Amended 10-Q for the Period Endined September 30, 2004
Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q/A

(Amendment No. 1)

 


 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2004

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period                      to                     

 

Commission File Number 001-16441

 


 

CROWN CASTLE INTERNATIONAL CORP.

(Exact name of registrant as specified in its charter)

 

Delaware   76-0470458

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

510 Bering Drive

Suite 500

Houston, Texas

  77057-1457
(Address of principal executive offices)   (Zip Code)

 

(713) 570-3000

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes x    No ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Yes x    No ¨

 

Number of shares of common stock outstanding at October 31, 2004: 223,591,172

 



Table of Contents

CROWN CASTLE INTERNATIONAL CORP.

INDEX

 

     Page

Explanatory Note Regarding Restatement

   3

PART I—FINANCIAL INFORMATION

    

Item 1. Financial Statements

    

Consolidated Balance Sheet at December 31, 2003 and September 30, 2004

   4

Consolidated Statement of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2003 and 2004

   5

Consolidated Statement of Cash Flows for the nine months ended September 30, 2003 and 2004

   6

Condensed Notes to Consolidated Financial Statements

   7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

   27

Item 3. Quantitative and Qualitative Disclosures About Market Risk

   39

Item 4. Controls and Procedures

   40

PART II—OTHER INFORMATION

    

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

   41

Item 6. Exhibits

   41

Signatures

   42

 

2


Table of Contents

EXPLANATORY NOTE REGARDING RESTATEMENT

 

The Company has restated its consolidated balance sheet as of December 31, 2003, and consolidated statements of operations and comprehensive income (loss) and stockholders’ equity for the years ended December 31, 2002 and 2003. The restatement affected periods prior to 2002. The impact of the restatement on such prior periods was reflected as an adjustment to opening accumulated deficit as of January 1, 2002. The restatement was reported in our Annual Report on Form 10-K for the year ended December 31, 2004 and is now being reported in this amendment to our Quarterly Report on Form 10-Q/A for the quarterly period ended September 30, 2004. The restatement has also been reported in amendments to our Quarterly Reports on Form 10-Q/A for the quarterly periods ended March 31, 2004 and June 30, 2004.

 

The consolidated financial statements have been restated to reflect the correction of errors for certain non-cash items relating to the Company’s lease accounting practices. On February 7, 2005, the Securities and Exchange Commission issued a public letter to the American Institute of Certified Public Accountants to clarify the interpretation of existing accounting literature applicable to certain leases and leasehold improvements. As a result, the Company has adjusted its method of accounting for tenant leases, ground leases and depreciation.

 

The corrections to the Company’s consolidated financial statements consist of non-cash adjustments primarily attributable to increases in site rental revenues, ground lease expense (included in site rental costs of operations) and depreciation expense. Since the adjustments affected results of operations at the Company’s majority owned Australian subsidiary (“CCAL”) and the Company’s two joint ventures with Verizon Communications, they also resulted in changes to minority interests and the purchase price allocation for the acquisition of a minority interest in 2003. The adjustments for depreciation expense also affected the discontinued operations of its UK subsidiary (“CCUK”), resulting in a change to the net gain on disposal. These adjustments have no effect on the Company’s credit (provision) for income taxes since the net impact on deferred tax assets and liabilities is offset by changes in valuation allowances. The adjustments do not affect historical net cash flows from operating, investing or financing activities, future cash flows or the timing of payments under related leases. Moreover, the corrections do not have any impact on cash balances, compliance with any financial covenants or debt instruments, or the current economic value of the Company’s leaseholds and its tower assets. The net impact of the accounting correction will generally be to accelerate ground lease expense (as such expenses are straight-lined over a period that equals or exceeds the remaining depreciable life of the tower, along with periods covered by tenant renewal options) and depreciation expense and, to a lesser extent, site rental revenues (as such revenues are only straight-lined over the current lease term, without regard to renewal options that may be exercised by a tenant).

 

The restatement adjustments increased the Company’s net loss and net loss per share for the three and nine months ended September 30, 2003 by approximately $19.3 million or $0.09 per share and $43.1 million or $0.21 per share, respectively, and decreased the net income and net income per share for the three and nine months ended September 30, 2004 by approximately $10.7 million or $0.04 per share and $33.5 million or $0.15 per share, respectively.

 

For a discussion of the individual restatement adjustments, see Note 1 of the Company’s condensed notes to consolidated financial statements in “Item 1. Financial Statements”. Additionally, see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” For more information on the impact of the restatement on other periods, see our Annual Report on Form 10-K for the year ended December 31, 2004.

 

The Company did not amend its Annual Report on Form 10-K or Quarterly Reports on Form 10-Q for periods affected by the restatement that ended prior to March 31, 2004. The financial statements and related financial information contained in the Company’s previously filed reports should no longer be relied upon.

 

All referenced amounts in this Quarterly Report for prior periods and prior period comparisons reflect the balances and amounts on a restated basis.

 

For the convenience of the reader, this Form 10-Q/A sets forth the original filing in its entirety. However, this Form 10-Q/A only (1) amends and restates Items 1, 2, and 4 of Part I of the original filing, in each case solely as a result of, and to reflect, the restatement and certain balance sheet reclassifications (as discussed in Note 1 of the condensed notes to consolidated financial statements), and (2) adds Item 2 of Part II to the original filing. No other information in the original filing is amended hereby. The foregoing items have not been updated to reflect other events occurring after the original filing or to modify or update those disclosures affected by subsequent events. In addition, pursuant to the rules of the Securities and Exchange Commission, Item 6 of Part II of the original filing has been amended to contain the currently dated certifications from the Company’s Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certifications of the Company’s Chief Executive Officer and Chief Financial Officer are attached to this Form 10-Q/A as Exhibits 31.1, 31.2 and 32.1.

 

Except for the foregoing amended information, this Form 10-Q/A retains the information as of the date of the original filing, and the Company has not updated the information contained herein to reflect events that occurred at a later date. Other events occurring after the date of the original filing or other disclosures necessary to reflect subsequent events have been addressed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, or will be addressed in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005, and reports filed with the Securities and Exchange Commission subsequent to the date of this filing.

 

3


Table of Contents

CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(In thousands of dollars, except share amounts)

 

     December 31,
2003


    September 30,
2004


 
     (As restated)     (As restated)  
           (Unaudited)  
ASSETS                 

Current assets:

                

Cash and cash equivalents

   $ 409,584     $ 757,005  

Short-term investments

     26,600       151,500  

Receivables:

                

Trade, net of allowance for doubtful accounts of $7,603 and $6,763 at December 31, 2003 and September 30, 2004, respectively

     37,289       29,977  

Other

     930       10,479  

Inventories

     9,615       8,368  

Deferred site rental receivable

     2,332       3,250  

Prepaid expenses and other current assets

     27,940       28,127  

Assets of discontinued operations (Notes 1 and 3)

     2,052,510       —    
    


 


Total current assets

     2,566,800       988,706  

Property and equipment, net of accumulated depreciation of $1,081,891 and $1,282,435 at December 31, 2003 and September 30, 2004, respectively

     3,593,570       3,395,320  

Goodwill

     270,438       270,438  

Deferred site rental receivable

     76,333       83,666  

Deferred financing costs and other assets, net of accumulated amortization of $39,692 and $33,189 at December 31, 2003 and September 30, 2004, respectively

     105,092       85,483  
    


 


     $ 6,612,233     $ 4,823,613  
    


 


LIABILITIES AND STOCKHOLDERS’ EQUITY                 

Current liabilities:

                

Accounts payable

   $ 9,785     $ 8,963  

Accrued interest

     49,063       32,559  

Accrued compensation and related benefits

     13,397       9,989  

Deferred rental revenues and other accrued liabilities

     106,384       128,303  

Liabilities of discontinued operations (Notes 1 and 3)

     353,544       —    

Long-term debt, current maturities

     267,142       —    
    


 


Total current liabilities

     799,315       179,814  

Long-term debt, less current maturities

     3,182,850       1,898,847  

Deferred ground lease payable

     98,524       111,375  

Other liabilities

     53,844       43,411  
    


 


Total liabilities

     4,134,533       2,233,447  
    


 


Commitments and contingencies

                

Minority interests

     176,645       176,362  

Redeemable preferred stock

     506,702       507,706  

Stockholders’ equity:

                

Common stock, $.01 par value; 690,000,000 shares authorized; shares issued:

                

December 31, 2003 – 220,758,321 and September 30, 2004 – 223,641,905

     2,208       2,236  

Additional paid-in capital

     3,349,459       3,379,191  

Accumulated other comprehensive income (loss)

     247,249       40,763  

Unearned stock compensation

     (8,122 )     (14,026 )

Accumulated deficit

     (1,796,441 )     (1,502,066 )
    


 


Total stockholders’ equity

     1,794,353       1,906,098  
    


 


     $ 6,612,233     $ 4,823,613  
    


 


 

See condensed notes to consolidated financial statements.

 

4


Table of Contents

CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands of dollars, except per share amounts)

 

     Three Months Ended
September 30,


   

Nine Months Ended

September 30,


 
     2003

    2004

    2003

    2004

 
     (As restated)     (As restated)     (As restated)     (As restated)  

Net revenues:

                                

Site rental

   $ 121,785     $ 135,229     $ 355,451     $ 397,916  

Network services and other

     17,396       14,956       53,944       48,172  
    


 


 


 


       139,181       150,185       409,395       446,088  
    


 


 


 


Operating expenses:

                                

Costs of operations (exclusive of depreciation, amortization and accretion):

                                

Site rental

     44,160       45,754       132,888       135,682  

Network services and other

     10,178       10,786       34,608       34,054  

General and administrative

     21,422       22,641       64,160       66,936  

Corporate development

     1,039       211       3,577       1,021  

Restructuring charges (credits)

     (1,058 )     (445 )     1,291       (478 )

Asset write-down charges

     6,137       —         7,517       3,816  

Non-cash general and administrative compensation charges

     6,205       1,442       13,933       9,860  

Depreciation, amortization and accretion

     70,276       70,030       210,942       211,449  
    


 


 


 


       158,359       150,419       468,916       462,340  
    


 


 


 


Operating income (loss)

     (19,178 )     (234 )     (59,521 )     (16,252 )

Other income (expense):

                                

Interest and other income (expense)

     (43,382 )     (13,590 )     (57,342 )     (40,353 )

Interest expense, amortization of deferred financing costs and dividends on preferred stock

     (62,408 )     (52,281 )     (189,928 )     (166,171 )
    


 


 


 


Loss from continuing operations before income taxes, minority interests and cumulative effect of change in accounting principle

     (124,968 )     (66,105 )     (306,791 )     (222,776 )

Provision for income taxes

     (585 )     6,856       (1,828 )     5,519  

Minority interests

     1,496       (544 )     3,908       (952 )
    


 


 


 


Loss from continuing operations before cumulative effect of change in accounting principle

     (124,057 )     (59,793 )     (304,711 )     (218,209 )

Discontinued operations (Notes 1 and 3):

                                

Income from operations of CCUK, net of tax

     5,076       15,400       12,617       46,399  

Net gain on disposal of CCUK, net of tax

     —         495,049       —         495,049  
    


 


 


 


Income from discontinued operations, net of tax

     5,076       510,449       12,617       541,448  
    


 


 


 


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

     (118,981 )     450,656       (292,094 )     323,239  

Cumulative effect of change in accounting principle for asset retirement obligations

     —         —         (551 )     —    
    


 


 


 


Net income (loss)

     (118,981 )     450,656       (292,645 )     323,239  

Dividends on preferred stock, net of gains (losses) on purchases of preferred stock

     (9,496 )     (9,836 )     (45,900 )     (28,864 )
    


 


 


 


Net income (loss) after deduction of dividends on preferred stock, net of gains (losses) on purchases of preferred stock

   $ (128,477 )   $ 440,820     $ (338,545 )   $ 294,375  
    


 


 


 


Net income (loss)

   $ (118,981 )   $ 450,656     $ (292,645 )   $ 323,239  

Other comprehensive income (loss):

                                

Foreign currency translation adjustments

     9,639       (2,841 )     74,586       12,335  

Less: reclassification adjustment for foreign currency translation adjustments included in net income (loss)

     —         (232,893 )     —         (232,893 )

Derivative instruments:

                                

Net change in fair value of cash flow hedging instruments

     67       (210 )     (1,408 )     (40 )

Amounts reclassified into results of operations

     1,810       725       5,188       2,599  

Minimum pension liability adjustment

     —         11,513       —         11,513  
    


 


 


 


Comprehensive income (loss)

   $ (107,465 )   $ 226,950     $ (214,279 )   $ 116,753  
    


 


 


 


Per common share – basic and diluted:

                                

Loss from continuing operations before cumulative effect of change in accounting principle

   $ (0.62 )   $ (0.31 )   $ (1.62 )   $ (1.12 )

Income from discontinued operations

     0.03       2.29       0.06       2.45  

Cumulative effect of change in accounting principle

     —         —         (0.01 )     —    
    


 


 


 


Net income (loss)

   $ (0.59 )   $ 1.98     $ (1.57 )   $ 1.33  
    


 


 


 


Common shares outstanding – basic and diluted (in thousands)

     216,621       222,841       216,516       221,329  
    


 


 


 


 

See condensed notes to consolidated financial statements.

 

5


Table of Contents

CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

(In thousands of dollars)

 

    

Nine Months Ended

September 30,


 
     2003

    2004

 
     (As restated)     (As restated)  

Cash flows from operating activities:

                

Net income (loss)

   $ (292,645 )   $ 323,239  

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

                

Depreciation, amortization and accretion

     210,942       211,449  

Losses on purchases and redemption of long-term debt

     18,858       38,253  

Non-cash general and administrative compensation charges

     13,933       9,860  

Amortization of deferred financing costs, discounts on long-term debt and dividends on preferred stock

     54,724       7,978  

Minority interests and loss on issuance of interest in joint venture

     7,332       952  

Equity in losses and write-downs of unconsolidated affiliates

     807       3,991  

Asset write-down charges

     7,517       3,816  

Income from discontinued operations

     (12,617 )     (541,448 )

Losses on purchases of preferred stock

     26,996       —    

Cumulative effect of change in accounting principle

     551       —    

Changes in assets and liabilities:

                

Decrease in receivables

     19,513       6,312  

Decrease in accrued interest

     (21,360 )     (16,504 )

Increase (decrease) in deferred rental revenues and other liabilities

     (203 )     857  

Decrease (increase) in inventories, prepaid expenses and other assets

     3,205       (6,732 )

Decrease in accounts payable

     (6,918 )     (814 )
    


 


Net cash provided by operating activities

     30,635       41,209  
    


 


Cash flows from investing activities:

                

Proceeds from disposition of property and equipment

     11,692       2,726  

Capital expenditures

     (20,702 )     (29,215 )

Investments in affiliates and other

     (13,245 )     (11,119 )

Maturities of investments

     789,960       250,100  

Purchases of investments

     (628,263 )     (375,000 )

Acquisition of minority interest in joint venture

     (5,873 )     —    
    


 


Net cash provided by (used for) investing activities

     133,569       (162,508 )
    


 


Cash flows from financing activities:

                

Proceeds from issuance of capital stock

     4,532       30,074  

Principal payments on long-term debt

     (9,500 )     (1,289,750 )

Purchases and redemption of long-term debt

     (251,867 )     (267,359 )

Purchases of capital stock

     (281,468 )     (52,990 )

Net borrowings (payments) under revolving credit agreements

     (35,000 )     (15,000 )

Incurrence of financing costs

     (7,441 )     (444 )

Proceeds from issuance of long-term debt

     230,000       —    
    


 


Net cash used for financing activities

     (350,744 )     (1,595,469 )
    


 


Effect of exchange rate changes on cash

     3,269       (105 )

Discontinued operations (Notes 1 and 3)

     945       2,064,294  
    


 


Net increase (decrease) in cash and cash equivalents

     (182,326 )     347,421  

Cash and cash equivalents at beginning of period

     339,837       409,584  
    


 


Cash and cash equivalents at end of period

   $ 157,511     $ 757,005  
    


 


Supplementary schedule of non-cash investing and financing activities:

                

Amounts recorded in connection with acquisition of minority interest:

                

Fair value of net assets recorded, including goodwill and other intangible assets

   $ 26,360     $ —    

Minority interest acquired

     46,265       —    

Minority interest issued

     (66,752 )     —    

Supplemental disclosure of cash flow information:

                

Interest paid

   $ 153,858     $ 172,376  

Income taxes paid

     328       481  

 

See condensed notes to consolidated financial statements.

 

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Table of Contents

CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. General

 

The information contained in the following notes to the consolidated financial statements is condensed from that which would appear in the annual consolidated financial statements; accordingly, the consolidated financial statements included herein should be reviewed in conjunction with the consolidated financial statements for the fiscal year ended December 31, 2004, and related notes thereto, included in the Annual Report on Form 10-K (the “Form 10-K”) filed by Crown Castle International Corp. with the Securities and Exchange Commission. All references to the “Company” include Crown Castle International Corp. and its subsidiary companies unless otherwise indicated or the context indicates otherwise.

 

The consolidated financial statements included herein are unaudited; however, they include all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to present fairly the consolidated financial position of the Company at September 30, 2004, the consolidated results of operations for the three and nine months ended September 30, 2003 and 2004, and the consolidated cash flows for the nine months ended September 30, 2003 and 2004. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the entire year. Certain reclassifications have been made to the prior period’s financial statements to be consistent with the presentation in the current period (see “Investments”).

 

On June 28, 2004, the Company signed a definitive agreement to sell its UK subsidiary (“CCUK”) to an affiliate of National Grid Transco Plc (“National Grid”). As a result, the Company has restated its financial statements to present CCUK’s assets, liabilities, results of operations and cash flows as amounts from discontinued operations. Such restatements have been made for all periods presented. On August 31, 2004, the Company completed the sale of CCUK. See Note 3.

 

Effects of Restatement

 

The consolidated financial statements as presented for the three and nine months ended September 30, 2003 and 2004 have been restated to reflect the correction of errors for certain non-cash items relating to the Company’s lease accounting practices. On February 7, 2005, the Securities and Exchange Commission issued a public letter to the American Institute of Certified Public Accountants to clarify the interpretation of existing accounting literature applicable to certain leases and leasehold improvements. As a result, the Company has adjusted its method of accounting for tenant leases, ground leases and depreciation.

 

The corrections to the Company’s consolidated financial statements consist of non-cash adjustments primarily attributable to increases in site rental revenues, ground lease expense (included in site rental costs of operations) and depreciation expense. Since the adjustments affected results of operations at CCAL and the Company’s two joint ventures with Verizon Communications, they also resulted in changes to minority interests and the purchase price allocation for the acquisition of a minority interest in 2003. The adjustments for depreciation expense also effected the discontinued operations of CCUK, resulting in a change to the net gain on disposal (see Note 3). The cumulative effects of these adjustments on the Company’s consolidated statements of operations from inception through September 30, 2004 are as follows: an increase in site rental revenues of $34,258,000; an increase in site rental costs of operations of $98,822,000; an increase in depreciation expense of $180,715,000; an increase in operating losses of $245,279,000; an increase in other expense (attributable to the loss on the issuance of an interest in the Crown Atlantic joint venture) of $3,126,000; an increase in minority interests of $43,071,000; a decrease in income from operations of CCUK, and a corresponding increase in the net gain on disposal of CCUK, of $4,839,000; and an increase in net losses of $205,334,000. These adjustments have no effect on the Company’s credit (provision) for income taxes since the net impact on deferred tax assets and liabilities is offset by changes in valuation allowances. The adjustments do not affect historical net cash flows from operating, investing or financing activities, future cash flows or the timing of payments under related leases. Moreover, the corrections do not have any impact on cash balances, compliance with any financial covenants or debt instruments, or the current economic value of the Company’s leaseholds and its tower assets. The net impact of the accounting correction will generally be to accelerate ground lease expense (as such expenses are straight-lined over a period that equals or exceeds the remaining depreciable life of the tower, along with periods covered by tenant renewal options) and depreciation expense and, to a lesser extent, site rental revenues (as such revenues are only straight-lined over the current lease term, without regard to renewal options that may be exercised by a tenant).

 

7


Table of Contents

CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Historically, the Company has calculated straight-line ground lease expense (for leases with fixed escalation provisions) using the current lease term (typically five to ten years) without regard to renewal options. Further, the Company depreciated all tower assets over a 20-year useful life, without regard to the term of the underlying ground lease, because of its historical experience in successfully renewing ground leases prior to expiration. As a result of this accounting adjustment, the Company now calculates its straight-line ground lease expense using a time period that equals or exceeds the remaining depreciable life of the tower asset. Further, when a tenant has exercisable renewal options that would compel the Company to exercise existing ground lease renewal options, the Company has straight-lined the ground lease expense over a sufficient portion of such ground lease renewals to coincide with the final termination of the tenant’s renewal options. The Company has also shortened the depreciable lives of certain tower assets that have ground lease expirations prior to the end of their useful life. When calculating its straight-line site rental revenues, the Company now considers all fixed elements of a tenant lease’s escalation provisions, even if such escalation provisions also include a variable element.

 

In addition, certain issuance costs from prior financing transactions that were previously included in deferred financing costs ($387,000) or additional paid-in capital ($16,057,000) have been charged to interest and other income (expense) ($10,877,000) or included with dividends on preferred stock ($5,567,000). Such corrections were made in accordance with EITF Issue No. 98-14, Debtor’s Accounting for Changes in Line-of-Credit or Revolving-Debt Arrangements (“EITF 98-14”), and EITF Topic No. D-42, The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock (“EITF D-42”). EITF 98-14 requires that a proportionate amount of unamortized deferred financing costs be written off when the borrowing availability under a credit facility is reduced. EITF D-42 requires that financing costs related to preferred stock that were classified as additional paid-in capital upon issuance be charged to results of operations upon the subsequent purchase or redemption of such preferred stock.

 

In addition, certain foreign currency translation adjustments ($686,000) included in accumulated other comprehensive income (loss) have been charged to results of operations for 2001 in accordance with EITF Issue No. 01-5, Application of FASB Statement No. 52 to an Investment Being Evaluated for Impairment That Will Be Disposed Of (“EITF 01-5”). In 2001, the Company wrote off an investment in Brazil, but did not write off the related translation adjustments. EITF 01-5 requires that accumulated foreign currency translation adjustments be included as part of the carrying amount of a foreign investment being evaluated for impairment under a committed plan of disposal.

 

Finally, the Company has recorded (1) deferred income tax provisions resulting from the adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, pursuant to which goodwill balances were no longer amortized, and (2) an adjustment to the estimated tax on the sale of CCUK (see Note 3). The deferred income tax provisions amounted to $4,000,000, $2,000,000 and $1,500,000 for the years ended December 31, 2002 and 2003 and the nine months ended September 30, 2004, respectively. Such amounts had previously been inappropriately offset by deferred tax assets. Upon the sale of CCUK, the Company incurred a federal alternative minimum tax which has been increased by $7,000,000 for certain adjustments to the tax basis of CCUK’s assets. A deferred tax asset arising from the carryforward of such alternative minimum tax can be offset against the deferred tax liabilities, resulting in a $7,500,000 deferred income tax credit for the nine months ended September 30, 2004.

 

8


Table of Contents

CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

The adjustments to amounts previously presented in the consolidated statement of operations for the three and nine months ended September 30, 2003 and 2004 are summarized as follows.

 

     As
Previously
Stated


    Restatement
Adjustments


    As Restated

 
    

(In thousands of dollars,

except per share amounts)

 

Three Months Ended September 30, 2003:

                        

Site rental revenues

   $ 120,127     $ 1,658     $ 121,785  

Site rental costs of operations

     40,062       4,098       44,160  

Depreciation expense

     60,846       9,430       70,276  

Operating income (loss)

     (7,308 )     (11,870 )     (19,178 )

Interest and other income (expense)

     (35,104 )     (8,278 )     (43,382 )

Credit (provision) for income taxes

     (85 )     (500 )     (585 )

Minority interests

     151       1,345       1,496  

Net income (loss)

     (99,678 )     (19,303 )     (118,981 )

Net income (loss) per common share—basic and diluted

     (0.50 )     (0.09 )     (0.59 )

Three Months Ended September 30, 2004:

                        

Site rental revenues

   $ 134,090     $ 1,139     $ 135,229  

Site rental costs of operations

     42,196       3,558       45,754  

Depreciation expense

     60,587       9,443       70,030  

Operating income (loss)

     11,628       (11,862 )     (234 )

Credit (provision) for income taxes

     (144 )     7,000       6,856  

Minority interests

     (1,729 )     1,185       (544 )

Income from discontinued operations, net of tax

     517,449       (7,000 )     510,449  

Net income (loss)

     461,333       (10,677 )     450,656  

Net income (loss) per common share—basic and diluted

     2.02       (0.04 )     1.98  

Nine Months Ended September 30, 2003:

                        

Site rental revenues

   $ 350,608     $ 4,843     $ 355,451  

Site rental costs of operations

     120,655       12,233       132,888  

Depreciation expense

     183,072       27,870       210,942  

Operating income (loss)

     (24,261 )     (35,260 )     (59,521 )

Interest and other income (expense)

     (45,938 )     (11,404 )     (57,342 )

Credit (provision) for income taxes

     (328 )     (1,500 )     (1,828 )

Minority interests

     (1,136 )     5,044       3,908  

Net income (loss)

     (249,525 )     (43,120 )     (292,645 )

Dividends on preferred stock, net of gains (losses) on purchases of preferred stock

     (43,948 )     (1,952 )     (45,900 )

Net income (loss) per common share—basic and diluted

     (1.36 )     (0.21 )     (1.57 )

Nine Months Ended September 30, 2004:

                        

Site rental revenues

   $ 394,422     $ 3,494     $ 397,916  

Site rental costs of operations

     124,974       10,708       135,682  

Depreciation expense

     182,931       28,518       211,449  

Operating income (loss)

     19,480       (35,732 )     (16,252 )

Interest and other income (expense)

     (39,966 )     (387 )     (40,353 )

Credit (provision) for income taxes

     (481 )     6,000       5,519  

Minority interests

     (4,538 )     3,586       (952 )

Income from discontinued operations, net of tax

     548,448       (7,000 )     541,448  

Net income (loss)

     356,772       (33,533 )     323,239  

Net income (loss) per common share—basic and diluted

     1.48       (0.15 )     1.33  

 

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Table of Contents

CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

The following tables describe the effects of the restatement on net income (loss) and the related per share amounts for the three and nine months ended September 30, 2003 and 2004.

 

     Three Months Ended
September 30,


    Nine Months Ended
September 30,


 
     2003

    2004

    2003

    2004

 
     (In thousand of dollars, except per share amounts)  

Net income (loss), as previously stated

   $ (99,678 )   $ 461,333     $ (249,525 )   $ 356,772  

Adjustments to site rental revenues

     1,658       1,139       4,843       3,494  

Adjustments to site rental costs of operations

     (4,098 )     (3,558 )     (12,233 )     (10,708 )

Adjustments to depreciation expense

     (9,430 )     (9,443 )     (27,870 )     (28,518 )

Adjustments to interest and other income (expense)

     (8,278 )     —         (11,404 )     (387 )

Adjustments to credit (provision) for income taxes

     (500 )     7,000       (1,500 )     6,000  

Adjustments to minority interests

     1,345       1,185       5,044       3,586  

Adjustments to income from discontinued operations, net of tax

     —         (7,000 )     —         (7,000 )
    


 


 


 


Net income (loss), as restated

     (118,981 )     450,656       (292,645 )     323,239  

Dividends on preferred stock, net of gains (losses) on purchases of preferred stock, as restated

     (9,496 )     (9,836 )     (45,900 )     (28,864 )
    


 


 


 


Net income (loss) after deduction of dividends on preferred stock, net of gains (losses) on purchases of preferred stock, as restated

   $ (128,477 )   $ 440,820     $ (338,545 )   $ 294,375  
    


 


 


 


Per common share—basic and diluted:

                                

Net income (loss), as previously stated

   $ (0.50 )   $ 2.02     $ (1.36 )   $ 1.48  

Adjustments to site rental revenues

     0.01       0.01       0.02       0.01  

Adjustments to site rental costs of operations

     (0.02 )     (0.02 )     (0.06 )     (0.05 )

Adjustments to depreciation expense

     (0.05 )     (0.04 )     (0.13 )     (0.13 )

Adjustments to interest and other income (expense)

     (0.04 )     —         (0.05 )     —    

Adjustments to credit (provision) for income taxes

     —         0.03       (0.01 )     0.03  

Adjustments to minority interests

     0.01       0.01       0.03       0.02  

Adjustments to income from discontinued operations, net of tax

     —         (0.03 )     —         (0.03 )

Adjustments to dividends on preferred stock, net of gains (losses) on purchases of preferred stock

     —         —         (0.01 )     —    
    


 


 


 


Net income (loss), as restated

   $ (0.59 )   $ 1.98     $ (1.57 )   $ 1.33  
    


 


 


 


 

The following table describes the effects of the restatement on comprehensive income (loss) for the three and nine months ended September 30, 2003 and 2004.

 

     Three Months Ended
September 30,


    Nine Months Ended
September 30,


 
     2003

    2004

    2003

    2004

 
     (In thousand of dollars)  

Comprehensive income (loss), as previously stated

   $ (87,678 )   $ 239,416     $ (165,313 )   $ 148,693  

Adjustments to net income (loss)

     (19,303 )     (10,677 )     (43,120 )     (33,533 )

Adjustments to foreign currency translation adjustments

     (484 )     (1,789 )     (5,846 )     1,593  
    


 


 


 


Comprehensive income (loss), as restated

   $ (107,465 )   $ 226,950     $ (214,279 )   $ 116,753  
    


 


 


 


 

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Table of Contents

CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

The following tables describe the cumulative effects of the restatement on the consolidated balance sheets as of December 31, 2003 and September 30, 2004.

 

    Property
and
Equipment


    Goodwill

  Deferred Site
Rental
Receivable(a)


  Deferred
Financing
Costs and
Other
Assets


    Deferred
Rental
Revenues
and
Other
Accrued
Liabilities


  Deferred
Ground
Lease
Payable


  Other
Liabilities


    Minority
Interests


    Stockholders’
Equity


 
    (in thousand of dollars)  

Balances as of December 31, 2003, as previously stated

  $ 3,755,073     $ 267,071   $ —     $ 146,786     $ 106,384   $ —     $ 55,978     $ 208,333     $ 1,984,413  

Reclassification of previously stated amounts

    —         —       45,887     (41,694 )     —       8,134     (8,134 )     —         —    

Adjustments to site rental revenues

    —         —       30,764     —         —       —       —         —         30,764  

Adjustments to site rental costs of operations

    —         —       —       —         —       88,114     —         —         (88,114 )

Adjustments to depreciation expense

    (152,197 )     —       —       —         —       —       —         —         (152,197 )

Adjustments to credit (provision) for income taxes

    —         —       —       —         —       —       6,000       —         (6,000 )

Adjustments to minority interests

    —         —       —       —         —       —       —         (39,485 )     39,485  

Adjustments to purchase price allocation for acquisition

    4,386       3,367     —       —         —       —       —         10,879       (3,126 )

Foreign currency translation adjustments (b)

    (13,692 )     —       2,014     —         —       2,276     —         (3,082 )     (10,872 )
   


 

 

 


 

 

 


 


 


Balances as of December 31, 2003, as restated

  $ 3,593,570     $ 270,438   $ 78,665   $ 105,092     $ 106,384   $ 98,524   $ 53,844     $ 176,645     $ 1,794,353  
   


 

 

 


 

 

 


 


 


Balances as of September 30, 2004, as previously stated

  $ 3,583,257     $ 267,071   $ —     $ 133,105     $ 121,303   $ —     $ 54,037     $ 211,176     $ 2,128,098  

Reclassification of previously stated amounts

    —         —       51,024     (47,235 )     —       10,626     (10,626 )     —         —    

Adjustments to site rental revenues

    —         —       34,258     —         —       —       —         —         34,258  

Adjustments to site rental costs of operations

    —         —       —       —         —       98,822     —         —         (98,822 )

Adjustments to depreciation expense

    (180,715 )     —       —       —         —       —       —         —         (180,715 )

Adjustments to interest and other income (expense)

    —         —       —       (387 )     —       —       —         —         (387 )

Adjustments to credit (provision) for income taxes

    —         —       —       —         —       —       —         —         —    

Adjustments to minority interests

    —         —       —       —         —       —       —         (43,071 )     43,071  

Adjustments to income from discontinued operations, net of tax

    —         —       —       —         7,000     —       —         —         (7,000 )

Adjustments to purchase price allocation for acquisition

    4,386       3,367     —       —         —       —       —         10,879       (3,126 )

Foreign currency translation adjustments (b)

    (11,608 )     —       1,634     —         —       1,927     —         (2,622 )     (9,279 )
   


 

 

 


 

 

 


 


 


Balances as of September 30, 2004, as restated

  $ 3,395,320     $ 270,438   $ 86,916   $ 85,483     $ 128,303   $ 111,375   $ 43,411     $ 176,362     $ 1,906,098  
   


 

 

 


 

 

 


 


 



(a) Balances as of December 31, 2003 and September 30, 2004, as restated, include current portion of $2,332 and $3,250, respectively.
(b) Amounts represent the effect of foreign currency translation for the lease accounting adjustments to the Australian operations.

 

Investments

 

As of December 31, 2003 and September 30, 2004, all investments (consisting of auction rate securities) were classified as held-to-maturity since the Company had the positive intent and ability to hold such investments until they matured. Held-to-maturity securities are stated at amortized cost. Although the Company’s auction rate securities had contractual maturities which exceeded one year, the underlying interest rates on such securities reset at intervals of less than 90 days. Therefore, these auction rate securities were priced and subsequently traded as short-term investments because of the interest rate reset feature. As a result, the Company has classified its auction rate securities as short-term investments in the accompanying consolidated balance sheet. The 2003 and 2004 balances of such securities was previously classified as cash equivalents due to the liquidity and pricing reset feature. In 2004, these securities were reclassified as short-term investments to conform with the current presentation. There was no impact on net earnings or cash flow from operations as a result of the reclassification.

 

Stock-Based Compensation

 

The Company used the “intrinsic value based method” of accounting for its stock-based employee compensation plans until December 31, 2002. This method does not result in the recognition of compensation expense when employee stock options are granted if the exercise price of the options equals or exceeds the fair market value of the stock at the date of grant. On January 1, 2003, the Company adopted the fair value method of accounting (using the “prospective” method of transition) for stock-based employee compensation awards granted on or after that date (see Note 2). The following table shows the pro forma effect on the Company’s net income (loss) and income (loss) per share as if compensation cost had been recognized for all stock options based on their fair value at the date of grant. The pro forma effect of stock options on the Company’s net income (loss) for those periods may not be representative of the pro forma effect for future periods due to the impact of vesting and potential future awards.

 

     Three Months Ended
September 30,


    Nine Months Ended
September 30,


 
     2003

    2004

    2003

    2004

 
     (As restated)     (As restated)     (As restated)     (As restated)  
     (In thousands of dollars, except per share amounts)  

Net income (loss), as reported

   $ (118,981 )   $ 450,656     $ (292,645 )   $ 323,239  

Add: Stock-based employee compensation expense included in reported net loss

     10,444       8,326       20,570       19,047  

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards

     (16,244 )     (10,842 )     (40,165 )     (27,271 )
    


 


 


 


Net income (loss), as adjusted

     (124,781 )     448,140       (312,240 )     315,015  

Dividends on preferred stock, net of gains (losses) on purchases of preferred stock

     (9,496 )     (9,836 )     (45,900 )     (28,864 )
    


 


 


 


Net income (loss) applicable to common stock for basic and diluted computations, as adjusted

   $ (134,277 )   $ 438,304     $ (358,140 )   $ 286,151  
    


 


 


 


Net income (loss) per common share—basic and diluted:

                                

As reported

   $ (0.59 )   $ 1.98     $ (1.57 )   $ 1.33  
    


 


 


 


As adjusted

   $ (0.62 )   $ 1.97     $ (1.65 )   $ 1.29  
    


 


 


 


 

11


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CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2. New Accounting Pronouncements

 

In June 2001, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (“SFAS 143”). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the related asset retirement costs. The fair value of a liability for an asset retirement obligation is to be recognized in the period in which it is incurred and can be reasonably estimated. Such asset retirement costs are to be capitalized as part of the carrying amount of the related long-lived asset and depreciated over the asset’s estimated useful life. Fair value estimates of liabilities for asset retirement obligations will generally involve discounted future cash flows. Periodic accretion of such liabilities due to the passage of time is to be recorded as an operating expense. The provisions of SFAS 143 were effective for fiscal years beginning after June 15, 2002, with initial application as of the beginning of the fiscal year. The Company adopted the requirements of SFAS 143 as of January 1, 2003. The adoption of SFAS 143 resulted in the recognition of liabilities amounting to $1,359,000 for contingent retirement obligations under certain tower site land leases (included in other long-term liabilities on the Company’s consolidated balance sheet), the recognition of asset retirement costs amounting to $808,000 (included in property and equipment on the Company’s consolidated balance sheet), and the recognition of a charge for the cumulative effect of the change in accounting principle amounting to $551,000. Accretion expense related to liabilities for contingent retirement obligations (included in depreciation, amortization and accretion on the Company’s consolidated statement of operations) amounted to $46,000 and $51,000 for the three months ended September 30, 2003 and 2004, respectively, and $133,000 and $151,000 for the nine months ended September 30, 2003 and 2004, respectively. At December 31, 2003 and September 30, 2004, liabilities for contingent retirement obligations amounted to $1,584,000 and $1,628,000, respectively.

 

In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”). SFAS 146 replaces the previous accounting guidance provided by Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” (“EITF 94-3”). SFAS 146 requires that costs associated with exit or disposal activities be recognized when they are incurred, rather than at the date of a commitment to an exit or disposal plan (as provided by EITF 94-3). Examples of costs covered by SFAS 146 include certain employee severance costs and lease termination costs that are associated with a restructuring or discontinued operation. The provisions of SFAS 146 were effective for exit or disposal activities initiated after December 31, 2002, and are to be applied prospectively. The Company adopted the requirements of SFAS 146 as of January 1, 2003. See Note 11.

 

In November 2002, the FASB’s Emerging Issues Task Force released its final consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). EITF 00-21 addresses certain aspects of the accounting for arrangements under which multiple revenue-generating activities will be performed, including the determination of whether an arrangement involving multiple deliverables contains more than one unit of accounting. The guidance in EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company adopted the provisions of EITF 00-21 as of July 1, 2003, and such adoption did not have a significant effect on its consolidated financial statements.

 

In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure (“SFAS 148”). SFAS 148 amends Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the provisions of SFAS 123 to require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results of operations. The Company adopted the disclosure requirements of SFAS 148 as of December 31, 2002. On January 1, 2003, the Company adopted the fair value method of accounting for stock-based employee compensation using the “prospective” method of transition as provided by SFAS 148. Under this transition method, the Company is recognizing compensation cost for all employee awards granted on or after January 1, 2003. The adoption of this new accounting method did not have a significant effect on the Company’s consolidated financial statements.

 

12


Table of Contents

CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”). In December 2003, the FASB issued a revised version of FIN 46. FIN 46 clarifies existing accounting literature regarding the consolidation of entities in which a company holds a “controlling financial interest”. A majority voting interest in an entity has generally been considered indicative of a controlling financial interest. FIN 46 specifies other factors (“variable interests”) which must be considered when determining whether a company holds a controlling financial interest in, and therefore must consolidate, an entity (“variable interest entities”). The provisions of FIN 46, as revised, are effective for the first reporting period ending after March 15, 2004. The Company adopted the provisions of FIN 46 as of March 31, 2004, and such adoption did not have a significant effect on its consolidated financial statements.

 

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“SFAS 150”). SFAS 150 requires that mandatorily redeemable financial instruments issued in the form of shares be classified as liabilities, and specifies certain measurement and disclosure requirements for such instruments. The provisions of SFAS 150 were effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted the requirements of SFAS 150 as of July 1, 2003. The Company determined that (1) its 12¾% Exchangeable Preferred Stock was to be reclassified as a liability upon adoption of SFAS 150 and (2) its 8¼% Convertible Preferred Stock and its 6.25% Convertible Preferred Stock were not to be reclassified as liabilities, since the conversion features caused them to be contingently redeemable rather than mandatorily redeemable financial instruments. In addition, the dividends on the Company’s 12¾% Exchangeable Preferred Stock were included in interest expense on its consolidated statement of operations beginning on July 1, 2003. The Company redeemed the remaining outstanding shares of 12¾% Exchangeable Preferred Stock in December of 2003.

 

3. Sale of CCUK

 

On June 28, 2004, the Company signed a definitive agreement to sell CCUK to an affiliate of National Grid for $2,035,000,000 in cash, subject to certain working capital type adjustments. On August 31, 2004, the Company completed the sale of CCUK. The proceeds for the transaction amounted to $2,027,973,000, after taking into account preliminary working capital type adjustments. In accordance with the terms of the Company’s 2000 Credit Facility, the Company was required to use $1,275,385,000 of the proceeds from the transaction to fully repay the outstanding borrowings under the 2000 Credit Facility (see Note 5). The remaining proceeds from the transaction will be used for general corporate purposes, which could include the repayment of outstanding indebtedness and/or investments in new business opportunities. Under the terms of the indentures governing the Company’s public debt securities, any proceeds from the sale of CCUK not invested in qualifying assets within one year must be offered to purchase such debt securities from the Company’s bondholders at the outstanding principal amount plus accrued interest. On September 10, 2004, in order to satisfy these requirements under the indentures, the Company voluntarily commenced an offer to purchase certain of its outstanding public debt securities in advance of the one year time period. On October 12, 2004, the Company purchased $465,000 in outstanding principal amount of tendered notes (see Note 5).

 

13


Table of Contents

CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

The carrying amounts of CCUK’s assets and liabilities are as follows:

 

     December 31,
2003


  

August 31,
2004

(Date of sale)


          (As restated)
     (In thousands of dollars)

Assets:

             

Cash and cash equivalents

   $ 26,243    $ 53,621

Receivables

     43,834      37,923

Inventories

     5,927      6,384

Prepaid expenses and other current assets

     49,605      40,458

Property and equipment, net

     986,872      972,403

Goodwill

     939,642      949,782

Other assets, net

     387      809
    

  

Assets of discontinued operations

   $ 2,052,510    $ 2,061,380
    

  

Liabilities:

             

Accounts payable

   $ 30,964    $ 30,930

Other current liabilities

     166,795      133,545

Other liabilities

     155,785      182,522
    

  

Liabilities of discontinued operations

   $ 353,544    $ 346,997
    

  

 

As of August 31, 2004, the Company’s consolidated stockholders’ equity accounts included foreign currency translation adjustments and a minimum pension liability adjustment of $232,893,000 and $(11,513,000), respectively, related to CCUK’s assets and liabilities. Such adjustments were included in accumulated other comprehensive income (loss) on the Company’s consolidated balance sheet and are part of the calculation of the net gain on the sale of CCUK.

 

The Company has recognized a net gain (as restated) of $495,049,000 during the third quarter of 2004 in connection with the sale of CCUK. Such gain is net of taxes of $18,000,000 (as restated), representing the Company’s estimated U.S. federal alternative minimum tax resulting from the transaction. This tax amount is included in other accrued liabilities on the Company’s consolidated balance sheet as of September 30, 2004. The cash proceeds from the transaction ($2,022,566,000), the cash payments for fees and expenses for the transaction ($12,776,000), and the net cash payments received from CCUK for the nine months ended September 30, 2004 ($54,504,000) are included as discontinued operations on the Company’s consolidated statement of cash flows. The net gain is calculated as follows (in thousands of dollars, as restated):

 

Proceeds from sale

   $ 2,027,973  

Assets of discontinued operations

     (2,061,380 )

Liabilities of discontinued operations

     346,997  

Foreign currency translation adjustments

     232,893  

Minimum pension liability adjustment

     (11,513 )

Fees and expenses

     (12,776 )

Severance costs

     (2,663 )

Compensation charges related to modified stock-based employee awards

     (6,482 )
    


Net gain on disposal of CCUK before income taxes

     513,049  

Estimated federal alternative minimum tax

     (18,000 )
    


Net gain on disposal of CCUK, net of tax

   $ 495,049  
    


 

Upon the closing of the sale of CCUK to National Grid, the Company’s stock-based employee compensation awards (comprised of restricted common stock and stock options) granted to CCUK employees (other than the President and Managing Director of CCUK) were modified as to the terms of their vesting and exercise. Such awards will continue to vest after the closing until either April 1, 2005 or September 30, 2005, depending on the position held by the CCUK employee. Further, vested stock options will be exercisable until either September 30, 2005 or December 30, 2005, again depending on the position held by the CCUK employee. As of August 31, 2004, the number of shares of the Company’s common stock subject to awards held by CCUK employees includes (1) 351,533 shares of restricted common stock, (2) 620,432 shares for unvested stock options and (3) 1,262,035

 

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CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

shares for vested stock options. The modifications to these awards have generally been treated as the grant of new awards for accounting purposes. As such, compensation charges related to the modified awards amounting to $6,482,000 have been recognized as part of the calculation of the net gain on the sale of CCUK. The awards held by the President and Managing Director of CCUK are subject to a severance agreement with stock options vesting and restricted common stock eligible for vesting over a period of 36 months from the closing date of the CCUK transaction. See Notes 7 and 12.

 

CCUK’s financial results have historically been presented as a separate operating segment (see Note 10). A summary of CCUK’s operating results is as follows:

 

     Three Months
Ended
September 30,
2003


    Two Months
Ended
August 31,
2004
(Date of sale)


    Nine Months
Ended
September 30,
2003


   

Eight Months

Ended

August 31,

2004

(Date of sale)


 
           (As restated)           (As restated)  
     (In thousands of dollars)  

Net revenues

   $ 98,054     $ 74,700     $ 271,950     $ 291,399  
    


 


 


 


Income before income taxes and cumulative effect of change in accounting principle

   $ 9,227     $ 29,322     $ 25,393     $ 73,561  

Provision for income taxes

     (4,151 )     (13,922 )     (11,292 )     (27,162 )

Cumulative effect of change in accounting principle for asset retirement obligations

     —         —         (1,484 )     —    
    


 


 


 


Income from discontinued operations

   $ 5,076     $ 15,400     $ 12,617     $ 46,399  
    


 


 


 


 

4. Goodwill and Other Intangible Assets

 

As of December 31, 2003 and September 30, 2004, the Company had consolidated goodwill of $270,438,000, as restated (including $215,061,000, as restated, at CCUSA and $55,377,000 at Crown Atlantic).

 

The value of site rental contracts from acquisitions included in CCUSA are accounted for as other intangible assets with finite useful lives, and are included in deferred financing costs and other assets on the Company’s consolidated balance sheet. A summary of other intangible assets with finite useful lives is as follows:

 

     Nine Months Ended September 30, 2004

 
     Gross
Carrying
Amount


   Accumulated
Amortization


   

Net Book

Value


 
     (In thousands of dollars)  

Balance at beginning of period

   $ 30,005    $ (14,653 )   $ 15,352  

Amortization expense

     —        (1,389 )     (1,389 )
    

  


 


Balance at end of period

   $ 30,005    $ (16,042 )   $ 13,963  
    

  


 


Estimated aggregate annual amortization expense:

                       

Years ending December 31, 2004 through 2008

          $ 1,852          
           


       

 

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CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

5. Long-term Debt

 

Long-term debt consists of the following:

 

     December 31,
2003


   

September 30,

2004


     (In thousands of dollars)

2000 Credit Facility

   $ 1,289,750     $ —  

Crown Atlantic Credit Facility

     195,000       180,000

4% Convertible Senior Notes due 2010

     230,000       230,000

10 3/8% Senior Discount Notes due 2011, net of discount

     12,366       11,341

9% Senior Notes due 2011

     161,712       26,133

11 1/4% Senior Discount Notes due 2011, net of discount

     10,979       10,700

9 1/2% Senior Notes due 2011

     114,265       4,753

10 3/4% Senior Notes due 2011

     428,695       428,695

9 3/8% Senior Notes due 2011

     407,225       407,225

7.5% Senior Notes due 2013

     300,000       300,000

7.5% Series B Senior Notes due 2013

     300,000       300,000
    


 

       3,449,992       1,898,847

Less: current maturities

     (267,142 )     —  
    


 

     $ 3,182,850     $ 1,898,847
    


 

 

2000 Credit Facility

 

On June 28, 2004, the Company signed a definitive agreement to sell CCUK to an affiliate of National Grid. On August 31, 2004, the Company completed the sale of CCUK. In accordance with the terms of the 2000 Credit Facility, the Company was required to use $1,286,568,000 of the proceeds from the transaction to fully repay the outstanding borrowings under the 2000 Credit Facility, including accrued interest and fees of $11,183,000. The repayment of the 2000 Credit Facility resulted in a loss of $13,886,000, consisting of the write-off of unamortized deferred financing costs. Such loss is included in interest and other income (expense) on the Company’s consolidated statement of operations. See Note 3.

 

Crown Atlantic Credit Facility

 

In February of 2004, Crown Atlantic amended its credit facility to reduce the available borrowings from $301,050,000 to $250,000,000. The amendment of the credit facility resulted in a loss of $387,000 consisting of the write-off of certain financing costs (as restated). Such loss is included in interest and other income (expense) on the Company’s consolidated statement of operations. During the nine months ended September 30, 2004, Crown Atlantic repaid $15,000,000 in outstanding borrowings under the Crown Atlantic Credit Facility. Crown Atlantic utilized cash provided by its operations to effect this repayment.

 

Purchases of the Company’s Debt Securities

 

On December 5, 2003, the Company commenced cash tender offers and consent solicitations for all of its outstanding 9% Senior Notes and 9½% Senior Notes. On December 31, 2003, in accordance with the terms of the tender offers, the purchase prices for the tendered notes (excluding accrued interest through the purchase date) were determined to be 107.112% of the outstanding principal amount for the 9% Senior Notes and 109.140% of the outstanding principal amount for the 9½% Senior Notes. Such purchase prices include a consent payment of $20.00 for each $1,000 principal amount of the tendered notes. On January 7, 2004, the Company (1) utilized $146,984,000 of its cash to purchase the $135,579,000 in outstanding principal amount of the tendered 9% Senior Notes, including accrued interest thereon of $1,763,000, and (2) utilized $124,030,000 of its cash to purchase the $109,512,000 in outstanding principal amount of the tendered 9½% Senior Notes, including accrued interest thereon of $4,508,000. The purchase of the tendered 9% Senior Notes resulted in a loss of $12,466,000 for the first quarter of 2004, consisting of the write-off of unamortized deferred financing costs ($2,823,000) and the excess of the total purchase price over the carrying value of the tendered notes ($9,643,000). The purchase of the tendered 9½% Senior Notes resulted in a loss of $11,652,000 for the first quarter of 2004, consisting of the write-off of unamortized deferred financing costs ($1,642,000) and the excess of the total purchase price over the carrying value of the tendered notes

 

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

($10,010,000). Such losses are included in interest and other income (expense) on the Company’s consolidated statement of operations for the nine months ended September 30, 2004. The 9% Senior Notes and 9½% Senior Notes that were tendered through December 31, 2003 have been classified as current maturities of long-term debt on the Company’s consolidated balance sheet as of December 31, 2003.

 

In January of 2004, the Company (1) utilized $1,570,000 of its cash to purchase $1,500,000 in outstanding principal amount at maturity of its 10 3/8% Discount Notes and (2) utilized $1,046,000 of its cash to purchase $1,000,000 in outstanding principal amount at maturity of its 11 1/4% Discount Notes, both in public market transactions. The debt purchases resulted in losses of $249,000 that are included in interest and other income (expense) on the Company’s consolidated statement of operations for the nine months ended September 30, 2004.

 

Under the terms of the indentures governing the Company’s public debt securities, any proceeds from the sale of CCUK not invested in qualifying assets within one year must be offered to purchase such debt securities from the Company’s bondholders at the outstanding principal amount plus accrued interest (see Note 3). On September 10, 2004, in order to satisfy these requirements under the indentures, the Company voluntarily commenced an offer to purchase for cash up to $216,412,000 of its 10 3/4% Senior Notes, $205,574,000 of its 9 3/8% Senior Notes, $151,445,000 of its 7.5% Senior Notes and $151,445,000 of its 7.5% Series B Senior Notes in advance of the one year time period. The offer to purchase these securities expired on October 8, 2004, at which time the Company accepted an aggregate of $465,000 in notes that had been tendered. On October 12, 2004, the Company utilized $475,000 of its cash to purchase the $465,000 in outstanding principal amount of the tendered notes, including accrued interest thereon of $10,000. The purchase of the tendered notes will result in a loss of $10,000 for the fourth quarter of 2004, consisting of the write-off of unamortized deferred financing costs. Such loss will be included in interest and other income (expense) on the Company’s consolidated statement of operations for the year ending December 31, 2004.

 

The Company anticipates that it may purchase additional debt securities using a portion of the proceeds from the sale of CCUK. See Notes 3 and 12.

 

Reporting Requirements Under the Indentures Governing the Company’s Debt Securities (the “Indentures”)

 

The following information (as such capitalized terms are defined in the Indentures) is presented solely as a requirement of the Indentures; such information is not intended as an alternative measure of financial position, operating results or cash flow from operations (as determined in accordance with generally accepted accounting principles). Furthermore, the Company’s measure of the following information may not be comparable to similarly titled measures of other companies.

 

Summarized financial information for (1) the Company and its Restricted Subsidiaries and (2) the Company’s Unrestricted Subsidiaries is as follows:

 

     September 30, 2004

     Company
and Restricted
Subsidiaries


   Unrestricted
Subsidiaries


   Consolidation
Eliminations


   

Consolidated

Total


     (As restated)    (As restated)    (As restated)     (As restated)
     (In thousands of dollars)

Cash and cash equivalents

   $ 684,497    $ 72,508    $ —       $ 757,005

Other current assets

     224,759      6,942      —         231,701

Property and equipment, net

     2,761,646      633,674      —         3,395,320

Investments in Unrestricted Subsidiaries

     433,311      —        (433,311 )     —  

Goodwill

     215,061      55,377      —         270,438

Deferred site rental receivable

     80,578      3,088      —         83,666

Other assets, net

     52,575      32,908      —         85,483
    

  

  


 

     $ 4,452,427    $ 804,497    $ (433,311 )   $ 4,823,613
    

  

  


 

Current liabilities

   $ 161,411    $ 18,403    $ —       $ 179,814

Long-term debt, less current maturities

     1,718,847      180,000      —         1,898,847

Deferred ground lease payable

     88,426      22,949      —         111,375

Other liabilities

     40,224      3,187      —         43,411

Minority interests

     29,715      146,647      —         176,362

Redeemable preferred stock

     507,706      —        —         507,706

Stockholders’ equity

     1,906,098      433,311      (433,311 )     1,906,098
    

  

  


 

     $ 4,452,427    $ 804,497    $ (433,311 )   $ 4,823,613
    

  

  


 

 

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CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

     Three Months Ended September 30, 2004

    Nine Months Ended September 30, 2004

 
     Company
and
Restricted
Subsidiaries


    Unrestricted
Subsidiaries


    Consolidated
Total


    Company
and
Restricted
Subsidiaries


    Unrestricted
Subsidiaries


   

Consolidated

Total


 
     (As restated)     (As restated)     (As restated)     (As restated)     (As restated)     (As restated)  
     (In thousands of dollars)  

Net revenues

   $ 119,809     $ 30,376     $ 150,185     $ 355,993     $ 90,095     $ 446,088  

Costs of operations (exclusive of depreciation, amortization and accretion)

     44,364       12,176       56,540       133,965       35,771       169,736  

General and administrative

     19,181       3,460       22,641       57,881       9,055       66,936  

Corporate development

     211       —         211       1,021       —         1,021  

Restructuring charges (credits)

     (428 )     (17 )     (445 )     (461 )     (17 )     (478 )

Asset write-down charges

     —         —         —         2,772       1,044       3,816  

Non-cash general and administrative compensation charges

     1,296       146       1,442       8,907       953       9,860  

Depreciation, amortization and accretion

     57,409       12,621       70,030       173,838       37,611       211,449  
    


 


 


 


 


 


Operating income (loss)

     (2,224 )     1,990       (234 )     (21,930 )     5,678       (16,252 )

Interest and other income (expense)

     (12,381 )     (1,209 )     (13,590 )     (36,732 )     (3,621 )     (40,353 )

Interest expense and amortization of deferred financing costs

     (49,765 )     (2,516 )     (52,281 )     (158,515 )     (7,656 )     (166,171 )

Credit for income taxes

     6,856       —         6,856       5,519       —         5,519  

Minority interests

     1,356       (1,900 )     (544 )     4,033       (4,985 )     (952 )

Income (loss) from discontinued operations

     510,450       (1 )     510,449       541,617       (169 )     541,448  
    


 


 


 


 


 


Net income (loss)

   $ 454,292     $ (3,636 )   $ 450,656     $ 333,992     $ (10,753 )   $ 323,239  
    


 


 


 


 


 


 

Tower Cash Flow and Adjusted Consolidated Cash Flow for the Company and its Restricted Subsidiaries is as follows under the indentures governing the 4% Convertible Senior Notes, the 10 3/4% Senior Notes, the 9 3/8% Senior Notes, the 7.5% Senior Notes and the 7.5% Series B Senior Notes:

 

    

(As restated)

(In thousands

of dollars)


 

Tower Cash Flow, for the three months ended September 30, 2004

   $ 99,346  
    


Consolidated Cash Flow, for the twelve months ended September 30, 2004

   $ 397,946  

Less: Tower Cash Flow, for the twelve months ended September 30, 2004

     (425,092 )

Plus: four times Tower Cash Flow, for the three months ended September 30, 2004

     397,384  
    


Adjusted Consolidated Cash Flow, for the twelve months ended September 30, 2004

   $ 370,238  
    


 

The amounts presented above for Tower Cash Flow, Consolidated Cash Flow and Adjusted Consolidated Cash Flow include the operating results from CCUK through August 31, 2004 (the date of sale). See Note 3.

 

Letters of Credit

 

The Company has issued letters of credit to various landlords, insurers and other parties in connection with certain contingent retirement obligations under various tower site land leases and certain other contractual obligations. The letters of credit were issued through one of CCUSA’s lenders in amounts aggregating $6,391,000 and expire on various dates through October 2005.

 

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CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

6. Redeemable Preferred Stock

 

Redeemable preferred stock ($.01 par value, 20,000,000 shares authorized) consists of the following:

 

     December 31,
2003


  

September 30,

2004


     (In thousands of dollars)

8¼% Cumulative Convertible Redeemable Preferred Stock; shares issued and outstanding: 200,000 (stated net of unamortized value of warrants; mandatory redemption and aggregate liquidation value of $200,000)

   $ 196,614    $ 196,922

6.25% Convertible Preferred Stock; shares issued and outstanding: 6,361,000 (stated net of unamortized issue costs; mandatory redemption and aggregate liquidation value of $318,050)

     310,088      310,784
    

  

     $ 506,702    $ 507,706
    

  

 

In March and June of 2004, the Company paid its quarterly dividends on the 8¼% Convertible Preferred Stock by issuing a total of 600,000 shares of its common stock. As allowed by the Deposit Agreement relating to dividend payments on the 8¼% Convertible Preferred Stock, the Company purchased the 600,000 shares of common stock from the dividend paying agent for a total of $8,247,000 in cash. The Company utilized cash from an Unrestricted investment subsidiary to effect the stock purchases. The Company may choose to continue issuances and purchases of stock in the future in order to offset dilution caused by the issuance of common stock as dividends on its preferred stock. See Note 7.

 

7. Stockholders’ Equity

 

In February of 2004, the Company issued 35,400 shares of common stock to the non-executive members of its Board of Directors. These shares had a grant-date fair value of $11.85 per share. In connection with these shares, the Company recognized non-cash general and administrative compensation charges of $419,000 for the three months ended March 31, 2004.

 

In March, April and May of 2004, the Company granted approximately 1,343,000 shares of restricted common stock to approximately 500 of its employees (including approximately 175 employees of CCUK). These restricted shares had a weighted-average grant-date fair value of $13.99 per share, determined based on the closing market price of the Company’s common stock on the grant dates. The restrictions on the shares will expire in various annual amounts over the vesting period of four years, with provisions for accelerated vesting based on the market performance of the Company’s common stock. In connection with these restricted shares, the Company will recognize non-cash general and administrative compensation charges of approximately $18,800,000 over the vesting period. Such charges will be reduced in the event that any of the restricted shares are forfeited before they become vested. In order to reach the first target level for accelerated vesting of these restricted shares, the market price of the Company’s common stock would have to close at or above $14.81 per share (125% of the base price of $11.85 per share) for twenty consecutive trading days. Reaching the first target level would result in the restrictions expiring with respect to one third of these restricted shares. In order to reach the second and third target levels for accelerated vesting of these restricted shares, the market price of the Company’s common stock would have to close at or above $18.52 per share and $23.14 per share, respectively (125% of each of the previous target levels), for twenty consecutive trading days. Reaching each of the second and third target levels would result in the restrictions expiring with respect to an additional third of these restricted shares. The vesting terms for the restricted shares held by CCUK employees were modified upon the closing of the sale of CCUK (see Notes 3 and 12).

 

On April 27, 2004, the market performance of the Company’s common stock reached the third (and final) target level for accelerated vesting of the restricted common shares that had been issued during the first quarter of 2003. This third target level was reached when the market price of the Company’s common stock closed at or above $12.45 per share (150% of the second target level of $8.30 per share) for twenty consecutive trading days. As a result, the restrictions expired with respect to the final third of such outstanding shares during the second quarter of 2004. The acceleration of the vesting for these shares resulted in the recognition of non-cash general and administrative compensation charges of $5,378,000 for the three months ended June 30, 2004. All of the executives

 

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

and employees elected to sell a portion of their vested shares in order to pay their respective minimum withholding tax liabilities, and the Company arranged to purchase these shares in order to facilitate the stock sales. The Company purchased approximately 587,300 of such shares of common stock (at a price of $14.92 per share) for a total of $8,762,000 in cash. The Company utilized cash from an Unrestricted investment subsidiary to effect the stock purchase.

 

In August of 2004, the Company began purchasing its common stock in public market transactions. Through September 3, 2004, the Company purchased a total of 2,666,400 shares of common stock. The Company utilized $35,981,000 in cash from an Unrestricted investment subsidiary to effect these common stock purchases. The Company may choose to continue purchases of common stock in the future. See Note 6.

 

8. Per Share Information

 

Per share information is based on the weighted-average number of common shares outstanding during each period for the basic computation and, if dilutive, the weighted-average number of potential common shares resulting from the assumed conversion of outstanding stock options, warrants, convertible preferred stock and convertible senior notes for the diluted computation.

 

A reconciliation of the numerators and denominators of the basic and diluted per share computations is as follows:

 

     Three Months Ended
September 30,


    Nine Months Ended
September 30,


 
     2003

    2004

    2003

    2004

 
     (As restated)     (As restated)     (As restated)     (As restated)  
     (In thousands of dollars, except per share amounts)  

Loss from continuing operations before cumulative effect of change in accounting principle

   $ (124,057 )   $ (59,793 )   $ (304,711 )   $ (218,209 )

Dividends on preferred stock

     (9,496 )     (9,836 )     (44,297 )     (28,864 )

Gains (losses) on purchases of preferred stock

     —         —         (1,603 )     —    
    


 


 


 


Loss from continuing operations before cumulative effect of change in accounting principle applicable to common stock for basic and diluted computations

     (133,553 )     (69,629 )     (350,611 )     (247,073 )

Income from discontinued operations

     5,076       510,449       12,617       541,448  

Cumulative effect of change in accounting principle

     —         —         (551 )     —    
    


 


 


 


Net income (loss) applicable to common stock for basic and diluted computations

   $ (128,477 )   $ 440,820     $ (338,545 )   $ 294,375  
    


 


 


 


Weighted-average number of common shares outstanding during the period for basic and diluted computations (in thousands)

     216,621       222,841       216,516       221,329  
    


 


 


 


Per common share—basic and diluted:

                                

Loss from continuing operations before cumulative effect of change in accounting principle

   $ (0.62 )   $ (0.31 )   $ (1.62 )   $ (1.12 )

Income from discontinued operations

     0.03       2.29       0.06       2.45  

Cumulative effect of change in accounting principle

     —         —         (0.01 )     —    
    


 


 


 


Net income (loss)

   $ (0.59 )   $ 1.98     $ (1.57 )   $ 1.33  
    


 


 


 


 

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CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

The calculations of common shares outstanding for the diluted computations exclude the following potential common shares. The inclusion of such potential common shares in the diluted per share computations would be antidilutive since the Company incurred net losses from continuing operations for all periods presented.

 

     September 30,

     2003

   2004

     (In thousands)

Options to purchase shares of common stock

   20,659    15,403

Warrants to purchase shares of common stock at an exercise price of $7.50 per share

   640    640

Warrants to purchase shares of common stock at an exercise price of $26.875 per share

   1,000    1,000

Shares of 8 1/4% Cumulative Convertible Redeemable Preferred Stock which are convertible into shares of common stock at a conversion price of $26.875 per share

   7,442    7,442

Shares of 6.25% Convertible Preferred Stock which are convertible into shares of common stock at a conversion price of $36.875 per share

   8,625    8,625

Shares of restricted common stock

   1,890    1,389

4% Convertible Senior Notes which are convertible into shares of common stock at a conversion price of $10.83 per share

   21,237    21,237
    
  

Total potential common shares

   61,493    55,736
    
  

 

As of September 30, 2004, outstanding stock options include (1) 7,223,000 options at exercise prices ranging from $-0- to $14.81 per share and a weighted-average exercise price of $8.68 per share, and (2) 8,180,000 options at exercise prices ranging from $15.13 to $39.75 per share and a weighted-average exercise price of $23.51 per share.

 

9. Commitments and Contingencies

 

The Company is involved in various claims, lawsuits and proceedings arising in the ordinary course of business. While there are uncertainties inherent in the ultimate outcome of such matters and it is impossible to presently determine the ultimate costs that may be incurred, management believes the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on the Company’s consolidated financial position or results of operations.

 

10. Operating Segments

 

The measurement of profit or loss currently used to evaluate the results of operations for the Company and its operating segments is earnings before interest, taxes, depreciation and amortization, as adjusted (“Adjusted EBITDA”). The Company defines Adjusted EBITDA as net income (loss) plus cumulative effect of change in accounting principle, income (loss) from discontinued operations, minority interests, provision for income taxes, interest expense, amortization of deferred financing costs and dividends on preferred stock, interest and other income (expense), depreciation, amortization and accretion, non-cash general and administrative compensation charges, asset write-down charges and restructuring charges (credits). Adjusted EBITDA is not intended as an alternative measure of operating results or cash flow from operations (as determined in accordance with generally accepted accounting principles), and the Company’s measure of Adjusted EBITDA may not be comparable to similarly titled measures of other companies. There are no significant revenues resulting from transactions between the Company’s operating segments.

 

21


Table of Contents

CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

As a result of the sale of CCUK, the Company has restated its financial statements to present CCUK’s results of operations and cash flows as amounts from discontinued operations (see Note 3). In addition, all periods have been restated to reflect the correction of certain accounting errors (see Note 1). Such restatements have been made for all periods presented. The financial results for the Company’s operating segments are as follows:

 

     Three Months Ended September 30, 2004

 
     CCUSA

    CCUK

   CCAL

   

Crown

Atlantic


   

Corporate
Office

and Other


    Consolidated
Total


 
     (As restated)     (As restated)    (As restated)     (As restated)           (As restated)  
     (In thousands of dollars)  

Net revenues:

                                               

Site rental

   $ 97,039     $ —      $ 9,683     $ 28,507     $ —       $ 135,229  

Network services and other

     12,112       —        975       1,869       —         14,956  
    


 

  


 


 


 


       109,151       —        10,658       30,376       —         150,185  
    


 

  


 


 


 


Costs of operations (exclusive of depreciation, amortization and accretion)

     40,140       —        4,319       12,081       —         56,540  

General and administrative

     13,069       —        2,508       1,289       5,775       22,641  

Corporate development

     —         —        —         —         211       211  
    


 

  


 


 


 


Adjusted EBITDA

     55,942       —        3,831       17,006       (5,986 )     70,793  

Restructuring charges (credits)

     (428 )     —        —         (17 )     —         (445 )

Non-cash general and administrative compensation charges

     725       —        9       144       564       1,442  

Depreciation, amortization and accretion

     50,674       —        6,741       12,516       99       70,030  
    


 

  


 


 


 


Operating income (loss)

     4,971       —        (2,919 )     4,363       (6,649 )     (234 )

Interest and other income (expense)

     (11,852 )     —        (368 )     45       (1,415 )     (13,590 )

Interest expense and amortization of deferred financing costs

     (11,661 )     —        (978 )     (2,516 )     (37,126 )     (52,281 )

Credit (provision) for income taxes

     7,000       —        (144 )     —         —         6,856  

Minority interests

     —         —        1,356       (1,900 )     —         (544 )

Income from discontinued operations

     —         510,449      —         —         —         510,449  
    


 

  


 


 


 


Net income (loss)

   $ (11,542 )   $ 510,449    $ (3,053 )   $ (8 )   $ (45,190 )   $ 450,656  
    


 

  


 


 


 


Capital expenditures

   $ 7,058            $ 576     $ 2,086     $ 38     $ 9,758  
    


        


 


 


 


Total assets (at period end)

   $ 2,968,864     $ —      $ 269,662     $ 733,746     $ 851,341     $ 4,823,613  
    


 

  


 


 


 


 

22


Table of Contents

CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

     Nine Months Ended September 30, 2004

 
     CCUSA

    CCUK

   CCAL

   

Crown

Atlantic


   

Corporate

Office

and Other


   

Consolidated

Total


 
     (As restated)     (As restated)    (As restated)     (As restated)           (As restated)  
     (In thousands of dollars)  

Net revenues:

                                               

Site rental

   $ 283,232     $ —      $ 30,386     $ 84,298     $ —       $ 397,916  

Network services and other

     39,338       —        3,302       5,532       —         48,172  
    


 

  


 


 


 


       322,570       —        33,688       89,830       —         446,088  
    


 

  


 


 


 


Costs of operations (exclusive of depreciation, amortization and accretion)

     120,603       —        13,775       35,358       —         169,736  

General and administrative

     39,417       —        7,518       4,015       15,986       66,936  

Corporate development

     —         —        —         —         1,021       1,021  
    


 

  


 


 


 


Adjusted EBITDA

     162,550       —        12,395       50,457       (17,007 )     208,395  

Restructuring charges (credits)

     (428 )     —        —         (17 )     (33 )     (478 )

Asset write-down charges

     2,772       —        —         1,044       —         3,816  

Non-cash general and administrative compensation charges

     4,372       —        50       949       4,489       9,860  

Depreciation, amortization and accretion

     152,973       —        20,723       37,303       450       211,449  
    


 

  


 


 


 


Operating income (loss)

     2,861       —        (8,378 )     11,178       (21,913 )     (16,252 )

Interest and other income (expense)

     (11,682 )     —        (689 )     (235 )     (27,747 )     (40,353 )

Interest expense and amortization of deferred financing costs

     (43,328 )     —        (3,438 )     (7,656 )     (111,749 )     (166,171 )

Credit (provision) for income taxes

     6,000       —        (481 )     —         —         5,519  

Minority interests

     —         —        4,033       (4,985 )     —         (952 )

Income from discontinued operations

     —         541,448      —         —         —         541,448  
    


 

  


 


 


 


Net income (loss)

   $ (46,149 )   $ 541,448    $ (8,953 )   $ (1,698 )   $ (161,409 )   $ 323,239  
    


 

  


 


 


 


Capital expenditures

   $ 23,230            $ 1,161     $ 4,565     $ 259     $ 29,215  
    


        


 


 


 


 

23


Table of Contents

CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

     Three Months Ended September 30, 2003

 
     CCUSA

    CCUK

   CCAL

   

Crown

Atlantic


   

Corporate
Office

and Other


    Consolidated
Total


 
     (As restated)          (As restated)     (As restated)     (As restated)     (As restated)  
     (In thousands of dollars)  

Net revenues:

                                               

Site rental

   $ 88,490     $ —      $ 7,786     $ 25,509     $ —       $ 121,785  

Network services and other

     12,999       —        1,035       3,362       —         17,396  
    


 

  


 


 


 


       101,489       —        8,821       28,871       —         139,181  
    


 

  


 


 


 


Costs of operations (exclusive of depreciation, amortization and accretion)

     40,078       —        3,751       10,509       —         54,338  

General and administrative

     11,985       —        2,037       1,445       5,955       21,422  

Corporate development

     —         —        —         —         1,039       1,039  
    


 

  


 


 


 


Adjusted EBITDA

     49,426       —        3,033       16,917       (6,994 )     62,382  

Restructuring charges (credits)

     (734 )     —        —         (324 )     —         (1,058 )

Asset write-down charges

     1,991       —        —         4,146       —         6,137  

Non-cash general and administrative compensation charges

     2,798       —        —         656       2,751       6,205  

Depreciation, amortization and accretion

     50,492       —        6,776       12,572       436       70,276  
    


 

  


 


 


 


Operating income (loss)

     (5,121 )     —        (3,743 )     (133 )     (10,181 )     (19,178 )

Interest and other income (expense)

     (168 )     —        218       145       (43,577 )     (43,382 )

Interest expense, amortization of deferred financing costs and dividends on preferred stock

     (7,852 )     —        (922 )     (3,809 )     (49,825 )     (62,408 )

Provision for income taxes

     (500 )     —        (85 )     —         —         (585 )

Minority interests

     —         —        1,342       154       —         1,496  

Income from discontinued operations

     —         5,076      —         —         —         5,076  
    


 

  


 


 


 


Net income (loss)

   $ (13,641 )   $ 5,076    $ (3,190 )   $ (3,643 )   $ (103,583 )   $ (118,981 )
    


 

  


 


 


 


Capital expenditures

   $ 3,164            $ 735     $ 2,165     $ 28     $ 6,092  
    


        


 


 


 


 

24


Table of Contents

CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

     Nine Months Ended September 30, 2003

 
     CCUSA

    CCUK

   CCAL

   

Crown

Atlantic


   

Corporate

Office

and Other


   

Consolidated

Total


 
     (As restated)          (As restated)     (As restated)     (As restated)     (As restated)  
     (In thousands of dollars)  

Net revenues:

                                               

Site rental

   $ 257,811     $ —      $ 21,875     $ 75,765     $ —       $ 355,451  

Network services and other

     41,149       —        2,677       10,118       —         53,944  
    


 

  


 


 


 


       298,960       —        24,552       85,883       —         409,395  
    


 

  


 


 


 


Costs of operations (exclusive of depreciation, amortization and accretion)

     121,965       —        10,570       34,961       —         167,496  

General and administrative

     38,048       —        5,385       4,569       16,158       64,160  

Corporate development

     —         —        —         —         3,577       3,577  
    


 

  


 


 


 


Adjusted EBITDA

     138,947       —        8,597       46,353       (19,735 )     174,162  

Restructuring charges (credits)

     1,580       —        —         (289 )     —         1,291  

Asset write-down charges

     3,352       —        —         4,165       —         7,517  

Non-cash general and administrative compensation charges

     6,675       —        —         1,348       5,910       13,933  

Depreciation, amortization and accretion

     152,633       —        19,441       37,452       1,416       210,942  
    


 

  


 


 


 


Operating income (loss)

     (25,293 )     —        (10,844 )     3,677       (27,061 )     (59,521 )

Interest and other income (expense)

     353       —        615       (11,083 )     (47,227 )     (57,342 )

Interest expense, amortization of deferred financing costs and dividends on preferred stock

     (24,774 )     —        (2,757 )     (11,574 )     (150,823 )     (189,928 )

Provision for income taxes

     (1,500 )     —        (328 )     —         —         (1,828 )

Minority interests

     866       —        3,944       (902 )     —         3,908  

Income from discontinued operations

     —         12,617      —         —         —         12,617  

Cumulative effect of change in accounting principle for asset retirement obligations

     (394 )     —        (57 )     (100 )     —         (551 )
    


 

  


 


 


 


Net income (loss)

   $ (50,742 )   $ 12,617    $ (9,427 )   $ (19,982 )   $ (225,111 )   $ (292,645 )
    


 

  


 


 


 


Capital expenditures

   $ 11,233            $ 1,995     $ 7,357     $ 117     $ 20,702  
    


        


 


 


 


 

11. Restructuring Charges and Asset Write-Down Charges

 

At December 31, 2003 and September 30, 2004, other accrued liabilities includes $2,716,000 and $1,487,000, respectively, related to restructuring charges. A summary of the restructuring charges by operating segment is as follows:

 

25


Table of Contents

CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

     Nine Months Ended September 30, 2004

 
     CCUSA

   

Crown

Atlantic


   

Corporate

Office

and Other


   

Consolidated

Total


 
     (In thousands of dollars)  

Amounts accrued at beginning of period:

                                

Employee severance

   $ 492     $ —       $ 33     $ 525  

Costs of office closures and other

     2,143       48       —         2,191  
    


 


 


 


       2,635       48       33       2,716  
    


 


 


 


Amounts charged (credited) to expense:

                                

Employee severance

     —         —         (33 )     (33 )

Costs of office closures and other

     (428 )     (17 )     —         (445 )
    


 


 


 


Total restructuring charges (credits)

     (428 )     (17 )     (33 )     (478 )
    


 


 


 


Amounts paid:

                                

Employee severance

     (492 )     —         —         (492 )

Costs of office closures and other

     (228 )     (31 )     —         (259 )
    


 


 


 


       (720 )     (31 )     —         (751 )
    


 


 


 


Amounts accrued at end of period:

                                

Employee severance

     —         —         —         —    

Costs of office closures and other

     1,487       —         —         1,487  
    


 


 


 


     $ 1,487     $ —       $ —       $ 1,487  
    


 


 


 


 

During the nine months ended September 30, 2004, the Company abandoned or disposed of certain tower sites and sites in development and recorded asset write-down charges of $2,772,000 for CCUSA and $1,044,000 for Crown Atlantic.

 

12. Subsequent Events

 

On October 27, 2004, the market performance of the Company’s common stock reached the first target level for accelerated vesting of the restricted common shares that had been issued during March, April and May of 2004 (see Note 7). This first target level was reached when the market price of the Company’s common stock closed at or above $14.81 per share (125% of the base price of $11.85 per share) for twenty consecutive trading days. As a result, the restrictions expired with respect to the first third of such outstanding shares during the fourth quarter of 2004. The acceleration of the vesting for these shares will result in the recognition of non-cash general and administrative compensation charges of approximately $3,133,000 for the three months ending December 31, 2004, of which $2,495,000 will be recorded in continuing operations and $638,000 will be charged to the net gain on disposal of CCUK (see Note 3). Most of the executives and employees sold a portion of their vested shares in order to pay their respective minimum withholding tax liabilities, and the Company arranged to purchase these shares in order to facilitate the stock sales. The Company purchased approximately 153,100 of such shares of common stock (at a price of $15.52 per share) for a total of $2,376,000 in cash. The Company utilized cash from an Unrestricted investment subsidiary to effect the stock purchase.

 

On November 4, 2004, the Company entered into an agreement with a subsidiary of Verizon Communications (“Verizon”) to acquire Verizon’s 37.245% equity interest in the Crown Castle Atlantic venture (“Crown Atlantic”). On that date, the Company acquired such equity interest for $295,000,000 in cash, inclusive of approximately $15,000,000 of net working capital. Following the transaction, the Company owns 100% of Crown Atlantic. The Company will account for the acquisition of the minority interest in Crown Atlantic using the purchase method. Following this transaction, the Company intends to combine the Crown Atlantic operating segment with the CCUSA operating segment (see Note 10). This change in reportable segments will be made in the Company’s consolidated financial statements for the year ending December 31, 2004, and segment information for all prior periods presented will be restated at that time.

 

On November 8, 2004, the Company commenced a cash tender offer for all of its outstanding 4% Convertible Senior Notes. In accordance with the terms of the tender offer, the purchase price for the tendered notes will be determined on December 3, 2004. The tender offer will expire on December 7, 2004.

 

26


Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion is intended to assist in understanding our consolidated financial condition as of September 30, 2004 and our consolidated results of operations for the three- and nine-month periods ended September 30, 2003 and 2004. The statements in this discussion regarding the industry outlook, our expectations regarding the future performance of our businesses and the other non-historical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks, uncertainties and assumptions, including but not limited to prevailing market conditions and those set forth below under the caption “Liquidity and Capital Resources — Factors That Could Affect Future Results”.

 

The following discussion should be read in conjunction with the response to Part I, Item 1 of this report and the consolidated financial statements of the Company, including the related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2004. Any capitalized terms used but not defined in this Item have the same meaning given to them in the Form 10-K.

 

On June 28, 2004, we signed a definitive agreement to sell our UK subsidiary (“CCUK”) to an affiliate of National Grid Transco Plc (“National Grid”). As a result, we have restated our financial statements to present CCUK’s assets, liabilities, results of operations and cash flows as amounts from discontinued operations. Such restatements have been made for all periods presented. On August 31, 2004, we completed the sale of CCUK. See “—Liquidity and Capital Resources”.

 

Restatement of Previously Issued Financial Statements

 

Our consolidated results of operations for the three and nine months ended September 30, 2003 and 2004 have been restated to reflect the correction of errors for certain non-cash items relating to our lease accounting practices. In February of 2005, we adjusted our method of accounting for tenant leases, ground leases and depreciation. The corrections to our consolidated results of operations consist of non-cash adjustments primarily attributable to increases in site rental revenues, ground lease expense (included in site rental costs of operations) and depreciation expense. Since the adjustments affected results of operations at CCAL and our two joint ventures with Verizon Communications, they also resulted in changes to minority interests. The adjustments for depreciation expense also effected the discontinued operations of CCUK, resulting in a change to the net gain on disposal. The cumulative effects of these adjustments on our consolidated statements of operations from inception through September 30, 2004 are as follows: an increase in site rental revenues of $34.3 million; an increase in site rental costs of operations of $98.8 million; an increase in depreciation expense of $180.7 million; an increase in operating losses of $245.3 million; an increase in other expense (attributable to the loss on the issuance of an interest in the Crown Atlantic joint venture) of $3.1 million; an increase in minority interests of $43.1 million; a decrease in income from operations of CCUK, and a corresponding increase in the net gain on disposal of CCUK, of $4.8 million; and an increase in net losses of $205.3 million. These adjustments have no effect on our credit (provision) for income taxes since the net impact on deferred tax assets and liabilities is offset by changes in valuation allowances. The net impact of the accounting correction will generally be to accelerate ground lease expense (as such expenses are straight-lined over a period that equals or exceeds the remaining depreciable life of the tower, along with periods covered by tenant renewal options) and depreciation expense and, to a lesser extent, site rental revenues (as such revenues are only straight-lined over the current lease term, without regard to renewal options that may be exercised by a tenant).

 

Historically, we have calculated straight-line ground lease expense (for leases with fixed escalation provisions) using the current lease term (typically five to ten years) without regard to renewal options. Further, we depreciated all tower assets over a 20-year useful life, without regard to the term of the underlying ground lease, because of our historical experience in successfully renewing ground leases prior to expiration. As a result of this accounting adjustment, we now calculate our straight-line ground lease expense using a time period that equals or exceeds the remaining depreciable life of the tower asset. Further, when a tenant has exercisable renewal options that would compel us to exercise existing ground lease renewal options, we have straight-lined the ground lease expense over a sufficient portion of such ground lease renewals to coincide with the final termination of the tenant’s renewal options. We have also shortened the depreciable lives of certain tower assets that have ground lease expirations prior to the end of their useful life. When calculating our straight-line site rental revenues, we now consider all fixed elements of a tenant lease’s escalation provisions, even if such escalation provisions also include a variable element. In addition, (1) certain issuance costs from prior financing transactions have been charged to other expense or included with dividends on preferred stock, (2) certain foreign currency translation adjustments have been charged to a prior year’s results of operations and (3) certain adjustments have been made to deferred income tax provisions and the estimated tax on the sale of CCUK. See Note 1 to our consolidated financial statements for additional information regarding the restatement.

 

Results of Operations

 

The following information is derived from our historical Consolidated Statements of Operations for the periods indicated.

 

27


Table of Contents
     Three Months Ended
September 30, 2003


    Three Months Ended
September 30, 2004


    Nine Months Ended
September 30, 2003


    Nine Months Ended
September 30, 2004


 
     Amount

   

Percent of
Net

Revenues


    Amount

   

Percent of
Net

Revenues


    Amount

    Percent of
Net
Revenues


    Amount

   

Percent of
Net

Revenues


 
     (As restated)     (As restated)     (As restated)     (As restated)  
     (In thousands of dollars)  

Net revenues:

                                                        

Site rental

   $ 121,785     87.5 %   $ 135,229     90.0 %   $ 355,451     86.8 %   $ 397,916     89.2 %

Network services and other

     17,396     12.5       14,956     10.0       53,944     13.2       48,172     10.8  
    


 

 


 

 


 

 


 

Total net revenues

     139,181     100.0       150,185     100.0       409,395     100.0       446,088     100.0  
    


 

 


 

 


 

 


 

Operating expenses:

                                                        

Costs of operations:

                                                        

Site rental

     44,160     36.3       45,754     33.8       132,888     37.4       135,682     34.1  

Network services and other

     10,178     58.5       10,786     72.1       34,608     64.2       34,054     70.7  
    


       


       


       


     

Total costs of operations

     54,338     39.0       56,540     37.6       167,496     40.9       169,736     38.0  

General and administrative

     21,422     15.4       22,641     15.1       64,160     15.7       66,936     15.0  

Corporate development

     1,039     0.8       211     0.2       3,577     0.9       1,021     0.2  

Restructuring charges (credits)

     (1,058 )   (0.8 )     (445 )   (0.3 )     1,291     0.3       (478 )   (0.1 )

Asset write-down charges

     6,137     4.4       —       —         7,517     1.8       3,816     0.9  

Non-cash general and administrative compensation charges

     6,205     4.5       1,442     1.0       13,933     3.4       9,860     2.2  

Depreciation, amortization and accretion

     70,276     50.5       70,030     46.6       210,942     51.5       211,449     47.4  
    


 

 


 

 


 

 


 

Operating income (loss)

     (19,178 )   (13.8 )     (234 )   (0.2 )     (59,521 )   (14.5 )     (16,252 )   (3.6 )

Other income (expense):

                                                        

Interest and other income (expense)

     (43,382 )   (31.2 )     (13,590 )   (9.0 )     (57,342 )   (14.0 )     (40,353 )   (9.0 )

Interest expense and amortization of deferred financing costs

     (62,408 )   (44.8 )     (52,281 )   (34.8 )     (189,928 )   (46.4 )     (166,171 )   (37.3 )
    


 

 


 

 


 

 


 

Loss from continuing operations before income taxes, minority interests and cumulative effect of change in accounting principle

     (124,968 )   (89.8 )     (66,105 )   (44.0 )     (306,791 )   (74.9 )     (222,776 )   (49.9 )

Credit (provision) for income taxes

     (585 )   (0.4 )     6,856     4.6       (1,828 )   (0.5 )     5,519     1.2  

Minority interests

     1,496     1.1       (544 )   (0.4 )     3,908     1.0       (952 )   (0.2 )
    


 

 


 

 


 

 


 

Loss from continuing operations before cumulative effect of change in accounting principle

     (124,057 )   (89.1 )     (59,793 )   (39.8 )     (304,711 )   (74.4 )     (218,209 )   (48.9 )

Discontinued operations:

                                                        

Income from operations of CCUK, net of tax

     5,076     3.6       15,400     10.3       12,617     3.1       46,399     10.4  

Net gain on disposal of CCUK, net of tax

     —       —         495,049     329.6       —       —         495,049     111.0  
    


 

 


 

 


 

 


 

Income from discontinued operations, net of tax

     5,076     3.6       510,449     339.9       12,617     3.1       541,448     121.4  
    


 

 


 

 


 

 


 

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

     (118,981 )   (85.5 )     450,656     300.1       (292,094 )   (71.3 )     323,239     72.5  

Cumulative effect of change in accounting principle for asset retirement obligations

     —       —         —       —         (551 )   (0.2 )     —       —    
    


 

 


 

 


 

 


 

Net income (loss)

   $ (118,981 )   (85.5 )%   $ 450,656     300.1 %   $ (292,645 )   (71.5 )%   $ 323,239     72.5 %
    


 

 


 

 


 

 


 

 

Comparison of Three Months Ended September 30, 2004 and 2003

 

Site rental revenues for the three months ended September 30, 2004 were $135.2 million, an increase of $13.4 million, or 11.0%, from the three months ended September 30, 2003. Of this increase, $8.5 million was attributable to CCUSA, $1.9 million was attributable to CCAL and $3.0 million was attributable to Crown Atlantic. Network services and other revenues for the three months ended September 30, 2004 were $15.0 million, a decrease of $2.4 million from the three months ended September 30, 2003. This decrease was primarily attributable to a $1.5 million decrease from Crown Atlantic and a $0.9 million decrease from CCUSA.

 

Total revenues for the three months ended September 30, 2004 were $150.2 million, a net increase of $11.0 million from the three months ended September 30, 2003. The increases in site rental revenues reflect the new tenant additions on our tower sites and contractual escalations on existing leases. In 2004, the rate of new tenant additions on our US tower sites has been approximately 25% greater than the comparable periods in 2003. The decreases in network services and other revenues reflect our efforts to de-emphasize this area of our business and increased competition. We expect that network services and other revenues may continue to decline as a percentage of total revenues for CCUSA and Crown Atlantic.

 

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Site rental costs of operations for the three months ended September 30, 2004 were $45.8 million, an increase of $1.6 million from the three months ended September 30, 2003. This increase was primarily attributable to cost increases of $0.8 million for CCUSA, $0.2 million for CCAL and $0.6 million for Crown Atlantic. Such cost increases relate to normal and customary increases in ground rentals on leases with variable escalations, repairs and maintenance and property taxes. Network services and other costs of operations for the three months ended September 30, 2004 were $10.8 million, an increase of $0.6 million from the three months ended September 30, 2003. This increase was primarily attributable to a $1.0 million increase in costs from Crown Atlantic and a $0.4 million increase in costs at CCAL, partially offset by a $0.8 million decrease in costs from CCUSA.

 

Total costs of operations for the three months ended September 30, 2004 were $56.5 million, a net increase of $2.2 million from the three months ended September 30, 2003. Gross margins (net revenues less costs of operations) for site rental as a percentage of site rental revenues increased to 66.2% for the three months ended September 30, 2004 from 63.7% for the three months ended September 30, 2003, because of higher margins from the CCUSA, CCAL and Crown Atlantic operations. Gross margins for network services and other as a percentage of network services and other revenues decreased to 27.9% for the three months ended September 30, 2004 from 41.5% for the three months ended September 30, 2003 because of lower margins from the Crown Atlantic operations, partially offset by higher margins from the CCUSA operations.

 

General and administrative expenses for the three months ended September 30, 2004 were $22.6 million, an increase of $1.2 million from the three months ended September 30, 2003. This increase was primarily attributable to:

 

  (1) a $0.5 million increase in expenses at CCAL (attributable to increased employee and other costs associated with increased business activity), and

 

  (2) a $1.1 million increase in expenses at CCUSA (primarily attributable to the transfer of a strategic business unit from the corporate office segment to CCUSA), partially offset by

 

  (3) a $0.2 million decrease in expenses at our corporate office segment (partially attributable to the transfer of such strategic business unit from the corporate office segment to CCUSA), and

 

  (4) a $0.2 million decrease in expenses at Crown Atlantic.

 

General and administrative expenses as a percentage of revenues decreased to 15.1% for the three months ended September 30, 2004 from 15.4% for the three months ended September 30, 2003, primarily due to stable overhead costs as compared to increasing revenues for CCUSA and Crown Atlantic.

 

Corporate development expenses for the three months ended September 30, 2004 were $0.2 million, compared to $1.0 million for the three months ended September 30, 2003. This decrease was primarily attributable to a decrease in salary costs related to corporate activities.

 

For the three months ended September 30, 2004, we recorded non-cash general and administrative compensation charges of $1.4 million related to the issuance of stock and stock options to certain employees and executives, compared to $6.2 million for the three months ended September 30, 2003. On October 27, 2004, the market performance of our common stock reached the first target level for accelerated vesting of the restricted common shares that had been issued during March, April and May of 2004. This first target level was reached when the market price of our common stock closed at or above $14.81 per share (125% of the base price of $11.85 per share) for twenty consecutive trading days. As a result, the restrictions expired with respect to the first third of such outstanding shares during the fourth quarter of 2004. The acceleration of the vesting for these shares will result in the recognition of non-cash general and administrative compensation charges of approximately $3.1 million for the three months ending December 31, 2004, of which $2.5 million will be recorded in continuing operations and $0.6 million will be charged to the net gain on disposal of CCUK.

 

Depreciation, amortization and accretion for the three months ended September 30, 2004 was $70.0 million, a decrease of $0.2 million from the three months ended September 30, 2003. This decrease was primarily attributable to:

 

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  (1) a $0.1 million decrease in depreciation from Crown Atlantic, and

 

  (2) a $0.3 million decrease in depreciation at our corporate office segment, partially offset by

 

  (3) a $0.2 million increase in depreciation from CCUSA.

 

Interest and other income (expense) for the three months ended September 30, 2004 resulted primarily from:

 

  (1) a loss of $13.9 million from the repayment of our 2000 credit facility (see “—Liquidity and Capital Resources”), and

 

  (2) $1.4 million from our share of losses incurred by unconsolidated affiliates, partially offset by

 

  (3) interest income from invested cash balances.

 

Interest expense and amortization of deferred financing costs for the three months ended September 30, 2004 was $52.3 million, a decrease of $10.1 million, or 16.2%, from the three months ended September 30, 2003. This decrease was primarily attributable to:

 

  (1) purchases and redemptions of our debt securities in 2003 and 2004 (see “—Liquidity and Capital Resources”), and

 

  (2) reductions in outstanding bank indebtedness at Crown Atlantic, partially offset by

 

  (3) the issuance of the 4% senior notes, the 7.5% senior notes and the 7.5% Series B senior notes in 2003, and

 

  (4) an increase in outstanding bank indebtedness at CCUSA in 2003, the proceeds of which were used to retire CCUK’s indebtedness and purchase certain of our public debt and preferred stock.

 

The credit for income taxes of $6.9 million for the three months ended September 30, 2004 consists primarily of a non-cash deferred tax asset resulting from an alternative minimum tax carryforward, partially offset by a non-cash deferred tax liability resulting from a difference between the book and tax basis of CCUSA’s goodwill.

 

Minority interests represent the minority partner’s 37.245% interest in Crown Atlantic’s operations and the minority shareholder’s 22.4% interest in the CCAL operations.

 

Comparison of Nine Months Ended September 30, 2004 and 2003

 

Site rental revenues for the nine months ended September 30, 2004 were $397.9 million, an increase of $42.5 million, or 11.9%, from the nine months ended September 30, 2003. Of this increase, $25.4 million was attributable to CCUSA, $8.5 million was attributable to CCAL and $8.5 million was attributable to Crown Atlantic. Network services and other revenues for the nine months ended September 30, 2004 were $48.2 million, a decrease of $5.8 million from the nine months ended September 30, 2003. This decrease was primarily attributable to a $1.8 million decrease from CCUSA and a $4.6 million decrease from Crown Atlantic, partially offset by a $0.6 million increase from CCAL.

 

Total revenues for the nine months ended September 30, 2004 were $446.1 million, a net increase of $36.7 million from the nine months ended September 30, 2003. The increases in site rental revenues reflect the new tenant additions on our tower sites and contractual escalations on existing leases. In 2004, the rate of new tenant additions on our US tower sites has been approximately 25% greater than the comparable periods in 2003. In addition, CCAL’s site rental revenues for the nine months ended September 30, 2004 include a nonrecurring contractual payment of $2.1 million related to a site commitment agreement with one of its customers. The decreases in network services and other revenues reflect our efforts to de-emphasize this area of our business and increased competition. We expect that network services and other revenues may continue to decline as a percentage of total revenues for CCUSA and Crown Atlantic.

 

Site rental costs of operations for the nine months ended September 30, 2004 were $135.7 million, an increase of $2.8 million from the nine months ended September 30, 2003. This increase was primarily attributable to cost increases of $2.6 million for CCAL, $0.1 million for CCUSA and $0.2 million for Crown Atlantic. Such cost increases relate to normal and customary increases in ground rentals on leases with variable escalations, repairs and maintenance and property taxes.

 

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Network services and other costs of operations for the nine months ended September 30, 2004 were $34.1 million, a decrease of $0.6 million from the nine months ended September 30, 2003. This decrease was primarily attributable to a $1.4 million decrease in costs from CCUSA, partially offset by a $0.2 million increase in costs from Crown Atlantic and a $0.6 million increase in costs from CCAL.

 

Total costs of operations for the nine months ended September 30, 2004 were $169.7 million, a net increase of $2.2 million from the nine months ended September 30, 2003. Gross margins (net revenues less costs of operations) for site rental as a percentage of site rental revenues increased to 65.9% for the nine months ended September 30, 2004 from 62.6% for the nine months ended September 30, 2003, because of higher margins from the CCUSA, CCAL and Crown Atlantic operations. Gross margins for network services and other as a percentage of network services and other revenues decreased to 29.3% for the nine months ended September 30, 2004 from 35.8% for the nine months ended September 30, 2003 because of lower margins from the Crown Atlantic operations.

 

General and administrative expenses for the nine months ended September 30, 2004 were $66.9 million, an increase of $2.8 million from the nine months ended September 30, 2003. This increase was primarily attributable to:

 

  (1) a $2.1 million increase in expenses at CCAL (attributable to increased employee and other costs associated with increased business activity), and

 

  (2) a $1.4 million increase in expenses at CCUSA (primarily attributable to the transfer of a strategic business unit from the corporate office segment to CCUSA), partially offset by

 

  (3) a $0.2 million decrease in expenses at our corporate office segment (partially attributable to the transfer of such strategic business unit from the corporate office segment to CCUSA), and

 

  (4) a $0.6 million decrease in expenses at Crown Atlantic.

 

General and administrative expenses as a percentage of revenues decreased to 15.0% for the nine months ended September 30, 2004 from 15.7% for the nine months ended September 30, 2003, primarily due to stable overhead costs as compared to increasing revenues for CCUSA and Crown Atlantic.

 

Corporate development expenses for the nine months ended September 30, 2004 were $1.0 million, compared to $3.6 million for the nine months ended September 30, 2003. This decrease was primarily attributable to a decrease in salary costs related to corporate activities.

 

During the nine months ended September 30, 2004, we recorded asset write-down charges of $3.8 million for CCUSA and Crown Atlantic. Such non-cash charges related to the abandonment or disposal of certain tower sites and sites in development.

 

For the nine months ended September 30, 2004, we recorded non-cash general and administrative compensation charges of $9.9 million related to the issuance of stock and stock options to certain employees and executives, compared to $13.9 million for the nine months ended September 30, 2003. On April 27, 2004, the market performance of our common stock reached the third (and final) target level for accelerated vesting of the restricted common shares that had been issued during the first quarter of 2003. This third target level was reached when the market price of our common stock closed at or above $12.45 per share (150% of the second target level of $8.30 per share) for twenty consecutive trading days. As a result, the restrictions expired with respect to the final third of such outstanding shares during the second quarter of 2004. The acceleration of the vesting for these shares resulted in the recognition of non-cash general and administrative compensation charges of $5.4 million for the second quarter of 2004. The restricted common shares that were issued during the first quarter of 2003 were granted to approximately 350 employees, while the restricted common shares that were issued in March through May of 2004 were granted to approximately 500 employees (including approximately 175 employees of CCUK).

 

On October 27, 2004, the market performance of our common stock reached the first target level for accelerated vesting of the restricted common shares that had been issued during March, April and May of 2004. This first target level was reached when the market price of our common stock closed at or above $14.81 per share (125% of the

 

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base price of $11.85 per share) for twenty consecutive trading days. As a result, the restrictions expired with respect to the first third of such outstanding shares during the fourth quarter of 2004. The acceleration of the vesting for these shares will result in the recognition of non-cash general and administrative compensation charges of approximately $3.1 million for the three months ending December 31, 2004, of which $2.5 million will be recorded in continuing operations and $0.6 million will be charged to the net gain on disposal of CCUK.

 

Depreciation, amortization and accretion for the nine months ended September 30, 2004 was $211.4 million, an increase of $0.5 million from the nine months ended September 30, 2003. This increase was primarily attributable to:

 

  (1) a $1.3 million increase in depreciation at CCAL, and

 

  (2) a $0.3 million increase in depreciation from CCUSA, partially offset by

 

  (3) a $0.1 million decrease in depreciation from Crown Atlantic, and