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
(Registrants 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
CROWN CASTLE INTERNATIONAL CORP.
Page | ||
3 | ||
PART IFINANCIAL INFORMATION |
||
Item 1. Financial Statements |
||
Consolidated Balance Sheet at December 31, 2003 and September 30, 2004 |
4 | |
5 | ||
Consolidated Statement of Cash Flows for the nine months ended September 30, 2003 and 2004 |
6 | |
7 | ||
Item 2. Managements 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 IIOTHER INFORMATION |
||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
41 | |
Item 6. Exhibits |
41 | |
42 |
2
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 Companys 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 Companys 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 Companys majority owned Australian subsidiary (CCAL) and the Companys 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 Companys 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 Companys 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 Companys 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 Companys condensed notes to consolidated financial statements in Item 1. Financial Statements. Additionally, see Item 2. Managements 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 Companys 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 Companys 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 Companys 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 Companys Annual Report on Form 10-K for the year ended December 31, 2004, or will be addressed in the Companys 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
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
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
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.
6
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 periods 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 CCUKs 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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
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 tenants 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 leases 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, Debtors 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 CCUKs 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
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 sharebasic 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 sharebasic 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 sharebasic 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 sharebasic and diluted |
1.48 | (0.15 | ) | 1.33 |
9
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 sharebasic 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 | ||||||
10
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 Companys 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 Companys 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 Companys 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 sharebasic and diluted: |
||||||||||||||||
As reported |
$ | (0.59 | ) | $ | 1.98 | $ | (1.57 | ) | $ | 1.33 | ||||||
As adjusted |
$ | (0.62 | ) | $ | 1.97 | $ | (1.65 | ) | $ | 1.29 | ||||||
11
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 assets 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 Companys consolidated balance sheet), the recognition of asset retirement costs amounting to $808,000 (included in property and equipment on the Companys 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 Companys 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 FASBs 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 CompensationTransition 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 Companys consolidated financial statements.
12
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 Companys 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 Companys 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 Companys 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 Companys 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
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The carrying amounts of CCUKs assets and liabilities are as follows:
December 31, 2003 |
August 31, (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 Companys 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 CCUKs assets and liabilities. Such adjustments were included in accumulated other comprehensive income (loss) on the Companys 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 Companys estimated U.S. federal alternative minimum tax resulting from the transaction. This tax amount is included in other accrued liabilities on the Companys 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 Companys 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 Companys 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 Companys 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
14
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.
CCUKs financial results have historically been presented as a separate operating segment (see Note 10). A summary of CCUKs 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 Companys 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 | |||||||||
15
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 Companys 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 Companys 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 Companys 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
16
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
($10,010,000). Such losses are included in interest and other income (expense) on the Companys 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 Companys 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 Companys consolidated statement of operations for the nine months ended September 30, 2004.
Under the terms of the indentures governing the Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 | |||||
17
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 CCUSAs lenders in amounts aggregating $6,391,000 and expire on various dates through October 2005.
18
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. | Redeemable Preferred Stock |
Redeemable preferred stock ($.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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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
19
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
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 sharebasic 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 | ||||||
20
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 Companys 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 Companys 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 Companys operating segments.
21
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 CCUKs 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 Companys operating segments are as follows:
Three Months Ended September 30, 2004 |
|||||||||||||||||||||||
CCUSA |
CCUK |
CCAL |
Crown Atlantic |
Corporate 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
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
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 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
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
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 Companys 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 Companys 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 Verizons 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 Companys 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
ITEM 2. | MANAGEMENTS 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 Managements 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 CCUKs 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 tenants 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 leases 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 years 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
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 Revenues |
Amount |
Percent of Revenues |
Amount |
Percent of Net Revenues |
Amount |
Percent of 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.
28
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:
29
(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 CCUKs 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 CCUSAs goodwill.
Minority interests represent the minority partners 37.245% interest in Crown Atlantics operations and the minority shareholders 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, CCALs 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.
30
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
31
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 |