
(Address of principal executive offices)
(713) 570-3000
(Registrant's telephone number, including area code)
Title of Each Class of Securities Registered Pursuant to Section
12(b) of the Securities Name of Exchange
Exchange Act of 1934 on Which Registered
- ---------------------------------------------------------------- -------------------
Common Stock, $.01 par value New York Stock Exchange
Rights to Purchase Series A Participating New York Stock Exchange
Cumulative Preferred Stock
Securities Registered Pursuant to Section 12(g) of the Securities Exchange Act
of 1934: NONE.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [_]
The aggregate market value of the voting and non-voting common stock held by
non-affiliates of the registrant was approximately $558.5 million as of June
28, 2002, the last business day of the registrant's most recently completed
second fiscal quarter, based on the New York Stock Exchange closing price on
that day of $3.93 per share.
Applicable Only to Corporate Registrants
As of March 18, 2003, there were 223,652,374 shares of Common Stock
outstanding.
Documents Incorporated by Reference
The information required to be furnished pursuant to Part III of this Form
10-K will be set forth in, and incorporated by reference from, the registrant's
definitive proxy statement for the annual meeting of stockholders (the "2003
Proxy Statement"), which will be filed with the Securities and Exchange
Commission not later than 120 days after the end of the fiscal year ended
December 31, 2002.
================================================================================
CROWN CASTLE INTERNATIONAL CORP.
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business............................................................................. 1
Item 2. Properties........................................................................... 30
Item 3. Legal Proceedings.................................................................... 31
Item 4. Submissions of Matters to a Vote of Security Holders................................. 31
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................ 32
Item 6. Selected Financial Data.............................................................. 33
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 35
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................... 61
Item 8. Financial Statements and Supplementary Data.......................................... 62
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 106
PART III
Item 10. Directors and Executive Officers of the Registrant................................... 106
Item 11. Executive Compensation............................................................... 106
Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 106
Item 13. Certain Relationships and Related Transactions....................................... 106
Item 14. Controls and Procedures.............................................................. 106
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................... 107
Signatures and Certifications................................................................. 118
PRELIMINARY NOTE: This Annual Report on Form 10-K contains forward-looking
statements as defined by the Private Securities Litigation Reform Act of 1995.
Forward-looking statements should be read in conjunction with the cautionary
statements and other important factors included in this Form 10-K. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Cautionary Statement for Purposes of Forward-Looking Statements"
and "Item 1. Business--Risk Factors" for descriptions of important factors
which could cause actual results to differ materially from those contained in
the forward-looking statements.
PART I
Item 1. Business
Overview
We own, operate and lease towers, including co-locatable rooftop sites, and
transmission networks for wireless communications and broadcast transmission
companies. We engage in such activities through a variety of structures,
including subleasing and management arrangements. As of December 31, 2002, we
owned, leased or managed 15,578 towers, including 10,794 sites in the United
States and Puerto Rico, 3,397 sites in the United Kingdom and 1,387 sites in
Australia. Our customers currently include many of the world's major wireless
communications and broadcast companies, including Verizon, Cingular, Nextel,
T-Mobile, Sprint PCS, AT&T Wireless, SingTel Optus ("Optus"), Vodafone, O2,
Hutchison 3G UK Limited ("Hutchison 3G"), Orange, British Sky Broadcasting
Group plc ("BSkyB"), National Transcommunications Limited ("NTL") and the
British Broadcasting Corporation ("BBC").
Our strategy is to increase our revenue by increasing the utilization of our
sites by wireless and broadcast companies, and, where appropriate, to continue
to build, acquire and operate new towers and wireless and transmission networks
and infrastructure through opportunities created by:
. the transfer to third parties, or outsourcing, of tower ownership and
management by major wireless carriers;
. the need for existing wireless carriers to expand coverage and improve
network capacity;
. the additional demand for towers and wireless infrastructure created by
new entrants into the wireless communications industry; and
. the introduction of wireless technologies including broadband data and
third generation ("3G") technology.
Our main businesses are leasing (including via licensing) antenna space on
wireless and broadcast towers that can accommodate multiple tenants
("co-location") and operating analog and digital broadcast transmission
networks and wireless networks. A key component of our strategy is to promote
sharing of wireless towers and broadcast transmission infrastructure. We also
provide certain network services relating to tower or other wireless
infrastructure for our customers, including project management of antenna
installations.
During 2002, the rate of new tenant additions to our towers decreased by
approximately 40% from 2001. Network services revenues have also been adversely
impacted in the U.S. due to reduced antenna installation activity related to
the decrease in new tenants. Network services revenues declined as a percentage
of our total revenue during 2002, and we expect such decline to continue in the
foreseeable future.
Our primary business in the United States is the leasing of antenna space on
our sites to wireless carriers. Our tower portfolio consists primarily of
towers in various metropolitan areas. As of December 31, 2002, 52.6% of our
towers were located in the 50 largest basic trading areas, or "BTAs", in the
U.S., and 71.3% of our towers were located in the 100 largest BTAs. See
"Business--The Company--U.S. Operations."
Our primary businesses in the United Kingdom, which is conducted through our
wholly owned subsidiary Crown Castle UK Limited, or "CCUK", are the operation
of television and radio broadcast transmission networks (including licenses to
use certain spectrum) and the leasing of antenna space to wireless carriers.
Following our 1997 acquisition of the BBC's broadcast and tower infrastructure,
we were awarded long-term contracts to provide the BBC and other broadcasters
analog and digital transmission services. We also lease antenna space to
wireless operators and broadcasters in the U.K. on the towers we acquired from
the BBC. In addition, we lease space to wireless operators on towers that we
acquired from wireless carriers or that we have
1
constructed and on rooftop installations constructed on sites acquired from
British Telecom ("BT"). In 2002, CCUK was granted spectrum licenses with
respect to two digital terrestrial television (DTT) multiplexes in the U.K.,
and, on October 30, 2002, CCUK, in conjunction with the BBC and BSkyB, launched
a multi-channel digital terrestrial television and radio broadcasting service
in the U.K. under the brand "Freeview." See "Business--The Company--U.K.
Operations."
Our primary business in Australia, which is conducted through Crown Castle
Australia Pty Limited, or "CCAL", is the leasing of antenna space to wireless
carriers. CCAL is owned 77.6% by us and 22.4% by Permanent Nominees (Aust) Ltd
on behalf of a group of professional and institutional investors led by Jump
Capital Limited. We currently operate 1,387 towers in Australia. See
"Business--The Company--Australia Operations".
We believe our towers are attractive to a diverse range of wireless
communications industries, including personal communications services (PCS),
cellular, enhanced specialized mobile radio, specialized mobile radio, 3G,
paging, and fixed microwave, as well as radio and television broadcasting. In
the U.S. our major customers include Verizon, Cingular, T-Mobile, Nextel,
Sprint PCS and AT&T Wireless. In the U.K. our major customers include the BBC,
Hutchison 3G, T-Mobile, Orange, 02, NTL, Vodafone and BSkyB. Our principal
customers in Australia are Optus, Vodafone Australia, Hutchison and Telstra.
Growth Strategy
Our objective is to become the leading owner and operator of towers,
transmission networks and other infrastructure for wireless communications and
broadcasting. We believe our experience in expanding and marketing our towers,
as well as our experience in owning and operating analog and digital
transmission networks, positions us to accomplish this objective. The key
elements of our business strategy are to:
. Grow Revenue Organically. We are seeking to increase the utilization of
our communications sites by increasing the number of antenna leases on
our owned and managed communications sites. Many of our towers have
capacity available for additional antenna space rental. We believe there
is demand for such co-location capacity both from existing carriers and
broadcasters and from new carriers and broadcasters, though the growth of
such demand has significantly decreased. We intend to continue to use
targeted sales and marketing techniques to increase utilization of and
investment return on our towers. During 2002, wireless carriers
significantly reduced the number of antennas they added to sites, making
our objective of growing revenue organically more challenging.
. Grow Margins. We are seeking to take advantage of the operating leverage
afforded by the relatively fixed nature of the operating costs associated
with our site rental business. The majority of the operating costs of our
site rental business consist of ground lease expense, property taxes,
repair and maintenance, utilities and salaries, which tend to escalate at
approximately the rate of inflation. Consequently, if increased
utilization of tower capacity is achieved at low incremental cost, our
site rental business should experience operating margin expansion.
. Allocate Capital Efficiently. We are focused on the efficient utilization
of capital. We may seek to expand our existing tower portfolios through
the selective acquisition and build of strategically located towers that
satisfy certain investment criteria and are complementary to our tower
portfolios. With respect to tower acquisitions, such transactions may
include acquisitions of sites from major wireless carriers or other tower
companies through direct acquisitions, tower exchanges, joint ventures or
other means. With respect to tower builds we may selectively build new
towers for wireless carriers as they expand and fill in their service
areas and deploy new technologies requiring additional communications
sites. Our decisions to invest additional capital in selective
acquisitions or build activities are generally based upon whether such
investments exhibit sufficient co-location revenue potential to achieve
our risk-adjusted return on investment hurdle rates. We may also allocate
capital to certain strategic adjacent activities that satisfy investment
return criteria or complement our tower portfolios. From time to time, we
may sell or swap certain of our towers or other assets as opportunities
arise. In addition, we may use some of our capital to acquire our debt
and equity securities when such acquisitions appear economically viable
and capital efficient.
2
. Extend Revenue Around Our Existing Assets. We are seeking to leverage our
assets and the skills of our personnel in the U.S., the U.K. and
Australia. With our wireless communications and broadcast transmission
network design and radio frequency engineering expertise, we are
positioned to extend the products and services we offer beyond the
leasing of tower space to other potentially shareable activities, such as
antenna and base station maintenance, shared antennas, shared microwave
backhaul and network monitoring. In addition, as evidenced by our recent
acquisition of DTT licenses and the launch of Freeview in the U.K., we
are pursuing other strategic opportunities, including the possible
opportunistic acquisition of spectrum licenses, which are complementary
to our existing assets and may provide revenue growth.
The Company
We operate our business through our subsidiaries primarily in three
geographic areas--the United States, the United Kingdom and Australia. We
conduct our U.S. operations principally through certain wholly owned
subsidiaries of Crown Castle Operating Company and our two joint ventures with
Verizon Communications. CCUK is our principal U.K. operating subsidiary, and
CCAL, a joint venture between us and Permanent Nominees (Aust) Ltd, is our
principal Australian operating subsidiary. We also use subsidiaries to hold the
assets we acquire or control as a result of various transactions we have
engaged or may engage in from time to time.
U.S. Operations
Overview
Our primary business in the United States is the leasing of antenna space on
multiple-tenant towers to a variety of wireless carriers under long-term lease
contracts. Supporting our competitive position in the site rental business, we
offer our customers certain infrastructure and network services, including
project management of antenna installations.
We lease antenna space to our customers on our owned, leased and managed
towers. We generally receive monthly rental payments from customers payable
under site rental leases that are typically five years with renewal options. We
also receive fees for managing the installation of customers' equipment and
antennas on certain of our sites. Our U.S. customers include such companies as
Verizon, Cingular, T-Mobile, Nextel, Sprint PCS and AT&T Wireless. We also
provide tower space to private network operators and various federal and local
government agencies.
At December 31, 2002, we owned 10,794 sites in the U.S. and Puerto Rico.
These towers are located predominantly in the eastern, midwestern and
southwestern United States, along with Puerto Rico. A substantial number of our
towers were acquired through transactions consummated within the past four
years. In addition, we may consider and enter into arrangements with other
wireless carriers and independent tower operators to acquire additional towers
or tower portfolios.
Through the Powertel acquisition, which closed in June 1999, we control and
operate approximately 675 towers. These towers represented substantially all of
the towers owned by Powertel (now a part of T-Mobile) in its 1.9 GHz wireless
network in the southeastern and midwestern United States. Approximately 90% of
these towers are in seven southeastern states providing coverage of such
metropolitan areas as Atlanta, Birmingham, Jacksonville, Memphis and
Louisville, and a number of major connecting highway corridors in the
southeast. These towers are complementary to BellSouth Mobility's 850 MHz tower
portfolio in the southeast and have minimal coverage overlap. Substantially all
of the Powertel towers are over 100 feet tall and can accommodate multiple
tenants.
Through the BellSouth Mobility and BellSouth DCS (now part of Cingular)
transactions, which were substantially completed in September 2000, we control
and operate approximately 3,060 towers (including towers built pursuant to
build-to-suit agreements). These towers represented (1) substantially all of
the towers in
3
BellSouth Mobility's 850 MHz wireless network in the southeastern and
midwestern United States providing coverage of 12 of the top 50 U.S.
metropolitan areas, including Miami, Atlanta, Tampa, Nashville and Indianapolis
and (2) substantially all of the towers in BellSouth DCS's 1.9 GHz wireless
network in North Carolina, South Carolina, east Tennessee and parts of Georgia.
A substantial majority of these towers are over 100 feet tall and can
accommodate multiple tenants.
Our joint venture with Verizon Communications relating to the Bell Atlantic
Mobile towers (the "Bell Atlantic Mobile venture") controlled and operated
approximately 2,020 towers (including towers built pursuant to a build-to-suit
agreement) as of December 31, 2002. Through our joint venture with Verizon
Communications relating to the GTE Wireless towers (the "GTE venture"), we
controlled and operated approximately 2,940 towers (including towers built
pursuant to a build-to-suit agreement) as of December 31, 2002. At the time of
acquisition, these towers represented substantially all the towers used in the
850 MHz wireless network of Verizon Wireless in the eastern, midwestern,
southwestern and Pacific coast areas of the U.S. and currently provide coverage
of 22 of the top 50 U.S. metropolitan areas, including New York, Chicago,
Houston, Washington, D.C., Philadelphia, Boston, Phoenix and San Francisco. A
substantial majority of these towers are over 100 feet tall and can accommodate
multiple tenants. We currently own 56.9% of the Bell Atlantic Mobile venture,
and Verizon Communications owns the remaining 43.1%. We currently own 82.2% of
the GTE venture, and Verizon Communications owns the remaining 17.8%.
The agreements relating to our joint ventures with Verizon Communications
provide that upon a dissolution of either venture and following satisfaction
(or adequate provision for satisfaction) of such venture's liabilities, we will
receive all the assets of the dissolved venture, other than any shares of our
common stock then held by the venture that were contributed by us as capital
contributions (15,597,783 shares to the Bell Atlantic Mobile venture and
5,063,731 shares to the GTE venture), all of which shares will be distributed
to the applicable Verizon Communications partner. In exchange for the
distribution of the venture's assets to us, we will pay to the applicable
Verizon Communications partner the then fair market value of such partner's
interest in the venture, excluding (1) an agreed venture interest relating to
the common stock held by the venture and distributed to such partner and (2) a
..001% interest retained by an affiliate of Verizon Communications and
concommitent operating restrictions. A dissolution of either venture may be
triggered (1) by the Verizon Communications partner at any time following the
third anniversary of the formation of the applicable venture and (2) by us at
any time following the fourth anniversary of such venture's formation (subject
to certain penalties if prior to the seventh anniversary in the case of the
Bell Atlantic Mobile venture). The GTE venture was formed on January 31, 2000,
and the Bell Atlantic Mobile venture was formed on March 31, 1999. As the third
anniversary of formation of both ventures has passed, the Verizon
Communications partners could trigger dissolution at any time, requiring us to
address the applicable payment obligations. As of December 31, 2002, assuming
the distribution of the shares of common stock held by the ventures to the
Verizon Communications partner, the interest of the Verizon Communications
partner in the GTE venture and the Bell Atlantic Mobile venture would have been
approximately 11.0% and 24.1%, respectively. As payment to our venture partner,
the dissolution of the GTE venture would require us to deliver cash, and the
dissolution of the Bell Atlantic Mobile venture would require us to deliver
cash or common stock at our option; such payments may negatively impact our
liquidity or cause dilution of our common stock. Additional information
regarding the venture dissolution terms can be found in the text of our prior
filings with the SEC and in the relevant venture agreements, which have been
filed as exhibits to certain of our prior SEC filings. We are currently in
discussions with Verizon Communications regarding certain amendments to the
venture agreements with respect to the procedures, payments and other aspects
of the dissolution provisions relating to the ventures, including a potential
deferral of dissolution or payments due upon dissolution. There can be no
assurances as to the outcome of these discussions.
During the third quarter of 2002, each of our ventures with Verizon
Communications negotiated a mutual consent to terminate its build-to-suit
commitments with Verizon, and we negotiated a mutual consent to terminate our
build-to-suit commitments with Cingular. Such agreement terminations eliminated
any requirement to build additional towers for either carrier. As a part of the
build-to-suit terminations, we sold certain tower construction projects for
approximately $22.9 million in cash. Asset write-down charges of approximately
$6.4 million were recorded during 2002 related to these projects.
4
We plan to continue to selectively build new towers which meet certain
economic criteria on a limited basis in areas where carriers fail to transmit
or drop signals in their coverage areas. To reduce risk and speculation, we now
generally look for sites with multiple tenant demand and obtain lease
commitments from wireless carriers prior to building a tower. Further, the
towers are constructed to accomodate multiple tenants in order to obviate the
need for expensive and time consuming upgrades, saving capital and time for
carriers.
Site Rental
In the U.S., we rent antenna space on our towers to a variety of carriers
operating cellular, personal communication services, specialized mobile radio,
enhanced specialized mobile radio, paging and other networks.
We generally receive monthly rental payments from customers payable under
site leases, and we also receive fees for managing the installation of
customers' equipment and antennas on certain of our sites. In the U.S., the new
leases typically entered into by us have original terms of five years (with
three or four optional renewal periods of five years each) and provide for
annual price increases based primarily on a consumer price index (subject to
certain caps). The lease agreements relating to tower network acquisitions
generally have a base term of 10 years, with multiple renewal options, each
typically ranging from five to ten years. We have existing master lease
agreements with most major wireless carriers, including AT&T Wireless, Verizon,
T-Mobile, Nextel and Sprint PCS, which provide certain terms (including
economic terms) that govern leases on our towers entered into by such parties
during the term of their master lease agreements.
The average monthly rental payment of a new tenant added to a tower varies
among the different regions in the U.S. and the type of service being provided
by the tenant, with broadband tenants (such as personal communications
services) paying more than narrowband tenants (such as paging), primarily as a
result of the physical size of the antenna installation. In addition, we also
routinely receive rental payment increases in connection with lease amendments
which authorize carriers to add additional antennas or other equipment to sites
on which they already have equipment pursuant to pre-existing lease agreements.
We have site rental opportunities in connection with our larger tower
acquisition transactions as a result of the fact that such transactions
typically involve a master lease agreement of some type with the selling or
transferring carrier and the opportunity to lease additional space to other
carriers. For example, in connection with each of the joint ventures with
Verizon Communications, we entered into a master lease agreement under which
its domestic wireless businesses lease antenna space on the towers transferred
to the ventures. Further, in connection with the Powertel, BellSouth Mobility
and BellSouth DCS transactions, we entered into agreements under which the
transferring carriers occupy space on the towers transferred to us. In each of
these transactions, we are permitted to lease additional space on the towers to
third parties.
Network Services
We design, build and operate our own communication sites on a limited basis.
During 2002, we slowed this activity significantly and expect to build less
than 20 towers in the U.S. in 2003. We also provide network services such as
network design and site selection, site acquisition, site development and
project management of antenna installations. Our customers are typically
charged for such services on a fixed price contract or a time and materials
basis. While we maintain network design services primarily to support the
location and construction of our multiple tenant towers, we do, from time to
time, provide network design and site selection services to carriers and other
customers on a consulting contract basis. In addition, we have engaged in site
acquisition services for our own purposes and for third parties. We generally
set prices for each site development
5
or project management service separately, and we may negotiate fees on
individual sites or for groups of sites. We manage the installation of antenna
systems for our cellular, personal communications services, specialized mobile
radio, enhanced specialized mobile radio, microwave and paging customers.
During 2002, network services revenues were adversely impacted in the U.S.
due to reduced antenna installation activity related to a decrease in new
tenant leases and our strategic decision to reduce our service offerings to
primarily the management of antenna installations on our sites and radio
frequency planning and testing. Network services revenue declined as a
percentage of our total revenues during 2002, and we expect such decline to
continue in the foreseeable future.
Significant Contracts
We have many agreements with telecommunications providers in the U.S.,
including leases, site management contracts and independent contractor
agreements. We currently have significant contracts with most of the major
wireless carriers, among others.
Customers
In both our site rental and network services businesses, we work with a
number of customers in a variety of businesses including cellular, personal
communications services, enhanced specialized mobile radio and paging. We work
primarily with large national carriers such as Verizon, Cingular, AT&T
Wireless, Sprint PCS, T-Mobile and Nextel. For the year ended December 31,
2002, Verizon Communications and its subsidiaries accounted for 16.3% of our
consolidated revenues. No other single customer in the U.S. accounted for more
than 10.0% of our consolidated revenues.
Industry Representative Customers
-------- ------------------------
Cellular / Personal Communications
Services......................... AT&T Wireless, Verizon, Sprint PCS, Cingular, T-Mobile,
Alltel, U.S. Cellular
Specialized Mobile Radio / Enhanced
Specialized Mobile Radio......... Nextel
Governmental Agencies.............. INS, Coast Guard, FBI, U.S. Postal Service, FAA, DEA, IRS
Private Industrial Users........... Federal Express, Laidlaw Transit, BFI
Data............................... Cingular, Datacom Information Systems, Ardis
Paging............................. WebLink Wireless, WorldCom, Arch
Utilities.......................... Peco Energy Corporation, Nevada Power, Reliant Energy
Entex
Other.............................. XM Satellite Radio
Sales and Marketing
Our sales organization maintains our profile within the wireless
telecommunications industry. We use public and proprietary databases to develop
targeted marketing programs focused on carrier network build-outs,
modifications, site additions and network services. Information about carriers'
existing sites, licenses, capital spend plans, deployment status, and actual
signal strength measurements taken in the field is analyzed to match specific
towers in our portfolios with potential new site demand.
A team of national account directors maintains our relationships with our
largest customers. These directors work to develop new site leasing
opportunities, network services contracts and site management opportunities, as
well as to ensure that customers' emerging needs are translated into new
products and services. This group also supports third party project management
partnerships to provide network deployments and backhaul transmission services.
6
Sales personnel in our regional offices develop and maintain close local
relationships with carriers that are expanding their networks, entering new
markets, bringing new technologies to market or requiring maintenance or add-on
business. We target numerous types of wireless carriers, including cellular,
personal communications services, enhanced specialized mobile radio, wireless
data, paging and government agencies. Our objective is to lease space on
existing towers and pre-sell capacity on our new towers prior to construction.
In addition to our full-time sales and marketing staff, a number of senior
managers spend a significant portion of their time on sales and marketing
activities and call on existing and prospective customers.
Competition
In the U.S., we compete with other independent tower owners which also
provide site rental and network services; wireless carriers which own and
operate their own tower networks; broadcasters and building owners that lease
antenna space, primarily on colocatable rooftop sites; and other potential
competitors, such as utilities and outdoor advertisers, some of which have
already entered the tower industry. Wireless carriers that own and operate
their own tower networks generally are substantially larger and have greater
financial resources than we have. We believe that tower location, capacity,
quality of service and deployment speed have been and will continue to be the
most significant competitive factors affecting tower rental companies.
The following is a list of some of the larger independent tower companies
that we compete with in the U.S.: American Tower Corp., SpectraSite, Pinnacle
Towers, and SBA Communications. We also compete with Sprint Sites USA, a
division of Sprint that markets and manages Sprint's sites and towers.
Significant additional site rental competition comes from the leasing of
rooftops and other alternative sites for antennas.
Competitors in the network services business include Bechtel, General
Dynamics, Lucent, Wireless Facilities, Inc., SBA Communications and Whalen &
Company (a subsidiary of Tetra Tech, Inc.). In 2002, we made a strategic
decision to reduce our service offerings to primarily management of antenna
installations on our sites and radio frequency planning and testing. We believe
that carriers base their decisions on the outsourcing of network services on
criteria such as a company's experience, track record, local reputation, price
and time for completion of a project.
U.K. Operations
Overview
We own and operate, through CCUK, one of the world's most established
broadcast television and radio transmission networks. In addition to providing
transmission services, we also lease antenna space on our 3,397 communications
sites in the United Kingdom to various communications service providers,
including T-Mobile, O2, Orange, Hutchison 3G and Vodafone, and provide
telecommunications network installation and maintenance services and
engineering consulting services. We provide transmission services for four of
the six digital terrestrial television multiplexes in the U.K., two BBC analog
television services, six UK-wide BBC radio services on FM, AM and DAB (the
first digital audio broadcast service in the U.K.), five BBC regional radio
services for Scotland, Wales and Northern Ireland, 38 local BBC radio stations
and two national commercial radio services through our network of transmitters,
which reach 99.4% of the U.K. population. These transmitters are located on
approximately 1,300 sites, more than half of which we own or control and the
balance of which are either licensed to us under a site-sharing agreement with
NTL or other third party site operators. In April 2001, we launched a new
wireless carrier network service for T-Mobile (previously One 2 One) in
Northern Ireland. In 2002, CCUK was granted spectrum licenses with respect to
two DTT multiplexes in the U.K., and on October 30, 2002, CCUK, together with
the BBC and BSkyB, launched a multi-channel DTT and radio broadcasting service,
under the brand "Freeview." In connection with Freeview, we have secured
long-term contracts to provide digital television transmission services to the
BBC, BSkyB, UKTV, Flextech Television, MTV (part of Viacom) and EMAP. See
"Business--The Company--U.K. Operations--Transmission Business" and
"--Significant Contracts".
7
Our core revenue generating activity in the U.K. is the analog and digital
terrestrial transmission of radio and television programs broadcast by the BBC.
CCUK's transmission business, which was formerly owned by the BBC, was
privatized under the Broadcasting Act 1996 and sold to CCUK in February 1997.
At the time the BBC home service transmission business was acquired, CCUK
entered into a 10-year transmission contract with the BBC for the provision of
terrestrial analog television and analog and digital radio transmission
services in the U.K. Digital television contracts were added in 1998 and 2002
as described below. For the 12 months ended December 31, 2002, approximately
33.7% of CCUK's consolidated revenues were derived from the provision of
transmission services to the BBC.
At December 31, 2002, we owned or managed 3,397 sites in the U.K. Our sites
are located throughout England, Wales, Scotland and Northern Ireland.
We expect to expand our existing portfolio in the U.K. by building and
acquiring additional sites. We anticipate that most of these new sites will be
developed on BT sites under our agreement with BT. See "Business--The
Company--U.K. Operations--Significant Contracts--British Telecom Agreement". We
believe our existing network of sites and towers encompasses many of the most
desirable site locations in the U.K. for wireless communications. However, due
to the shorter range over which telecommunications signals carry, as compared
to broadcast signals, wireless communications providers require a denser
portfolio of sites to cover a given area.
In March 1999, CCUK completed the One 2 One (now part of T-mobile)
transaction. Through this transaction, CCUK has added an aggregate of 1,672
towers (including towers built pursuant to a build-to-suit agreement with
T-Mobile) to its portfolio. These towers represent substantially all the towers
in T-Mobile's nationwide wireless network in the U.K. These towers form part of
CCUK's nationwide network of sites and towers to be marketed to wireless
carriers in the United Kingdom. See "Business--The Company--U.K.
Operations--Significant Contracts--T-Mobile Northern Ireland Network".
In November 2000, CCUK entered into an agreement with BT to lease space on
as many as 4,000 BT sites throughout the U.K. These sites are principally
rooftop facilities owned by BT in urban areas. As of December 31, 2002, we had
developed 648 sites under this agreement. In April 2002, CCUK reached agreement
with BT to defer until March 2003 payment of (Pounds)50 million (approximately
$80.5 million) which had been due March 2002 from CCUK to BT under this
agreement. We are currently in discussions with BT regarding certain amendments
to this agreement, including the further deferral or reduction of this payment
and a reduction of the number of BT sites acquired. There can be no assurances
as to the outcome of these discussions. See "Business--The Company--U.K.
Operations--Significant Contracts--British Telecom Agreement".
In February 2001, CCUK signed an agreement with Hutchison 3G whereby
Hutchison 3G would lease space on a minimum of 4,000 CCUK sites throughout the
U.K. In addition, in February 2001, CCUK signed an initial agreement with its
existing customer O2 (previously BT Cellnet) pursuant to which O2 would lease
additional space on CCUK sites throughout the U.K., with a minimum take up of
500 additional sites per year for each of the years 2001, 2002 and 2003. Under
each of these agreements, the carrier is disputing the terms of the agreement
and is not currently leasing the required number of sites within the time
period contemplated by the agreement, and CCUK is currently in discussions with
the carriers regarding the terms of the agreements and resolution of the
disputed issues. There can be no assurances as to the outcome of these
discussions. See "Business--The Company--U.K. Operations--Significant
Contracts--Hutchison 3G Agreement" and "--O2 Agreement".
Transmission Business
Analog. For the 12 months ended December 31, 2002, CCUK generated
approximately 27.2% of its revenues from the provision of analog broadcast
transmission services to the BBC. Under the BBC analog
8
transmission contract, we provide terrestrial transmission services for the
BBC's analog television and radio programs and certain other related services
(including BBC digital radio) for an initial 10-year term through March 31,
2007. See "Business--The Company--U.K. Operations--Significant Contracts--BBC
Analog Transmission Contract".
In addition to the BBC analog transmission contract, we have separate
contracts to provide maintenance and transmission services for two national
commercial radio stations, Virgin Radio and talkSPORT (formerly Talk Radio). In
July 2001, the Virgin Radio contract was renewed for a period expiring April
30, 2008. The talkSPORT contract commenced on February 4, 1995 and expires on
December 31, 2008.
We own all of the transmitter equipment used for broadcasting the BBC's
domestic radio and television programs within the U.K., whether located on one
of CCUK's sites or on an NTL or other third-party site. As of December 31,
2002, CCUK had 3,929 transmitters, of which 2,571 were for television
broadcasting and the remainder were for radio.
A few of our most powerful television transmitters together cover the
majority of the U.K. population. The coverage achieved by the less powerful
transmitters is relatively low, but is important to the BBC's ambition of
attaining universal coverage in the U.K. This is illustrated by the fact that
one of our analog television transmitters (Crystal Palace) provides coverage to
20% of the U.K. population and the top 16 analog transmitters provide coverage
to 79% of the U.K. population.
All of our U.K. transmitters are capable of unmanned operation and are
maintained by mobile maintenance teams from 25 bases located across the U.K. A
site-sharing agreement provides us with reciprocal access rights to NTL's
broadcast transmission sites on which we have equipment.
DTT Network. In January 2000, we completed the rollout of the 80 station
network required under our contracts with the then current holders (including
the BBC and ITV Digital) of four of the six licenses issued in the U.K. for
digital terrestrial television (DTT) services. Of these sites, 49 are owned or
controlled by us, and the remainder are on NTL owned or controlled towers
pursuant to a site sharing arrangement. In 2002, following the award of the DTT
licenses formerly held by ITV Digital ("ITVD") to the BBC (one license) and
CCUK (two licenses), we upgraded our DTT network to provide a more reliable
signal. This upgrade consisted of (1) a change in the radio frequency
modulation scheme and (2) increases to the transmission power at a number of
transmitter sites.
Digital Transmission and Broadcast ("Freeview"). In 1997, the U.K.
Independent Television Commission ("ITC") awarded ITVD three of the five
available commercial digital terrestrial television "multiplexes" for new
program services. From 1999 to March 2002, pursuant to a digital transmission
contract with an original term of twelve years, CCUK was responsible for the
transmission of the ITVD signal through the CCUK-owned digital terrestrial
television network to approximately 1.2 million ITVD subscribers in the U.K. In
April 2002, ITVD announced plans to liquidate its assets and returned its DTT
multiplex licenses to the ITC. Prior to the liquidation, CCUK earned gross
revenues of approximately (Pounds)19.4 million ($27.6 million) annually under
the ITVD transmission contract. ITVD represented approximately 12% of the 2001
gross revenues of CCUK and approximately 3% of the 2001 consolidated gross
revenues of the Company.
Following the return of the licenses by ITVD, the ITC conditionally awarded
the license for one multiplex to the BBC and the licenses for two multiplexes
to CCUK. No license fees were paid to the U.K. government with respect to the
award of the multiplex licenses other than an approximately $38,000 application
fee per multiplex. The licenses were formally granted on August 16, 2002 for a
term of 12 years, and CCUK has the right to renew the licenses for an
additional term of 12 years subject to satisfaction of certain performance
criteria. On October 30, 2002, the BBC, CCUK and BSkyB launched their
multi-channel digital TV and radio broadcasting services, under the brand
"Freeview". Digital TV Services Ltd ("DTVSL"), a cost-sharing cooperative in
which CCUK, the BBC and BSkyB are equal shareholders, has been created
specifically to
9
promote Freeview. In addition to being the licensed broadcast operator of the
two multiplexes awarded to CCUK, CCUK provides the transmission of the DTT
program signals for the two CCUK and two BBC multiplexes through the CCUK-owned
DTT network.
Following the award of the DTT licenses and in connection with the launch of
Freeview, in August 2002 CCUK entered into an agreement with the BBC to provide
transmission and distribution service for the multiplex awarded to the BBC.
Also in August 2002, CCUK entered into an agreement with BSkyB to provide
transmission, distribution and multiplexing service in relation to 75% of the
capacity of one of the CCUK multiplexes. Both of these agreements are for an
initial period of six years with an option by the BBC and BSkyB for an
additional six-year term. In addition, CCUK has entered into agreements to
provide transmission, distribution and multiplexing services to a number of TV
and radio content providers (EMAP, Flextech, Guardian Media Group, MTV, OneWord
and UKTV) through the two multiplexes awarded to CCUK. Agreements with the TV
content providers are also for six-year terms, with renewal options, while
agreements with radio providers are generally for shorter terms. Through such
agreements, CCUK is currently transmitting content for such customers with
respect to approximately 90% of its licensed capacity and is currently in
negotiations with content providers with respect to the remaining capacity.
CCUK has contracted annual revenues of approximately (Pounds)25.3 million
($40.7 million) for the provision of transmission, distribution and
multiplexing services related to the new multiplex licenses in 2003, which
replaces the approximately (Pounds)19.4 million annual revenues previously
earned from the ITVD contract and is in addition to the revenues generated from
the original 1998 BBC Digital Transmission Contract. See "Business--The
Company--U.K. Operations--Significant Contracts--1998 BBC Digital Transmission
Contract", "--2002 BBC Digital Transmission Contract" and "--BSkyB Digital
Transmission Contract."
CCUK has invested, as a result of its previous contract with ITVD,
substantially all of the capital required to provide the services described
above. CCUK is already incurring, again by virtue of its previous contract with
ITVD, a large proportion of the operating costs required to provide these
services (including payments to British Telecom for distribution circuits and
payments to NTL for site rental). Since CCUK will offer a more complete
end-to-end service to content providers than was provided to ITVD, CCUK expects
to incur certain additional operating costs including (1) payments to BBC's
technology division for multiplexing services and (2) payments to DTVSL for
promotion and marketing of Freeview. In 2003, CCUK will incur additional annual
operating expenses of approximately (Pounds)5.3 million ($8.5 million) above
the costs incurred for the provision of broadcast services to ITVD.
Digital Radio (DAB). In addition to our DTT transmission and broadcast
services, we currently provide transmission services for digital radio
broadcasts (DAB) in the U.K. In 1995, the BBC launched, over our transmission
network, its initial national digital radio service, and this service is now
broadcast to approximately 65% of the U.K. population. A license for an
independent national digital radio network was awarded to the Digital One
consortium during 1998. In addition, local digital radio licenses have been
awarded since 1999, and on July 14, 2000, we were awarded a 12 year contract
with Switchdigital (London) Limited to provide their London local digital radio
network service. Since that time, CCUK has been awarded two additional 12 year
contracts by other Switchdigital consortia, covering two areas of Scotland.
Site sharing for other DAB multiplexes provides additional revenues at several
other transmission sites.
Site Rental
The acquisition of the BBC transmission network provided a valuable initial
portfolio for the location of wireless antennas. As of December 31, 2002,
approximately 310 companies rented antenna space on CCUK's 3,397 towers. These
site rental agreements have normally been for three to 20 years and are
generally subject to rent reviews every three years. Site sharing customers are
generally charged annually in advance, according to rate schedules that are
based on the antenna size and position on the tower. Our largest site rental
customer in the U.K. is NTL under the Site-Sharing Agreement and the digital
broadcasting site sharing agreement.
10
These site sharing agreements relate to the reciprocal use of sites for the
respective broadcast contracts of CCUK and NTL and are not representative of
the typical wireless colocation tenant. See "Business--The Company--U.K.
Operations--Significant Contracts--Site-Sharing Agreement."
CCUK's largest (by revenue) site rental customers consist mainly of wireless
carriers such as Hutchison 3G, T-Mobile, O2, Orange, NTL, Vodafone and BT.
Revenues from these non-BBC sources continue to become an increasing portion of
CCUK's total U.K. revenue base. We believe that site rental from communication
service providers will increase in line with the expected growth of these
communication services along with the deployment of new technologies, such as
3G, in the U.K.
We have master lease agreements with all of the major U.K.
telecommunications site users, including BT, O2, T-Mobile, Orange, Hutchison 3G
and Vodafone. These agreements typically specify the terms and conditions
(including pricing and volume discount plans) under which these customers have
access to all sites within our U.K. portfolio. Customers submit orders for
specific sites using the standard terms included in the master lease agreements.
Network Services
CCUK provides broadcast and telecommunications network services to various
customers in the U.K. We have engineering and technical staff capable of
meeting the requirements of our current customer base and the challenges of
developing digital technology. Within the U.K., CCUK has worked with several
telecommunications operators on design and build projects as they rollout their
networks.
Network Design and Site Selection.
In December 1999, CCUK and T-Mobile entered into an agreement under which
CCUK would establish a turnkey mobile network for T-Mobile in Northern Ireland.
In April 2001, CCUK launched the network, which now covers approximately 98.5%
of the population of Northern Ireland. CCUK provides cell planning,
acquisition, design, build, operation and maintenance services related to the
network, including ownership of the antenna, provisioning of backhaul and
signal monitoring. T-Mobile provides the base stations and holds the spectrum
license. The agreement with T-Mobile is for an initial term of 11 years. We
currently own and operate approximately 200 tower sites in Northern Ireland,
and T-Mobile is a tenant on substantially all of these sites as part of the
network.
In June 2000, CCUK was awarded a contract for the first phase of a
three-phase network rollout of Europe's first commercial 3G network on the Isle
of Man. In March 2001, CCUK was awarded a further contract with Manx Telecom
for the second and third phases. The network, comprised of approximately 28
sites, was built by NEC and Siemens for Manx Telecom, a wholly owned subsidiary
of mmO2, and was completed in September 2001. CCUK provided turnkey project
management, installation and commissioning of the 3G radio access network,
including site planning, design, build and radio frequency planning. Service on
the network was launched in December 2001.
Site Acquisition. In the U.K. we are involved in site acquisition services
for our own purposes and for third parties. We recognize that the site
acquisition phase often carries the highest risk for a project. To ensure the
greatest possible likelihood of success and timely acquisition, we combine a
desktop survey of potential barriers to development with a physical site search
with relevant analyses, assessments and, where necessary, surveys. We seek to
utilize our experience in site acquisition and co-location when meeting with
local planning authorities.
Site Development and Antenna Installation. CCUK provides turnkey network
rollout and deployment services, including site design, site construction and
installation activity for wireless infrastructure. CCUK's operations division
provides program and project management through its delivery teams, using
project management tools and software. The majority of construction activities
are completed through independent contractors experienced in the wireless
telecommunications construction industry. Operations are located in four
regional offices across the U.K., providing a nationwide service to our
customers.
11
Significant Contracts
CCUK's principal analog broadcast transmission contract is the BBC analog
transmission contract. CCUK also has entered into DTT contracts with the BBC.
In connection with Freeview, CCUK has entered into transmission and
multiplexing contracts with BSkyB and various other broadcasters. Under the
site-sharing agreement, CCUK also gives NTL access to facilities to provide
broadcast transmission to non-CCUK customers. CCUK also has long-term service
agreements with broadcast customers such as Virgin Radio, talkSPORT and
Switchdigital plus a number of smaller broadcasters. In addition, CCUK has
several agreements with telecommunication providers, including leases, site
management contracts and independent contractor agreements. CCUK has agreements
with Hutchison 3G and O2 which contain lease commitments for a minimum number
of CCUK sites. Certain terms of each such agreement are currently in dispute
and we are currently in discussions with Hutchison 3G and O2 in an effort to
resolve the disputed issues. CCUK has also entered into contracts to design and
build infrastructure for customers such as O2, T-Mobile, Orange and Vodafone,
including the turnkey network contract for T-Mobile in Northern Ireland.
BBC Analog Transmission Contract. CCUK entered into a 10-year transmission
contract with the BBC for the provision of terrestrial analog television and
analog and digital radio transmission services in the U.K. at the time the BBC
home service transmission business was acquired. The BBC analog transmission
contract also provides for CCUK to be liable to the BBC for "service credits"
(i.e., rebates of its charges) in the event that certain standards of service
are not attained as a result of what the contract characterizes as "accountable
faults" or the failure to meet certain "response times" in relation to making
repairs at certain key sites. Experience has shown that CCUK is equipped to
meet the BBC's service requirements as demonstrated by the fact that CCUK is
subject to periodic performance reviews and to date has paid no service credit
penalties.
The initial term of the BBC analog transmission contract ends on March 31,
2007. Thereafter, the BBC analog transmission contract may be terminated with
12 months' prior notice by either of the parties, expiring on March 31 in any
contract year, from and including March 31, 2007. It may also be terminated
earlier by or upon mutual agreement, bankruptcy or insolvency of a party,
certain force majeure events, a material breach and certain change of control
events (as defined in the BBC analog transmission contract).
It is contemplated that the BBC analog transmission contract will be amended
and extended in some manner. However, there can be no assurances that any such
modifications or extensions will occur.
1998 BBC Digital Transmission Contract. In 1998, we bid for and won the
12-year contract from the BBC to build and operate the DTT transmission network
for its first multiplex. The BBC has committed to the full DTT roll-out
contemplated by the contract. Under the contract, the BBC may send us notice to
terminate the contract during November 2003 through January 2004 (the
three-month period following the fifth anniversary of our commencement of
digital terrestrial transmission services for the BBC), but only if the BBC's
Board of Governors determines, in its sole discretion, that digital television
in the U.K. does not have sufficient viewership to justify continued digital
television broadcasts. Under this provision, the BBC will pay us a termination
fee in cash that substantially recovers our capital investment in the network
as a result of this contract, and any residual ongoing operating costs and
liabilities. Like the BBC analog transmission contract, the contract is
terminable upon the occurrence of certain change of control events.
2002 BBC Digital Transmission Contract. Following the award of the DTT
licenses and in connection with the launch of Freeview, in August 2002 CCUK
entered into an agreement with the BBC to provide transmission and distribution
service for the new DTT multiplex licensed to the BBC. This agreement commenced
on October 30, 2002 and has an initial term of six years, with an option by the
BBC to renew for an additional six-year term.
BSkyB Digital Transmission Contract. In addition, following the award of the
DTT licenses and in connection with the launch of Freeview, in August 2002 CCUK
entered into an agreement with BSkyB to provide multiplexing, distribution and
transmission service in relation to 75% of the capacity of one of the
multiplexes licensed to CCUK. This agreement is for an initial period of six
years, with an option by BSkyB to renew for an additional six-year term.
12
BT Digital Distribution Contract. Under the BBC and Freeview related digital
transmission contracts (including the contracts described above), in addition
to providing DTT transmission services, CCUK has agreed to provide for the
distribution of the BBC and Freeview related broadcast signals from their
respective television studios to CCUK's transmission network. In May 1998, CCUK
entered into a 12-year distribution contract with BT in which BT has agreed to
provide fully duplicated, primarily fiber-based, digital distribution services.
This contract is now being used to provide program distribution services in
connection with Freeview and has been amended to expire contemporaneously with
our DTT multiplex licenses in 2014 (with provisions for extending the term).
Site-Sharing Agreement. In order to optimize service coverage for television
and radio services and to enable viewers to receive all analog UHF television
services using one receiving antenna, the BBC, as the predecessor to CCUK, and
NTL made arrangements to share certain broadcast sites. This arrangement was
introduced in the 1960s when UHF television broadcasting began in the U.K. In
addition to service coverage advantages, the arrangement also minimizes costs
and avoids the difficulties of obtaining additional sites.
On September 10, 1991, the BBC and NTL entered into the Site-Sharing
Agreement which set out the commercial site sharing terms under which the
parties were entitled to share each other's sites for any television and radio
services. Under the Site-Sharing Agreement, the party that is the owner, lessee
or licensee of each site is defined as the "Station Owner". The other party,
the "Sharer", is entitled to request a license to use certain facilities at
that site. The Site-Sharing Agreement and each site license provide for the
Station Owner to be paid a commercial license fee in accordance with the
Site-Sharing Agreement rate schedule and for the Sharer to be responsible, in
normal circumstances, for the costs of accommodation and equipment used
exclusively by it. The Site-Sharing Agreement may be terminated with five
years' prior notice on December 31, 2005 or on any tenth anniversary of that
date. As no notice was served in 2000, the next termination date is December
31, 2015. It may also be terminated upon a material breach, bankruptcy or
insolvency of a party, and cessation of a broadcast transmission business or
function.
Similar site sharing arrangements have been entered into between NTL and us
for the build-out of digital transmission sites and equipment, including a
supplementary ratecard related to site sharing fees for new digital facilities
and revised operating and maintenance procedures related to digital equipment.
Revenues received by CCUK under these NTL agreements with respect to space
rented by NTL on CCUK owned sites are substantially offset by payments made to
NTL with respect to space rented by CCUK on NTL owned sites.
T-Mobile Northern Ireland Network. In December 1999, CCUK and T-Mobile
entered into an agreement under which CCUK would establish a turnkey mobile
network for T-Mobile in Northern Ireland. In April 2001, CCUK launched the
network, which now covers approximately 98.5% of the population of Northern
Ireland. CCUK provides cell planning, acquisition, design, build, operation and
maintenance services related to the network, including ownership of the
antenna, provisioning of backhaul and signal monitoring. T-Mobile provides the
base stations and holds the spectrum license. The agreement with T-Mobile is
for an initial term of 11 years. We currently own and operate approximately 200
tower sites in Northern Ireland, and T-Mobile is a tenant on substantially all
of these sites as part of the network.
British Telecom Agreement. In November 2000, CCUK entered into an agreement
with BT to lease space on as many as 4,000 BT sites (principally rooftop
facilities) throughout the U.K. We are developing the BT site portfolio for the
deployment of wireless services, including second generation ("2G") and 3G
services. We contracted to invest an aggregate of (Pounds)150 million
(approximately $241 million) for the first 1,500 sites from the BT site
portfolio, but the final payment due is the subject of discussions as described
below. As of December 31, 2002, we had developed 648 sites under this
agreement. In June 2001, CCUK signed a management services agreement to manage
the pre-existing BT site sharing customers on the sites subject to this
agreement. In April 2002, CCUK reached agreement with BT to defer until March
2003 the final required payment of (Pounds)50 million (approximately $80.5
million), for the third of three tranches of 500 sites, which had been due
March 2002 from
13
CCUK to BT under this agreement. We are currently in discussions with BT
regarding certain amendments to this agreement, including the further deferral
or reduction of the payment that would otherwise be owed in March 2003 and a
reduction in the number of BT sites acquired. There can be no assurances as to
the outcome of these discussions.
Hutchison 3G Agreement. In February 2001, CCUK signed an agreement with
Hutchison 3G whereby Hutchison 3G would lease space on a minimum of 4,000 CCUK
sites throughout the U.K. Currently, Hutchison 3G is not leasing the number of
sites required within the time period contemplated by the agreement. We are
currently in discussions with Hutchison 3G regarding several potential
amendments to this agreement, including one such amendment which may result in
the deferral or reduction of Hutchison 3G's take or pay commitments. We are
also discussing with Hutchison 3G amending the agreement to include CCUK's new
build processes. There can be no assurances as to the outcome of these
discussions.
O2 Agreement. In February 2001, CCUK signed an initial agreement with its
existing customer O2 pursuant to which O2 would lease additional space on CCUK
sites throughout the U.K., with a minimum take up of 1,500 additional through
2003 (a minimum take up of 500 sites per year for each of 2001, 2002 and 2003).
O2 did not satisfy the minimum take up requirements in 2001 or 2002. The terms
of the agreement are in dispute, and we are currently in discussions with O2
which may result in the deferral or reduction of O2's take or pay commitments.
There can be no assurances as to the outcome of these discussions.
Third Generation Technology
During April 2000, the United Kingdom auctioned five licenses relating to 3G
mobile communications. Vodafone, O2, T-Mobile, Orange and Hutchison 3G
currently hold the 3G licenses acquired through these auctions. We contemplate
working with the 3G license holders in order to provide site sharing of network
towers, equipment and other communications infrastructure as a solution to many
of the commercial and technical challenges and costs which the 3G license
holders will face.
During 2000 and 2001, CCUK provided turnkey project management, installation
and commissioning of the 3G radio access network (including site planning,
design, build and radio frequency planning) with respect to the network rollout
of Europe's first 3G network on the Isle of Man. The network, comprised of
approximately 28 sites, was built by NEC and Siemens for Manx Telecom, a wholly
owned subsidiary of mmO2 plc, and was launched in December 2001. See
"Business--The Company--U.K. Operations--Network Services--Network Design and
Site Selection".
There can be no assurances that 3G or other new wireless technologies will
be introduced or deployed as rapidly or in the manner previously or presently
projected by the wireless industry. The deployment of 3G has already been
significantly delayed as to prior projections. In addition, demand and customer
adoption rates of 3G and other technologies may be lower or slower than
anticipated for numerous reasons. As a result, growth opportunities and demand
for site rental as a result of such technologies may not be realized at the
times or to the extent previously or presently anticipated.
Customers
For the 12 months ended December 31, 2002, the BBC accounted for
approximately 33.7% of CCUK's consolidated revenues. This percentage has
decreased from 44.2% and 39.4% for the 12 months ended December 31, 2000 and
December 31, 2001, respectively, and is expected to continue to decline as CCUK
continues to expand its site rental business. CCUK provides the five largest
U.K. personal communications network/cellular operators (O2, T-Mobile, Orange,
Vodafone and Hutchison 3G) with infrastructure services and
14
also provides fixed telecommunications operators, such as BT and Energis, with
microwave links and backhaul infrastructure. The following is a list of some of
CCUK's leading site rental customers by industry segment.
Industry Representative Customers
-------- ------------------------
Broadcasting. BBC, NTL, Virgin Radio, talkSPORT, XFM, Switchdigital,
BSkyB, UKTV, Flextech Television, MTV, EMAP
Cellular--GSM Vodafone, O2, Orange, T-Mobile
3G........... Hutchison 3G, O2, Orange, Vodafone, T-Mobile
PMR/TETRA.... Airwave, Inquam
Sales and Marketing
We have a staff of sales and business development personnel in the U.K. who
identify new revenue-generating opportunities, develop and maintain key account
relationships, and tailor service offerings to meet the needs of specific
customers. A good relationship has been maintained with the BBC, and good
relationships have been developed and maintained with many of the major
broadcasters and wireless communications carriers in the U.K.
Competition
CCUK's primary competitors with respect to its digital terrestrial broadcast
transmission platform are satellite and cable broadcast operators, including
BSkyB, NTL, Telewest and Cable & Wireless. NTL is CCUK's primary competitor in
the terrestrial broadcast transmission market in the U.K. NTL provides analog
transmission services to ITV, Channels 4 and 5, and S4C television networks,
the national commercial radio service Classic FM, a number of local analog
commercial radio stations and Digital One, the national digital radio license
holder. NTL retains partial ownership of both the SDN digital television
multiplex and Digital One, the national independent digital radio licensee. NTL
has also been awarded the transmission contract for two of the six DTT
multiplexes. CCUK operates the transmission network contracts for the other
four multiplexes, two for the BBC and two for the CCUK licensed multiplexes.
Although CCUK and NTL are broadcast competitors, they have reciprocal rights
to the use of each others' sites for broadcast transmission usage in order to
enable each of them to achieve the necessary country-wide coverage. This
relationship is formalized by the Site-Sharing Agreement entered into in 1991,
the time at which NTL was privatized. See "Business--The Company--U.K.
Operations--Significant Contracts--Site-Sharing Agreement."
CCUK's primary competition to its site leasing business comes from building
owners, including utilities, that lease space on co-locatable rooftop sites.
NTL also offers site rental on approximately 2,000 of its sites, some of which
are managed on behalf of third parties. U.K. mobile operators own site
infrastructure and lease space to other users. Their openness to sharing with
direct competitors varies by operator; however, several operators have made
public statements indicating they are willing to share or jointly develop
certain sites with competitors and other third parties under certain
circumstances.
CCUK faces competition from a large number of companies in the provision of
network services. The companies include specialty consultants and equipment
manufacturers such as Nortel and Ericsson. NTL also offers certain network
services to its customers, including installation and maintenance.
Australia Operations
Our primary business in Australia is the leasing of antenna space to
wireless carriers. CCAL, a joint venture which is owned 77.6% by us and 22.4%
by Permanent Nominees (Aust) Ltd, acting on behalf of a group of professional
and institutional investors led by Jump Capital Limited, is our principal
Australian operating subsidiary.
15
CCAL is the largest independent tower operator in Australia with a
nationwide tower portfolio providing sites for cellular coverage for over 92%
of the population in Australia. CCAL currently operates 1,387 towers, with a
strategic presence in all of Australia's licensed regions including Sydney,
Melbourne, Brisbane, Adelaide and Perth.
716 of CCAL's towers were purchased from Optus during 2000 for approximately
$135 million (Australia $220 million) in cash. As part of this transaction,
Optus agreed to lease space on these towers for an initial term of 15 years.
The agreement also provided CCAL with an exclusive right to develop all future
tower sites for Optus through April 2006. These build-to-suit provisions were
terminated in March 2002 by mutual consent. In terminating the build-to-suit
arrangement, it was agreed that CCAL would purchase an additional 44 sites for
an aggregate of $5.7 million (Australia $10.5 million), 41 of which have been
acquired to date.
An additional 643 towers were acquired from Vodafone Australia in April 2001
for approximately $121 million (Australia $240 million). As part of this
transaction, Vodafone Australia has agreed to lease space on these towers for
an initial period of 10 years, and CCAL has the exclusive right to acquire up
to 600 additional tower sites that Vodafone may construct through April 2007.
The Vodafone Australia acquisition was funded 85.1% by us and 14.9% by the Jump
Capital group, which resulted in our interest in CCAL being increased from
66.7% to 77.6%. In 2002, CCAL exercised its right under the warranty provisions
of the original acquisition agreement to return 18 towers which did not meet
certain criteria. This resulted in a return to CCAL of $3.5 million (Australia
$6.3 million) of consideration which was originally paid for these sites. In
2002, CCAL acquired an additional four sites from Vodafone pursuant to the
terms of the original acquisition agreement.
As of December 31, 2002, CCAL also provided maintenance services on
approximately 1,067 customer sites and management services on approximately
1,094 customer sites.
In Australia, CCAL competes with other independent tower owners which also
provide site rental and network services; wireless carriers, which own and
operate their own tower networks; service companies that provide engineering
and site acquisition services; and other site owners, such as broadcasters and
building owners. The two other significant tower owners in Australia are
Telstra and Broadcast Australia. We believe that tower location, capacity,
quality of service, deployment speed and price within a geographic market are
the most significant competitive factors affecting tower rental companies.
Employees
At December 31, 2002, we employed approximately 1,462 people worldwide.
Other than in the U.K., we are not a party to any collective bargaining
agreements. In the U.K., we are party to a collective bargaining agreement with
the Broadcast, Entertainment, Cinematographic and Theatrical Union (BECTU).
This agreement establishes bargaining procedures relating to the terms and
conditions of employment for all of CCUK's non-management staff. CCUK is
currently in discussions with BECTU regarding the potential restructure of
pension arrangements as they relate to the former employees of the BBC. We
contemplate a satisfactory resolution to these discussions without a work
stoppage or similar event, but there can be no assurances of such an outcome.
We have not experienced any strikes or work stoppages, and management believes
that our employee relations are satisfactory. See "Business--2002
Events--Restructurings."
Regulatory Matters
To date, we have not incurred any material fines or penalties or experienced
any material adverse effects to our business as a result of any domestic or
international regulations. The summary below is based on regulations currently
in effect, and such regulations are subject to review and modification by the
applicable governmental authority from time to time. See "Business--Risk
Factors."
16
United States
Federal Regulations
Both the FCC and FAA regulate towers used for wireless communications
transmitters and receivers. Such regulations control the siting and marking of
towers and may, depending on the characteristics of particular towers, require
the registration of tower facilities and the issuance of determinations
confirming no hazard to air traffic. Wireless communications devices operating
on towers are separately regulated and independently licensed based upon the
particular frequency used. In addition, the FCC and the FAA have developed
standards to consider proposals for new or modified tower and antenna
structures based upon the height and location, including proximity to airports,
of proposed tower and antenna structures. Proposals to construct or to modify
existing tower and antenna structures above certain heights are reviewed by the
FAA to ensure the structure will not present a hazard to aviation, which
determination may be conditioned upon compliance with lighting and marking
requirements. The FCC requires its licensees to operate communications devices
only on towers that comply with FAA rules and are registered with the FCC, if
required by its regulations. Where tower lighting is required by FAA
regulation, tower owners bear the responsibility of notifying the FAA of any
tower lighting outage. Failure to comply with the applicable requirements may
lead to civil penalties.
Local Regulations
Local regulations include city and other local ordinances (including
subdivision and zoning ordinances), approvals for construction and removal of
towers, and restrictive covenants imposed by community developers. These
regulations vary greatly, but typically require us to obtain approval from
local officials prior to tower construction. Local zoning authorities may
render decisions or place conditions on construction that are responsive to
community residents' concerns regarding the height and visibility of the towers.
Other Regulations
We hold, through certain of our subsidiaries, certain licenses for radio
transmission facilities granted by the FCC, including licenses for common
carrier microwave and commercial mobile radio services, including specialized
mobile radio and paging facilities, as well as private mobile radio services
including industrial/business radio facilities, which are subject to additional
regulation by the FCC. We are required to obtain the FCC's approval prior to
the transfer of control of any of our FCC licenses.
United Kingdom
Telecommunications systems and equipment used for the transmission of
signals over radio frequencies have to be licensed in the U.K. These licenses
are issued on behalf of the British Government by the Secretary of State for
Trade and Industry under the Telecommunications Act 1984, the Wireless
Telegraphy Acts 1949, 1968 and 1998 and the Broadcasting Act 1996. CCUK has a
number of such licenses under which it runs the telecommunications distribution
and transmission systems which are necessary for the provision of its
transmission services.
Licenses under the Telecommunications Act 1984
CCUK has the following three licenses under the Telecommunications Act 1984:
Transmission License. The Transmission License is a renewable license to run
telecommunications systems for the transmission via radio of broadcasting
services. This license is for a period of at least 25 years from January 23,
1997, and is CCUK's principal license. The license has certain price control
conditions and change of control provisions.
17
General Telecom License. The general telecom license is a general license to
run telecommunications systems and authorizes CCUK to run all the necessary
telecommunications systems to convey messages to its transmitter sites (e.g.,
via leased circuits or using its own microwave links). The license does not
cover the provision of public switched telephony networks (which would require
a public telecommunications license as described above).
Satellite License. The satellite license is a license to run
telecommunications systems for the provision of satellite telecommunication
services and allows the conveyance via satellite of messages, including data
and radio broadcasting. The license excludes television broadcasting direct to
the home via satellite although distribution via satellite of television
broadcasting services which are to be transmitted terrestrially is permitted.
Licenses under the Wireless Telegraphy Acts 1949, 1968 and 1998
CCUK has a number of licenses under the Wireless Telegraphy Acts 1949, 1968
and 1998, authorizing the use of radio equipment for the provision of certain
services over allocated radio frequencies including:
. a broadcasting services license in relation to the transmission services
provided to the BBC and other broadcast customers,
. a fixed point-to-point radio links license, and
. DTT test and development licenses.
All the existing licenses under the Wireless Telegraphy Acts 1949, 1968 and
1998 have to be renewed annually with the payment of a fee. The BBC, Virgin
Radio and talkSPORT have each contracted to pay their portion of these fees.
CCUK is also obliged to pay these fees in respect of its DTT licenses.
Multiplex Spectrum Licenses - Broadcasting Act 1996
In August 2002, CCUK was granted two 12 year multiplex spectrum licenses to
provide DTT broadcasting services in the UK, with a 12 year renewal option
subject to certain performance criteria. Each of the these two licenses
contains conditions relating to how CCUK provides its services, including
conditions regarding signal quality, marketing, and fairness and open
competition regarding contracts with program providers. In addition, CCUK must
meet obligations to implement certain power increases with respect to a number
of the stations listed in the licenses. See "Business--The Company--U.K.
Operations--Transmission Business."
New Legislation
The EU Counsel of Ministers and the European Parliament have reached an
agreement on new directives that will establish a framework for the regulation
of electronic communications networks, services and associated facilities
throughout the European Union. As part of this initiative, new legislation is
planned for implementation in the U.K. by the end of 2003, which will
consolidate various regulatory bodies including Office of Telecommunications
(OFTEL) and the Independent Television Commission (ITC) to create a single body
to regulate broadcasting and telecommunications in the U.K. Under the proposed
new legislation CCUK's existing telecommunications licenses will be updated and
replaced. CCUK is currently in consultation with OFTEL to discuss the
implications of the proposed changes.
Australia
Federal Regulation
Carrier licenses and nominated carrier declarations issued under the Federal
Telecommunications Act 1997 authorize the use of network units for the supply
of telecommunications services to the public. The definition of "network units"
includes line links and base stations used for wireless telephony services but
does not include
18
tower infrastructure. Accordingly, CCAL as a tower owner and operator does not
require a carrier license. Similarly, because CCAL does not own any
transmitters or spectrum, it does not currently require any apparatus or
spectrum licenses issued under the Federal Radiocommunications Act 1992.
Carriers have a statutory obligation to provide other carriers with access
to tower facilities and sites and, if there is a dispute (including as to
pricing), the matter may be referred to the Australian Competition and Consumer
Commission for resolution. As a non-carrier, CCAL is not currently subject to
this regime and negotiates site access on a commercial basis.
While the Federal Telecommunications Act 1997 grants certain exemptions from
planning laws for the installation of "low impact facilities," towers are
expressly excluded from the definition of "low impact facilities." Accordingly,
in connection with the construction of new tower facilities, CCAL is subject to
state and local planning laws which vary on a site by site basis. For a limited
number of sites, CCAL is also required to install aircraft warning lighting in
compliance with federal aviation regulations.
Local Regulations
In Australia there are various local, state and territory laws and
regulations which relate to, among other things, town planning and zoning
restrictions, standards and approvals for the design, construction or
alteration of a structure or facility, and environmental regulations. As in the
U.S., these laws vary greatly, but typically require tower owners to obtain
approval from government bodies prior to tower construction and for ongoing
compliance with environmental laws.
Environmental Matters
To date, we have not incurred any material fines or penalties or experienced
any material adverse effects to our business as a result of any domestic or
international environmental regulations or matters. See "Business--Risk
Factors."
Our operations are subject to foreign, federal, state and local laws and
regulations relating to the management, use, storage, disposal, emission, and
remediation of, and exposure to, hazardous and non-hazardous substances,
materials and wastes. As an owner and operator of real property, we are subject
to certain environmental laws that impose strict, joint-and-several liability
for the cleanup of on-site or off-site contamination relating to existing or
historical operations, and we could also be subject to personal injury or
property damage claims relating to such contamination. We are potentially
subject to environmental and cleanup liabilities in the U.S., U.K. and
Australia.
As licensees and site owners, we are also subject to regulations and
guidelines that impose a variety of operational requirements relating to radio
frequency emissions. As employers, we are subject to OSHA and similar
guidelines regarding employee protection from radio frequency exposure. The
potential connection between radio frequency emissions and certain negative
health effects, including some forms of cancer, has been the subject of
substantial study by the scientific community in recent years. To date, the
results of these studies have been inconclusive.
We have compliance programs and monitoring projects to help assure that we
are in substantial compliance with applicable environmental laws. Nevertheless,
there can be no assurance that the costs of compliance with existing or future
environmental laws will not have a material adverse effect on our business,
results of operations, or financial condition.
19
2002 Events
Set forth below is a description of certain other significant events which
took place during 2002 and involved or affected our business or operations. The
description of a significant event set forth below is only a summary of the
main points relating to such event.
Restructurings
In March 2002, we announced a restructuring of our U.K. operations. In
connection with the restructuring, we reduced our U.K. staff by 212 full time
employees and disposed of certain service lines. We recorded cash charges of
$8.5 million during 2002 with respect to this restructuring.
In October 2002, the Company announced a restructuring of its U.S. business.
As part of the restructuring, the Company is reducing its U.S. workforce by
approximately 230 employees and is closing some smaller offices. The actions
taken for the restructuring will be substantially completed by the end of the
first quarter of 2003. In connection with this restructuring, the Company
recorded cash charges of approximately $6.1 million in the fourth quarter of
2002 related to employee severance payments and costs of office closures.
Deferral of British Telecom Payments
In April 2002, CCUK reached agreement with BT to defer until March 2003 the
final required payment of (Pounds)50 million (approximately $80.5 million), for
the third of three tranches of 500 sites, which had been due March 2002 from
CCUK to BT under the BT site agreement. We are currently in discussions with BT
regarding certain amendments to this agreement, including the further deferral
or reduction of the payment that would otherwise be owed in March 2003 and a
reduction of the number of BT sites acquired. There can be no assurances as to
the outcome of these discussions. See "Business--The Company--U.K.
Operations--Significant Contracts--British Telecom Agreement".
Repurchase of Securities
In August and September of 2002, we began repurchasing our stock (both
common and preferred) and debt securities in public market transactions.
Through December 31, 2002, we repurchased debt securities and shares of
preferred stock with aggregate principal and redemption amounts (at maturity)
of approximately $407.4 million. We utilized approximately $203.8 million in
cash to effect these repurchases, resulting in aggregate gains of $178.6
million. Through December 31, 2002, we also repurchased a total of 1.5 million
shares of common stock (in addition to the common stock purchases described
below), utilizing $3.0 million in cash.
In July 2002, we repurchased 8.5 million shares of our common stock through
a privately negotiated transaction for approximately $18.3 million in cash. The
shares purchased represented all of the remaining shares previously owned by
affiliates of France Telecom.
In June, September and December 2002, we paid our quarterly dividends on the
8 1/4% Convertible Preferred Stock by issuing a total of 3.7 million shares of
our common stock. As allowed by the Deposit Agreement relating to dividend
payments on the 8 1/4% Convertible Preferred Stock, we repurchased the 3.7
million shares of common stock from the dividend paying agent for a total of
approximately $12.2 million in cash. We may choose to continue such issuances
and repurchases of stock in the future in order to avoid further dilution
caused by the issuance of common stock as dividends on its preferred stock.
Termination of U.S. Build-to-Suit Agreements
During the third quarter of 2002, each of our joint ventures with Verizon
Communications negotiated a mutual consent to terminate its build-to-suit
agreements with Verizon Wireless, and we negotiated a mutual
20
consent to terminate our build-to-suit agreements with Cingular. Such agreement
terminations eliminated any requirement to build additional towers for either
carrier. As a part of the build-to-suit terminations, we sold certain tower
construction projects for approximately $22.9 million in cash. Asset write-down
charges of approximately $6.4 million were recorded during 2002 related to
these projects.
Paydown of Joint Venture Credit Facility
In September 2002, the Bell Atlantic Mobile venture repaid $50.0 million in
outstanding borrowings under its credit facility. The Bell Atlantic Mobile
venture utilized cash provided by its operations to effect this repayment.
Freeview
On October 30, 2002, CCUK, in conjunction with BBC and BSkyB, launched
Freeview, a DTT service in the U.K. CCUK currently provides broadcast services,
including transmission services, with respect to the four DTT multiplexes
utilized in connection with Freeview. CCUK has contracted annual revenues of
approximately (Pounds)25.3 million ($40.7 million) for the provision of
transmission, distribution and multiplexing services related to the new DTT
multiplex spectrum licenses relating to Freeview in 2003. Additional annual
operating costs of approximately (Pounds)5.3 million ($8.5 million) above the
costs incurred for the provision of broadcast services pursuant to the former
ITVD contract, are expected. See "Business--The Company--U.K.
Operations--Transmission Business."
CCUK Credit Facility Amendment
On November 22, 2002, CCUK completed an amendment to its U.K. revolving
credit facility to cure a termination event, which resulted from the
termination of the ITVD transmission contract in connection with the
liquidation of ITVD. Under terms of the amended facility due June 18, 2006,
CCUK will have (Pounds)120.0 million of borrowing capacity, of which (Pounds)90
million was drawn as of December 31, 2002. The amendments postpone any
additional reductions in the revolver until June 30, 2004, eliminate certain
financial covenants and increase the applicable interest rate by 25 basis
points.
Senior Management and Board of Directors Changes
In May 2002, J. Landis Martin was named non-executive Chairman of our Board
of Directors, succeeding Ted B. Miller, Jr. Ted B. Miller, Jr., our former
Chief Executive Officer and Chairman of the Board, resigned from our Board of
Directors effective August 2, 2002. David L. Ivy resigned from our Board of
Directors effective August 9, 2002. In addition, Carl Ferenbach, age 60, and
Ari Q. Fitzgerald, age 40, were appointed to our Board of Directors in July
2002 and August 2002, respectively, to fill vacancies on the Board.
Risk Factors
You should carefully consider the risks described below, as well as the
other information contained in this document, when evaluating your investment
in our securities.
Substantial Level of Indebtedness--Our substantial level of indebtedness could
adversely affect our ability to react to changes in our business. We may also
be limited in our ability to use debt to fund future capital needs.
We have a substantial amount of indebtedness. The following chart sets forth
certain important credit information and is presented as of December 31, 2002
(dollars in thousands).
Total indebtedness................................. $3,226,960
Redeemable preferred stock......................... 756,014
Stockholders' equity............................... 2,208,498
Debt and redeemable preferred stock to equity ratio 1.80x
21
In addition, our earnings for the twelve months ended December 31, 2002 were
insufficient to cover fixed charges by $262.7 million.
As a result of our substantial indebtedness:
. we could be more vulnerable to general adverse economic and industry
conditions;
. we may find it more difficult to obtain additional financing to fund
future working capital, capital expenditures and other general corporate
requirements;
. we will be required to dedicate a substantial portion of our cash flow
from operations to the payment of principal and interest on our debt,
reducing the available cash flow to fund other projects;
. we may have limited flexibility in planning for, or reacting to, changes
in our business and in the industry; and
. we may have a competitive disadvantage relative to other companies in our
industry with less debt.
We cannot guarantee that we will be able to generate enough cash flow from
operations or that we will be able to obtain enough capital to service our
debt, pay our obligations under our convertible preferred stock or fund our
planned capital expenditures. In addition, we may need to refinance some or all
of our indebtedness on or before maturity. We cannot guarantee, however, that
we will be able to refinance our indebtedness on commercially reasonable terms
or at all.
Ability to Service Debt--To service our indebtedness, we will require a
significant amount of cash from our subsidiaries. An inability to access our
subsidiaries' cash flow may lead to an acceleration of our indebtedness,
including our notes. Currently, the instruments governing our subsidiaries'
indebtedness do not allow sufficient funds to be distributed to CCIC to service
its indebtedness.
If CCIC is unable to refinance its subsidiary debt or renegotiate the terms
of such debt, CCIC may not be able to meet its debt service requirements,
including interest payments on our notes, in the future. Our 10 5/8% discount
notes, our 9% senior notes, our 9 1/2% senior notes, our 10 3/4% senior notes
and our 9 3/8% senior notes require annual cash interest payments of
approximately $25.4 million, $14.9 million, $10.9 million, $47.6 million and
$38.2 million, respectively. Prior to May 15, 2004 and August 1, 2004, the
interest expense on our 10 3/8% discount notes and our 11 1/4% discount notes,
respectively, will be comprised solely of the amortization of original issue
discount. Thereafter, the 10 3/8% discount notes and the 11 1/4% discount notes
will require annual cash interest payments of approximately $46.6 million and
$22.8 million, respectively. Prior to December 15, 2003, we do not expect to
pay cash dividends on our exchangeable preferred stock or, if issued, cash
interest on the exchange debentures. Thereafter, assuming all dividends or
interest have been paid-in-kind, our exchangeable preferred stock or, if
issued, the exchange debentures will require annual cash dividend or interest
payments of approximately $34.3 million. Annual cash interest payments on the
CCUK bonds are (Pounds)11.25 million ($18.1 million). In addition, our various
credit facilities will require periodic interest payments on amounts borrowed
thereunder, which amounts could be substantial.
Our Business Depends on the Demand for Wireless Communications and Towers--We
have been and are likely to continue to be adversely affected by the slowdown
in the growth of, or reduction in demand for, wireless communications.
Demand for our site rentals depends on demand for communication sites from
wireless carriers, which, in turn, depends on the demand for wireless services.
The demand for our sites depends on many factors which we cannot control,
including:
. the level of demand for specific sites;
. the level of demand for wireless services generally;
22
. the financial condition and access to capital of wireless carriers;
. the strategy of carriers relating to owning or leasing communication
sites;
. the availability of equipment to wireless carriers;
. changes in telecommunications regulations; and
. general economic conditions.
Wireless carriers are currently competing vigorously with each other through
price reductions of their services to customers. A prolonged "price war" among
our carrier customers could adversely affect their business and result in a
significant reduction in the number of new site leases from such carriers or
other material adverse effect on our business or operations.
A slowdown in the growth of, or reduction in, demand in a particular
wireless segment could adversely affect the demand for communication sites.
Moreover, wireless carriers often operate with substantial indebtedness, and
financial problems for our customers could result in accounts receivable going
uncollected, the loss of a customer (and associated lease revenue) or a reduced
ability of these customers to finance expansion activities. A slowdown in the
deployment of equipment for new wireless technology, the consolidation of
wireless carriers, the sharing of networks by wireless carriers or the
increased use of alternative sites (e.g. rooftops) could also adversely affect
the demand for our sites. Finally, advances in technology, such as the
development of new antenna systems, new terrestrial deployment technologies and
new satellite systems, could reduce the need for land-based, or terrestrial,
transmission networks. To some extent, almost all of the above factors have
occurred in recent years with an adverse effect on our business, and such
factors are likely to persist in the future. The occurrence of any of these
factors could have a material adverse effect on our financial condition and
results of operations.
Continuation of the Current Economic and Telecommunications Industry
Slowdown--This slowdown could materially and adversely affect our business
(including reducing demand for our towers and network services) and the
business of our customers.
The significant general slowdown in the U.S. and certain international
economies, particularly in the wireless and telecommunications industries, has
negatively affected the factors described in the immediately preceding risk
factor, influencing demand for tower space and network services. This slowdown
could reduce consumer demand for wireless services, or negatively impact the
debt and equity markets, thereby causing carriers to delay or abandon
implementation of new systems and technologies, including 3G and other wireless
broadband services. Further, the war with Iraq, the war on terrorism, the
threat of additional terrorist attacks and the political and economic
uncertainties resulting therefrom may impose additional risks upon and
adversely effect the telecommunications industry, our business and our results
of operations.
We believe that the current economic slowdown, particularly in the wireless
and telecommunications industries, has already harmed, and may continue to
harm, the financial condition of some wireless service providers, certain of
which, including customers of ours, have filed or may file for bankruptcy.
Failure to Properly Manage Our Operations and Growth--If we are unable to
successfully integrate acquired operations or manage our existing operations as
we grow, our business will be adversely affected, and we may not be able to
continue our current business strategy.
We cannot guarantee that we will be able to successfully integrate acquired
businesses and assets into our business or implement our growth plans without
delay. If we fail to do so it could have a material adverse effect on our
financial condition and results of operations. We have grown significantly over
the past four years and have undergone several restructurings. Further, we will
be integrating additional sites relating to the BT Agreement into our
portfolios. See "Business--The Company--U.K. Operations--Significant Contracts--
23
British Telecom Agreement". Successful integration of these transactions and
assets will depend primarily on our ability to manage these combined
operations. For the twelve months ended December 31, 2002 we had a net loss of
$272.5 million, depreciation and amortization of $301.9 million and interest
expense of $302.6 million. We expect that such significant net losses and
expenses will continue, at least in the near term, as a result of our prior
growth and the financing thereof.
Implementation of any future consolidations, acquisitions or exchanges may
impose significant strains on our management, operating systems and financial
resources. If we fail to manage our growth or encounter unexpected difficulties
during expansion or transition, it could have a material adverse effect on our
financial condition and results of operations. The pursuit and integration of
certain acquisitions, exchanges and joint venture opportunities may require
substantial attention from our senior management, which will limit the amount
of time they would otherwise be able to devote to our existing operations.
A Substantial Portion Of Our Revenues Is Derived From a Small Number of
Customers, Including Verizon, the BBC and Cingular--The loss or consolidation
of any of our limited number of customers could materially decrease revenues.
Approximately 64.7% of our revenues are derived from 10 customers, including
Verizon and Cingular, which represented 16.3% and 9.6% of our revenues,
respectively, for the twelve-month period ended December 31, 2002. The loss of
any one of our large customers as a result of consolidation, merger or
bankruptcy with other customers of ours or otherwise could materially decrease
our revenues and have other adverse effects on our business.
In addition, a substantial portion of our revenues are received from a few
major wireless carriers, particularly carriers that have transferred their
tower assets to us. We cannot guarantee that the lease or management service
agreements with such carriers will not be terminated or that these carriers
will renew such agreements.
If we were to lose our contracts with the BBC or our site sharing agreement
with NTL, we would likely lose a substantial portion of our revenues. The BBC
accounted for approximately 11.2% of our revenues for the twelve-month period
ended December 31, 2002. Further, NTL has recently experienced some financial
difficulties, and there can be no assurances that we will not experience
adverse effects relating to the financial difficulties of NTL.
Our broadcast business is substantially dependent on our contracts with the
BBC. We cannot guarantee that the BBC will renew our contracts or that they
will not attempt to negotiate terms that are not as favorable to us as those in
place now. If we were to lose these BBC contracts, our business, results of
operations and financial condition would be materially adversely affected. The
initial term of our analog transmission contract with the BBC will expire on
March 31, 2007, and the initial terms of our two digital television
transmission contracts with the BBC expire on October 31, 2008 and October 30,
2010, respectively. In addition, the BBC can serve notice to terminate our
original digital transmission contract with them (which currently provides
annual revenues of approximately (Pounds)11.4 million ($18.4 million) per year)
during November 2003 through January 2004 if the BBC's board of governors does
not believe that digital television in the U.K. has enough viewers.
A substantial portion of our U.K. broadcast transmission operations is
conducted using sites owned by NTL, our principal broadcast competitor in the
U.K. NTL also utilizes our sites for their broadcast operations. This site
sharing arrangement with NTL may be terminated on December 31, 2015, or any
10-year anniversary of that date, with five years' prior notice by either us or
NTL, and may be terminated sooner if there is a continuing breach of the
agreement. We cannot guarantee that this agreement will not be terminated,
which could have a material adverse effect on our business, results of
operations and financial condition.
24
As a Holding Company, We Require Dividends From Subsidiaries to Meet Cash
Requirements or Pay Dividends--If our subsidiaries are unable to dividend cash
to us when we need it, we may be unable to pay dividends or satisfy our
obligations, including interest and principal payments, under our debt
instruments.
Crown Castle International Corp., or "CCIC", is a holding company with no
business operations of its own. CCIC's most significant asset is the
outstanding capital stock of its subsidiaries. CCIC conducts all of its
business operations through its subsidiaries. Accordingly, CCIC's only source
of cash to pay dividends or make other distributions on its capital stock or to
pay interest and principal on its outstanding indebtedness is distributions
relating to its ownership interest in its subsidiaries from the net earnings
and cash flow generated by such subsidiaries or from proceeds of debt or equity
offerings. We currently expect that the earnings and cash flow of CCIC's
subsidiaries will be retained and used by such subsidiaries in their
operations, including the service of their respective debt obligations. Even if
we did determine to make a distribution in respect of the capital stock of
CCIC's subsidiaries, there can be no assurance that CCIC's subsidiaries will
generate sufficient cash flow to pay or distribute such a dividend or funds, or
that applicable state law and contractual restrictions, including negative
covenants contained in the debt instruments of such subsidiaries, would permit
such dividends, distributions or payments. Furthermore, the terms of our credit
facilities place restrictions on our principal subsidiaries' ability to pay
dividends or to make distributions, and in any event, such dividends or
distributions may only be paid if no default has occurred under the applicable
instrument. Moreover, CCIC's subsidiaries are permitted under the terms of
their existing debt instruments to incur additional indebtedness that may
restrict or prohibit the making of distributions, the payment of dividends or
the making of loans by such subsidiaries to CCIC. See "Business--Risk
Factors--Substantial Level of Indebtedness" and "Business--Risk
Factors--Ability to Service Debt".
Restrictive Debt Covenants--The terms of our debt instruments limit our ability
to take a number of actions that our management might otherwise believe to be
in our best interests. In addition, if we fail to comply with our covenants,
our debt could be accelerated.
Currently we have debt instruments in place that restrict our ability to
incur more indebtedness, pay dividends, create liens, sell assets and engage in
certain mergers and acquisitions. Our subsidiaries, under their debt
instruments, are also required to maintain specific financial ratios. Our
ability to comply with the restrictions of these instruments and to satisfy our
debt obligations will depend on our future operating performance. If we fail to
comply with the debt restrictions, we will be in default under those
instruments, which in some cases would cause the maturity of substantially all
of our long-term indebtedness to be accelerated. The restrictions may also
effect our decisions relating to certain strategic growth opportunities.
We Operate Our Business In a Competitive Industry and Some Of Our Competitors
Have Significantly More Resources--As a result of this competition, we may find
it more difficult to achieve favorable lease rates on our towers.
We face competition for site rental customers from various sources,
including:
. other large independent tower owners;
. wireless carriers that own and operate their own towers and lease antenna
space to other carriers;
. alternative facilities such as rooftops, broadcast towers and utility
poles;
. new alternative deployment methods;
. site development companies that acquire antenna space on existing towers
for wireless carriers and manage new tower construction; and
. traditional local independent tower operators.
Wireless carriers that own and operate their own tower portfolios generally
are substantially larger and have greater financial resources than we have.
Further, the weak financial status of certain of our competitors could
25
lead to increased competition in certain areas. Competition for tenants on
towers could adversely affect lease rates and service income.
New Technologies Could Make Our Tower Antenna Leasing Services Less Desirable
to Potential Tenants and Result in Decreasing Revenues--Such new technologies
could decrease demand for tower leases and negatively impact our revenues.
The development and deployment of signal combining technologies, which
permit one antenna to service multiple transmission frequencies and, thereby,
multiple 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 FCC has granted license
applications for several low-earth orbiting satellite systems that are intended
to provide mobile voice or data services. The growth in delivery of video
services by direct broadcast satellites could also adversely affect demand for
our antenna space.
Other technologies which may be developed and emerge could serve as
substitutes and alternatives to leasing which might otherwise be anticipated or
expected on our sites and towers had such technologies not existed. Any
reduction in tower leasing demand resulting from multiple band, satellite or
other technologies could negatively impact our revenues or otherwise have a
material adverse effect on our business, financial condition or results of
operations.
Agreements Among Our Customers May Act as Alternatives to Leasing Sites From
Us--The proliferation of such agreements could have a material adverse effect
on our revenues and operations.
Wireless service providers frequently enter into agreements with competitors
allowing them to utilize one another's wireless communications facilities to
accommodate customers who are out of range of their home providers' services.
In addition, wireless service providers have also entered into agreements
allowing two or more carriers to share a single wireless network or jointly
develop a tower portfolio in certain locations. Such agreements may be viewed
by wireless service providers as a superior alternative to leasing space for
their own antennas on our communication sites. The proliferation of these
roaming, network sharing and joint development agreements could have a material
adverse effect on our business, financial condition or results of operations.
Variability In Demand For Network Services Business Has Reduced The
Predictability of Our Results--Our network services business has historically
experienced significant volatility in demand.
The operating results of our network services business for any particular
period may vary significantly and should not necessarily be considered
indicative of longer-term results. Network services revenues have also been
adversely impacted in the U.S. due to reduced antenna installation activity
related to a decrease in new tenants. Further, we continue to reduce our
network service offerings, and, therefore, the service business has and should
continue to become less significant to our operations.
We May Need Additional Financing for Strategic Growth Opportunities Which May
Not Be Available--If we are unable to raise capital in the future when needed,
we may not be able to fund future growth opportunities.
Over time, we may require significant capital expenditures for strategic
growth opportunities . Currently, we have agreed to lease space on and develop
as many as 4,000 BT sites throughout the United Kingdom. We are contractually
committed to invest (Pounds)150 million (approximately $241 million) for the
first 1,500 sites from the BT site portfolio. See "Business--The Company--U.K.
Operations--Significant Contracts--British Telecom Agreement". Further, our
partners in our two joint ventures with Verizon Communications have the right
to dissolve those ventures and require us to purchase (for cash, in the case of
the GTE venture, and for cash or
26
common stock, at our option, in the case of the Bell Atlantic Mobile venture)
their interests in the ventures. See "Business--The Company--U.S. Operations."
As of December 31, 2002, we had consolidated cash and cash equivalents of
$516.2 million and consolidated liquid investments (consisting of marketable
securities) of $115.7 million. We also had approximately $1.1 billion in
outstanding borrowings under our credit facilities at that date. Our ability to
borrow under the credit facilities is limited by the financial covenants
contained in those agreements, including covenants relating to current
financial performance (as defined in the various credit agreements), levels of
indebtedness and debt service requirements. Under the terms of the credit
facilities, we could draw approximately $500 million in additional borrowings
as of December 31, 2002 while remaining in compliance with these covenants.
We may need additional sources of debt or equity capital in the future to
fund future growth opportunities. Additional financing may not be available or
may be restricted by the terms of our credit facilities and the terms of our
other outstanding indebtedness. Additional sales of equity securities will
dilute our existing stockholders. If we are unable to raise capital when our
needs arise, we may not be able to fund future growth opportunities.
We Generally Lease or Sublease the Land Under Our Towers and May Not Be Able to
Maintain These Leases--If we fail to protect our rights against persons
claiming superior rights in our communications sites, our business may be
adversely affected.
Our real property interests relating to our communications sites consist
primarily of fee interests, leasehold and sub-leasehold interests, easements,
licenses and rights-of-way. A loss of these interests, including losses arising
from the bankruptcy of one or more of our significant lessors or from the
default by one or more of our lessors under their mortgage financing, could
interfere with our ability to conduct our business and generate revenues. For
various reasons, we may not always have the ability to access, analyze and
verify all information regarding titles and other issues prior to completing an
acquisition of sites. Further, we may not be able to renew ground leases on
commercially viable terms. Approximately 13% of our sites are on land where our
property interests in such land have a final expiration date of less than ten
years. Our inability to protect our rights to the land under our towers could
have a material adverse affect on our business, financial condition and results
of operations.
Laws and Regulations Which Could Change at Any Time and With Which We Could
Fail to Comply Regulate Our Business--If we fail to comply with applicable laws
or regulations, we could be fined or even lose our right to conduct some of our
business.
A variety of foreign, federal, state and local laws and regulations apply to
our business. Failure to comply with applicable requirements may lead to civil
penalties or require us to assume indemnification obligations or breach
contractual provisions. We cannot guarantee that existing or future laws or
regulations will not adversely affect our business, increase delays or result
in additional costs. These factors could have a material adverse effect on our
financial condition and results of operations.
Emissions From Antennas on Our Towers May Create Health Risks--We could suffer
from future claims if the radio frequency emissions from equipment on our
towers is demonstrated to cause negative health effects.
The FCC and other government agencies impose requirements and other
guidelines on its licensees relating to radio frequency emissions. The
potential connection between radio frequency emissions and certain negative
health effects, including some forms of cance