Crown Castle is an American operator of telecommunications networks based in Houston. The company operates over 40,000 transmission masts, 70,000 small cells for wireless communication as well as a fiber optic cable network.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended June 30, 2004
OR
For the transition period to
Commission File Number 001-16441
CROWN CASTLE INTERNATIONAL CORP.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
510 Bering Drive
Suite 500
Houston, Texas
(713) 570-3000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
Number of shares of common stock outstanding at July 30, 2004: 225,375,924
INDEX
PART I—FINANCIAL INFORMATION
PART II—OTHER INFORMATION
2
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands of dollars, except share amounts)
June 30,
2004
Current assets:
Cash and cash equivalents
Receivables:
Trade, net of allowance for doubtful accounts of $7,603 and $6,866 at December 31, 2003 and June 30, 2004, respectively
Other
Inventories
Prepaid expenses and other current assets
Assets of discontinued operations (Notes 1 and 3)
Total current assets
Property and equipment, net of accumulated depreciation of $916,004 and $1,028,779 at December 31, 2003 and June 30, 2004, respectively
Goodwill
Deferred financing costs and other assets, net of accumulated amortization of $39,692 and $42,247 at December 31, 2003 and June 30, 2004, respectively
Current liabilities:
Accounts payable
Accrued interest
Accrued compensation and related benefits
Deferred rental revenues and other accrued liabilities
Liabilities of discontinued operations (Notes 1 and 3)
Long-term debt, current maturities
Total current liabilities
Long-term debt, less current maturities
Other liabilities
Total liabilities
Commitments and contingencies
Minority interests
Redeemable preferred stock
Stockholders’ equity:
Common stock, $.01 par value; 690,000,000 shares authorized; shares issued:
December 31, 2003 – 220,758,321 and June 30, 2004 – 225,296,483
Additional paid-in capital
Accumulated other comprehensive income (loss)
Unearned stock compensation
Accumulated deficit
Total stockholders’ equity
See condensed notes to consolidated financial statements.
3
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (Unaudited)
(In thousands of dollars, except per share amounts)
Three Months Ended
Six Months Ended
Net revenues:
Site rental
Network services and other
Operating expenses:
Costs of operations (exclusive of depreciation, amortization and accretion):
General and administrative
Corporate development
Restructuring charges (credits)
Asset write-down charges
Non-cash general and administrative compensation charges
Depreciation, amortization and accretion
Operating income (loss)
Other income (expense):
Interest and other income (expense)
Interest expense and amortization of deferred financing costs
Loss from continuing operations before income taxes, minority interests and cumulative effect of change in accounting principle
Provision for income taxes
Loss from continuing operations before cumulative effect of change in accounting principle
Income from discontinued operations, net of tax (Notes 1 and 3)
Loss before cumulative effect of change in accounting principle
Cumulative effect of change in accounting principle for asset retirement obligations
Net loss
Dividends on preferred stock, net of gains (losses) on purchases of preferred stock
Net loss after deduction of dividends on preferred stock, net of gains (losses) on purchases of preferred stock
Other comprehensive income (loss):
Foreign currency translation adjustments
Derivative instruments:
Net change in fair value of cash flow hedging instruments
Amounts reclassified into results of operations
Comprehensive income (loss)
Per common share – basic and diluted:
Income from discontinued operations
Cumulative effect of change in accounting principle
Common shares outstanding – basic and diluted (in thousands)
4
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(In thousands of dollars)
Cash flows from operating activities:
Adjustments to reconcile net loss to net cash provided by operating activities:
Losses on purchases of long-term debt
Amortization of deferred financing costs and discounts on long-term debt
Minority interests and loss on issuance of interest in joint venture
Equity in losses and write-downs of unconsolidated affiliates
Changes in assets and liabilities:
Decrease in receivables
Decrease in deferred rental revenues and other liabilities
Decrease in accrued interest
Decrease in accounts payable
Decrease (increase) in inventories, prepaid expenses and other assets
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from disposition of property and equipment
Capital expenditures
Investments in affiliates and other
Maturities of investments
Purchases of investments
Acquisition of minority interest in joint venture
Net cash provided by (used for) investing activities
Cash flows from financing activities:
Proceeds from issuance of capital stock
Purchases of long-term debt
Purchases of capital stock
Net borrowings (payments) under revolving credit agreements
Principal payments on long-term debt
Incurrence of financing costs
Net cash used for financing activities
Effect of exchange rate changes on cash
Discontinued operations (Notes 1 and 3)
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
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
Minority interest acquired
Minority interest issued
Supplemental disclosure of cash flow information:
Interest paid
Income taxes paid
5
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, 2003, 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 June 30, 2004, the consolidated results of operations for the three and six months ended June 30, 2003 and 2004, and the consolidated cash flows for the six months ended June 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.
On June 28, 2004, the Company signed a definitive agreement to sell its UK subsidiary (“CCUK”) to an affiliate of National Grid Transco Plc (“National Grid”). As a result, the Company has restated its financial statements to present CCUK’s assets, liabilities, results of operations and cash flows as amounts from discontinued operations. Such restatements have been made for all periods presented. See Note 3.
Stock-Based Compensation
The Company used the “intrinsic value based method” of accounting for its stock-based employee compensation plans until December 31, 2002. This method does not result in the recognition of compensation expense when employee stock options are granted if the exercise price of the options equals or exceeds the fair market value of the stock at the date of grant. On January 1, 2003, the Company adopted the fair value method of accounting (using the “prospective” method of transition) for stock-based employee compensation awards granted on or after that date (see Note 2). The following table shows the pro forma effect on the Company’s net loss and loss per share as if compensation cost had been recognized for all stock options based on their fair value at the date of grant. The pro forma effect of stock options on the Company’s net 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.
Net loss, as reported
Add: Stock-based employee compensation expense included in reported net loss
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards
Net loss, as adjusted
Net loss applicable to common stock for basic and diluted computations, as adjusted
Loss per common share—basic and diluted:
As reported
As adjusted
6
CROWN CASTLE INTERNATION CORP. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2. New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (“SFAS 143”). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the related asset retirement costs. The fair value of a liability for an asset retirement obligation is to be recognized in the period in which it is incurred and can be reasonably estimated. Such asset retirement costs are to be capitalized as part of the carrying amount of the related long-lived asset and depreciated over the asset’s estimated useful life. Fair value estimates of liabilities for asset retirement obligations will generally involve discounted future cash flows. Periodic accretion of such liabilities due to the passage of time is to be recorded as an operating expense. The provisions of SFAS 143 were effective for fiscal years beginning after June 15, 2002, with initial application as of the beginning of the fiscal year. The Company adopted the requirements of SFAS 143 as of January 1, 2003. The adoption of SFAS 143 resulted in the recognition of liabilities amounting to $1,359,000 for contingent retirement obligations under certain tower site land leases (included in other long-term liabilities on the Company’s consolidated balance sheet), the recognition of asset retirement costs amounting to $808,000 (included in property and equipment on the Company’s consolidated balance sheet), and the recognition of a charge for the cumulative effect of the change in accounting principle amounting to $551,000. Accretion expense related to liabilities for contingent retirement obligations (included in depreciation, amortization and accretion on the Company’s consolidated statement of operations) amounted to $44,000 and $50,000 for the three months ended June 30, 2003 and 2004, respectively, and $87,000 and $99,000 for the six months ended June 30, 2003 and 2004, respectively. At December 31, 2003 and June 30, 2004, liabilities for contingent retirement obligations amounted to $1,584,000 and $1,624,000, 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 12.
In November 2002, the FASB’s Emerging Issues Task Force released its final consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). EITF 00-21 addresses certain aspects of the accounting for arrangements under which multiple revenue-generating activities will be performed, including the determination of whether an arrangement involving multiple deliverables contains more than one unit of accounting. The guidance in EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company adopted the provisions of EITF 00-21 as of July 1, 2003, and such adoption did not have a significant effect on its consolidated financial statements.
In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure (“SFAS 148”). SFAS 148 amends Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the provisions of SFAS 123 to require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results of operations. The Company adopted the disclosure requirements of SFAS 148 as of December 31, 2002. On January 1, 2003, the Company adopted the fair value method of accounting for stock-based employee compensation using the “prospective” method of transition as provided by SFAS 148. Under this transition method, the Company is recognizing compensation cost for all employee awards granted on or after January 1, 2003. The adoption of this new accounting method did not have a significant effect on the Company’s consolidated financial statements.
7
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 12 3/4% Exchangeable Preferred Stock was to be reclassified as a liability upon adoption of SFAS 150 and (2) its 8 1/4% Convertible Preferred Stock and its 6.25% Convertible Preferred Stock were not to be reclassified as liabilities, since the conversion features caused them to be contingently redeemable rather than mandatorily redeemable financial instruments. In addition, the dividends on the Company’s 12 3/4% 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 12 3/4% Exchangeable Preferred Stock in December of 2003.
In December 2003, the FASB issued Statement of Financial Accounting Standards No. 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits (“SFAS 132(R)”). SFAS 132(R) revises the required disclosures about pension plans and other postretirement benefit plans. SFAS 132(R) replaces Statement of Financial Accounting Standards No. 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits (which was originally issued in February 1998), but retains its disclosure requirements. SFAS 132(R) requires additional disclosures about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans, and requires that certain disclosures be included in interim financial statements. SFAS 132(R) applies to the Company’s disclosures for CCUK’s defined benefit plan. The provisions of SFAS 132(R) are generally effective for fiscal years ending after December 15, 2003; however, many of the new disclosure requirements for information about foreign plans, as well as information about future benefit payments, do not become effective until fiscal years ending after June 15, 2004. The interim-period disclosure requirements of SFAS 132(R) are effective for interim periods beginning after December 15, 2003. The Company has adopted the annual reporting requirements of SFAS 132(R) as of December 31, 2003, except for the disclosure about future benefit payments. The Company has adopted the interim-period reporting requirements as of March 31, 2004 (see Note 8).
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. The closing date of the transaction, subject to certain approvals, is expected to be on or before September 30, 2004. In accordance with the terms of the Company’s 2000 Credit Facility, the Company will be 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 in the United States. Under the terms of the indentures governing the Company’s public debt securities, any proceeds from the sale of CCUK not invested in qualifying assets within one year must be offered to purchase such debt securities from the Company’s bondholders at the outstanding principal amount plus accrued interest. The carrying amounts of CCUK’s assets and liabilities are as follows:
8
Assets:
Receivables
Property and equipment, net
Other assets, net
Assets of discontinued operations
Liabilities:
Other current liabilities
Liabilities of discontinued operations
As of June 30, 2004, the Company’s consolidated stockholders’ equity accounts include foreign currency translation adjustments and a minimum pension liability adjustment of $242,914,000 and $(11,573,000), respectively, related to CCUK’s assets and liabilities. Such adjustments are included in accumulated other comprehensive income (loss) on the Company’s consolidated balance sheet and will be part of the calculation of the net gain on the sale of CCUK when the transaction is closed.
CCUK’s financial results have historically been presented as a separate operating segment (see Note 11). A summary of CCUK’s operating results is as follows:
Net revenues
Income before income taxes and cumulative effect of change in accounting principle
4. Goodwill and Other Intangible Assets
As of December 31, 2003 and June 30, 2004, the Company had consolidated goodwill of $267,071,000 (including $211,694,000 at CCUSA and $55,377,000 at Crown Atlantic).
9
The value of site rental contracts from acquisitions included in CCUSA are accounted for as other intangible assets with finite useful lives, and are included in deferred financing costs and other assets on the Company’s consolidated balance sheet. A summary of other intangible assets with finite useful lives is as follows:
GrossCarrying
Amount
Accumulated
Amortization
Net Book
Value
Balance at beginning of period
Amortization expense
Balance at end of period
Estimated aggregate annual amortization expense:
Years ending December 31, 2004 through 2008
5. Long-term Debt
Long-term debt consists of the following:
December 31,
2003
2000 Credit Facility
Crown Atlantic Credit Facility
4% Convertible Senior Notes due 2010
10 3/8% Senior Discount Notes due 2011, net of discount
9% Senior Notes due 2011
11 1/4% Senior Discount Notes due 2011, net of discount
9 1/2% Senior Notes due 2011
10 3/4% Senior Notes due 2011
9 3/8% Senior Notes due 2011
7.5% Senior Notes due 2013
7.5% Series B Senior Notes due 2013
Less: current maturities
On June 28, 2004, the Company signed a definitive agreement to sell CCUK to National Grid Transco Plc. In accordance with the terms of the 2000 Credit Facility, the Company will be required to use a majority of the proceeds from the transaction to fully repay the outstanding borrowings under the 2000 Credit Facility. As a result, the Company has reclassified the outstanding borrowings under the 2000 Credit Facility as a current liability on its consolidated balance sheet as of June 30, 2004. See Note 3.
In February of 2004, Crown Atlantic amended its credit facility to reduce the available borrowings from $301,050,000 to $250,000,000. During the six months ended June 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. As a result, available borrowings under the Crown Atlantic Credit Facility amount to $70,000,000.
10
Purchases of the Company’s Debt Securities
On December 5, 2003, the Company commenced cash tender offers and consent solicitations for all of its outstanding 9% Senior Notes and 9 1/2% 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 9 1/2% 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 9 1/2% 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 9 1/2% 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 ($10,010,000). Such losses are included in interest and other income (expense) on the Company’s consolidated statement of operations for the six months ended June 30, 2004. The 9% Senior Notes and 9 1/2% Senior Notes that were tendered through December 31, 2003 have been classified as current maturities of long-term debt on the Company’s consolidated balance sheet as of December 31, 2003.
In January of 2004, the Company (1) utilized $1,570,000 of its cash to purchase $1,500,000 in outstanding principal amount at maturity of its 10 3/8 % Discount Notes and (2) utilized $1,046,000 of its cash to purchase $1,000,000 in outstanding principal amount at maturity of its 11¼% Discount Notes, both in public market transactions. The debt purchases resulted in losses of $249,000 that are included in interest and other income (expense) on the Company’s consolidated statement of operations for the six months ended June 30, 2004.
The Company anticipates that it may purchase additional debt securities using a portion of the proceeds from the pending sale of CCUK. See Note 3.
Reporting Requirements Under the Indentures Governing the Company’s Debt Securities (the “Indentures”)
The following information (as such capitalized terms are defined in the Indentures) is presented solely as a requirement of the Indentures; such information is not intended as an alternative measure of financial position, operating results or cash flow from operations (as determined in accordance with generally accepted accounting principles). Furthermore, the Company’s measure of the following information may not be comparable to similarly titled measures of other companies.
Summarized financial information for (1) the Company and its Restricted Subsidiaries and (2) the Company’s Unrestricted Subsidiaries is as follows:
11
Companyand Restricted
Subsidiaries
Unrestricted
Consolidation
Eliminations
Consolidated
Total
Other current assets
Investments in Unrestricted Subsidiaries
Current liabilities
Stockholders’ equity
Company
and
Restricted
Costs of operations (exclusive of depreciation, amortization and accretion)
Income (loss) from discontinued operations
Net income (loss)
12
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 10¾% Senior Notes, the 9 3/8% Senior Notes, the 7.5% Senior Notes and the 7.5% Series B Senior Notes:
Tower Cash Flow, for the three months ended June 30, 2004
Consolidated Cash Flow, for the twelve months ended June 30, 2004
Less: Tower Cash Flow, for the twelve months ended June 30, 2004
Plus: four times Tower Cash Flow, for the three months ended June 30, 2004
Adjusted Consolidated Cash Flow, for the twelve months ended June 30, 2004
The amounts presented above for Tower Cash Flow, Consolidated Cash Flow and Adjusted Consolidated Cash Flow continue to include the operating results from CCUK, and will do so until the pending sale of CCUK is closed. See Note 3.
Letters of Credit
The Company has issued letters of credit to various landlords, insurers and other parties in connection with certain contingent retirement obligations under various tower site land leases and certain other contractual obligations. The letters of credit were issued through one of CCUSA’s lenders in amounts aggregating $13,841,000 and expire on various dates through October 2005.
6. Redeemable Preferred Stock
Redeemable preferred stock ($.01 par value, 20,000,000 shares authorized) consists of the following:
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)
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)
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 repurchased 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 such issuances and purchases of stock in the future in order to avoid further dilution caused by the issuance of common stock as dividends on its preferred stock.
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.
13
In March, April and May of 2004, the Company granted approximately 1,343,000 shares of restricted common stock to approximately 500 of its employees (including approximately 175 employees of CCUK). These restricted shares had a weighted-average grant-date fair value of $13.99 per share, determined based on the closing market price of the Company’s common stock on the grant dates. The restrictions on the shares will expire in various annual amounts over the vesting period of four years, with provisions for accelerated vesting based on the market performance of the Company’s common stock. In connection with these restricted shares, the Company will recognize non-cash general and administrative compensation charges of approximately $18,800,000 over the vesting period. Such charges will be reduced in the event that any of the restricted shares are forfeited before they become vested. In order to reach the first target level for accelerated vesting of these restricted shares, the market price of the Company’s common stock would have to close at or above $14.81 per share (125% of the base price of $11.85 per share) for twenty consecutive trading days. Reaching the first target level would result in the restrictions expiring with respect to one third of these restricted shares. In order to reach the second and third target levels for accelerated vesting of these restricted shares, the market price of the Company’s common stock would have to close at or above $18.52 per share and $23.14 per share, respectively (125% of each of the previous target levels), for twenty consecutive trading days. Reaching each of the second and third target levels would result in the restrictions expiring with respect to an additional third of these restricted shares. The vesting terms for the restricted shares held by CCUK employees will be modified upon the closing of the sale of CCUK (see Notes 3 and 13).
On April 27, 2004, the market performance of the Company’s common stock reached the third (and final) target level for accelerated vesting of the restricted common shares that had been issued during the first quarter of 2003. This third target level was reached when the market price of the Company’s common stock closed at or above $12.45 per share (150% of the second target level of $8.30 per share) for twenty consecutive trading days. As a result, the restrictions expired with respect to the final third of such outstanding shares during the second quarter of 2004. The acceleration of the vesting for these shares resulted in the recognition of non-cash general and administrative compensation charges of $5,378,000 for the three months ended June 30, 2004. All of the executives 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.
8. Employee Benefit Plan
The components of net periodic pension cost for CCUK’s defined benefit pension plan are as follows:
Service cost
Interest cost
Expected return on plan assets
Amortization of net actuarial (gain) loss
Net periodic pension cost
CCUK contributed $1,323,000 to its pension plan during the six months ended June 30, 2004, and expects to contribute a total of approximately $2,637,000 for the year ending December 31, 2004. Amounts related to CCUK’s defined benefit pension plan are included in discontinued operations on the Company’s consolidated financial statements as a result of the pending sale of CCUK (see Note 3).
9. 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
14
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:
Dividends on preferred stock
Gains (losses) on purchases of preferred stock
Loss from continuing operations before cumulative effect of change in accounting principle applicable to common stock for basic and diluted computations
Net loss applicable to common stock for basic and diluted computations
Weighted-average number of common shares outstanding during the period for basic and diluted computations (in thousands)
Per common share—basic and diluted:
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 for all periods presented.
Options to purchase shares of common stock at exercise prices currently ranging from $-0- to $39.75 per share
Warrants to purchase shares of common stock at an exercise price of $7.50 per share
Warrants to purchase shares of common stock at an exercise price of $26.875 per share
Shares of 8¼% Cumulative Convertible Redeemable Preferred Stock which are convertible into shares of common stock
Shares of 6.25% Convertible Preferred Stock which are convertible into shares of common stock
Shares of restricted common stock
4% Convertible Senior Notes which are convertible into shares of common stock
Total potential common shares
10. 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
15
determine the ultimate costs that may be incurred, management believes the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on the Company’s consolidated financial position or results of operations.
11. Operating Segments
The measurement of profit or loss currently used to evaluate the results of operations for the Company and its operating segments is earnings before interest, taxes, depreciation and amortization, as adjusted (“Adjusted EBITDA”). The Company defines Adjusted EBITDA as net income (loss) plus cumulative effect of change in accounting principle, income (loss) from discontinued operations, minority interests, provision for income taxes, interest expense, amortization of deferred financing costs and dividends on preferred stock, interest and other income (expense), depreciation, amortization and accretion, non-cash general and administrative compensation charges, asset write-down charges and restructuring charges (credits). Adjusted EBITDA is not intended as an alternative measure of operating results or cash flow from operations (as determined in accordance with generally accepted accounting principles), and the Company’s measure of Adjusted EBITDA may not be comparable to similarly titled measures of other companies. There are no significant revenues resulting from transactions between the Company’s operating segments.
As a result of the pending sale of CCUK, the Company has restated its financial statements to present CCUK’s results of operations and cash flows as amounts from discontinued operations (see Note 3). Such restatements have been made for all periods presented. The financial results for the Company’s operating segments are as follows:
Corporate
Office
and Other
Adjusted EBITDA
Total assets (at period end)
For the three months ended June 30, 2004, CCUK’s capital expenditures of $9,386,000 are included in discontinued operations on the Company’s consolidated statement of cash flows.
16
CorporateOffice
For the six months ended June 30, 2004, CCUK’s capital expenditures of $22,058,000 are included in discontinued operations on the Company’s consolidated statement of cash flows.
17
Restructuring charges
For the three months ended June 30, 2003, CCUK’s capital expenditures of $12,760,000 are included in discontinued operations on the Company’s consolidated statement of cash flows.
18
For the six months ended June 30, 2003, CCUK’s capital expenditures of $58,988,000 are included in discontinued operations on the Company’s consolidated statement of cash flows.
19
12. Restructuring Charges and Asset Write-Down Charges
At December 31, 2003 and June 30, 2004, other accrued liabilities includes $2,716,000 and $2,080,000, respectively, related to restructuring charges. A summary of the restructuring charges by operating segment is as follows:
Amounts accrued at beginning of period:
Employee severance
Costs of office closures and other
Amounts charged (credited) to expense:
Total restructuring charges (credits)
Amounts paid:
Amounts accrued at end of period:
During the six months ended June 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.
13. Subsequent Events
In August of 2004, the Company began purchasing its common stock in public market transactions. Through August 5, 2004, the Company purchased a total of 730,400 shares of common stock. The Company utilized $9,803,000 in cash from an Unrestricted investment subsidiary to effect these common stock purchases.
Upon the closing of the sale of CCUK to National Grid, the Company’s stock-based employee compensation awards (comprised of restricted stock awards and stock options) granted to CCUK employees (other than Peter Abery, the President and Managing Director of CCUK) will be 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 5, 2004, the number of shares of the Company’s common stock subject to awards held by CCUK employees includes (1) 352,939 shares of restricted common stock, (2) 646,974 shares for unvested stock options and (3) 1,251,270 shares for vested stock options. The Company expects that the modifications to these awards will generally be treated as the grant of new awards for accounting purposes. As such, compensation charges related to the modified awards will be recognized as part of the calculation of the net gain on the sale of CCUK when the transaction is closed. The awards held by Peter Abery are subject to a severance agreement with stock options vesting and restricted stock awards eligible for vesting over a period of 36 months from the closing date of the CCUK transaction. See Notes 3 and 7.
20
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in understanding our consolidated financial condition as of June 30, 2004 and our consolidated results of operations for the three- and six-month periods ended June 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 nonhistorical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks, uncertainties and assumptions, including but not limited to prevailing market conditions and those set forth below under the caption “Liquidity and Capital Resources — Factors That Could Affect Future Results”.
The following discussion should be read in conjunction with the response to Part I, Item 1 of this report and the consolidated financial statements of the Company, including the related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Form 10-K. Any capitalized terms used but not defined in this Item have the same meaning given to them in the Form 10-K.
On June 28, 2004, we signed a definitive agreement to sell our UK subsidiary (“CCUK”) to an affiliate of National Grid Transco Plc (“National Grid”). As a result, we have restated our financial statements to present CCUK’s assets, liabilities, results of operations and cash flows as amounts from discontinued operations. Such restatements have been made for all periods presented. See “–Liquidity and Capital Resources”.
Results of Operations
The following information is derived from our historical Consolidated Statements of Operations for the periods indicated.
21
June 30, 2003
June 30, 2004
Percent ofNet
Revenues
Total net revenues
Costs of operations:
Total costs of operations
Comparison of Three Months Ended June 30, 2004 and 2003
Site rental revenues for the three months ended June 30, 2004 were $131.4 million, an increase of $14.7 million, or 12.6%, from the three months ended June 30, 2003. Of this increase, $7.9 million was attributable to CCUSA, $4.4 million was attributable to CCAL and $2.4 million was attributable to Crown Atlantic. Network services and other revenues for the three months ended June 30, 2004 were $18.5 million, a decrease of $1.1 million from the three months ended June 30, 2003. This decrease was primarily attributable to a $1.9 million decrease from Crown Atlantic, partially offset by a $0.6 million increase from CCUSA and a $0.3 million increase from CCAL.
Total revenues for the three months ended June 30, 2004 were $149.9 million, a net increase of $13.6 million from the three months ended June 30, 2003. The increases in site rental revenues reflect the new tenant additions on our tower sites and contractual escalations on existing leases. In 2004, the rate of new tenant additions on our US tower sites has been approximately 25% greater than the comparable periods in 2003. In addition, CCAL’s site rental revenues for the three months ended June 30, 2004 include a nonrecurring contractual payment of $2.1 million related to a site commitment agreement with one of its customers. The increases or decreases in network services and other revenues reflect fluctuations in demand for antenna installations from our tenants. We expect that network services and other revenues may continue to decline as a percentage of total revenues for CCUSA and Crown Atlantic as we continue to de-emphasize this area of our business.
Site rental costs of operations for the three months ended June 30, 2004 were $41.8 million, an increase of $1.9 million from the three months ended June 30, 2003. This increase was primarily attributable to cost increases of $0.7
22
million for CCUSA, $1.0 million for CCAL and $0.2 million for Crown Atlantic. Network services and other costs of operations for the three months ended June 30, 2004 were $12.3 million, a decrease of $0.5 million from the three months ended June 30, 2003. This decrease was primarily attributable to a $0.7 million decrease in costs from Crown Atlantic, partially offset by a $0.1 million increase in costs from CCAL.
Total costs of operations for the three months ended June 30, 2004 were $54.1 million, a net increase of $1.3 million from the three months ended June 30, 2003. Gross margins (net revenues less costs of operations) for site rental as a percentage of site rental revenues increased to 68.1% for the three months ended June 30, 2004 from 65.7% for the three months ended June 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 33.7% for the three months ended June 30, 2004 from 34.7% for the three months ended June 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 June 30, 2004 were $22.7 million, an increase of $0.5 million from the three months ended June 30, 2003. This increase was primarily attributable to:
General and administrative expenses as a percentage of revenues decreased to 15.1% for the three months ended June 30, 2004 from 16.3% for the three months ended June 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 June 30, 2004 were $0.4 million, compared to $0.9 million for the three months ended June 30, 2003. This decrease was primarily attributable to a decrease in salary costs related to corporate activities.
During the three months ended June 30, 2004, we recorded asset write-down charges of $1.9 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 three months ended June 30, 2004, we recorded non-cash general and administrative compensation charges of $6.2 million related to the issuance of stock and stock options to certain employees and executives, compared to $5.8 million for the three months ended June 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).
23
Depreciation, amortization and accretion for the three months ended June 30, 2004 was $61.1 million, an increase of $0.4 million from the three months ended June 30, 2003. This increase was primarily attributable to:
Interest and other income (expense) for the three months ended June 30, 2004 resulted primarily from:
Interest expense and amortization of deferred financing costs for the three months ended June 30, 2004 was $56.6 million, a decrease of $7.2 million, or 11.3%, from the three months ended June 30, 2003. This decrease was primarily attributable to:
Minority interests represent the minority partner’s interest in Crown Atlantic’s operations (43.1% through April 30, 2003 and 37.245% since May 1, 2003), the minority partner’s interest in the operations of the Crown Castle GT joint venture (17.8% through April 30, 2003 and none thereafter) and the minority shareholder’s 22.4% interest in the CCAL operations.
Comparison of Six Months Ended June 30, 2004 and 2003
Site rental revenues for the six months ended June 30, 2004 were $260.3 million, an increase of $29.9 million, or 13.0%, from the six months ended June 30, 2003. Of this increase, $17.6 million was attributable to CCUSA, $6.7 million was attributable to CCAL and $5.5 million was attributable to Crown Atlantic. Network services and other revenues for the six months ended June 30, 2004 were $33.2 million, a decrease of $3.3 million from the six months ended June 30, 2003. This decrease was primarily attributable to a $0.9 million decrease from CCUSA and a $3.1 million decrease from Crown Atlantic, partially offset by a $0.7 million increase from CCAL.
Total revenues for the six months ended June 30, 2004 were $293.5 million, a net increase of $26.5 million from the six months ended June 30, 2003. The increases in site rental revenues reflect the new tenant additions on our tower sites and contractual escalations on existing leases. In 2004, the rate of new tenant additions on our US tower sites has been approximately 25% greater than the comparable periods in 2003. In addition, CCAL’s site rental revenues for the six months ended June 30, 2004 include a nonrecurring contractual payment of $2.1 million related to a site commitment agreement with one of its customers. The increases or decreases in network services and other revenues reflect fluctuations in demand for antenna installations from our tenants. We expect that network services and other revenues may continue to decline as a percentage of total revenues for CCUSA and Crown Atlantic as we continue to de-emphasize this area of our business.
24
Site rental costs of operations for the six months ended June 30, 2004 were $82.8 million, an increase of $2.2 million from the six months ended June 30, 2003. This increase was primarily attributable to a cost increase of $2.4 million for CCAL, partially offset by a cost decrease of $0.2 million for CCUSA. Network services and other costs of operations for the six months ended June 30, 2004 were $23.3 million, a decrease of $1.2 million from the six months ended June 30, 2003. This decrease was primarily attributable to a $0.6 million decrease in costs from CCUSA and a $0.8 million decrease in costs from Crown Atlantic, partially offset by a $0.2 million increase in costs from CCAL.
Total costs of operations for the six months ended June 30, 2004 were $106.0 million, a net increase of $1.0 million from the six months ended June 30, 2003. Gross margins (net revenues less costs of operations) for site rental as a percentage of site rental revenues increased to 68.2% for the six months ended June 30, 2004 from 65.0% for the six months ended June 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 29.9% for the six months ended June 30, 2004 from 33.2% for the six months ended June 30, 2003 because of lower margins from the Crown Atlantic operations.
General and administrative expenses for the six months ended June 30, 2004 were $44.3 million, an increase of $1.6 million from the six months ended June 30, 2003. This increase was primarily attributable to:
General and administrative expenses as a percentage of revenues decreased to 15.1% for the six months ended June 30, 2004 from 16.0% for the six months ended June 30, 2003, primarily due to stable overhead costs as compared to increasing revenues for CCUSA and Crown Atlantic.
Corporate development expenses for the six months ended June 30, 2004 were $0.8 million, compared to $2.5 million for the six months ended June 30, 2003. This decrease was primarily attributable to a decrease in salary costs related to corporate activities.
During the six months ended June 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 six months ended June 30, 2004, we recorded non-cash general and administrative compensation charges of $8.4 million related to the issuance of stock and stock options to certain employees and executives, compared to $7.7 million for the six months ended June 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).
Depreciation, amortization and accretion for the six months ended June 30, 2004 was $122.3 million, an increase of $0.1 million from the six months ended June 30, 2003. This increase was primarily attributable to:
25
Interest and other income (expense) for the six months ended June 30, 2004 resulted primarily from:
Interest expense and amortization of deferred financing costs for the six months ended June 30, 2004 was $113.9 million, a decrease of $13.6 million, or 10.7%, from the six months ended June 30, 2003. This decrease was primarily attributable to:
Liquidity and Capital Resources
On June 28, 2004, we signed a definitive agreement to sell CCUK to an affiliate of National Grid for $2.035 billion in cash. The closing date of the transaction, subject to certain approvals, is expected to be on or before September 30, 2004. In accordance with the terms of our 2000 credit facility, we will be required to use $1.275 billion of the proceeds from the transaction to fully repay the outstanding borrowings under the 2000 credit facility. 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 in the United States. Under the terms of the indentures governing our 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 our bondholders at the outstanding principal amount plus accrued interest. As a result of the pending sale of CCUK, we have restated our financial statements to present CCUK’s assets, liabilities, results of operations and cash flows as amounts from discontinued operations. Such restatements have been made for all periods presented.
After closing the sale of CCUK and repaying the outstanding borrowings under the 2000 credit facility, we anticipate replacing such facility with new senior indebtedness. We currently expect that the principal amount of such new senior indebtedness would range from $500 million to $800 million. In addition, we anticipate that we may purchase additional debt securities with the remaining proceeds from the CCUK sale. Such purchases would likely be from the outstanding 10 3/4% senior notes, 9 3/8% senior notes, 10 3/8% discount notes, 9% senior notes, 11 1/4% discount notes and 9 1/2% senior notes, and could involve public market purchases, contractual redemptions or tender offers. The following discussion is written from our historical perspective on our liquidity and capital resources prior to the CCUK sale. Subsequent to closing the CCUK sale and restructuring our balance sheet as anticipated, we expect that this discussion will reflect an improved liquidity position with less financial risk.
26
Since inception, we have generally funded our activities, other than acquisitions and investments, through cash provided by operations, excess proceeds from contributions of equity capital and borrowings under our senior credit facilities. We have generally financed acquisitions and investments with the proceeds from equity contributions, borrowings under our senior credit facilities and issuances of debt securities.
Our goal is to maximize net cash from operating activities and fund all capital spending and debt service from our operating cash flow, without reliance on additional borrowing or the use of our cash. However, due to the risk factors outlined below (see “Factors that Could Affect Future Results”), there can be no assurance that this will be possible. As part of our strategy to achieve increases in net cash from operating activities, we seek to lower our interest expense by reducing outstanding debt balances or lowering interest rates. Such reductions can be made either by using a portion of our existing cash balances to purchase our debt securities, or with attractive refinancing opportunities.
Our business strategy contemplates substantial capital expenditures, although significantly reduced from previous years’ levels, in connection with the further improvement, maintenance and selective expansion of our existing tower portfolios. During 2004, we expect that the majority of our discretionary capital expenditures will occur in connection with additional site improvements.
A summary of our net cash provided by operating activities and capital expenditures (both amounts from our consolidated statement of cash flows) is as follows:
The decrease in net cash from operating activities for the six months ended June 30, 2004 as compared to the six months ended June 30, 2003 is largely due to an increase in cash interest paid and the continued decline in our network services business, partially offset by growth in our core site leasing business. Changes in working capital, and particularly changes in accrued interest, have a dramatic impact on our net cash from operating activities for interim periods, largely due to the timing of interest payments on our various senior notes issues. In addition, the debt refinancing transactions we completed in 2003 and 2004 have impacted the timing of our interest payments as compared to prior periods. Cash interest payments for the six months ended June 30, 2004, as compared to the comparable prior year period, were increased by payments related to the 4% senior notes, the 7.5% senior notes and the 7.5% Series B senior notes. The proceeds from these three debt issues were used in 2003 to retire the 10 5/8% discount notes (which required cash interest payments beginning on May 15, 2003) and a portion of the 10 3/8% discount notes and the 11 1/4% discount notes (which were not going to require cash interest payments until November 15, 2004 and February 1, 2005, respectively). Cash interest payments for the six months ended June 30, 2004 were also impacted by increased borrowings under the amended 2000 credit facility, a portion of which were used to retire CCUK’s outstanding indebtedness in 2003. For the year ending December 31, 2004, we expect that our net cash from operating activities will be positively impacted by continued growth in our core site leasing business, but we do not expect to benefit from improvements in working capital to the same extent as in 2003.
Our capital expenditures can be separated into two general categories: (1) maintenance (which includes maintenance activities on our sites, vehicles, information technology equipment and office equipment), and (2) revenue generating (which includes tower improvements, enhancements to their structural capacity in order to support additional leasing and the construction of new towers and rooftop sites). For the second quarter of 2004, total capital expenditures were $12.7 million, of which $3.5 million were for maintenance activities and $9.2 million were for revenue generating activities.
Capital expenditures were $19.5 million for the six months ended June 30, 2004, of which $16.2 million were for CCUSA, $0.6 million were for CCAL, $2.5 million were for Crown Atlantic and $0.2 million were for CCIC. For the year ending December 31, 2004, we currently expect that our total capital expenditures will be between approximately $40.0 million and $50.0 million, of which approximately $33.0 million to $40.0 million will be for revenue generating activities and approximately $7.0 million to $10.0 million will be for maintenance activities. As
27
such, we expect that our capital expenditures for this period will be fully funded by net cash from operating activities, as discussed above. Our decisions regarding the construction of new towers are discretionary, and depend upon expectations of achieving acceptable rates of return given current market conditions. Such decisions are influenced by the availability of capital and expected returns on alternative investments.
To fund the execution of our business strategy, we expect to use our available cash balances and cash provided by future operations. We do not currently expect to utilize further borrowings available under our U.S. credit facilities in any significant amounts prior to the expected closing for the sale of CCUK. We may have additional cash needs to fund our operations in the future should our financial performance deteriorate. We may also have additional cash needs in the future if additional tower acquisitions, build-to-suit or other opportunities arise. If we do not otherwise have cash available, or borrowings under our credit facilities have otherwise been utilized, when our cash need arises, we would be forced to seek additional debt or equity financing or to forego the opportunity. In the event we determine to seek additional debt or equity financing, there can be no assurance that any such financing will be available, on commercially acceptable terms or at all, or permitted by the terms of our existing indebtedness.
As of June 30, 2004, we had consolidated cash and cash equivalents of $232.5 million (including $65.0 million at CCUSA, $39.8 million at CCUK, $14.5 million at CCAL, $20.8 million at Crown Atlantic, $69.2 million in an unrestricted investment subsidiary and $23.2 million at CCIC), consolidated long-term debt of $3,174.1 million, consolidated redeemable preferred stock of $507.4 million and consolidated stockholders’ equity of $1,912.9 million.
For the six months ended June 30, 2003 and 2004, our net cash used for financing activities was $80.0 million and $287.9 million, respectively. The amount for 2004 is largely due to financing transactions we have completed in an effort to lower our future cash interest payments and simplify our capital structure. Following is a summary of significant financing transactions completed in 2004.
On December 5, 2003, we commenced cash tender offers and consent solicitations for all of our 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, we (1) utilized $147.0 million of our cash to purchase the $135.6 million in outstanding principal amount of the tendered 9% senior notes, including accrued interest thereon of $1.8 million, and (2) utilized $124.0 million of our cash to purchase the $109.5 million in outstanding principal amount of the tendered 9½% senior notes, including accrued interest thereon of $4.5 million. The purchase of the tendered 9% senior notes resulted in a loss of $12.5 million for the first quarter of 2004, consisting of the write-off of unamortized deferred financing costs ($2.8 million) and the excess of the total purchase price over the carrying value of the tendered notes ($9.7 million). The purchase of the tendered 9½% senior notes resulted in a loss of $11.7 million for the first quarter of 2004, consisting of the write-off of unamortized deferred financing costs ($1.7 million) and the excess of the total purchase price over the carrying value of the tendered notes ($10.0 million). Such losses are included in interest and other income (expense) on our consolidated statement of operations for the six months ended June 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 our consolidated balance sheet as of December 31, 2003. Upon completion of these tender offers, the outstanding balances for the 9% senior notes and the 9½% senior notes were $26.1 million and $4.8 million, respectively.
In January of 2004, we (1) utilized $1.6 million of our cash to purchase $1.5 million in outstanding principal amount at maturity of our 10 3/8% discount notes and (2) utilized $1.0 million of our cash to purchase $1.0 million in outstanding principal amount at maturity of our 11 1/4% discount notes, both in public market transactions. The debt purchases resulted in losses of $0.2 million that are included in interest and other income (expense) on our consolidated statement of operations for the six months ended June 30, 2004.
During the six months ended June 30, 2004, Crown Atlantic repaid $15.0 million in outstanding borrowings under its credit facility. Crown Atlantic utilized cash provided by its operations to effect this repayment. In February of 2004, Crown Atlantic amended its credit facility to reduce the available borrowings from $301.1 million to $250.0 million.
28
In March and June of 2004, we paid our quarterly dividends on the 8¼% convertible preferred stock by issuing a total of 0.6 million shares of our common stock. As allowed by the Deposit Agreement relating to dividend payments on the 8¼% convertible preferred stock, we repurchased the 0.6 million shares of common stock from the dividend paying agent for a total of $8.2 million in cash. We utilized cash from an unrestricted investment subsidiary to effect the stock purchases. We may choose to continue such issuances and purchases of stock in the future in order to avoid further dilution caused by the issuance of common stock as dividends on our preferred stock.
In April of 2004, the restrictions expired with respect to the final third of the outstanding restricted common shares that had been issued during the first quarter of 2003 (see “—Results of Operations”). All of the executives and employees elected to sell a portion of their vested shares in order to pay their respective minimum withholding tax liabilities, and we arranged to purchase these shares in order to facilitate the stock sales. We purchased 0.6 million of such shares of common stock (at a price of $14.92 per share) for a total of $8.8 million in cash. We utilized cash from an unrestricted investment subsidiary to effect the stock purchase.
In August of 2004, we began purchasing our common stock in public market transactions. Through August 5, 2004, we purchased a total of 0.7 million shares of common stock. We utilized $9.8 million in cash from an unrestricted investment subsidiary to effect these common stock purchases.
We seek to allocate our available capital among the investment alternatives that provide the greatest risk-adjusted returns given current market conditions. As such, we may continue to (1) acquire sites, build new towers and make improvements to existing towers and (2) make investments in emerging businesses that are complementary to our core site leasing business when the expected returns from such investments meet our investment return criteria. In addition, we may continue to utilize a portion of our available cash balances to purchase our own stock (either common or preferred) or debt securities from time to time as market prices make such investments attractive.
As of July 31, 2004, our restricted U.S., U.K. and Australian subsidiaries had approximately $317.2 million of unused borrowing availability under the amended 2000 credit facility. As of July 31, 2004, Crown Atlantic had unused borrowing availability under its amended credit facility of approximately $70.0 million. Our credit facilities require our subsidiaries to maintain certain financial covenants and place restrictions on the ability of our subsidiaries to, among other things, incur debt and liens, pay dividends, make capital expenditures, undertake transactions with affiliates and make investments. These facilities also limit the ability of the borrowing subsidiaries to pay dividends to CCIC. As discussed above, we will be required to use a portion of the proceeds from the pending sale of CCUK to fully repay the outstanding borrowings under our 2000 credit facility. As a result, we have reclassified the outstanding borrowings under the 2000 credit facility as a current liability on our consolidated balance sheet as of June 30, 2004.
The primary factors that determine our subsidiaries’ ability to comply with their debt covenants are (1) their current financial performance (as defined in the credit agreements), (2) their levels of indebtedness and (3) their debt service requirements. Since we do not currently expect that our subsidiaries will need to utilize significant additional borrowings under their credit facilities, the primary risk of a debt covenant violation would result from a deterioration of a subsidiary’s financial performance. In addition, the credit facilities will require that financial performance increase in future years as covenant calculations become more restrictive. Should a covenant violation occur in the future as a result of a shortfall in financial performance (or for any other reason), we might be required to make principal payments earlier than currently scheduled and may not have access to additional borrowings under these facilities as long as the covenant violation continues. Any such early principal payments would have to be made from our existing cash balances.
As a holding company, CCIC will require distributions or dividends from its subsidiaries, or will be forced to use its remaining cash balances, to fund its debt obligations, including interest payments on the notes. The terms of the indebtedness of our subsidiaries limit their ability to distribute cash to CCIC. Subject to certain financial covenants, the terms of the amended 2000 credit facility permit the distribution of funds to CCIC in order for it to pay (1) up to $17.5 million of its annual corporate overhead expenses and (2) interest payments on its existing indebtedness. There can be no assurance, however, that our subsidiaries will generate sufficient cash from their operations to make all of such permitted distributions. As a result, we could be required to apply a portion of our
29
remaining cash to fund interest payments on the notes. If we do not retain sufficient funds or raise additional funds from any future financing, we may not be able to make our interest payments on the notes.
If we are unable to refinance our indebtedness or renegotiate the terms of such debt prior to maturity, we may not be able to meet our debt service requirements, including interest payments on the notes, in the future. Our 4% senior notes, our 10 3/8% discount notes, our 9% senior notes, our 9 1/2% senior notes, our 10 3/4% senior notes, our 9 3/8% senior notes, our 7.5% senior notes and our 7.5% Series B senior notes require annual cash interest payments of $9.2 million, $1.2 million, $2.4 million, $0.5 million, $46.1 million, $38.2 million, $22.5 million and $22.5 million, respectively. Prior to August 1, 2004, the interest expense on our 11 1/4% discount notes will be comprised solely of the amortization of original issue discount. Thereafter, the 11 1/4% discount notes will require annual cash interest payments of $1.2 million. In addition, our credit facilities require periodic interest payments on amounts borrowed thereunder, which amounts are substantial.
We have issued letters of credit to various landlords, insurers and other parties in connection with certain contingent retirement obligations under various tower site land leases and certain other contractual obligations. The letters of credit were issued through one of CCUSA’s lenders in amounts aggregating $13.8 million and expire on various dates through October 2005.
Our ability to make scheduled payments of principal of, or to pay interest on, our debt obligations, and our ability to refinance any such debt obligations, will depend on our future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. In addition, our ability to refinance any indebtedness in the future would depend in part on our maintaining adequate credit ratings from the commercial rating agencies. Such credit ratings are dependent on all the liquidity and performance factors discussed above, as well as general expectations that the rating agencies have regarding the outlook for our business and our industry. We anticipate that we may need to refinance a substantial portion of our indebtedness on or prior to its scheduled maturity. There can be no assurance that we will be able to effect any required refinancings of our indebtedness on commercially reasonable terms or at all.
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, our measure of the following information may not be comparable to similarly titled measures of other companies.
30
Summarized financial information for (1) CCIC and our Restricted Subsidiaries and (2) our Unrestricted Subsidiaries is as follows:
and Restricted
Companyand
31
Tower Cash Flow and Adjusted Consolidated Cash Flow for CCIC and our Restricted Subsidiaries is as follows under the indentures governing the 4% 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:
The amounts presented above for Tower Cash Flow, Consolidated Cash Flow and Adjusted Consolidated Cash Flow continue to include the operating results from CCUK, and will do so until the pending sale of CCUK is closed. See “—Liquidity and Capital Resources”.
Impact of Recently Issued Accounting Standards
In January 2003, the Financial Accounting Standards Board (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. We adopted the provisions of FIN 46 as of March 31, 2004, and such adoption did not have a significant effect on our consolidated financial statements.
In December 2003, the FASB issued Statement of Financial Accounting Standards No. 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits (“SFAS 132(R)”). SFAS 132(R) revises the required disclosures about pension plans and other postretirement benefit plans. SFAS 132(R) replaces Statement of Financial Accounting Standards No. 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits (which was originally issued in February 1998), but retains its disclosure requirements. SFAS 132(R) requires additional disclosures about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans, and requires that certain disclosures be included in interim financial statements. SFAS 132(R) applies to our disclosures for CCUK’s defined benefit plan. The provisions of SFAS 132(R) are generally effective for fiscal years ending after December 15, 2003; however, many of the new disclosure requirements for information about foreign plans, as well as information about future benefit payments, do not become effective until fiscal years ending after June 15, 2004. The interim-period disclosure requirements of SFAS 132(R) are effective for interim periods beginning after December 15, 2003. We have adopted the annual reporting requirements of SFAS 132(R) as of December 31, 2003, except for the disclosure about future benefit payments. We have adopted the interim-period reporting requirements as of March 31, 2004.
Factors That Could Affect Future Results
The following factors could affect our future results or cause actual results to vary materially from those described in our forward-looking statements:
32
Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those expected. More information about potential factors which could affect our results is included in the Risk Factors sections of our filings with the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a result of our international operating, investing and financing activities, we are exposed to market risks, which include changes in foreign currency exchange rates and interest rates which may adversely affect our results of operations and financial position. In attempting to minimize the risks and/or costs associated with such activities, we seek to manage exposure to changes in interest rates and foreign currency exchange rates where economically prudent to do so.
Certain of the financial instruments we have used to obtain capital are subject to market risks from fluctuations in market interest rates. The majority of our financial instruments, however, are long-term fixed interest rate notes and debentures. As of June 30, 2004, we have $1,455.4 million of floating rate indebtedness, of which $67.5 million has been effectively converted to fixed rate indebtedness through the use of an interest rate swap agreement. In addition, the $1,275.4 million of floating rate indebtedness outstanding under our 2000 credit facility as of June 30, 2004 will have to be fully repaid from the proceeds of the pending sale of CCUK (see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources”). The closing date of that transaction is expected to be on or before September 30, 2004. As a result, a fluctuation in market interest rates of one percentage point in 2004 would impact our interest expense by approximately $10.8 million.
33
The majority of our foreign currency transactions are denominated in the British pound sterling or the Australian dollar, which are the functional currencies of CCUK and CCAL, respectively. As a result of CCUK’s and CCAL’s transactions being denominated and settled in such functional currencies, the risks associated with currency fluctuations are primarily associated with foreign currency translation adjustments. We do not currently hedge against foreign currency translation risks and do not currently believe that foreign currency exchange risk is significant to our operations. The pending sale of CCUK will generally eliminate our foreign currency risks related to the British pound sterling. In addition, substantially all of the cash consideration for the CCUK sale is denominated in United States dollars, so we have no significant foreign currency risk related to that transaction.
The foreign currency exchange rates used to translate the 2003 and 2004 financial statements for CCAL were as follows:
CCAL
(Australian dollar)
Average exchange rate for:
January 2003
February 2003
March 2003
April 2003
May 2003
June 2003
January 2004
February 2004
March 2004
April 2004
May 2004
June 2004
Ending exchange rate for:
December 2003
ITEM 4. CONTROLS AND PROCEDURES
The Company conducted an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective in alerting them in a timely manner to material information relating to the Company required to be included in the Company’s periodic reports under the Securities Exchange Act of 1934.
There have been no changes in the Company’s internal control over financial reporting during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the stockholders of the Company was held on May 26, 2004, at which meeting the stockholders voted to (1) elect Randall A. Hack, Edward C. Hutcheson, Jr. and J. Landis Martin as Class III directors, (2) approve the Company’s 2004 Stock Incentive Plan, (3) ratify the appointment of KPMG LLP as independent public accountants for 2004 and (4) reject a stockholder proposal regarding implementation of the MacBride Principles. The voting results for each proposal submitted to a vote is as listed below.
34
Election of Class III Directors
Randall A. Hack – 203,631,794 votes for and 8,881,523 votes withheld.
Edward C. Hutcheson, Jr. – 158,291,802 votes for and 54,221,515 votes withheld.
J. Landis Martin – 204,394,269 votes for and 8,119,048 votes withheld.
The other directors whose term of office as a director continued after the meeting are: Dale N. Hatfield, Lee W. Hogan and Robert F. McKenzie as Class I directors; and Carl Ferenbach, Ari Q. Fitzgerald, John P. Kelly and William D. Strittmater as Class II directors.
Approval of Company’s 2004 Stock Incentive Plan
131,416,583 votes for, 49,986,587 votes against and 139,082 votes abstaining.
Ratification of Appointment of KPMG LLP as Independent Auditors for 2004
210,736,992 votes for, 1,732,101 votes against and 44,224 votes abstaining.
Stockholder Proposal Regarding MacBride Principles
5,582,583 votes for, 159,610,867 votes against and 16,348,802 votes abstaining.
The holders of the Company’s 8 1/4% Convertible Preferred Stock were entitled to vote on an as converted basis on each of the proposals with the common stock, voting as a single class, and such votes are included in the voting results of the common stock set forth for each of the proposals above.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(b) Reports on Form 8-K:
The Registrant filed a Current Report on Form 8-K dated April 14, 2004 with the SEC on April 15, 2004 furnishing under Items 7 and 12 a press release dated April 14, 2004 announcing that the Registrant had increased certain elements of its outlook for full year 2004.
The Registrant filed a Current Report on Form 8-K dated May 5, 2004 with the SEC on May 6, 2004 furnishing under Items 7 and 12 a press release dated May 5, 2004 disclosing its financial results for the first quarter of 2004.
The Registrant filed a Current Report on Form 8-K dated June 28, 2004 with the SEC on June 28, 2004 (1) disclosing pursuant to Item 5 that it had issued a press release dated June 28, 2004 announcing that it had signed a definitive agreement to sell CCUK, its UK subsidiary, to National Grid Transco Plc for $2.035 billion in cash and (2) furnishing such press release pursuant to Items 7 and 9.
35
The Registrant filed a Current Report on Form 8-K dated June 28, 2004 with the SEC on June 30, 2004 (1) describing under Item 5 certain terms of the definitive agreement relating to the sale of CCUK and (2) filing such definitive agreement pursuant to Item 7.
The Registrant filed a Current Report on Form 8-K dated June 28, 2004 with the SEC on July 9, 2004 furnishing under Item 9 certain Unaudited Pro Forma Condensed Consolidated Financial Information of the Registrant.
The Registrant filed a Current Report on Form 8-K dated July 28, 2004 with the SEC on July 30, 2004 furnishing under Items 7 and 12 a press release dated July 28, 2004 and a press release dated July 29, 2004 disclosing its financial results for the second quarter of 2004.
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 6, 2004
By:
/S/ W. BENJAMIN MORELAND
/S/ WESLEY D. CUNNINGHAM
37