As filed with the Securities and Exchange Commission on April 6, 1999 Registration No. 333-71715 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- AMENDMENT NO. 2 TO FORM S-4 REGISTRATION STATEMENT Under The Securities Act of 1933 --------------- CROWN CASTLE INTERNATIONAL CORP. (Exact name of Registrant as specified in its charter) Delaware 4899 76-0470458 (State or other (Primary Standard Industrial (I.R.S. Employer jurisdiction of Classification Number) Identification Number) incorporation or organization) --------------- Mr. Charles C. Green, III 510 Bering Drive Suite 500 Houston, Texas 77057 (713) 570-3000 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) --------------- Copies to: Stephen L. Burns, Esq. Cravath, Swaine & Moore 825 Eighth Avenue New York, New York 10019 --------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] --------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. Information contained herein is subject to completion or amendment. A Registration Statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the Registration Statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this prospectus is not complete and may be changed. We may + +not sell these securities until the registration statements filed with the + +Securities and Exchange Commission relating to these securities is effective. + +This prospectus is not an offer to sell these securities and it is not + +soliciting an offer to buy these securities in any state where the offer or + +sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subject to Completion April 6, 1999 Prospectus [LOGO] CROWN CASTLE INTERNATIONAL CROWN CASTLE INTERNATIONAL CORP. ------------- This prospectus (and accompanying letter of transmittal) relates to our offer to exchange up to $200,000,000 of our new 12 3/4% Senior Exchangeable Preferred Stock due 2010, which will be freely transferable, for any and all outstanding 12 3/4% Senior Exchangeable Preferred Stock due 2010 issued in a private offering on December 16, 1998. Expiration Date: . The exchange offer expires at 5:00 p.m., New York City time, on [ ], 1999, unless extended. Withdrawal Rights: . Tenders of old preferred stock may be withdrawn at any time prior to the expiration of the exchange offer. The New Preferred Stock: . The terms of the new preferred stock are substantially identical to the terms of the old preferred stock, except that the new preferred stock will be freely tradeable. The Exchange Debentures: . The terms of the exchange debentures are substantially identical to the terms of the restricted exchange debentures, except that the exchange debentures will be freely tradeable. ------------- Please see "Risk Factors" beginning on page 17 for a discussion of certain factors you should consider in connection with the exchange offer. ------------- Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the new preferred stock or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ------------- The date of this prospectus is , 1999.
TABLE OF CONTENTS Page ---- Prospectus Summary................. 1 Risk Factors....................... 17 Use of Proceeds.................... 28 Dividend Policy.................... 28 Capitalization..................... 29 Unaudited Pro Forma Condensed Consolidated Financial Statements........................ 30 Selected Financial and Other Data of CCIC........................... 37 Selected Financial and Other Data of CTI............................ 39 Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 41 The Exchange Offer................. 55 Industry Background................ 62 Business........................... 70 The 1999 Transactions.............. 95 Page ---- The Proposed Offerings............. 106 Management......................... 107 Certain Relationships and Related Transactions...................... 120 Principal Stockholders............. 129 Description of Securities.......... 132 Book-Entry, Delivery and Form...... 189 Description of Capital Stock....... 194 Description of Certain Indebtedness...................... 201 Certain U.S. Federal Income Tax Considerations................... 207 Plan of Distribution............... 207 Legal Matters...................... 208 Independent Auditors............... 208 Certain Currency Translations...... 208 Available Information.............. 208 Index to Financial Statements...... F-1 i
PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. It may not contain all the information that is important to you. We encourage you to read this entire prospectus carefully. The Company We are a leading owner and operator of wireless communications and broadcast transmission infrastructure. After giving effect to the completion of the recent and proposed transactions we describe in this prospectus, as of December 31, 1998, we owned or managed 6,137 towers, including 4,451 towers in the United States and Puerto Rico and 1,686 towers in the United Kingdom. Our customers currently include many of the world's major wireless communications and broadcast companies, including Bell Atlantic Mobile, BellSouth Mobility, AT&T Wireless, Nextel and the British Broadcasting Corporation. Our strategy is to use our leading domestic and international position to capture the growing consolidation and build-out opportunities created by: . the outsourcing of tower ownership and management by major wireless carriers; . the need for existing wireless carriers to expand coverage and improve capacity; . the additional demand for towers created by new entrants into the wireless communications industry; . the privatization of state-run broadcast transmission networks; and . the introduction of new digital broadcast transmission technology and wireless technologies. Our two main businesses are leasing antenna space on wireless and broadcast multi-tenant towers and operating broadcast transmission networks. We also provide complementary services to our customers, including network design, radio frequency engineering, site acquisition, site development and construction, antenna installation and network management and maintenance. We believe that our full service capabilities are a key competitive advantage in forming strategic partnerships to acquire large wireless and broadcast tower portfolios and in winning contracts for new tower construction. Our primary business in the United States is the leasing of antenna space to wireless carriers. After completion of the recent and proposed transactions we describe in this prospectus, we will have concentrations of towers, or tower clusters, in 26 of the 50 largest U.S. metropolitan areas, 23 of which are east of the Mississippi river. We believe that by owning and managing large tower clusters we are able to offer our customers the ability to expand their networks rapidly and efficiently across particular markets or regions. Accordingly, we have entered into agreements with both Bell Atlantic Mobile and BellSouth Mobility that will allow us to control and operate substantially all the towers in their 850 MHz networks. Our primary business in the United Kingdom is the operation of television and radio broadcast transmission networks. Following the 1997 acquisition of the BBC's broadcast and tower infrastructure, we were awarded long-term contracts to provide the BBC and other broadcasters analog and digital transmission services. We also lease antenna space to wireless operators in the United Kingdom on the towers we acquired from the BBC and from various wireless carriers. After completion of the One2One transaction described in this prospectus, we will have nationwide broadcast and wireless coverage in the United Kingdom. 1
Growth Strategy Our objective is to become the premier global provider of wireless communications and broadcast transmission infrastructure and related services. Our experience in expanding tower portfolios and operating analog and digital transmission networks, our significant relationships with wireless carriers and broadcasters and our ability to offer customers our in-house technical and operational expertise positions us to accomplish this objective. The key elements of our growth strategy are to: Maximize Utilization of Tower Capacity. We seek to increase the number of antenna leases on the towers and rooftops that we own or manage. Many of our towers have significant capacity for additional antennas. We can increase the number of tenants on these towers at a low incremental cost. Leverage Expertise of U.S. and U.K. Personnel to Capture Global Growth Opportunities. Our ability to design, develop and operate wireless communications and broadcast transmission networks, including the transmission of signals, is an important competitive advantage in our pursuit of growth opportunities, as evidenced by our BBC, One2One, Bell Atlantic, BellSouth and Powertel transactions. Partner with Wireless Carriers to Assume Ownership of their Existing Towers. We will continue to seek to partner with major wireless carriers in order to assume ownership of their towers directly or through joint ventures or control their towers through contractual arrangements. We believe that we will be able to capitalize on our relationships with our strategic partners and customers with international operations to expand our global coverage, or footprint. Provide Build-to-Suit Towers for Wireless Carriers and Broadcasters. We are aggressively pursuing opportunities to build new towers for wireless carriers. As wireless carriers continue to expand and fill-in their service areas, they will require additional communications sites and will have to build new towers where multi-tenant towers are not available. Similarly, the introduction of digital television broadcasting in the United States and elsewhere in the world will require the construction of new broadcast towers to accommodate new digital transmission equipment and analog transmission equipment displaced from existing towers. Acquire Existing Broadcast Transmission Networks. We intend to pursue selective acquisitions of broadcast transmission networks and related infrastructure around the world. We believe we can capitalize on the experience we have gained through the acquisition of the BBC's broadcast transmission network and our roll-out of digital television transmission services throughout the United Kingdom. Continue to Decentralize Management Functions. In order to better manage our efforts to add tenants to our towers and our new tower build programs, and in anticipation of the continued growth of our tower footprint throughout the United States, we have begun and plan to continue decentralizing some management and operational functions. To that end, in addition to our Pittsburgh operating headquarters and regional office, we have opened five regional offices and plan to add 10 additional regional offices in connection with the recent and proposed transactions described below. 2
1999 Transactions Bell Atlantic Joint Venture On March 31, 1999, we formed a joint venture with Bell Atlantic Mobile to own and operate approximately 1,459 towers. These towers represent substantially all the towers in Bell Atlantic's 850 MHz wireless network in the eastern and southwestern United States, including markets such as New York, Philadelphia, Boston, Washington, D.C. and Phoenix. We manage the day-to-day operations of the joint venture. There is a master build-to-suit agreement pursuant to which the joint venture will build and own the next 500 towers to be built for Bell Atlantic's wireless communications business. Bell Atlantic leases antenna space on the towers transferred to the joint venture and will lease antenna space on all towers built pursuant to the build-to-suit agreement. We own approximately 61.5% of the joint venture and Bell Atlantic and certain of its affiliates own the other 38.5% along with a 0.001% interest in the joint venture's operating subsidiary. Proposed BellSouth Transaction On March 8, 1999, we entered into a preliminary agreement with BellSouth and certain of its affiliates to control and operate approximately 1,850 towers. These towers represent substantially all the towers in BellSouth's 850 MHz wireless network in the southeastern and midwestern United States, including such markets as Miami, Atlanta, Tampa, Nashville and Indianapolis. We will be responsible for managing, maintaining, marketing and leasing the available space on BellSouth's towers. There will be a master build-to-suit agreement pursuant to which we will have the right to build, control and operate the next 500 towers to be built for BellSouth's wireless communications business. BellSouth will lease antenna space on the 1,850 towers, as well as the towers built pursuant to the build-to-suit agreement. While we will have complete responsibility for the towers and will receive all the economic benefits of leasing available space on the towers, BellSouth will continue to own the tower infrastructure. In connection with our entering into the preliminary agreement, we placed $50.0 million in an escrow account which will be returned to us at the first closing date. See "Risk Factors--We May Not Consummate the 1999 Transactions". Proposed Powertel Acquisition On March 15, 1999, we entered into an agreement with Powertel Inc. to purchase approximately 650 towers. These towers represent substantially all of Powertel's owned towers in its 1.9 GHz wireless network in the southeastern and midwestern United States, including such markets as Atlanta, Birmingham, Jacksonville, Memphis and Louisville, and a number of major connecting highway corridors in the southeast. These towers are complementary to BellSouth's 850 MHz footprint in the southeast and have minimal coverage overlap. Powertel will lease antenna space on the towers we acquire in the acquisition. Pursuant to the acquisition agreement, we placed $50.0 million in escrow to be applied to the purchase price at closing. See "Risk Factors--We May Not Consummate the 1999 Transactions". Proposed One2One Transaction On March 5, 1999, we entered into an agreement with One2One, pursuant to which CTI, our U.K. operating subsidiary, has agreed to manage, develop and, at its option, acquire up to 821 towers. These towers represent substantially all the towers in One2One's 1800 MHz nationwide wireless network in the United Kingdom. We believe this transaction will position us to capitalize on 3
lease-up and build-out opportunities provided by the introduction of new wireless technologies. CTI will be responsible for managing and leasing available space on the towers and will receive all the income from any such third party leases. ---------------- Although we expect the Powertel acquisition and the One2One transaction to be consummated during the first half of 1999, and the first closing of the BellSouth transaction to be consummated by May 31, 1999, the operative agreements governing these transactions are subject to a number of significant conditions. Therefore, we cannot guarantee that we will close any of these proposed transactions on the terms described in this prospectus or at all. See "Risk Factors--We May Not Consummate the 1999 Transactions". When we refer to financial information in this prospectus as "after giving effect to" or "pro forma for" the 1999 Transactions, we mean after giving effect to the transactions described above, other than the One2One transaction, which does not have a material impact on our pro forma financial results. Proposed Offerings On March 16, 1999, we filed a Registration Statement on Form S-1 in connection with a proposed concurrent public underwritten offering of our common stock and our Senior Discount Notes due 2011. The proceeds from these proposed offerings will be used, in part, to finance the BellSouth transaction and the Powertel acquisition. ---------------- Our principal executive offices are located at 510 Bering Drive, Suite 500, Houston, Texas 77057, and our telephone number is (713) 570-3000. 4
Corporate Structure The following chart illustrates as of December 31, 1998, assuming the recent and proposed transactions and the proposed offerings described in this prospectus had been completed, (1) our organizational structure, including our principal subsidiaries, and (2) our consolidated debt obligations. See "Capitalization" and "The 1999 Transactions". 5
v The Offering Summary of Terms of the Exchange Offer The Exchange Offer.......... We are offering to exchange for each $1,000 liquidation preference of our outstanding 12 3/4% Senior Exchangeable Preferred Stock due 2010, which we call the old preferred stock, $1,000 liquidation preference of our 12 3/4% Senior Exchangeable Preferred Stock due 2010, which has been registered under the Securities Act of 1933 and which we call the new preferred stock. As of the date of this document, $200,000,000 in aggregate liquidation preference of old preferred stock is outstanding. The old preferred stock was originally issued in a private placement. Resale...................... We believe that new preferred stock issued pursuant to the exchange offer in exchange for old preferred stock may be offered for resale, resold and otherwise transferred by you without compliance with the registration and prospectus delivery provisions of the Securities Act of 1933, provided that: . you are acquiring the new preferred stock in the ordinary course of your business; . you have not engaged in, do not intend to engage in, and have no arrangement or understanding with any person to participate in the distribution of the new preferred stock; and . you are not our "affiliate" as defined under Rule 405 of the Securities Act. Each participating broker-dealer that receives shares of new preferred stock for its own account pursuant to the exchange offer in exchange for shares of old preferred stock that were acquired as a result of market-making or other trading activity must acknowledge that it will deliver a prospectus in connection with any resale of the shares of new preferred stock. See "Plan of Distribution". Any holder of old preferred stock who (1) is our affiliate, (2) does not acquire new preferred stock in the ordinary course of its business, (3) tenders in the exchange offer with the intention to participate, or for the purpose of participating, in a distribution of new preferred stock or (4) is a broker-dealer that acquired the old preferred stock directly from us, must comply with the registration and prospectus delivery requirements of the Securities Act of 1933 in connection with the resale of the new preferred stock. 6
Expiration Date............. 5:00 p.m., New York City time, on , 1999, unless we extend the exchange offer. Certain Conditions to the Exchange Offer............. The exchange offer is subject to certain customary conditions, which we may waive. Special Procedures for Beneficial Holders......... If you beneficially own shares of old preferred stock which are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and you wish to tender in the exchange offer, you should contact such registered holder promptly and instruct such person to tender on your behalf. If you wish to tender in the exchange offer on your own behalf, you must, prior to completing and executing the letter of transmittal and delivering your shares of old preferred stock, either arrange to have the shares of old preferred stock registered in your name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time. Withdrawal Rights........... You may withdraw your tender of old preferred stock at any time before the offer expires. Certain Tax Consequences.... The exchange pursuant to the exchange offer will generally not be a taxable event for United States federal income tax purposes. Use of Proceeds............. We will not receive any proceeds from the exchange pursuant to the exchange offer. Exchange Agent.............. ChaseMellon Shareholder Services, L.L.C. is serving as exchange agent in connection with the exchange offer. Summary Description of the Securities to be Registered The New Preferred Stock: The new preferred stock have the same financial terms and covenants as the old preferred stock, which are as follows: Securities Offered.......... 200,000 shares of 12 3/4% Senior Exchangeable Preferred Stock due 2010 with a liquidation preference of $1,000 per share. We have the option to exchange the Exchangeable Preferred Stock, in whole but not in part, for 12 3/4% Senior Subordinated Exchange Debentures due 2010. Dividends................... Annual fixed rate of 12 3/4%. We will declare and pay dividends on March 15, June 15, September 15 and December 15 of each year, beginning on March 15, 1999. 7
On or before December 15, 2003, we have the option to pay dividends in cash or in additional fully paid and non-assessable shares of new preferred stock with an aggregate liquidation preference equal to the amount of such dividends. After December 15, 2003, we will pay dividends only in cash. Mandatory Redemption........ We will be required to redeem all of the shares of new preferred stock outstanding on December 15, 2010 at a redemption price equal to 100% of the liquidation preference of such shares, plus accumulated and unpaid dividends to the date of redemption. Optional Redemption......... On or after December 15, 2003, we may redeem some or all of the shares of new preferred stock at any time at the redemption prices (together with accumulated and unpaid dividends, if any, to the date of redemption) listed in the section "Description of Securities--Description of Senior Exchangeable Preferred Stock" under the heading "Optional Redemption". In addition, before December 15, 2001, we may redeem up to 35% of the outstanding shares of new preferred stock with the proceeds of certain public equity offerings or strategic equity investments at a redemption price equal to 112.750% of the liquidation preference of the new preferred stock, together with accumulated and unpaid dividends, if any, to the date of redemption. Change of Control........... If we experience specific kinds of changes in control, we must make an offer to purchase any and all shares of new preferred stock for cash at a purchase price of 101% of the liquidation preference of such shares, together with all accumulated and unpaid dividends to the date of purchase. However, our repurchase of new preferred stock under these circumstances must comply with certain provisions of the indenture governing our outstanding senior notes. If we were unable to comply with those provisions and fail to repurchase new preferred stock, then holders of the new preferred stock would be entitled to certain voting rights. In addition, there can be no assurance that we will have sufficient funds to repurchase the new preferred stock in the event of a change of control or that our creditors will otherwise allow us to make the repurchase. See "Risk Factors--We May Not Have Sufficient Funds to Repurchase the Exchangeable Preferred Stock or the Exchange Debentures Upon a Change of Control". The certificate of designations governing the new Certain Covenants........... preferred stock contains certain covenants for your benefit which, among other things, limit our ability and the ability of certain of our subsidiaries to: . borrow money; 8
. pay dividends on stock or purchase our capital stock; . make investments; and . sell assets or merge with or into other companies. These covenants are subject to important exceptions and qualifications which are described in "Description of Securities-- Description of Senior Exchangeable Preferred Stock" under the heading "Certain Covenants." Voting Rights............... The new preferred stock will have no voting rights except as required by law and as specified in the certificate of designations. If we fail to meet our obligations under the covenants contained in the certificate of designations, the holders of the new preferred stock will be entitled to elect two additional members of our Board of Directors. Exchange Feature............ On any scheduled dividend payment date, we have the option to exchange all (but not less than all) of the shares of new preferred stock then outstanding for our 12 3/4% Senior Subordinated Exchange Debentures due 2010, which we call the exchange debentures. If we exercise our option to exchange, we will issue exchange debentures in an aggregate principal amount equal to the aggregate liquidation preference of the outstanding new preferred stock. The indenture governing our outstanding senior notes contains substantial restrictions on our ability to exchange new preferred stock for exchange debentures. See "Description of Securities--Description of Senior Exchangeable Preferred Stock--Exchange". Registration Rights.... Holders of new preferred stock are not entitled to any registration rights with respect to the new preferred stock. The Exchange Debentures: Securities Offered.......... 12 3/4% Senior Subordinated Exchange Debentures due 2010 in an aggregate principal amount equal to the aggregate liquidation preference of the new preferred stock outstanding on the date of the exchange, plus such principal amount of additional exchange debentures as may be issued in lieu of cash interest. Maturity.................... December 15, 2010. Interest.................... At an annual fixed rate of 12 3/4%. We will pay interest on each June 15 and December 15 of each year, commencing on the first of these dates that occurs after the date of the exchange. On or before December 15, 2003, we have the option to pay interest in cash or in additional exchange debentures in an 9
aggregate principal amount equal to the amount of such interest. After December 15, 2003, we will pay interest only in cash. On or after December 15, 2003, we may redeem some or all of the exchange debentures at any time at Optional Redemption......... the redemption prices (together with accrued and unpaid interest, if any, to the date of redemption) listed in the section "Description of Securities--Description of Senior Subordinated Exchange Debentures" under the heading "Optional Redemption". In addition, before December 15, 2001, we may redeem up to 35% of the exchange debentures with the proceeds of certain public equity offerings or strategic equity investments at the price listed in the section "Description of Securities--Description of Senior Subordinated Exchange Debentures" under the heading "Optional Redemption". If we choose this option, we must redeem the exchange debentures within 60 days of receiving the proceeds. Mandatory Offer to If we sell certain assets or experience specific Repurchase................. kinds of changes of control, we must offer to repurchase the exchange debentures at the prices listed in the section "Description of Securities--Description of Senior Subordinated Exchange Debentures" under the heading "Repurchase at the Option of Holders". Basic Covenants of the Exchange Indenture......... If and when we issue the exchange debentures, we will issue them under an indenture with United States Trust Company of New York, as trustee. The indenture will, among other things, restrict our ability and the ability of certain of our subsidiaries to: .borrow money; .pay dividends on stock or purchase stock; .make investments; and . sell certain assets or merge with or into other companies. For more details, see the section "Description of Securities--Description of Senior Subordinated Exchange Debentures" under the heading "Certain Covenants". Risk Factors You should carefully consider all of the information in this prospectus. In particular, you should evaluate the specific risk factors under "Risk Factors" for a discussion of certain risks related to your participation in the exchange offer. 10
Summary Unaudited Pro Forma Financial and Other Data The unaudited pro forma financial and other data set forth below have been derived from the pro forma financial statements included under "Unaudited Pro Forma Condensed Consolidated Financial Statements". The pro forma statement of operations data and other data for the year ended December 31, 1998, give effect to the transactions detailed under "Unaudited Pro Forma Condensed Consolidated Financial Statements" as if they had occurred on January 1, 1998. The pro forma balance sheet data give effect to such transactions occurring in 1999 as if they had occurred on December 31, 1998. The unaudited pro forma financial and other data for the Restricted Group (as defined) are not intended as alternative measures of operating results, financial position or cash flow from operations (as determined in accordance with generally accepted accounting principles). The information set forth below should be read in conjunction with "Unaudited Pro Forma Condensed Consolidated Financial Statements", "Selected Financial and Other Data of CCIC", "Selected Financial and Other Data of CTI", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and the notes thereto included elsewhere in this prospectus. Company Restricted Group Pro Forma Pro Forma ------------ ---------------- Year Ended Year Ended December 31, December 31, 1998 1998 ------------ ---------------- (Dollars in thousands) Statement of Operations Data: Net revenues: Site rental and broadcast transmission........ $ 251,679 $ 72,286 Network services and other.................... 50,299 32,217 --------- --------- Total net revenues.......................... 301,978 104,503 --------- --------- Costs of operations: Site rental and broadcast transmission........ 94,663 23,684 Network services and other.................... 29,480 17,329 --------- --------- Total costs of operations................... 124,143 41,013 --------- --------- Expected incremental operating expenses for proposed transactions(a)....................... 21,054 15,917 General and administrative...................... 28,571 21,153 Corporate development(b)........................ 4,633 4,625 Non-cash compensation charges(c)................ 16,589 9,907 Depreciation and amortization................... 148,155 61,066 --------- --------- Operating income (loss)......................... (41,167) (49,178) Other income (expense): Interest and other income (expense)........... 4,945 1,101 Interest expense and amortization of deferred financing costs.............................. (89,059) (50,608) --------- --------- Income (loss) before income taxes and minority interests...................................... (125,281) (98,685) Provision for income taxes...................... (374) (374) Minority interests.............................. 1,307 -- --------- --------- Net income (loss)............................... (124,348) (99,059) Dividends on preferred stock.................... (26,745) (26,745) --------- --------- Net income (loss) after deduction of dividends on preferred stock............................. $(151,093) $(125,804) ========= ========= Other Data: Site data(d): Towers and revenue producing rooftop sites at end of period................................ ========= ========= 11
Company Restricted Group Pro Forma Pro Forma ------------ ---------------- Year Ended Year Ended December 31, December 31, 1998 1998 ------------ ---------------- (Dollars in thousands) EBITDA(e): Site rental and broadcast transmission......... $ 148,581 $ 46,823 Network services and other..................... 683 (4,486) Expected incremental operating expenses for proposed transactions (a)..................... (21,054) (15,917) Corporate development expenses(b).............. (4,633) (4,625) ---------- ---------- Total EBITDA................................. $ 123,577 $ 21,795 ========== ========== Adjusted EBITDA(e)............................... -- $ Capital expenditures............................. $ 202,553 88,535 Summary cash flow information: Net cash provided by operating activities...... 111,891 13,511 Net cash used for investing activities......... (212,763) (88,535) Net cash provided by financing activities...... 1,042,743 1,010,263 Ratio of earnings to fixed charges(f)............ -- -- Ratio of EBITDA to cash interest expense(g)...... 3.06x 6.23x Company Pro Forma Restricted Group Pro Forma As of December 31, 1998 As of December 31, 1998 ------------------------------------- ---------------------------------------- Pro Forma for Pro Forma for Proposed Proposed Pro Forma Offerings and Pro Forma Offerings and Historical for Proposed 1999 Historical for Proposed 1999 CCIC Offerings Transactions CCIC Offerings Transactions ---------- ------------ ------------- ---------- ------------ ------------- (Dollars in thousands) Balance Sheet Data: Cash and cash equivalents............ $ 296,450 $ 962,575 $ 49,583 $ 41,785 $ 707,910 (h) $ 3,293 (h) Property and equipment, net.................... 592,594 592,594 2,067,969 165,205 165,205 1,048,100 Total assets............ 1,523,230 2,200,230 2,769,269 1,130,685 1,807,685 2,184,994 Total debt.............. 429,710 729,710 909,710 173,599 473,599 473,599 Net debt(i)............. 133,260 (232,865) 860,127 131,814 (234,311) 470,306 Redeemable preferred stock.................. 201,063 201,063 201,063 201,063 201,063 201,063 Total stockholders' equity 737,562 1,114,562 1,491,562 737,562 1,114,562 1,491,562 - -------- (a) We expect that we will incur incremental operating expenses as a result of the Bell Atlantic joint venture and the proposed transactions described in this prospectus. Such incremental expenses are currently estimated to amount to approximately $5.2 million per year for the joint venture and approximately $15.9 million per year for the proposed BellSouth transaction and the proposed Powertel acquisition. We have included the effect of these incremental expenses in the accompanying summary pro forma financial data in order to more accurately present the effect of these transactions on our consolidated results of operations. The effect of these incremental expenses has not been reflected in the Unaudited Pro Forma Condensed Consolidated Statement of Operations included elsewhere in this prospectus. See "Notes to Unaudited Pro Forma Condensed Consolidated Statement of Operations." (b) Corporate development expenses represent costs incurred in connection with acquisitions and development of new business initiatives. These expenses consist primarily of allocated compensation, benefits and overhead costs that are not directly related to the administration or management of existing towers. (c) Represents charges related to the issuance of stock options to employees and executives. (d) Represents our aggregate number of sites at the end of the period assuming we had consummated the joint venture, the BellSouth transaction and the Powertel acquisition. As of December 31, 1998, we had contracts with 1,365 buildings in the United States to manage on behalf of such buildings the leasing of space for antennas on the rooftops of such buildings. A revenue producing rooftop represents a rooftop where we have arranged a lease of space on such rooftop and, as such, are receiving payments in respect of our management contract. We generally do not receive any payment for rooftops under management unless we actually lease space on such rooftops to third parties. As of December 31, 1998, we had 1,284 rooftop sites under management throughout the United States that were not revenue producing rooftops but were available for leasing to customers and, in the United Kingdom, we had 54 revenue producing rooftop sites that were occupied by our transmitters but were not available for leasing to customers. 12
(e) EBITDA is defined as operating income (loss) plus depreciation and amortization and non-cash compensation charges. Adjusted EBITDA is defined as the sum of (i) annualized site rental and broadcast transmission EBITDA before corporate development for the most recent calendar quarter and (ii) EBITDA, less site rental and broadcast transmission EBITDA before corporate development, for the most recent four calendar quarters. EBITDA and Adjusted EBITDA are presented as additional information because management believes them to be useful indicators of our ability to meet debt service and capital expenditure requirements. They are not, however, intended as alternative measures of operating results or cash flow from operations (as determined in accordance with generally accepted accounting principles). Furthermore, our measure of EBITDA may not be comparable to similarly titled measures of other companies. (f) For purposes of computing the ratio of earnings to fixed charges, earnings represent income (loss) before income taxes, minority interests and fixed charges. Fixed charges consist of interest expense, the interest component of operating leases and amortization of deferred financing costs. For the year ended December 31, 1998, our earnings were insufficient to cover our fixed charges by $125.3 million. For the year ended December 31, 1998, earnings were insufficient to cover fixed charges of the Restricted Group by $98.7 million. (g) Total interest expense for the year ended December 31, 1998 includes amortization of deferred financing costs and discount of $47.2 million for CCIC, $0.9 million for CTI and $0.6 million for the Bell Atlantic joint venture. (h) Pro forma balances of cash and cash equivalents for the Restricted Group exclude $248.1 million of proceeds from our initial public offering and our offering of exchangeable preferred stock (along with interest earned on such amounts since the consummation of these transactions) that were contributed to the joint venture, of which approximately $45.9 million remained in the joint venture after its formation. (i) Net debt represents total debt less cash and cash equivalents. 13
Summary Financial and Other Data of CCIC The summary historical consolidated financial and other data for CCIC set forth below for each of the four years in the period ended December 31, 1998, and as of December 31, 1995, 1996, 1997 and 1998, have been derived from the consolidated financial statements of CCIC, which have been audited by KPMG LLP, independent certified public accountants. The results of operations for the year ended December 31, 1998 are not comparable to the year ended December 31, 1997, and the results for the year ended December 31, 1997 are not comparable to the year ended December 31, 1996 as a result of business acquisitions consummated in 1997 and 1998. Results of operations of these acquired businesses are included in CCIC's consolidated financial statements for the periods subsequent to the respective dates of acquisition. The summary historical financial and other data for the Restricted Group (as defined) are not intended as alternative measures of operating results or cash flows from operations (as determined in accordance with generally accepted accounting principles). The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--CCIC" and the consolidated financial statements and the notes thereto of CCIC included elsewhere in this document. Years Ended December 31, ------------------------------------ 1995 1996 1997 1998 ------- ------- -------- -------- (Dollars in thousands) Statement of Operations Data: Net revenues: Site rental and broadcast transmission...................... $ 4,052 $ 5,615 $ 11,010 $ 75,028 Network services and other......... 6 592 20,395 38,050 ------- ------- -------- -------- Total net revenues............... 4,058 6,207 31,405 113,078 ------- ------- -------- -------- Costs of operations: Site rental and broadcast transmission...................... 1,226 1,292 2,213 26,254 Network services and other......... -- 8 13,137 21,564 ------- ------- -------- -------- Total costs of operations........ 1,226 1,300 15,350 47,818 ------- ------- -------- -------- General and administrative........... 729 1,678 6,824 23,571 Corporate development(a)............. 204 1,324 5,731 4,625 Non-cash compensation charges(b) .... -- -- -- 12,758 Depreciation and amortization........ 836 1,242 6,952 37,239 ------- ------- -------- -------- Operating income (loss).............. 1,063 663 (3,452) (12,933) Other income (expense): Equity in earnings (losses) of unconsolidated affiliate.......... -- -- (1,138) 2,055 Interest and other income (expense)(c)...................... 53 193 1,951 4,220 Interest expense and amortization of deferred financing costs....... (1,137) (1,803) (9,254) (29,089) ------- ------- -------- -------- Loss before income taxes and minority interests........................... (21) (947) (11,893) (35,747) Provision for income taxes........... -- (10) (49) (374) Minority interests................... -- -- -- (1,654) ------- ------- -------- -------- Net loss............................. (21) (957) (11,942) (37,775) Dividends on preferred stock......... -- -- (2,199) (5,411) ------- ------- -------- -------- Net loss after deduction of dividends on preferred stock.................. $ (21) $ (957) $(14,141) $(43,186) ======= ======= ======== ======== Loss per common share--basic and di- luted............................... $ (0.01) $ (0.27) $ (2.27) $ (1.02) ======= ======= ======== ======== Common shares outstanding--basic and diluted (in thousands)...................... 3,316 3,503 6,238 42,518 ======= ======= ======== ======== 14
Years Ended December 31, ----------------------------------------- 1995 1996 1997 1998 -------- -------- --------- ---------- (Dollars in thousands) Other Data: Site data (at period end)(d): Towers owned...................... 126 155 240 1,344 Towers managed.................... 7 7 133 129 Rooftop sites managed (revenue producing)(e).................... 41 52 80 135 -------- -------- --------- ---------- Total sites owned and managed... 174 214 453 1,608 ======== ======== ========= ========== EBITDA(f): Site rental....................... $ 2,697 $ 3,555 $ 7,682 $ 44,661 Network services and other........ (594) (326) 1,549 (2,972) Corporate development expenses(a)...................... (204) (1,324) (5,731) (4,625) -------- -------- --------- ---------- Total EBITDA.................... $ 1,899 $ 1,905 $ 3,500 $ 37,064 ======== ======== ========= ========== Restricted Group EBITDA............. $ 1,899 $ 1,905 $ 3,500 $ 5,799 Capital expenditures................ 161 890 18,035 138,759 Summary cash flow information: Net cash provided by (used for) operating activities............. 1,672 (530) (624) 44,976 Net cash used for investing activities....................... (16,673) (13,916) (111,484) (149,248) Net cash provided by financing activities....................... 15,597 21,193 159,843 345,248 Ratio of earnings to fixed charges(g)......................... -- -- -- -- Balance Sheet Data (at period end): Cash and cash equivalents........... $ 596 $ 7,343 $ 55,078 $ 296,450 Property and equipment, net......... 16,003 26,753 81,968 592,594 Total assets........................ 19,875 41,226 371,391 1,523,230 Total debt.......................... 11,182 22,052 156,293 429,710 Redeemable preferred stock(h)....... 5,175 15,550 160,749 201,063 Total stockholders' equity (defi- cit)............................... 619 (210) 41,792 737,562 - -------- (a) Corporate development expenses represent costs incurred in connection with acquisitions and development of new business initiatives. These expenses consist primarily of allocated compensation, benefits and overhead costs that are not directly related to the administration or management of existing towers. For the year ended December 31, 1997, such expenses include (1) nonrecurring cash bonuses of $0.9 million paid to certain executive officers in connection with our initial investment in Castle Transmission, our U.K. subsidiary and (2) a nonrecurring cash charge of $1.3 million related to the purchase by CCIC of shares of common stock from CCIC's former chief executive officer in connection with the Castle Transmission investment. See "Certain Relationships and Related Transactions". (b) Represents charges related to the issuance of stock options to certain employees and executives. (c) Includes a $1.2 million fee received in March 1997 as compensation for leading the investment consortium which provided the equity financing in connection with the Castle Transmission investment. (d) Represents the aggregate number of sites of CCIC as of the end of each period. (e) As of December 31, 1998, we had contracts with 1,365 buildings in the United States to manage on behalf of such buildings the leasing of space for antennas on the rooftops of such buildings. A revenue producing rooftop represents a rooftop where we have arranged a lease of space on such rooftop and, as such, are receiving payments in respect of our management contract. We generally do not receive any payment for rooftops under management unless we actually lease space on such rooftops to third parties. As of December 31, 1998, we had 1,284 rooftop sites under management throughout the United States that were not revenue producing but were available for leasing to customers and, in the United Kingdom, we had 54 revenue producing rooftop sites that were occupied by our transmitters but were not available for leasing to customers. (f) EBITDA is defined as operating income (loss) plus depreciation and amortization and non-cash compensation changes. EBITDA is presented as additional information because management believes it to be a useful indicator of our ability to meet debt service and capital expenditure requirements. It is not, however, intended as an alternative measure of operating results or cash flow from operations (as determined in accordance with generally accepted accounting principles). Furthermore, our measure of EBITDA may not be comparable to similarly titled measures of other companies. 15
(g) For purposes of computing the ratio of earnings to fixed charges, earnings represent income (loss) before income taxes, fixed charges and equity in earnings (losses) of unconsolidated affiliate. Fixed charges consist of interest expense, the interest component of operating leases and amortization of deferred financing costs. For the years ended December 31, 1995, 1996, 1997 and 1998, earnings were insufficient to cover fixed charges by $21,000, $0.9 million, $10.8 million and $37.8 million, respectively. (h) The 1995, 1996 and 1997 amounts represent (1) senior convertible preferred stock we privately placed in August 1997 and October 1997, all of which has been converted into shares of common stock, and (2) Series A convertible preferred stock, the Series B convertible preferred stock and Series C convertible preferred stock we privately placed in April 1995, July 1996 and February 1997, respectively, all of which has been converted into shares of common stock in connection with the consummation of our initial public offering in August 1998. The 1998 amount represents our 12 3/4% exchangeable preferred stock. 16
RISK FACTORS You should carefully consider the risks described below, as well as the other information included in this prospectus, when evaluating your participation in the exchange offer. If You Fail to Exchange Your Shares of Old Preferred Stock They Will Continue to Be Restricted Securities and May Become Less Liquid Shares of old preferred stock which you do not tender or we do not accept will, following the exchange offer, continue to be restricted securities and you may not offer or sell them except pursuant to an exemption from, or in a transaction not subject to, the Securities Act of 1933 and applicable state securities law. We will issue new preferred stock in exchange for the old preferred stock pursuant to the exchange offer only following the satisfaction of the procedures and conditions set forth in "The Exchange Offer--Procedures for Tendering." Such procedures and conditions include timely receipt by the exchange agent of such shares of old preferred stock, and of a properly completed and duly executed letter of transmittal. Because we anticipate that most holders of old preferred stock will elect to exchange such shares of old preferred stock, we expect that the liquidity of the market for any shares of old preferred stock remaining after the consummation of the exchange offer may be substantially limited. Any shares of old preferred stock tendered and exchanged in the exchange offer will reduce the aggregate principal amount of the old preferred stock outstanding. Following the exchange offer, if you did not tender your shares of old preferred stock you generally will not have any further registration rights, and such shares of old preferred stock will continue to be subject to certain transfer restrictions. Accordingly, the liquidity of the market for such shares of old preferred stock could be adversely affected. The shares of old preferred stock are currently eligible for sale pursuant to Rule 144A and Regulation S through the Private Offerings, Resale and Trading through Automated Linkages ("PORTAL") market of the National Association of Securities Dealers, Inc. Failure to Properly Manage the Integration Necessitated by Our Rapid Growth Could Adversely Affect Our Performance We have grown significantly over the past two years through acquisitions and, as evidenced by our recent and proposed transactions, such growth continues to be an important part of our business plan. The addition of over 4,700 towers to our tower portfolios through our recent and proposed transactions will increase our current business considerably and will add operating complexities. Successful integration of these transactions will depend primarily on our ability to manage these combined operations and to integrate new management and employees with and into our existing operations. We cannot guarantee that we will be able to successfully integrate these acquired businesses and assets or any future acquisitions into our business or implement our plans without delay. If we fail to do so it could have a material adverse effect on our financial condition and results of operations. We regularly evaluate potential acquisition and joint venture opportunities and are currently evaluating potential transactions that could involve substantial expenditures, possibly in the near term. Implementation of our acquisition strategy may impose significant strains on our management, operating systems and financial resources. If we fail to manage our growth or encounter unexpected difficulties during expansion it could have a material adverse effect on our financial condition and results of operations. The pursuit and integration of acquisitions and joint venture opportunities will require substantial attention from our senior management, which will limit the amount of time they are able to devote to our existing operations. 17
Our Substantial Level of Indebtedness Could Adversely Affect Our Financial Condition We are a highly leveraged company. The following chart sets forth certain important credit information and is presented as of December 31, 1998, (1) assuming we had completed our proposed debt and equity offerings and (2) assuming we had completed our proposed debt and equity offerings and consummated the 1999 Transactions described in this prospectus, each as of December 31, 1998. Pro Forma for the Proposed Pro Forma for Offerings and the Proposed the 1999 Offerings Transactions ------------- ------------- (Dollars in thousands) Total indebtedness.......................... $ 729,710 $ 909,710 Redeemable preferred stock.................. 201,063 201,063 Stockholders' equity........................ 1,114,562 1,491,562 Debt and redeemable preferred stock to equity ratio............................... 0.84x 0.74x In addition, assuming we had completed the proposed debt and equity offerings and the 1999 Transactions on January 1, 1998, our earnings for the twelve months ended December 31, 1998, would have been insufficient to cover fixed charges by $104.2 million. Given our substantial indebtedness, we could be affected in the following ways: . We could be more vulnerable to general adverse economic and industry conditions. . We may find it more difficult to obtain additional financing to fund future working capital, capital expenditures and other general corporate requirements. . We will be required to dedicate a substantial portion of our cash flow from operations to the payment of principal and interest on our debt, reducing the available cash flow to fund other projects. . We may have limited flexibility in planning for, or reacting to, changes in our business and in the industry. . We will have a competitive disadvantage relative to other less leveraged companies in our industry. We cannot guarantee that we will be able to generate enough cash flow from operations or that we will be able to obtain enough capital to service our debt or fund our planned capital expenditures. In addition, we may need to refinance some or all of our indebtedness on or before maturity. We cannot guarantee, however, that we will be able to refinance our indebtedness on commercially reasonable terms or at all. Currently we have debt instruments in place which restrict our ability to incur more indebtedness, pay dividends, create liens, sell assets and engage in certain mergers and acquisitions. Some of our subsidiaries, under the debt instruments, are also required to maintain specific financial ratios. Our ability to comply with the restrictions of these instruments and to satisfy our debt obligations will depend on our future operating performance. If we fail to comply with the debt restrictions, we will be in default under those instruments, which in some cases would cause the maturity of substantially all of our long-term indebtedness to be accelerated. See "Description of Certain Indebtedness". 18
We May Not Consummate the 1999 Transactions We cannot guarantee that we will complete any or all of the proposed transactions that we describe in this prospectus. The agreements with respect to the proposed Powertel acquisition, the proposed BellSouth transaction and the proposed One2One transaction contain many conditions that must be satisfied before we can close these transactions. In addition, we cannot assure you that the transactions, if and when consummated, will be done so on the terms described in this prospectus. Each of the agreements relating to these proposed transactions includes provisions that could result in our purchasing fewer towers at closing. If one or more of these transactions is not consummated or is consummated on significantly different terms than those described in this prospectus, it could substantially affect the implementation of our business strategy. In connection with our entering into the acquisition agreement with Powertel, we made a $50.0 million escrow payment, which amount, or some portion thereof, is subject to our forfeit if the Powertel acquisition does not close as a result of our inability or unwillingness to deliver the balance of the purchase price at the scheduled closing date. In connection with our entering into the agreement for the BellSouth transaction, we placed $50.0 million into an escrow fund. We could be forced to pay this amount to BellSouth if we do not enter into definitive agreements with respect to the BellSouth transaction, or if we fail to comply with all conditions, covenants and representations we are required to fulfill in connection therewith. The loss of these escrow payments, alone or together, would significantly affect our available working capital and could have a material adverse effect on our ability to implement our business strategy. See "The 1999 Transactions". We Require Significant Capital to Expand Our Operations and Make Acquisitions Our business strategy contemplates substantial capital expenditures (1) in connection with the expansion of our tower portfolios by partnering with wireless carriers to assume ownership or control of their existing towers, by pursuing opportunities to build new towers for wireless carriers and by pursuing other tower acquisition opportunities and (2) to acquire existing transmission networks globally as opportunities arise. We anticipate that we will build, through the end of 1999, approximately 750 towers in the United States at a cost of approximately $175.0 million and approximately 200 towers in the United Kingdom at a cost of approximately $23.0 million. We also expect that the capital expenditure requirements related to the roll-out of digital broadcast transmission in the United Kingdom will be approximately (Pounds)100.0 million ($170.0 million). In addition to capital expenditures in connection with contracted build-to-suits, we expect to apply a significant amount of capital to finance the cash portion of the consideration being paid in connection with the 1999 Transactions. To fund the execution of the our business strategy, including the proposed transactions described in this prospectus, we expect to use the net proceeds of our proposed debt and equity offerings and borrowings available under our U.S. and U.K. credit facilities. Our business strategy, however, includes the pursuit of additional tower acquisition and new tower construction opportunities, and we may have additional cash needs as opportunities arise. Some of the opportunities that we are currently pursuing could require significant additional capital. In the event we do not otherwise have cash available, or borrowings under our credit facilities have otherwise been utilized, when an opportunity 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. To the extent we are unable to finance future capital expenditures, we will be unable to achieve our currently contemplated business strategy. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources". 19
Our Ability to Pay Dividends on the Exchangeable Preferred Stock May be Restricted by Law or by the Terms of Debt Instruments Our ability to pay any dividends is dependent on applicable provisions of state law, and our ability to pay cash dividends on the exchangeable preferred stock is subject to the terms of the 10 5/8% notes indenture, which currently prohibit us from paying cash dividends on any preferred stock, including the exchangeable preferred stock. Our ability to pay dividends on the exchangeable preferred stock in the future will depend on our meeting certain financial criteria. See "Description of Certain Indebtedness". Moreover, under Delaware law we are permitted to pay dividends on our capital stock, including the exchangeable preferred stock, only out of surplus, or if there is no surplus, out of net profits for the year in which a dividend is declared or for the immediately preceding fiscal year. Surplus is defined as the excess of a company's total assets over the sum of its total liabilities plus the par value of its outstanding capital stock. In order to pay dividends in cash, we must have surplus or net profits equal to the full amount of the cash dividend at the time such dividend is declared. We cannot predict what the value of our assets or the amount of the liabilities will be in the future and, accordingly, we cannot guarantee that we will be able to pay cash dividends on the exchangeable preferred stock. The Exchangeable Preferred Stock is Subordinated to Our Other Debt Our obligations with respect to the exchangeable preferred stock are subordinate and junior in right of payment to all our present and future indebtedness, including the 10 5/8% discount notes. In the event of a bankruptcy, liquidation or reorganization, our assets will be available to pay obligations on the exchangeable preferred stock only after we have paid all other indebtedness. Therefore, we may not have sufficient assets remaining to pay amounts due on any or all of the exchangeable preferred stock then outstanding. While any shares of exchangeable preferred stock are outstanding, we may not authorize, create or increase the amount of any class or series of stock that ranks senior to the exchangeable preferred stock with respect to the payment of dividends or amounts upon liquidation, dissolution or winding up without the consent of the holders of a majority of the outstanding shares of exchangeable preferred stock. However, without the consent of any holder of exchangeable preferred stock, we may create additional classes of stock, increase the authorized number of shares of preferred stock or issue a new series of stock that ranks pari passu with or junior to the exchangeable preferred stock with respect to the payment of dividends and amounts upon liquidation, dissolution or winding up. If We Issue the Exchange Debentures, They Will be Subordinated to Our Other Debt If we issue the exchange debentures, they will rank behind all of our existing indebtedness (other than our trade payables) and all of our future borrowings (other than our trade payables), except any future indebtedness that expressly provides that it ranks equal with, or subordinated in right of payment to, the exchange debentures. As a result, upon any distribution to our creditors in a bankruptcy, liquidation or reorganization or similar proceeding relating to us or our property, the holders of our senior debt will be entitled to be paid in full in cash before any payment may be made with respect to the exchange debentures. In the event of a bankruptcy, liquidation or reorganization or similar proceeding relating to our company, holders of the exchange debentures will participate with trade creditors and all other holders of subordinated indebtedness of the company in the assets remaining only after we have paid all of our senior debt. On December 31, 1998, we had $545.4 million of outstanding indebtedness and other liabilities (including approximately $375.9 million of indebtedness and other liabilities of our subsidiaries), all of 20
which would have been senior in right of payment to the exchange debentures. Assuming we had consummated the 1999 Transactions and our proposed debt and equity offerings and applied the net proceeds as intended on December 31, 1998, as of that date we would have had $1,025.7 million of indebtedness and other liabilities (including $556.2 million of indebtedness and other liabilities of our subsidiaries). See "Description of Securities--Description of the Senior Subordinated Exchange Debentures--Ranking". We May Not Have Sufficient Funds to Repurchase the Exchangeable Preferred Stock or the Exchange Debentures Upon a Change of Control Under the certificate of designation (in the case of the exchangeable preferred stock) and the exchange indenture (in the case of the exchange debentures), in the event of a change of control of CCIC: . we are required to offer to purchase all outstanding shares of exchangeable preferred stock, in whole or in part, at a purchase price equal to 101% of its aggregate liquidation preference, plus accumulated and unpaid dividends; and . each holder of exchange debentures may require us to purchase their exchange debentures, in whole or in part, at a purchase price equal to 101% of their aggregate principal amount, plus any accrued and unpaid interest. In the case of the exchangeable preferred stock, our offer to repurchase upon a change of control must comply with certain provisions of our existing senior notes indenture. If we are unable to comply with those provisions and fail to repurchase the exchangeable preferred stock, then holders of our exchangeable preferred stock would be entitled to limited voting rights. In addition, if a change of control were to occur, we may not have the financial resources to repurchase all of the exchangeable preferred stock and/or exchange debentures and repay any other indebtedness that would become payable upon the occurrence of the change of control. This feature of the exchangeable preferred stock and exchange debentures may in certain circumstances discourage or make more difficult a sale or takeover of us. We Will Have Broad Discretion in the Application of Proceeds from Our Proposed Offerings We will allocate a substantial portion of the estimated net proceeds from our proposed debt and equity offerings to fund our proposed BellSouth transaction and our proposed Powertel acquisition, as well as for general corporate purposes. In addition, if either or both of these transactions are not consummated, we may use these funds for as yet unidentified acquisitions, investments or joint ventures in the United States or abroad. In such case, we cannot determine now how we would reallocate such proceeds. In addition, in such case we would have broad discretion in allocating these net proceeds from the offerings without any action or approval of our stockholders. Moreover, the indenture governing the issuance of the notes will not contain any restrictions on the use of proceeds from the proposed offerings. Accordingly, investors may not have the opportunity to evaluate the economic, financial and other relevant information that will be considered by us in determining the application of any such net proceeds. As a Holding Company, We Require Dividends from Subsidiaries to Meet Cash Requirements or Pay Dividends Crown Castle International Corp. is a holding company with no business operations of its own. CCIC's only significant asset is the outstanding capital stock of its subsidiaries. CCIC conducts all its business operations through its subsidiaries. Accordingly, CCIC's only source of cash to pay dividends or make other distributions on its capital stock or to pay interest on its outstanding indebtedness is distributions with respect to its ownership interest in its subsidiaries from the net 21
earnings and cash flow generated by such subsidiaries. Although the notes to be issued in the proposed debt offering will not require cash interest payments until , at such time the notes to be issued in the proposed debt offering will have accreted to $ million and will require annual cash interest payments of . In addition, the notes to be issued in the proposed debt offering will mature on . In addition, we will be required to begin paying cash interest payments on our 10 5/8% discount notes in May 2003 and on our 12 3/4% exchangeable preferred stock in March 2004. We currently expect that the earnings and cash flow of CCIC's subsidiaries will be retained and used by such subsidiaries in their operations, including to service their respective debt obligations. Even if we determined to make a distribution in respect of the capital stock of CCIC's subsidiaries, there can be no assurance that CCIC's subsidiaries will generate sufficient cash flow to pay such a dividend or distribute such funds to CCIC or that applicable state law and contractual restrictions, including negative covenants contained in the debt instruments of such subsidiaries, would permit such dividends or distributions. Furthermore, the terms of our U.S. and U.K. credit facilities place restrictions on our principal subsidiaries' ability to pay dividends or to make distributions, and in any event, such dividends or distributions may only be paid if no default has occurred under the applicable instrument. In addition, CCIC's subsidiaries will be permitted under the terms of their existing debt instruments to incur additional indebtedness that may restrict or prohibit the making of distributions, the payment of dividends or the making of loans by such subsidiaries to CCIC. See "--Our Substantial Level of Indebtedness Could Adversely Affect Our Financial Condition" and "Description of Certain Indebtedness". Our Agreements with TdF Give TdF Substantial Governance and Economic Rights We have entered into agreements with TdF that give TdF significant protective rights with respect to the governance of CCIC and CTI, the ownership of CTI and the disposition of shares in CCIC and CTI. CTI's operations currently account for a substantial majority of our revenues. TdF's Governance Rights May Prevent Us From Taking Actions Our Board of Directors Consider to Be in the Best Interest of Our Securityholders We have granted TdF the ability to govern some of our activities, including the ability to: . prohibit us from entering into certain material transactions, including material acquisitions; . elect up to two members of our Board of Directors; and . elect at least one director to the executive and nominating and corporate governance committees of our Board of Directors. In addition, TdF has significant governance rights over CTI. Although TdF currently has only a 20% equity interest in CTI, TdF has the right to restrict a number of corporate actions at CTI. TdF's exercise of these rights could be contrary to your interests and could prevent us from conducting some activities that our Board of Directors consider to be in our best interests and the best interests of our shareholders. See "Certain Relationships and Related Transactions--Agreements with TdF Related to the Roll Up--Governance Agreement". TdF Has an Option to Acquire Our U.K. Operations in Connection with a Sale of CCIC Under the circumstances described below, TdF also will have the right to acquire all of our shares in CTSH or to require us to purchase all of TdF's shares in CTSH, at fair market value in either case. This right will be triggered under the following circumstances: . the sale of all or substantially all of our assets; . a merger, consolidation or similar transaction that would result in any person owning more than 50% of our voting power or equity securities; 22
. an unsolicited acquisition by any person of more than 25% of our voting power or equity securities; or . other circumstances arising from an acquisition by any person that would give rise to a right of the BBC to terminate our analog or digital transmission contracts with the BBC. Further, immediately before any of these events occurs, TdF will have the right to require us to purchase 50% of their Class A common stock in cash at the same price we would have to pay once the event occurs. If we were required to sell our shares in CTSH to TdF, we would no longer own our U.K. business. On the other hand, if we were required to purchase all of TdF's shares in CTSH and/or purchase 50% of their Class A common stock, we cannot guarantee that we would have the necessary funds to do so or that we would be permitted to do so under our debt instruments. If we did not have sufficient funds, we would have to seek additional financing. We cannot guarantee, however, that such financing would be available on commercially reasonable terms or at all. If such financing were not available, we might be forced to sell certain other assets at unfavorable prices in order to generate the cash needed to buy the shares from TdF. In addition, our obligation to purchase TdF's shares could result in an event of default under our debt instruments. TdF Has an Option to Put Its Interest in Our U.K. Operations to Us for Cash Under certain other circumstances, TdF will have the right to require us to purchase all of their shares in CTSH, at fair market value. We may elect to pay either (1) in cash or (2) with our common stock at a discount of 15% to its market value. We cannot guarantee that we will have sufficient funds to purchase such shares for cash if TdF were to require us to purchase their shares of capital stock of CTSH. If we did not have sufficient funds, we would either need to seek additional financing or purchase the shares with our common stock. We cannot guarantee that we could obtain such financing on terms acceptable to us. If we were to issue shares of common stock to effect the purchase, this would result in substantial dilution of our other stockholders, could adversely affect the market prices of the common stock and could impair our ability to raise additional capital through the sale of our equity securities. TdF Has Preemptive Rights to Acquire Our Common Stock When We Otherwise Issue Common Stock Except in certain circumstances, if we issue any equity securities (other than equity that is mandatorily exchangeable for debt, such as the exchangeable preferred stock) to any person, including the equity offering and in connection with the formation of the Bell Atlantic joint venture and the proposed BellSouth transaction, we must offer TdF the right to purchase, at the same cash price and on the same other terms proposed, up to the amount of such equity securities as would be necessary for TdF and its affiliates to maintain their consolidated ownership percentage in us. We May Not Be Able to Construct New Towers at the Pace and in the Locations that We Desire Our growth strategy depends in part on our ability to construct and operate towers in conjunction with expansion by wireless carriers. As of December 31, 1998, we had 72 towers under construction. We currently have plans to commence construction on approximately 800 to 1,100 additional towers during fiscal 1999. Our ability to construct new towers can be affected by a number of factors beyond our control, including: . zoning and local permitting requirements and national regulatory approvals; . availability of construction equipment and skilled construction personnel; and . bad weather conditions. 23
In addition, as the concern over tower proliferation has grown in recent years, certain communities have placed restrictions on new tower construction or have delayed granting permits required for construction. You should consider that: . the barriers to new construction may prevent us from building towers where we want; . we may not be able to complete the number of towers planned for construction in accordance with the requirements of our customers; and . we cannot guarantee that there will be a significant need for the construction of new towers once the wireless carriers complete the build-out of their tower network infrastructure. Our Business Depends on the Demand for Wireless Communications Demand for our site rentals depends on demand for communication sites from wireless carriers, which, in turn, depends on the demand for wireless services. The demand for our sites depends on certain factors which we cannot control, including: . the level of demand for wireless services generally; . the financial condition and access to capital of wireless carriers; . the strategy of carriers with respect to owning or leasing communication sites; . changes in telecommunications regulations; and . general economic conditions. A slowdown in the growth of, or reduction in, demand in a particular wireless segment could adversely affect the demand for communication sites. Moreover, wireless carriers often operate with substantial leverage, and financial problems for our customers could result in accounts receivable going uncollected, in the loss of a customer and the associated lease revenue or in a reduced ability of these customers to finance expansion activities. Finally, advances in technology, such as the development of new satellite systems, could reduce the need for land-based transmission and reception networks. The occurrence of any of these factors could have a material adverse effect on our financial condition and results of operations. Variability in Demand for Network Services May Reduce the Predictability of Our Results Demand for our network services fluctuates from period to period and within periods. These fluctuations are caused by a number of factors, including: . the timing of customers' capital expenditures; . annual budgetary considerations of customers; . the rate and volume of wireless carriers' tower build-outs; . timing of existing customer contracts; and . general economic conditions. While demand for our network services fluctuates, we must incur certain costs, such as maintaining a staff of network services employees in anticipation of future contracts, even when there may be no current business. Consequently, the operating results of our network services businesses for any particular period may vary significantly, and should not be considered as necessarily being indicative of longer-term results. Furthermore, as wireless carriers complete their build-outs, the need for the construction of new towers and the demand for certain network services could decrease significantly and could result in fluctuations and, possibly, significant declines in our operating performance. 24
We Operate our Business in an Increasingly Competitive Industry and Many of Our Competitors Have Significantly More Resources We face competition for site rental customers from various sources, including: . other large independent tower owners; . wireless carriers that own and operate their own tower footprints and lease antenna space to other carriers; . site development companies which acquire antenna space on existing towers for wireless carriers and manage new tower construction; and . traditional local independent tower operators. Wireless carriers that own and operate their own tower portfolios generally are substantially larger and have greater financial resources than we have. We believe that tower location and capacity, price, quality of service and density within a geographic market historically have been and will continue to be the most significant competitive factors affecting the site rental business. Competition for the acquisition of towers is keen, and we expect it to continue to grow. We not only compete against other independent tower owners and operators, but also against wireless carriers, broadcasters and site developers. As competition increases for tower acquisitions, we may be faced with fewer acquisition opportunities, as well as higher acquisition prices. While we regularly explore acquisition opportunities, we cannot guarantee that we will be able to identify suitable towers to acquire in the future. A Substantial Portion of Our Revenues Are Dependent Upon Agreements with Several Business Partners Assuming we had completed the roll-up of our U.K. subsidiary to 80% ownership (the "Roll-Up") and the 1999 Transactions, each as of January 1, 1998, the BBC would have still accounted for approximately 25.1% of our revenues for the twelve month period ended December 31, 1998. Our broadcast transmission business is substantially dependent on our contracts with the BBC. See "Business--U.K. Operations--Significant Contracts". The initial term of our analog transmission contract with the BBC will expire on March 31, 2007, and our digital transmission contract with the BBC expires on October 31, 2010. In addition, our digital transmission contract with the BBC may be terminated by the BBC after five years if the BBC's board of governors does not believe that digital television in the United Kingdom has enough viewers. We cannot guarantee that the BBC will renew these contracts or that they will not attempt to negotiate terms that are not as favorable to us as those in place now. If we were to lose these BBC contracts, our business, results of operations and financial condition would be materially adversely affected. In order to optimize service coverage in the United Kingdom and enable viewers to receive all analog UHF television services using one receiving antenna, CTI and NTL have agreed to share all UHF television sites. See "Business--U.K. Operations--Significant Contracts". We are currently in negotiations with NTL to amend the agreement to reflect the build-out of digital transmission sites and equipment, new rates for site sharing fees for new digital facilities and revised operating and maintenance procedures for the new equipment. This agreement may be terminated with five years' notice by either CTI or NTL, and is set to expire on December 31, 2005. We cannot guarantee that this agreement will not be terminated, which could have a material adverse effect on our business, results of operations and financial condition. 25
We Are Subject to Extensive Regulations Which Could Change at Any Time and Which We Could Fail to Comply With We are subject to a variety of foreign, federal, state and local regulation. Failure to comply with applicable requirements may lead to civil penalties or require us to assume costly indemnification obligations. We cannot guarantee that existing regulatory policies will not adversely affect the timing or cost of new tower construction or that additional regulations will not be adopted which increase delays or result in additional costs. These factors could have a material adverse effect on our financial condition and results of operations. Since we signed our analog transmission contract with the BBC, the BBC has increased its service requirements to include 24-hour broadcasting on our terrestrial transmission network for the BBC's two national television services and a requirement for CTI to add a number of filler stations to its network to extend existing BBC services. The BBC has agreed to increases of approximately (Pounds)800,000 ($1,330,240) per year in the charges payable by the BBC to CTI for these service enhancements. The additional charges may necessitate an amendment to CTI's Transmission Telecommunications License. OFTEL, the relevant regulatory authority in the United Kingdom, has confirmed in initial discussions with CTI that it is not OFTEL's intention to prevent the provision of such additional services to the BBC at an additional charge. CTI is discussing with OFTEL the most appropriate way to rectify this situation in order to allow the additional services to be provided to the BBC in return for the additional agreed payments. While we expect the license to be amended, there can be no assurance as to the final resolution of these issues with OFTEL. Our customers may also become subject to new regulations or regulatory policies which adversely affect the demand for communication sites. In addition, as we pursue international opportunities, we will be subject to regulation in foreign jurisdictions. Costs of Compliance with Environmental Laws Could Adversely Affect Our Financial Condition Our operations are subject to foreign, federal, state and local laws and regulations regarding the management, use, storage, disposal, emission, release and remediation of, and exposure to, hazardous and nonhazardous substances, materials or wastes. Under certain environmental laws, we could be held liable for the remediation of hazardous substance contamination at current or former facilities or at third-party waste disposal sites, and we also could be subject to personal injury or property damage claims related to such contamination. We cannot guarantee that costs of compliance with existing or future environmental laws will not have a material adverse effect on our financial condition and results of operations. See "Business--Environmental Matters". Emissions from Our Antennas May Create Health Risks Our towers are subject to government requirements and other guidelines relating to radio frequency emissions. The potential connection between radio frequency emissions and certain negative health effects, including some forms of cancer, has been the subject of substantial study by the scientific community in recent years. To date, the results of these studies have been inconclusive. We cannot guarantee that we will not be subject to claims relating to radio frequency emissions in the future. Our International Operations Expose Us to Currency Risks We conduct business in countries outside the United States, which exposes us to fluctuations in foreign currency exchange rates. For the twelve month period ended December 31, 1998, assuming we had completed the Roll-Up on January 1, 1998, but without giving effect to the 1999 Transactions, approximately 74.3% of our consolidated revenues would have originated outside the 26
United States, all of which were denominated in currencies other than U.S. dollars (principally pounds sterling). We have not historically engaged in significant hedging activities with respect to our non-U.S. dollar operations. We Are Heavily Dependent on Our Senior Management Our existing operations and continued future development are dependent to a significant extent upon the performance and active participation of certain key individuals, including our chief executive officer and the chief operating officers of our principal U.S. and U.K. subsidiaries. We cannot guarantee that we will be successful in retaining the services of these, or other key personnel. None of our employees have signed noncompetition agreements. If we were to lose any of these individuals, our financial condition and results of operations could be materially adversely affected. We are Subject to Year 2000 Compliance Problems We are in the process of conducting a comprehensive review of our computer systems to identify which of our systems will need to be modified, upgraded or converted to recognize dates after December 31, 1999, which is known as the year 2000 problem. The failure to correct a material year 2000 problem could result in a system failure, such as the failure of tower lighting or security monitoring systems, or miscalculations causing disruption of operations including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. We cannot assure you that we will be able to resolve all year 2000 compliance issues without any future disruption or that we will not incur significant additional expense in attempting to do so. In addition, if some of our major suppliers and customers fail to address their own year 2000 compliance issues, their non-compliance could have a material adverse effect on us and our operations. There is Currently No Market for the Securities The shares of new preferred stock will be new securities for which there currently is no established trading market. We do not intend to apply for listing of the new preferred stock on a national securities exchange or automatic quotation system. Although the initial purchasers of the old preferred stock have informed us that they currently intend to make a market in the new preferred stock, the initial purchasers are not obligated to do so, and any such market making may be discontinued at any time without notice. The liquidity of any market for the shares of new preferred stock will depend upon the number of holders of the new preferred stock, the interest of securities dealers in making a market in the new preferred stock and other factors. Accordingly, there can be no assurance as to the development or liquidity of any market for the shares of new preferred stock. If an active trading market for the shares of new preferred stock does not develop, the market price and liquidity of the shares of new preferred stock may be adversely affected. If the shares of new preferred stock are traded, they may trade at a discount from their initial offering price, depending upon prevailing interest rates, the market for similar securities, our financial performance and certain other factors. The liquidity of, and trading markets for, the shares of new preferred stock also may be adversely affected by general declines in the market for payment-in-kind preferred stock. Such declines may adversely affect the liquidity of, and trading markets for, the shares of new preferred stock, independent of our financial performance or prospects. Historically, the market for payment-in-kind preferred stock has been subject to disruptions that have caused substantial volatility in the prices of securities similar to the new preferred stock. There can be no assurance that the market, if any, for the shares of new preferred stock will not be subject to similar disruptions. Any such disruptions may have an adverse effect on the holders of the new preferred stock. 27
This Document Includes Forward-Looking Statements This document includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical facts included in this document, including, without limitation, the statements under "Prospectus Summary", "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Industry Background" and "Business" and located elsewhere in this document regarding industry prospects, our prospects and our financial position are forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from our expectations are disclosed in this document, including, without limitation, in conjunction with the forward-looking statements included under "Risk Factors". All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements included in this document. We undertake no obligation to publicly update or revise any forward- looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward- looking events discussed in this document might not occur. USE OF PROCEEDS We will not receive any proceeds from the exchange offer. DIVIDEND POLICY We have never declared or paid any cash dividends on our capital stock and do not anticipate paying cash dividends on our capital stock in the foreseeable future. It is our current policy to retain earnings to finance the expansion of our operations. Future declaration and payment of dividends, if any, will be determined in light of the then-current conditions, including our earnings, operations, capital requirements, financial condition and other factors deemed relevant by the Board of Directors. In addition, our ability to pay dividends is limited by the terms of our debt instruments and the terms of the certificate of designations in respect of our exchangeable preferred stock. See "Description of Certain Indebtedness" and "Description of Capital Stock". 28
CAPITALIZATION The following table sets forth as of December 31, 1998 (1) our historical capitalization, (2) our pro forma capitalization after giving effect to our proposed debt and equity offerings and (3) our pro forma capitalization after giving effect to such proposed offerings and the 1999 Transactions. The information set forth below should be read in conjunction with "Unaudited Pro Forma Condensed Consolidated Financial Statements", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and the notes thereto included elsewhere in this document. The 1999 Transactions are not contingent upon our proposed offerings. See "Unaudited Pro Forma Condensed Consolidated Financial Statements" for detail regarding the pro forma adjustments. December 31, 1998 -------------------------------------- Pro Forma for Proposed Pro Forma Offerings and for Proposed 1999 Actual Offerings Transactions ---------- ------------ ------------- (Dollars in thousands, except share amounts) Cash and cash equivalents(a)............ $ 296,450 $ 962,575 $ 49,583 ========== ========== ========== Notes payable and current maturities of long-term debt......................... $ -- $ -- $ -- ========== ========== ========== Long-term debt (less current maturities): Senior Credit Facility(b).............. $ 5,500 $5,500 $5,500 10 5/8% Senior Discount Notes due 2007.................................. 168,099 168,099 168,099 CTI Credit Facility(b)................. 55,177 55,177 55,177 9% Guaranteed Bonds due 2007........... 200,934 200,934 200,934 Bell Atlantic Joint Venture Credit Facility.............................. -- -- 180,000 Proposed Notes offered................. -- 300,000 300,000 ---------- ---------- ---------- Total long-term debt(a)............... 429,710 729,710 909,710 ---------- ---------- ---------- Minority interests...................... 39,185 39,185 50,915 Redeemable preferred stock: Exchangeable Preferred Stock ($.01 par value; 400,000 shares authorized; 200,000 shares issued)(a)............. 201,063 201,063 201,063 Stockholders' equity: Common stock ($.01 par value; 690,000,000 shares authorized): Common Stock (83,123,873 shares issued, actual; shares issued, pro forma for offerings; and shares issued, pro forma for the offerings and the Proposed Transactions)(c).... 831 831 831 Class A Common Stock (11,340,000 shares issued)....................... 113 113 113 Additional paid-in capital(c).......... 795,153 1,175,153 1,552,153 Cumulative foreign currency translation adjustment............................ 1,690 1,690 1,690 Accumulated deficit.................... (60,225) (63,225) (63,225) ---------- ---------- ---------- Total stockholders' equity(a)......... 737,562 1,114,562 1,491,562 ---------- ---------- ---------- Total capitalization(a).............. $1,407,520 $2,084,520 $2,653,250 ========== ========== ========== - ------- (a) On a pro forma basis for our proposed offerings and the 1999 Transactions, the Restricted Group (as defined) would have cash and cash equivalents, total long-term debt, redeemable preferred stock, total stockholders' equity and total capitalization of $3.3 million, $473.6 million, $201.1 million, $1,491.6 million, and $2,166.2 million, respectively. See "Unaudited Pro Forma Condensed Consolidated Financial Statements--Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet". (b) As of March 1, 1999, our principal U.S. subsidiary, Crown Communication, had unused borrowing availability under its senior credit facility of approximately $54.0 million, and our principal U.K. subsidiary, CTI, had approximately (Pounds)24.0 million ($39.9 million) of unused borrowing availability under its credit facility. See "Description of Certain Indebtedness". (c) Our issuance of (1) approximately 15.6 million shares of common stock in connection with the formation of the Bell Atlantic joint venture, (2) approximately 9.1 million shares of common stock in connection with the proposed BellSouth transaction and (3) approximately million shares of common stock pursuant to our proposed equity offering will give TdF the right to purchase up to approximately (1) 5.42 million shares of common stock at approximately $12.65 per share, (2) million shares of common stock at approximately $ per share and (3) million shares of common stock at a price equal to the public offering price less the underwriting discount, in each case pursuant to TdF's antidilutive right under the Governance Agreement. See "Certain Relationships and Related Transactions--Agreements with TdF Related to the Roll-Up--Governance Agreement". 29
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following unaudited pro forma condensed consolidated financial statements are based on the historical financial statements of CCIC and the historical financial statements of the entities acquired by CCIC during the period presented, adjusted to give effect to the following transactions (collectively, the "Transactions"): (1) the Roll-Up; (2) CCIC's initial public offering in August 1998 (the "IPO"); (3) the conversion of CCIC's senior convertible preferred stock into common stock (all of which, as of July 17, 1998, had been converted); (4) the issuance of CCIC's 12 3/4% Exchangeable Preferred Stock due 2010 in December 1998; (5) the Proposed Offerings; (6) the Bell Atlantic joint venture; (7) the proposed BellSouth transaction; and (8) the proposed Powertel acquisition. In this pro forma discussion, we refer to the transactions set forth in clauses (1) through (4) of the preceding sentence collectively as the 1998 Transactions, and we refer to the Bell Atlantic joint venture, the proposed BellSouth transaction and the proposed Powertel acquisition collectively as the 1999 Transactions. We refer to all of the above transactions as the Transactions. The Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1998 gives effect to the Transactions as if they had occurred as of January 1, 1998. The Unaudited Pro Forma Condensed Consolidated Balance Sheet gives effect to the (1) Proposed Offerings and (2) the 1999 Transactions as if they had occurred as of December 31, 1998. The pro forma adjustments are described in the accompanying notes and are based upon available information and certain assumptions that management believes are reasonable. Included in the notes accompanying the pro forma financial statements are tables summarizing the unaudited pro forma results of operations and balance sheet for CCIC and its Restricted Subsidiaries (as defined in the Indenture governing the 10 5/8% discount notes, the "10 5/8% Notes Indenture"); such group of companies is hereinafter referred to as the "Restricted Group". The Restricted Group excludes CTI and the Bell Atlantic joint venture, both of which are designated as Unrestricted Subsidiaries (as defined in the 10 5/8% Notes Indenture) under our debt instruments. The pro forma financial statements do not purport to represent what CCIC's results of operations or financial condition would actually have been had the 1998 Transactions, the Proposed Offerings or the 1999 Transactions in fact occurred on such dates or to project CCIC's results of operations or financial condition for any future date or period. The pro forma financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this document and "Management's Discussion and Analysis of Financial Condition and Results of Operations". The Roll-Up, the Bell Atlantic joint venture and the proposed Powertel acquisition are accounted for under the purchase method of accounting. The total purchase price for the Roll-Up, the Bell Atlantic joint venture and the proposed Powertel acquisition have been allocated to the identifiable tangible and intangible assets and liabilities of the applicable acquired business based upon CCIC's preliminary estimate of their fair values with the remainder allocated to goodwill and other intangible assets. The allocations of the purchase prices are subject to revision when additional information concerning asset and liability valuations is obtained; however, we do not expect that any such revisions will have a material effect on our consolidated financial position or results of operations. We have recorded the purchase price for the Roll-Up based on (1) the number of shares of our common stock and Class A common stock exchanged for shares of CTI's capital stock and (2) the price per share received by us in our IPO. 30
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS Year Ended December 31, 1998 (Dollars in thousands, except per share amounts) Pro Forma Historical for 1998 Bell Adjustments Pro Forma Adjustments Transactions Atlantic Adjustments Historical Historical for 1998 for 1998 for Proposed and Proposed Joint for Joint CCIC(a) CTI(b) Transactions Transactions Offerings Offerings Venture Venture ---------- ---------- ------------ ------------ ------------ ------------ ---------- ----------- Net revenues: Site rental and broadcast transmission.... $ 75,028 $84,714 $ -- $159,742 $ -- $ 159,742 $ 11,183 $31,009(k) Network services and other....... 38,050 12,514 (265)(c) 50,299 -- 50,299 -- -- -------- ------- -------- -------- -------- --------- -------- ------- Total net revenues........ 113,078 97,228 (265) 210,041 -- 210,041 11,183 31,009 -------- ------- -------- -------- -------- --------- -------- ------- Operating expenses: Costs of operations: Site rental and broadcast transmission.... 26,254 35,901 -- 62,155 -- 62,155 14,941 -- (l) Network services and other....... 21,564 7,916 -- 29,480 -- 29,480 -- -- General and administrative.. 23,571 5,265 (265)(c) 28,571 -- 28,571 -- -- (l) Corporate development..... 4,625 8 -- 4,633 -- 4,633 -- -- Non-cash compensation charges......... 12,758 3,831 -- 16,589 -- 16,589 -- -- Depreciation and amortization.... 37,239 25,684 11,463 (d) 74,386 -- 74,386 6,278 23,346 (m) -------- ------- -------- -------- -------- --------- -------- ------- 126,011 78,605 11,198 215,814 -- 215,814 21,219 23,346 -------- ------- -------- -------- -------- --------- -------- ------- Operating income (loss).......... (12,933) 18,623 (11,463) (5,773) -- (5,773) (10,036) 7,663 Other income (expense): Equity in earnings of unconsolidated affiliate....... 2,055 -- (2,055)(e) -- -- -- -- -- Interest and other income (expense)....... 4,220 725 -- 4,945 -- 4,945 -- -- Interest expense and amortization of deferred financing costs........... (29,089) (13,378) 3,689 (f) (38,778) (32,570)(i) (71,348) -- (17,711)(n) -------- ------- -------- -------- -------- --------- -------- ------- Income (loss) before income taxes and minority interests....... (35,747) 5,970 (9,829) (39,606) (32,570) (72,176) (10,036) (10,048) Provision for income taxes.... (374) -- -- (374) -- (374) -- -- Minority interests....... (1,654) -- (1,194)(g) (2,848) -- (2,848) -- 4,155 (o) -------- ------- -------- -------- -------- --------- -------- ------- Net income (loss).......... (37,775) 5,970 (11,023) (42,828) (32,570) (75,398) (10,036) (5,893) Dividends on preferred stock........... (5,411) -- (21,334)(h) (26,745) -- (26,745) -- -- -------- ------- -------- -------- -------- --------- -------- ------- Net income (loss) after deduction of dividends on preferred stock........... $(43,186) $ 5,970 $(32,357) $(69,573) $(32,570) $(102,143) $(10,036) $(5,893) ======== ======= ======== ======== ======== ========= ======== ======= Loss per common share--basic and diluted ........ $ (1.02) $ (0.74) $ ======== ======== ========= Common shares outstanding-- basic and diluted (in thousands)...... 42,518 94,064 ======== ======== ========= Pro Forma for 1998 Adjustments Adjustments Transactions, for for Offerings Proposed Proposed Pro Forma and Joint BellSouth Historical Powertel for the Venture Transaction Powertel(s) Acquisition Transactions ------------- --------------- ----------- ------------- ------------ Net revenues: Site rental and broadcast transmission.... $ 201,934 $33,840(p) $ 1,865 $14,040(t) $ 251,679 Network services and other....... 50,299 -- -- -- 50,299 ------------- --------------- ----------- ------------- ------------ Total net revenues........ 252,233 33,840 1,865 14,040 301,978 ------------- --------------- ----------- ------------- ------------ Operating expenses: Costs of operations: Site rental and broadcast transmission.... 77,096 11,400(l)(q) 6,167 -- (l) 94,663 Network services and other....... 29,480 -- -- -- 29,480 General and administrative.. 28,571 -- (l) -- -- (l) 28,571 Corporate development..... 4,633 -- -- -- 4,633 Non-cash compensation charges......... 16,589 -- -- -- 16,589 Depreciation and amortization.... 104,010 30,500 (r) 7,534 6,111 (u) 148,155 ------------- --------------- ----------- ------------- ------------ 260,379 41,900 13,701 6,111 322,091 ------------- --------------- ----------- ------------- ------------ Operating income (loss).......... (8,146) (8,060) (11,836) 7,929 (20,113) Other income (expense): Equity in earnings of unconsolidated affiliate....... -- -- -- -- -- Interest and other income (expense)....... 4,945 -- -- -- 4,945 Interest expense and amortization of deferred financing costs........... (89,059) -- -- -- (89,059) ------------- --------------- ----------- ------------- ------------ Income (loss) before income taxes and minority interests....... (92,260) (8,060) (11,836) 7,929 (104,227) Provision for income taxes.... (374) -- -- -- (374) Minority interests....... 1,307 -- -- -- 1,307 ------------- --------------- ----------- ------------- ------------ Net income (loss).......... (91,327) (8,060) (11,836) 7,929 (103,294) Dividends on preferred stock........... (26,745) -- -- -- (26,745) ------------- --------------- ----------- ------------- ------------ Net income (loss) after deduction of dividends on preferred stock........... $(118,072) $(8,060) $(11,836) $ 7,929 $(130,039) ============= =============== =========== ============= ============ Loss per common share--basic and diluted ........ $ $ ============= ============ Common shares outstanding-- basic and diluted (in thousands)...... ============= ============ See Notes to Unaudited Pro Forma Condensed Consolidated Statement of Operations 31
Notes to Unaudited Pro Forma Condensed Consolidated Statement of Operations (Dollars in thousands) (a) The historical results of operations for CTI are included in CCIC's historical results of operations for the period from the date of the Roll- Up, August 21, 1998, through December 31, 1998. (b) Reflects the historical results of operations of CTI (under U.S. GAAP) for the periods prior to the consummation of the Roll-Up on August 21, 1998. Such results have been translated from pounds sterling to U.S. dollars at the average Noon Buying Rate for the period. (c) Reflects the elimination of management fees payable to CCIC from CTI. (d) Reflects the incremental amortization of goodwill as a result of the Roll- Up. Goodwill is being amortized over twenty years. (e) Reflects the elimination of equity accounting adjustments to include CCIC's percentage in CTI's earnings and losses. (f) Reflects decrease in interest expense attributable to the repayment of borrowings under CCIC's senior credit facility from a portion of the net proceeds from the issuance of our 12 3/4% exchangeable preferred stock. (g) Reflects the minority interest in dividends accrued on CTI's Redeemable Preference Shares. (h) Reflects (1) decrease in dividends of $4,348 attributable to the conversion of the outstanding shares of senior convertible preferred stock into shares of common stock and (2) increase in dividends of $25,682 attributable to 12 3/4% exchangeable preferred stock. (i) Reflects (1) increase in interest expense of $29,570 as a result of the issuance of the notes in the proposed debt offering at an assumed interest rate of % per annum and (2) nonrecurring financing fees of $3,000 related to the term loans incurred to fund the escrow payments in connection with the proposed BellSouth transaction and the proposed Powertel acquisition (the "Term Loans"). (j) Reflects the historical results of operations of the tower operations to be contributed to the Bell Atlantic joint venture. (k) Reflects additional revenues to be recognized by the Bell Atlantic joint venture pursuant to the global lease and the formation agreement. (l) We expect that the Bell Atlantic joint venture will incur incremental operating expenses as a stand-alone entity. Such incremental expenses are currently estimated to amount to approximately $5.2 million per year. In addition, we expect that we will incur incremental operating expenses as a result of the proposed BellSouth transaction and the proposed Powertel acquisition. Such incremental expenses are currently estimated to amount to approximately $15.9 million per year. These incremental operating expenses are based on management's best estimates rather than any contractual obligations; as such, these amounts have not been presented as adjustments in the accompanying pro forma financial statement. (m) Reflects the incremental depreciation of property and equipment as a result of the Bell Atlantic joint venture. Property and equipment is being depreciated over twenty years. (n) Reflects additional interest expense attributable to borrowings under a credit facility entered into by the Bell Atlantic joint venture. Such borrowings are initially estimated to incur interest at a rate of 9.25% per annum. (o) Reflects the minority partner's 38.5% interest in the joint venture's operations. (p) Reflects additional revenues to be recognized by CCIC in connection with the proposed BellSouth transaction pursuant to the sublease of tower space by BellSouth. This amount includes $26,640 in revenues to be received from BellSouth and $7,200 in revenues to be received from other tenants. (q) Reflects additional costs to be incurred for ground rents in connection with the proposed BellSouth transaction pursuant to the preliminary agreement. (r) Reflects the incremental depreciation of property and equipment as a result of the proposed BellSouth transaction. Property and equipment is being depreciated over twenty years. (s) Reflects the historical results of operations of the tower operations to be acquired in the proposed Powertel acquisition. (t) Reflects additional revenues to be recognized by CCIC in connection with the proposed Powertel acquisition pursuant to master site agreements. (u) Reflects the incremental depreciation of property and equipment as a result of the proposed Powertel acquisition. Property and equipment is being depreciated over twenty years. 32
The following tables summarize the unaudited pro forma results of operations for the Restricted Group. Such information is not intended as an alternative measure of the operating results as would be determined in accordance with generally accepted accounting principles. Year Ended December 31, 1998 --------------------------------------------------------------------------------------------------- Restricted Adjustments Adjustments Restricted Exclusion of Group for for Group Pro Pro Forma Exclusion of Certain Pro Forma Proposed Proposed Forma for for Proposed Unrestricted Adjustments for Proposed BellSouth Historical Powertel the Offerings Subsidiaries for Roll-Up Offerings Transaction Powertel Acquisition Transactions ------------ ------------ ------------ ------------ ----------- ---------- ----------- ------------ Net revenues: Site rental and broadcast transmission...... $ 159,742 $(137,201) $ -- $ 22,541 $33,840 $ 1,865 $14,040 $ 72,286 Network services and other......... 50,299 (18,082) -- 32,217 -- -- -- 32,217 --------- --------- -------- -------- ------- -------- ------- --------- Total net revenues......... 210,041 (155,283) -- 54,758 33,840 1,865 14,040 104,503 --------- --------- -------- -------- ------- -------- ------- --------- Operating expenses: Costs of operations: Site rental and broadcast transmission..... 62,155 (56,038) -- 6,117 11,400 6,167 -- 23,684 Network services and other........ 29,480 (12,151) -- 17,329 -- -- -- 17,329 General and administrative.... 28,571 (7,683) 265 21,153 -- -- -- 21,153 Corporate development....... 4,633 (8) -- 4,625 -- -- -- 4,625 Non-cash compensation charges........... 16,589 (6,682) -- 9,907 -- -- -- 9,907 Depreciation and amortization...... 74,386 (46,002) (11,463) 16,921 30,500 7,534 6,111 61,066 --------- --------- -------- -------- ------- -------- ------- --------- 215,814 (128,564) (11,198) 76,052 41,900 13,701 6,111 137,764 --------- --------- -------- -------- ------- -------- ------- --------- Operating income (loss)............ (5,773) (26,719) 11,198 (21,294) (8,060) (11,836) 7,929 (33,261) Other income (expense): Interest and other income (expense).. 4,945 (3,844) -- 1,101 -- -- -- 1,101 Interest expense and amortization of deferred financing costs... (71,348) 20,740 -- (50,608) -- -- -- (50,608) --------- --------- -------- -------- ------- -------- ------- --------- Income (loss) before income taxes and minority interests......... (72,176) (9,823) 11,198 (70,801) (8,060) (11,836) 7,929 (82,768) Provision for income taxes...... (374) -- -- (374) -- -- -- (374) Minority interests......... (2,848) 1,654 1,194 -- -- -- -- -- --------- --------- -------- -------- ------- -------- ------- --------- Net income (loss).. (75,398) (8,169) 12,392 (71,175) (8,060) (11,836) 7,929 (83,142) Dividends on preferred stock... (26,745) -- -- (26,745) -- -- -- (26,745) --------- --------- -------- -------- ------- -------- ------- --------- Net income (loss) after deduction of dividends on preferred stock... $(102,143) $ (8,169) $ 12,392 $(97,920) $(8,060) $(11,836) $ 7,929 $(109,887) ========= ========= ======== ======== ======= ======== ======= ========= 33
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET As of December 31, 1998 (Dollars in thousands) Pro Forma for Adjustments Adjustments Pro Forma Historical Proposed for for for Bell Atlantic Adjustments Offerings Proposed Historical Proposed Proposed Joint for Joint and Joint BellSouth Historical CCIC Offerings Offerings Venture(e) Venture Venture Transaction Powertel(o) ---------- ----------- ---------- ------------- ----------- ---------- ----------- ----------- Assets: Current assets: Cash and cash equivalents..... $ 296,450 $666,125(a) $ 962,575 $ -- $(208,375)(f) $ 754,200 $(430,000)(l) $ -- Receivables...... 36,420 -- 36,420 -- -- 36,420 -- -- Inventories...... 6,599 -- 6,599 -- -- 6,599 -- -- Prepaid expenses and other current assets.. 2,647 -- 2,647 -- -- 2,647 -- 2,031 ---------- -------- ---------- ------- --------- ---------- --------- -------- Total current assets......... 342,116 666,125 1,008,241 -- (208,375) 799,866 (430,000) 2,031 Property and equipment, net.. 592,594 -- 592,594 83,557 508,923 (g) 1,185,074 610,000 (m) 121,490 Investments in affiliates...... 2,258 -- 2,258 -- -- 2,258 -- -- Goodwill and other intangible assets, net..... 569,740 -- 569,740 -- -- 569,740 -- -- Deferred financing costs and other assets, net..... 16,522 10,875(b) 27,397 -- 4,625 (h) 32,022 -- -- ---------- -------- ---------- ------- --------- ---------- --------- -------- $1,523,230 $677,000 $2,200,230 $83,557 $ 305,173 $2,588,960 $ 180,000 $123,521 ========== ======== ========== ======= ========= ========== ========= ======== Liabilities and Stockholders' Equity: Current liabilities: Accounts payable......... $ 46,020 $ -- $ 46,020 $ -- $ -- $46,020 $ -- $ -- Other current liabilities..... 46,867 -- 46,867 -- -- 46,867 -- 309 Long-term debt, current maturities...... -- -- -- -- -- -- -- -- ---------- -------- ---------- ------- --------- ---------- --------- -------- Total current liabilities.... 92,887 -- 92,887 -- -- 92,887 -- 309 Long-term debt, less current maturities...... 429,710 300,000(c) 729,710 -- 180,000 (i) 909,710 -- -- Other liabilities..... 22,823 -- 22,823 -- -- 22,823 -- -- ---------- -------- ---------- ------- --------- ---------- --------- -------- Total liabilities.... 545,420 300,000 845,420 -- 180,000 1,025,420 -- 309 ---------- -------- ---------- ------- --------- ---------- --------- -------- Minority interests....... 39,185 -- 39,185 -- 11,730 (j) 50,915 -- -- Redeemable preferred stock........... 201,063 -- 201,063 -- -- 201,063 -- -- Stockholders' equity.......... 737,562 377,000(d) 1,114,562 83,557 113,443 (k) 1,311,562 180,000 (n) 123,212 ---------- -------- ---------- ------- --------- ---------- --------- -------- $1,523,230 $677,000 $2,200,230 $83,557 $ 305,173 $2,588,960 $ 180,000 $123,521 ========== ======== ========== ======= ========= ========== ========= ======== Adjustments for Proposed Pro Forma Powertel for the Acquisition Transactions -------------- ------------ Assets: Current assets: Cash and cash equivalents..... $(274,617)(p) $ 49,583 Receivables...... -- 36,420 Inventories...... -- 6,599 Prepaid expenses and other current assets.. -- 4,678 -------------- ------------ Total current assets......... (274,617) 97,280 Property and equipment, net.. 151,405 (q) 2,067,969 Investments in affiliates...... -- 2,258 Goodwill and other intangible assets, net..... -- 569,740 Deferred financing costs and other assets, net..... -- 32,022 -------------- ------------ $(123,212) $2,769,269 ============== ============ Liabilities and Stockholders' Equity: Current liabilities: Accounts payable......... $ -- $ 46,020 Other current liabilities..... -- 47,176 Long-term debt, current maturities...... -- -- -------------- ------------ Total current liabilities.... -- 93,196 Long-term debt, less current maturities...... -- 909,710 Other liabilities..... -- 22,823 -------------- ------------ Total liabilities.... -- 1,025,729 -------------- ------------ Minority interests....... -- 50,915 Redeemable preferred stock........... -- 201,063 Stockholders' equity.......... (123,212)(r) 1,491,562 -------------- ------------ $(123,212) $2,769,269 ============== ============ See Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet 34
Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet (Dollars in thousands) (a) Reflects the following adjustments to cash and cash equivalents: (1) Increase resulting from the receipt of proceeds from the Proposed Offerings....................................... $ 700,000 (2) Decrease resulting from the payment of underwriting discounts and commissions and other fees and expenses related to the Proposed Offerings........................ (30,875) (3) Decrease resulting from the payment of nonrecurring financing fees related to the Term Loans................. (3,000) --------- Total adjustments to cash and cash equivalents........... $ 666,125 ========= (b) Reflects deferred financing costs resulting from the payment of underwriting discounts and commissions and other fees and expenses related to our proposed debt offering. (c) Reflects the increase resulting from the receipt of proceeds from our proposed debt offering. (d) Reflects the following adjustments to stockholders' equity: (1) Increase resulting from the receipt of proceeds from our proposed equity offering................................. $ 400,000 (2) Decrease resulting from the payment of underwriting discounts and commissions and other fees and expenses related to our proposed equity offering.................. (20,000) (3) Decrease resulting from payment of nonrecurring financing fees related to the Term Loans........................... (3,000) --------- Total adjustments to stockholders' equity................ $ 377,000 ========= (e) Reflects the historical amounts from the statement of net assets for the tower operations to be contributed to the Bell Atlantic joint venture. (f) Reflects the following adjustments to cash and cash equivalents: (1) Increase resulting from borrowings under a credit facility to be entered into by the Bell Atlantic joint venture.............................. $ 180,000 (2) Decrease resulting from distribution to minority partner.................................................. (380,000) (3) Decrease resulting from payment of deferred financing costs for a credit facility to be entered into by the Bell Atlantic joint venture.............................. (4,625) (4) Decrease resulting from payment of fees and expenses related to the Bell Atlantic joint venture............... (3,750) --------- Total adjustments to cash and cash equivalents........... $(208,375) ========= (g) Reflects the increase in basis of property and equipment contributed to the Bell Atlantic joint venture by the minority partner. (h) Reflects the deferred financing costs for the credit facility to be entered into by the Bell Atlantic joint venture. (i) Reflects the borrowings under a credit facility to be entered into by the Bell Atlantic joint venture. (j) Reflects the 38.5% minority interest in the Bell Atlantic joint venture. (k) Reflects the following adjustments to stockholders' equity: (1) Increase resulting from increase in basis of property and equipment contributed to the Bell Atlantic joint venture by the minority partner.................................. $ 508,923 (2) Decrease resulting from distribution to minority partner.................................................. (380,000) (3) Decrease resulting from minority interest................ (11,730) (4) Decrease resulting from payment of fees and expenses related to the Bell Atlantic joint venture............... (3,750) --------- Total adjustments to stockholders' equity................ $ 113,443 ========= (l) Reflects the payment of the cash portion of the purchase price for the proposed BellSouth transaction. (m) Reflects the basis of property and equipment recorded in connection with the proposed BellSouth transaction. (n) Reflects the increase resulting from the issuance of common stock for a portion of the purchase price for the proposed BellSouth transaction. (o) Reflects the historical amounts from the statement of net assets for the tower operations to be acquired in the proposed Powertel acquisition. (p) Reflects the payment of the closing price for the proposed Powertel acquisition. (q) Reflects the increase in basis of property and equipment acquired in the proposed Powertel acquisition. (r) Reflects the elimination of the historical basis of the net assets acquired in the proposed Powertel acquisition. The following table summarizes the adjustments for the Proposed Offerings, with increases to liabilities and stockholders' equity balances shown as negative amounts: Adjustment Reference ------------------------------------------------- (a)(1),(c),(d)(1) (a)(2),(b),(d)(2) (a)(3),(d)(3) Totals ----------------- ----------------- ------------- --------- Cash and cash equiva- lents.................. $ 700,000 $(30,875) $(3,000) $ 666,125 Deferred financing cost and other assets, net.. -- 10,875 -- 10,875 Long-term debt, less current maturities..... (300,000) -- -- (300,000) Stockholders' equity.... (400,000) 20,000 3,000 (377,000) --------- -------- ------- --------- $ -- $ -- $ -- $ -- ========= ======== ======= ========= 35
The following table summarizes the adjustments for the Bell Atlantic joint venture, with increases to liabilities and stockholders' equity balances shown as negative amounts: Adjustment Reference ------------------------------------------------------------------------ (f)(1),(i) (f)(2),(k)(2) (f)(3),(h) (f)(4),(k)(4) (g),(j),(k)(1),(k)(3) Totals ---------- ------------- ---------- ------------- --------------------- --------- Cash and cash equiva- lents.................. $ 180,000 $(380,000) $(4,625) $(3,750) $ -- $(208,375) Property and equipment, net.................... -- -- -- -- 508,923 508,923 Deferred financing costs and other assets, net.. -- -- 4,625 -- -- 4,625 Long-term debt, less current maturities..... (180,000) -- -- -- -- (180,000) Minority interests...... -- -- -- -- (11,730) (11,730) Stockholders' equity.... -- 380,000 -- 3,750 (497,193) (113,443) --------- --------- ------- ------- --------- --------- $ -- $ -- $ -- $ -- $ -- $ -- ========= ========= ======= ======= ========= ========= The following table summarizes the adjustments for the proposed BellSouth transaction, with increases to liabilities and stockholders' equity balances shown as negative amounts: Adjustment Reference -------------------- (l),(m),(n) -------------------- Cash and cash equivalents............................... $(430,000) Property and equipment, net............................. 610,000 Stockholders' equity.................................... (180,000) --------- $ -- ========= The following table summarizes the adjustments for the proposed Powertel acquisition, with increases to liabilities and stockholders' equity balances shown as negative amounts: Adjustment Reference -------------------- (p),(q),(r) -------------------- Cash and cash equivalents............................... $(274,617) Property and equipment, net............................. 151,405 Stockholders' equity.................................... 123,212 --------- $ -- ========= The following table summarizes the unaudited pro forma balance sheet for the Restricted Group. Such information is not intended as an alternative measure of financial position as determined in accordance with generally accepted accounting principles. As of December 31, 1998 ------------------------------------------------------------------------------------------------------------ Restricted Group Pro Forma Restricted for Group Adjustments Proposed Adjustments Restricted Pro Pro for Offerings for Adjustments Group Forma for Exclusion of Forma for Bell Atlantic and Proposed for Proposed Pro Forma Proposed Unrestricted Proposed Joint Joint BellSouth Historical Powertel for the Offerings Subsidiaries Offerings Venture Venture Transaction Powertel Acquisition Transactions ---------- ------------ ---------- ------------- ---------- ----------- ---------- ------------ ------------ Assets: Current assets: Cash and cash equivalents...... $ 962,575 $(254,665) $ 707,910 $ -- $ 707,910 $(430,000) $ -- $(274,617) $ 3,293 Receivables....... 36,420 (18,733) 17,687 -- 17,687 -- -- -- 17,687 Inventories....... 6,599 (5,309) 1,290 -- 1,290 -- -- -- 1,290 Prepaid expenses and other current assets... 2,647 (2,039) 608 -- 608 -- 2,031 -- 2,639 ---------- --------- ---------- -------- ---------- --------- -------- --------- ---------- Total current assets......... 1,008,241 (280,746) 727,495 -- 727,495 (430,000) 2,031 (274,617) 24,909 Property and equipment, net.... 592,594 (427,389) 165,205 -- 165,205 610,000 121,490 151,405 1,048,100 Investments in affiliates........ 2,258 -- 2,258 -- 2,258 -- -- -- 2,258 Investments in Unrestricted Subsidiaries...... -- 744,941 744,941 197,000 941,941 -- -- -- 941,941 Goodwill and other intangible assets, net............... 569,740 (426,011) 143,729 -- 143,729 -- -- -- 143,729 Deferred financing costs and other assets, net....... 27,397 (3,340) 24,057 -- 24,057 -- -- -- 24,057 ---------- --------- ---------- -------- ---------- --------- -------- --------- ---------- $2,200,230 $(392,545) $1,807,685 $197,000 $2,004,685 $ 180,000 $123,521 $(123,212) $2,184,994 ========== ========= ========== ======== ========== ========= ======== ========= ========== Liabilities and Stockholders' Equity: Current liabilities: Accounts payable.......... $ 46,020 $ (34,648) $11,372 $ -- $11,372 $ -- $ -- $ -- $ 11,372 Other current liabilities...... 46,867 (40,586) 6,281 -- 6,281 -- 309 -- 6,590 Long-term debt, current maturities....... -- -- -- -- -- -- -- -- -- ---------- --------- ---------- -------- ---------- --------- -------- --------- ---------- Total current liabilities.... 92,887 (75,234) 17,653 -- 17,653 -- 309 -- 17,962 Long-term debt, less current maturities........ 729,710 (256,111) 473,599 -- 473,599 -- -- -- 473,599 Other liabilities.. 22,823 (22,015) 808 -- 808 -- -- -- 808 ---------- --------- ---------- -------- ---------- --------- -------- --------- ---------- Total liabilities...... 845,420 (353,360) 492,060 -- 492,060 -- 309 -- 492,369 ---------- --------- ---------- -------- ---------- --------- -------- --------- ---------- Minority interests......... 39,185 (39,185) -- -- -- -- -- -- -- Redeemable preferred stock... 201,063 -- 201,063 -- 201,063 -- -- -- 201,063 Stockholders' equity............ 1,114,562 -- 1,114,562 197,000 1,311,562 180,000 123,212 (123,212) 1,491,562 ---------- --------- ---------- -------- ---------- --------- -------- --------- ---------- $2,200,230 $(392,545) $1,807,685 $197,000 $2,004,685 $ 180,000 $123,521 $(123,212) $2,184,994 ========== ========= ========== ======== ========== ========= ======== ========= ========== 36
SELECTED FINANCIAL AND OTHER DATA OF CCIC The selected historical consolidated financial and other data for CCIC set forth below for each of the four years in the period ended December 31, 1998, and as of December 31, 1995, 1996, 1997 and 1998, have been derived from the consolidated financial statements of CCIC, which have been audited by KPMG LLP, independent certified public accountants. The results of operations for the year ended December 31, 1998 are not comparable to the year ended December 31, 1997, and the results for the year ended December 31, 1997 are not comparable to the year ended December 31, 1996 as a result of business acquisitions consummated in 1997 and 1998. Results of operations of these acquired businesses are included in CCIC's consolidated financial statements for the periods subsequent to the respective dates of acquisition. The selected historical financial and other data for the Restricted Group (as defined) are not intended as alternative measures of operating results or cash flows from operations (as determined in accordance with generally accepted accounting principles). The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--CCIC" and the consolidated financial statements and the notes thereto of CCIC included elsewhere in this document. Years Ended December 31, ----------------------------------------- 1995 1996 1997 1998 -------- -------- --------- ---------- (Dollars in thousands) Statement of Operations Data: Net revenues: Site rental and broadcast transmission..................... $ 4,052 $ 5,615 $ 11,010 $ 75,028 Network services and other........ 6 592 20,395 38,050 -------- -------- --------- ---------- Total net revenues.............. 4,058 6,207 31,405 113,078 -------- -------- --------- ---------- Costs of operations: Site rental and broadcast transmission..................... 1,226 1,292 2,213 26,254 Network services and other........ -- 8 13,137 21,564 -------- -------- --------- ---------- Total costs of operations....... 1,226 1,300 15,350 47,818 -------- -------- --------- ---------- General and administrative......... 729 1,678 6,824 23,571 Corporate development(a)........... 204 1,324 5,731 4,625 Non-cash compensation charges(b)... -- -- -- 12,758 Depreciation and amortization...... 836 1,242 6,952 37,239 -------- -------- --------- ---------- Operating income (loss)............ 1,063 663 (3,452) (12,933) Equity in earnings (losses) of unconsolidated affiliate.......... -- -- (1,138) 2,055 Interest and other income (expense)(c)...................... 53 193 1,951 4,220 Interest expense and amortization of deferred financing costs....... (1,137) (1,803) (9,254) (29,089) -------- -------- --------- ---------- Loss before income taxes and minority interests................ (21) (947) (11,893) (35,747) Provision for income taxes......... -- (10) (49) (374) Minority interests................. -- -- -- (1,654) -------- -------- --------- ---------- Net loss........................... (21) (957) (11,942) (37,775) Dividends on preferred stock....... -- -- (2,199) (5,411) -------- -------- --------- ---------- Net loss after deduction of dividends on preferred stock...... $ (21) $ (957) $ (14,141) $ (43,186) ======== ======== ========= ========== Loss per common share--basic and diluted........................... $ (0.01) $ (0.27) $ (2.27) $ (1.02) ======== ======== ========= ========== Common shares outstanding--basic and diluted (in thousands)........ 3,316 3,503 6,238 42,518 ======== ======== ========= ========== Other Data: Site data (at period end)(d): Towers owned....................... 126 155 240 1,344 Towers managed..................... 7 7 133 129 Rooftop sites managed (revenue producing)(e)..................... 41 52 80 135 -------- -------- --------- ---------- Total sites owned and managed...... 174 214 453 1,608 ======== ======== ========= ========== EBITDA(f).......................... $ 1,899 $ 1,905 $ 3,500 $ 37,064 Restricted Group EBITDA............ 1,899 1,905 3,500 5,799 Capital expenditures............... 161 890 18,035 138,759 Summary cash flow information: Net cash provided by (used for) operating activities............. 1,672 (530) (624) 44,976 Net cash used for investing activities....................... (16,673) (13,916) (111,484) (149,248) Net cash provided by financing activities....................... 15,597 21,193 159,843 345,248 Ratio of earnings to fixed charges(g)........................ -- -- -- -- Balance Sheet Data (at period end): Cash and cash equivalents.......... $ 596 $ 7,343 $ 55,078 $ 296,450 Property and equipment, net........ 16,003 26,753 81,968 592,594 Total assets....................... 19,875 41,226 371,391 1,523,230 Total debt......................... 11,182 22,052 156,293 429,710 Redeemable preferred stock(h)...... 5,175 15,550 160,749 201,063 Total stockholders' equity (deficit)......................... 619 (210) 41,792 737,562 37
- -------- (a) Corporate development expenses represent costs incurred in connection with acquisitions and development of new business initiatives. These expenses consist primarily of allocated compensation, benefits and overhead costs that are not directly related to the administration or management of existing towers. For the year ended December 31, 1997, such expenses include (1) nonrecurring cash bonuses of $0.9 million paid to certain executive officers in connection with our initial investment in Castle Transmission, our U.K. subsidiary and (2) a nonrecurring cash charge of $1.3 million related to the purchase by CCIC of shares of common stock from CCIC's former chief executive officer in connection with the Castle Transmission investment. See "Certain Relationships and Related Transactions". (b) Represents charges related to the issuance of stock options to certain employees and executives. (c) Includes a $1.2 million fee received in March 1997 as compensation for leading the investment consortium which provided the equity financing in connection with the Castle Transmission investment. (d) Represents the aggregate number of sites of CCIC as of the end of each period. (e) As of December 31, 1998, we had contracts with 1,365 buildings in the United States to manage on behalf of such buildings the leasing of space for antennas on the rooftops of such buildings. A revenue producing rooftop represents a rooftop where we have arranged a lease of space on such rooftop and, as such, are receiving payments in respect of our management contract. We generally do not receive any payment for rooftops under management unless we actually lease space on such rooftops to third parties. As of December 31, 1998, we had 1,284 rooftop sites under management throughout the United States that were not revenue producing but were available for leasing to customers and, in the United Kingdom, the Company had 54 revenue producing rooftop sites that were occupied by our transmitters but were not available for leasing to customers. (f) EBITDA is defined as operating income (loss) plus depreciation and amortization and non-cash compensation charges. EBITDA is presented as additional information because management believes it to be a useful indicator of our ability to meet debt service and capital expenditure requirements. It is not, however, intended as an alternative measure of operating results or cash flow from operations (as determined in accordance with generally accepted accounting principles). Furthermore, our measure of EBITDA may not be comparable to similarly titled measures of other companies. (g) For purposes of computing the ratio of earnings to fixed charges, earnings represent income (loss) before income taxes, fixed charges and equity in earnings (losses) of unconsolidated affiliate. Fixed charges consist of interest expense, the interest component of operating leases and amortization of deferred financing costs. For the years ended December 31, 1995, 1996, 1997 and 1998, earnings were insufficient to cover fixed charges by $21,000, $0.9 million, $10.8 million and $37.8 million, respectively. (h) The 1995, 1996 and 1997 amounts represent (1) the senior convertible preferred stock we privately placed in August 1997 and October 1997, all of which has been converted into shares of common stock, and (2) Series A convertible preferred stock, the Series B convertible preferred stock and the Series C convertible preferred stock we privately placed in April 1995, July 1996 and February 1997, respectively, all of which has been converted into shares of common stock in connection with the consummation of our initial public offering in August 1998. The 1998 amount represents our 12 3/4% exchangeable preferred stock. ---------------- The selected quarterly historical consolidated financial data for CCIC set forth below have been derived from the consolidated financial statements of CCIC. Three Months Ended ------------------------------------------------------------ March 31 June 30 September 30 December 31 ------------ ------------ --------------- -------------- (In thousands of dollars, except per share amounts) 1997: Net revenues........... $ 1,994 $ 4,771 $ 11,481 $ 13,159 Gross profit(1)........ 1,731 2,258 5,648 6,418 Net loss............... (443) (1,706) (4,001) (5,792) Loss per common share-- basic and diluted..... (0.13) (0.51) (0.62) (0.69) 1998: Net revenues........... $ 11,837 $ 11,530 $ 28,894 $ 60,817 Gross profit(1)........ 6,244 7,550 15,835 35,631 Net loss............... (6,606) (6,426) (17,444) (7,299) Loss per common share-- basic and diluted..... (0.79) (0.78) (0.33) (0.09) - -------- (1) Represents net revenues less costs of operations. 38
SELECTED FINANCIAL AND OTHER DATA OF CTI The selected historical financial data for CTI, which was 34.3% owned by CCIC prior to the Roll-Up, presents (i) selected historical financial data of the BBC Home Service Transmission Business prior to its acquisition by CTI (the "Predecessor") for the year ended March 31, 1996 and the eleven and two months ended February 27, 1997, (ii) selected historical consolidated financial data of CTI after such acquisition for the one month ended March 31, 1997 and for the nine months ended December 31, 1997, and (iii) selected historical consolidated financial data of CTI for the eight months ended August 31, 1998. The selected historical financial data for the year ended March 31, 1996 and the eleven months ended February 27, 1997 have been derived from the financial statements of the Predecessor, which have been audited by KPMG, Chartered Accountants. The selected financial data for the one month ended March 31, 1997 and the nine months ended December 31, 1997 have been derived from the consolidated financial statements of CTI, which have been audited by KPMG, Chartered Accountants. The selected historical financial data for the two months ended February 27, 1997 have been derived from the unaudited financial statements of the Predecessor, and the selected historical financial data for the eight months ended August 31, 1998 have been derived from the unaudited consolidated financial statements of CTI, which include all adjustments that CTI considers necessary for a fair presentation of the financial position and results of operations for that period. The results of operations for the one month ended March 31, 1997, the nine months ended December 31, 1997 and the eight months ended August 31, 1998 are not necessarily indicative of the results of operations of CTI that may be expected for the entire year. CCIC acquired a majority ownership interest in CTI upon consummation of the Roll-Up in August 1998 and, as a result, historical financial data of CTI for the year ended December 31, 1998 is not presented. This information reflects financial data for CTI as a whole, is not limited to that portion of the financial data attributable to CCIC's percentage ownership of CTI prior to the Roll-Up and is not indicative of any distributions or dividends that CCIC might receive in the future. CTI is subject to significant restrictions on its ability to make dividends and distributions to CCIC. See "Risk Factors--As a Holding Company, We Depend on Dividends from Subsidiaries to Meet Cash Requirements or Pay Dividends". The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--CTI" and the consolidated financial statements and the notes thereto of CTI included elsewhere in this document. Predecessor Company CTI ---------------------------------------------- --------------------------------------------- Eleven Two One Nine Eight Year Months Months Month Months Months Ended Ended Ended Ended Ended Ended March 31, February 27, February 27, March 31, December 31, August 31, 1996 1997 1997 1997 1997 1998 -------------- -------------- -------------- ------------- -------------- -------------- (Pounds sterling in thousands) Statement of Operations Data: Net revenues..... (Pounds)70,367 (Pounds)70,614 (Pounds)12,805 (Pounds)6,433 (Pounds)56,752 (Pounds)59,033 Operating expenses(b)..... 62,582 56,612 10,108 5,188 47,976 47,821 -------------- -------------- -------------- ------------- -------------- -------------- Operating income.......... 7,785 14,002 2,697 1,245 8,776 11,212 Interest and other income.... -- -- -- 49 288 440 Interest expense and amortization of deferred financing costs........... -- -- -- (969) (12,419) (9,507) -------------- -------------- -------------- ------------- -------------- -------------- Income (loss) before income taxes........... 7,785 14,002 2,697 325 (3,355) 2,145 Provision for income taxes.... -- -- -- -- -- -- -------------- -------------- -------------- ------------- -------------- -------------- Net income (loss) under U.K. GAAP............ 7,785 14,002 2,697 325 (3,355) 2,145 Adjustments to convert to U.S. GAAP............ 3,707 3,993 726 78 866 1,493 -------------- -------------- -------------- ------------- -------------- -------------- Net income (loss) under U.S. GAAP............ (Pounds)11,492 (Pounds)17,995 (Pounds) 3,423 (Pounds) 403 (Pounds)(2,489) (Pounds) 3,638 ============== ============== ============== ============= ============== ============== Other Data: Site data(c): Towers and revenue producing rooftop sites at end of period......... EBITDA (under U.S. GAAP)(d)... (Pounds)20,620 (Pounds)27,040 (Pounds) 5,161 (Pounds)3,064 (Pounds)25,695 (Pounds)29,244 Capital expenditures (under U.S. GAAP)........... 18,079 21,810 711 748 14,361 36,304 Ratio of earnings to fixed charges(e)...... Ratio of EBITDA to cash interest expense......... Summary cash flow information (under U.S. GAAP): Net cash provided by operating activities...... 24,311 28,146 5,161 4,871 25,555 27,226 Net cash used for investing activities...... (17,190) (21,811) (711) (52,889) (14,668) (36,135) Net cash provided by (used for) financing activities...... (7,121) (6,335) (4,450) 57,706 (12,423) 9,955 CTI ---------------------------------- One Nine Eight Month Months Months Ended Ended Ended March 31, December 31, August 31, 1997(a) 1997(a) 1998(a) ---------- ------------ ---------- (Dollars in thousands) Statement of Operations Data: Net revenues..... $ 10,697 $ 94,365 $ 98,160 Operating expenses(b)..... 8,627 79,774 79,517 ---------- ------------ ---------- Operating income.......... 2,070 14,591 18,643 Interest and other income.... 81 479 731 Interest expense and amortization of deferred financing costs........... (1,611) (20,650) (15,808) ---------- ------------ ---------- Income (loss) before income taxes........... 540 (5,580) 3,566 Provision for income taxes.... -- -- -- ---------- ------------ ---------- Net income (loss) under U.K. GAAP............ 540 (5,580) 3,566 Adjustments to convert to U.S. GAAP............ 130 1,440 2,483 ---------- ------------ ---------- Net income (loss) under U.S. GAAP............ $ 670 $ (4,140) $ 6,049 ========== ============ ========== Other Data: Site data(c): Towers and revenue producing rooftop sites at end of period......... 801 808 ============ ========== EBITDA (under U.S. GAAP)(d)... $ 5,095 $ 42,726 $ 48,627 Capital expenditures (under U.S. GAAP)........... 1,244 23,879 60,366 Ratio of earnings to fixed charges(e)...... 1.44x -- 1.44x Ratio of EBITDA to cash interest expense......... 3.58x 2.71x 3.76x Summary cash flow information (under U.S. GAAP): Net cash provided by operating activities...... 8,099 42,493 45,271 Net cash used for investing activities...... (87,944) (24,390) (60,085) Net cash provided by (used for) financing activities...... 95,954 (20,657) 16,553 39
- -------- (a) CTI publishes its consolidated financial statements in pounds sterling. For the convenience of the reader, the information set forth above contains translations of pound sterling amounts into U.S. dollars at the Noon Buying Rate on December 31, 1998 of (Pounds)1.00=1.6628. No representation is made that the pound sterling amounts have been, could have been or could be converted into U.S. dollars at the rate indicated or any other rates. On February 26, 1999, the Noon Buying Rate was (Pounds)1.00 = $1.6027. (b) Included in operating expenses for the eight months ended August 31, 1998 are non-cash compensation charges for (Pounds)2.3 million ($3.9 million) related to the issuance of stock options to certain executives and employees. (c) As of August 31, 1998, CTI's 54 revenue producing rooftop sites were occupied by its transmitters but were not available for leasing to customers. (d) EBITDA is defined as operating income (loss) plus depreciation and amortization and non-cash compensation charges. EBITDA is presented as additional information because management believes it to be a useful indicator of CTI's ability to meet debt service and capital expenditure requirements. It is not, however, intended as an alternative measure of operating results or cash flow from operations (as determined in accordance with generally accepted accounting principles). Furthermore, CTI's measure of EBITDA may not be comparable to similarly titled measures of other companies. (e) For purposes of computing the ratio of earnings to fixed charges, earnings represent income (loss) before income taxes and fixed charges. Fixed charges consist of interest expense, the interest component of operating leases and amortization of deferred financing costs. For the nine months ended December 31, 1997, earning were insufficient to cover fixed charges by (Pounds)2.5 million ($4.1 million). 40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion sets forth separately the historical consolidated results of operations of CCIC and CTI and is intended to assist in understanding (1) CCIC's consolidated financial condition as of December 31, 1998 and its consolidated results of operations for each year in the three-year period ended December 31, 1998 and (2) CTI's consolidated results of operations for each twelve-month period in the two-year period ended March 31, 1998. The statements in this discussion regarding the industry outlook, the Company's expectations regarding the future performance of its businesses and the other nonhistorical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including but not limited to the uncertainties relating to decisions on capital expenditures to be made in the future by wireless carriers and broadcasters and the risks and uncertainties described in "Risk Factors". This discussion should be read in conjunction with "Unaudited Pro Forma Condensed Consolidated Financial Statements", "Selected Financial and Other Data of CCIC", "Selected Financial and Other Data of CTI" and the consolidated financial statements and the notes thereto included elsewhere in this document. Results of operations of the acquired businesses that are wholly and majority owned are included in the Company's consolidated financial statements for the periods subsequent to the respective dates of acquisition. As such, the Company's results of operations for the year ended December 31, 1998 are not comparable to the year ended December 31, 1997, and the results for the year ended December 31, 1997 are not comparable to the year ended December 31, 1996. Overview The continued growth of the Company's business depends substantially on the condition of the wireless communications and broadcast industries. The Company believes that the demand for communications sites will continue to grow and expects that, due to increased competition, wireless carriers will continue to seek operating and capital efficiencies by (1) outsourcing certain network services and the build-out and operation of new and existing infrastructure and (2) co-locating antennas and transmission equipment on multiple tenant towers. In addition, wireless carriers are beginning to seek to sell their wireless communications infrastructure to, or establish joint ventures with, experienced infrastructure providers, such as the Company, that have the ability to manage networks. Further, the Company believes that wireless carriers and broadcasters will continue to seek to outsource the operation of their towers and, eventually, their transmission networks, including the transmission of their signals. Management believes that the Company's ability to manage towers and transmission networks and its proven track record of providing end-to-end services to the wireless communications and broadcasting industries position it to capture such business. The willingness of wireless carriers to utilize the Company's infrastructure and related services is affected by numerous factors, including consumer demand for wireless services, interest rates, cost of capital, availability of capital to wireless carriers, tax policies, willingness to co-locate equipment, local restrictions on the proliferation of towers, cost of building towers and technological changes affecting the number of communications sites needed to provide wireless communications services to a given geographic area. The Company's revenues that are derived from the provision of transmission services to the broadcasting industry will be affected by the timing of the roll-out of digital terrestrial television broadcasts in both the United Kingdom and the United States, as well as in other countries around the world, consumer demand for digital terrestrial broadcasting, interest rates, cost of capital, zoning restrictions on tall towers and the cost of building towers. As an important part of its business strategy, the Company will seek (1) to take advantage of the operating leverage of its site rental business by increasing the antenna space leased on its owned or managed communications sites, (2) to leverage its in-house technical and operational expertise, 41
(3) to expand its tower footprints by partnering with wireless carriers to assume ownership of their existing towers and by pursuing build-to-suit opportunities and (4) to acquire existing transmission networks globally as opportunities arise. Results of Operations The Company's primary sources of revenues are from (1) the rental of antenna space on towers and rooftops sites, (2) the provision of network services and (3) the provision of analog and digital broadcast transmission services. CCIC CCIC's primary sources of revenues are from (1) the rental of antenna space on towers and rooftop sites and (2) the provision of network services, which includes network design and site selection, site acquisition, site development and construction and antenna installation. Site rental revenues are received primarily from wireless communications companies, including cellular, PCS, paging, specialized mobile radio/enhanced specialized mobile radio ("SMR/ESMR") and microwave operators. Site rental revenues are generally recognized on a monthly basis under lease agreements, which typically have original terms of five years (with three or four optional renewal periods of five years each). Average revenues for CCIC's managed rooftop sites are less than for the owned and managed towers because a substantial portion of the revenues from the tenants at rooftop sites is remitted to the building owner or manager. Network services revenues consist of revenues from (1) network design and site selection, (2) site acquisition, (3) site development and construction, (4) antenna installation and (5) other services. Network services revenues are received primarily from wireless communications companies. Network services revenues are recognized under service contracts which provide for billings on either a fixed price basis or a time and materials basis. Demand for CCIC's network services fluctuates from period to period and within periods. See "Risk Factors--Variability in Demand for Network Services May Reduce the Predictability of Our Results". Consequently, the operating results of CCIC's network services businesses for any particular period may vary significantly, and should not be considered as indicative of longer-term results. CCIC also derives revenues from the ownership and operation of microwave radio and SMR networks in Puerto Rico where CCIC owns radio wave spectrum in the 2,000 MHz and 6,000 MHz range (for microwave radio) and the 800 MHz range (for SMR). These revenues are generally recognized under monthly management or service agreements. Costs of operations for site rental primarily consist of land leases, repairs and maintenance, utilities, insurance, property taxes and monitoring costs as well as, in the case of managed sites, rental payments. For any given tower, such costs are relatively fixed over a monthly or an annual time period. As such, operating costs for owned towers do not generally increase significantly as additional customers are added. However, rental expenses at certain managed towers increase as additional customer antennas are added, resulting in higher incremental revenues but lower incremental margins than on owned towers. Costs of operations for network services consist primarily of employee compensation and related benefits costs, subcontractor services, consulting fees, and other on-site construction and materials costs. CCIC incurs these network services costs (1) to support its internal operations, including construction and maintenance of its owned towers, and (2) to maintain the employees necessary to provide end-to-end services to third parties regardless of the level of such business at any time. The Company believes that its experienced staff enables it to provide the type of end-to-end services that enhance its ability to acquire access to the infrastructure of wireless carriers and to attract significant build-to-suit contracts. General and administrative expenses consist primarily of employee compensation and related benefits costs, advertising, professional and consulting fees, office rent and related expenses and travel costs. Corporate development expenses represent costs incurred in connection with 42
acquisitions and development of new business initiatives. These expenses consist primarily of allocated compensation, benefits and overhead costs that are not directly related to the administration or management of existing towers. Depreciation and amortization charges relate to CCIC's property and equipment (primarily towers, construction equipment and vehicles), goodwill and other intangible assets recorded in connection with business acquisitions. Depreciation of towers and amortization of goodwill are computed with a useful life of 20 years. Amortization of other intangible assets (principally the value of existing site rental contracts at Crown) is computed with a useful life of 10 years. Depreciation of construction equipment and vehicles are generally computed with useful lives of 10 years and 5 years, respectively. In May 1997, the Company consummated the TEA acquisition and the TeleStructures acquisition. In August 1997, the Company consummated the acquisition of Crown Communication. In August 1998, the Company consummated a share exchange with the shareholders of CTSH, pursuant to which the Company's ownership of CTSH increased from approximately 34.3% to 80%. In October 1998, CTI consummated the Millennium acquisition. Results of operations of these acquired businesses are included in the Company's consolidated financial statements for the periods subsequent to the respective dates of acquisition. As such, the Company's results of operations for the year ended December 31, 1998 are not comparable to the year ended December 31, 1997, and the results for the year ended December 31, 1997 are not comparable to the year ended December 31, 1996. See "--CTI" for a description of the revenues and operating expenses that are included in CCIC's consolidated results of operations subsequent to the consummation of the share exchange in August 1998. The following information is derived from CCIC's historical Consolidated Statements of Operations for the periods indicated. Year Ended Year Ended Year Ended December 31, 1996 December 31, 1997 December 31, 1998 -------------------- ------------------ ------------------ Percent Percent Percent of Net of Net of Net Amount Revenues Amount Revenues Amount Revenues --------- --------- -------- -------- -------- -------- (Dollars in thousands) Net revenues: Site rental and broadcast transmission.......... $ 5,615 90.5% $ 11,010 35.1% $ 75,028 66.4% Network services and other................. 592 9.5 20,395 64.9 38,050 33.6 --------- ------- -------- ----- -------- ----- Total net revenues... 6,207 100.0 31,405 100.0 113,078 100.0 --------- ------- -------- ----- -------- ----- Operating expenses: Costs of operations: Site rental and broadcast transmission.......... 1,292 23.0 2,213 20.1 26,254 35.0 Network services and other................. 8 1.4 13,137 64.4 21,564 56.7 --------- -------- -------- Total costs of operations.......... 1,300 21.0 15,350 48.9 47,818 42.3 General and administrative........ 1,678 27.0 6,824 21.7 23,571 20.8 Corporate development.. 1,324 21.3 5,731 18.3 4,625 4.1 Non-cash compensation charges............... -- -- -- -- 12,758 11.3 Depreciation and amortization.......... 1,242 20.0 6,952 22.1 37,239 32.9 --------- ------- -------- ----- -------- ----- Operating income (loss)................. 663 10.7 (3,452) (11.0) (12,933) (11.4) Other income (expense): Equity in earnings (losses) of unconsolidated affiliate............. -- -- (1,138) (3.6) 2,055 1.8 Interest and other income (expense)...... 193 3.1 1,951 6.2 4,220 3.7 Interest expense and amortization of deferred financing costs................. (1,803) (29.0) (9,254) (29.5) (29,089) (25.7) --------- ------- -------- ----- -------- ----- Loss before income taxes and minority interests.............. (947) (15.2) (11,893) (37.9) (35,747) (31.6) Provision for income taxes.................. (10) (0.2) (49) (0.1) (374) (0.3) Minority interests...... -- -- -- -- (1,654) (1.5) --------- ------- -------- ----- -------- ----- Net loss................ $ (957) (15.4)% $(11,942) (38.0)% $(37,775) (33.4)% ========= ======= ======== ===== ======== ===== 43
Comparison of Years Ended December 31, 1998 and 1997 Consolidated revenues for 1998 were $113.1 million, an increase of $81.7 million from 1997. This increase was primarily attributable to (i) a $64.0 million, or 581.5%, increase in site rental and broadcast transmission revenues, of which $52.5 million was attributable to CTI and $11.5 million was attributable to the Crown operations; (ii) an $11.4 million increase in network services revenues from the Crown operations; and (iii) $5.6 million in network services revenues from CTI. Costs of operations for 1998 were $47.8 million, an increase of $32.5 million from 1997. This increase was primarily attributable to (i) a $24.0 million increase in site rental and broadcast transmission costs, of which $20.1 million was attributable to CTI and $3.9 million was attributable to the Crown operations; (ii) a $3.8 million increase in network services costs related to the Crown operations; and (iii) $4.2 million in network services costs from CTI. Costs of operations for site rental and broadcast transmission as a percentage of site rental and broadcast transmission revenues increased to 35.0% for 1998 from 20.1% for 1997, primarily due to (1) higher costs attributable to the CTI operations which are inherent with CTI's broadcast transmission business, and (2) higher costs for the Crown operations. Costs of operations for network services as a percentage of network services revenues decreased to 56.7% for 1998 from 64.4% for 1997, primarily due to improved margins from the Crown operations. Margins from the Crown network services operations vary from period to period, often as a result of increasingly competitive market conditions. General and administrative expenses for 1998 were $23.6 million, an increase of $16.7 million from 1997. This increase was primarily attributable to (i) an $11.3 million increase in expenses related to the Crown operations; (ii) a $2.8 million increase in expenses at our corporate office; and (iii) $2.4 million in expenses at CTI. General and administrative expenses as a percentage of revenues decreased for 1998 to 20.8% from 21.7% for 1997 because of lower overhead costs as a percentage of revenues for CTI, partially offset by higher overhead costs as a percentage of revenues for Crown and the increase in costs at our corporate office. Corporate development expenses for 1998 were $4.6 million, a decrease of $1.1 million from 1997. Corporate development expenses for 1997 included nonrecurring compensation charges associated with the CTI Investment of (i) $0.9 million for certain executive bonuses and (ii) the repurchase of shares of our common stock from a member of our Board of Directors, which resulted in compensation charges of $1.3 million. Corporate development expenses for 1998 included discretionary bonuses related to the Company's performance totaling approximately $1.8 million for certain members of our management. We have recorded non-cash compensation charges of $12.8 million related to the issuance of stock options to certain employees and executives. Such charges are expected to amount to approximately $1.6 million per year through 2002 and approximately $0.8 million in 2003. See "--Compensation Charges Related to Stock Option Grants". Depreciation and amortization for 1998 was $37.2 million, an increase of $30.3 million from 1997. This increase was primarily attributable to (1) a $9.5 million increase in depreciation and amortization related to the property and equipment, goodwill and other intangible assets acquired in the Crown acquisition; and (2) $20.3 million of depreciation and amortization related to the property and equipment and goodwill from CTI. The equity in earnings (losses) of unconsolidated affiliate represents our 34.3% share of CTI's net earnings (losses) for the periods from March 1997 through August 1998 (at which time the share exchange with CTI's shareholders was consummated). For the eight months ended August 31, 1998, after making appropriate adjustments to CTI's results of operations for such period to conform to generally accepted accounting principles of the United States, CTI had net revenues, operating 44
income, interest expense (including amortization of deferred financing costs) and net income of $97.2 million, $18.6 million, $13.4 million and $6.0 million, respectively. Included in CTI's results of operations for such period are non- cash compensation charges for approximately $3.8 million related to the issuance of stock options to certain members of CTI's management. Interest and other income for 1997 includes a $1.2 million fee received in March 1997 as compensation for leading the investment consortium which provided the equity financing for CTI. Interest income for 1998 resulted primarily from (1) the investment of excess proceeds from the sale of the 10 5/8% discount notes in November 1997; and (2) the investment of the net proceeds from the IPO in August 1998. See "--Liquidity and Capital Resources". Interest expense and amortization of deferred financing costs for 1998 was $29.1 million, an increase of $19.8 million, or 214.3%, from 1997. This increase was primarily attributable to amortization of the original issue discount on the 10 5/8% Notes and interest on CTI's indebtedness. Minority interests represent the minority shareholder's 20% interest in CTI's operations. Comparison of Years Ended December 31, 1997 and 1996 Consolidated revenues for 1997 were $31.4 million, an increase of $25.2 million from 1996. This increase was primarily attributable to (1) a $5.4 million, or 96.1%, increase in site rental revenues, of which $4.2 million was attributable to the Crown operations and $0.7 million was attributable to the Puerto Rico operations; (2) $10.4 million in network services revenues from TEA; and (3) $7.2 million in network services revenues from the Crown operations. The remainder of the increase was largely attributable to higher revenues from SMR and microwave radio services in Puerto Rico and the monthly service fees received from CTI beginning in March 1997. Costs of operations for 1997 were $15.4 million, an increase of $14.1 million from 1996. This increase was primarily attributable to (1) $8.5 million of network services costs related to the TEA operations; (2) $3.9 million of network services costs related to the Crown operations; and (3) $0.9 million in site rental costs attributable to the Crown operations. Costs of operations for site rental as a percentage of site rental revenues decreased to 20.1% for 1997 from 23.0% for 1996 because of increased utilization of the towers located in the southwestern United States and Puerto Rico. Costs of operations for network services as a percentage of network services revenues were 64.4% for 1997, reflecting lower margins that are inherent in the network services businesses acquired in 1997. General and administrative expenses for 1997 were $6.8 million, an increase of $5.1 million from 1996. This increase was primarily attributable to $3.0 million of expenses related to the Crown operations and $1.4 million of expenses related to the TEA operations, along with an increase in costs of $0.2 million at CCIC's corporate office. General and administrative expenses as a percentage of revenues decreased for 1997 to 21.7% from 27.0% for 1996 because of lower overhead costs as a percentage of revenues for Crown and TEA. Corporate development expenses for 1997 were $5.7 million, an increase of $4.4 million from 1996. A substantial portion of this increase was attributable to nonrecurring compensation charges associated with the CTI Investment of (1) $0.9 million for certain executive bonuses and (2) the repurchase of shares of CCIC's common stock from a member of its Board of Directors, which resulted in compensation charges of $1.3 million. The remaining $2.2 million of the increase in corporate development expenses was attributable to a higher allocation of personnel costs, along with an overall increase in such costs, associated with an increase in acquisition and business development activities. Depreciation and amortization for 1997 was $7.0 million, an increase of $5.7 million from 1996. This increase was primarily attributable to (1) $4.7 million of depreciation and amortization related to the property and equipment, goodwill and other intangible assets acquired in the Crown acquisition; 45
(2) $0.5 million of depreciation and amortization related to the property and equipment and goodwill acquired in the TEA and TeleStructures acquisitions; and (3) $0.3 million resulting from twelve months of depreciation related to the property and equipment acquired in the Puerto Rico acquisition. The equity in losses of unconsolidated affiliate of $1.1 million represents CCIC's 34.3% share of CTI's net loss for the period from March through December 1997. After making appropriate adjustments to CTI's results of operations for such period to conform to generally accepted accounting principles of the United States, CTI had net revenues, operating income, interest expense (including amortization of deferred financing costs) and net losses of $103.5 million, $16.5 million, $20.4 million and $3.3 million, respectively. Interest and other income for 1997 includes a $1.2 million fee received in March 1997 as compensation for leading the investment consortium which provided the equity financing for CTI, the impact on earnings of which was partially offset by certain executive bonuses related to the CTI Investment and included in corporate development expenses. Interest income for 1997 resulted primarily from the investment of excess proceeds from the sale of CCIC's Series C convertible preferred stock in February 1997. Interest expense and amortization of deferred financing costs for 1997 was $9.3 million, an increase of $7.5 million, or 413.3%, from 1996. This increase was primarily attributable to (1) commitment fees related to an unfunded interim loan facility related to the Crown acquisition and an unfunded revolving credit facility; (2) interest on notes payable to the former stockholders of Crown for a portion of the purchase price of the Crown Communication Inc.; (3) amortization of the original issue discount on the 10 5/8% discount notes; (4) interest and fees associated with borrowings under CCIC's bank credit facility which were used to finance the Crown acquisition on an interim basis; (5) interest on outstanding borrowings assumed in connection with the Crown acquisition; and (6) interest on borrowings under CCIC's bank credit facility which were used to finance the acquisition of the Puerto Rico system. CTI CTI's primary sources of revenues are from (1) the provision of analog and digital broadcast transmission services to the BBC and commercial broadcasters, (2) the rental of antenna space on towers and (3) the provision of network services, which includes broadcast consulting, network design and site selection, site acquisition, site development and antenna installation and site management and other services. Broadcast transmission services revenues are received for both analog and digital transmission services. Monthly analog transmission revenues are principally received from the BBC under a contract with an initial 10-year term through March 31, 2007. Digital transmission services revenues from the BBC and ONdigital are recognized under contracts with initial terms of 12 years through November 15, 2010. Monthly revenues from these digital transmission contracts increase over time as the network rollout progresses. See "Business--U.K. Operations--Significant Contracts". Site rental revenues are received from other broadcast transmission service providers (primarily NTL) and wireless communications companies, including all four U.K. cellular operators (Cellnet, Vodafone, One2One and Orange). As of December 31, 1998, approximately 200 companies rented space on approximately 514 of CTI's 919 towers and rooftops. Site rental revenues are generally recognized on a monthly basis under lease agreements with original terms of three to twelve years. Such lease agreements generally require annual payments in advance, and include rental rate adjustment provisions between one and three years from the commencement of the lease. Site rental revenues are expected to become an increasing portion of CTI's total U.K. revenue base, and the Company believes that the demand for site rental from communication service providers will increase in line with the expected growth of these communication services in the United Kingdom. 46
Network services revenues consist of (1) network design and site selection, site acquisition, site development and antenna installation (collectively, "network design and development") and (2) site management and other services. Network design and development services are provided to (1) a number of broadcasting and related organizations, both in the United Kingdom and other countries; (2) all four U.K. cellular operators; and (3) a number of other wireless communications companies, including Dolphin and Highway One. These services are usually subject to a competitive bid, although a significant proportion result from an operator coming onto an existing CTI site. Revenues from such services are recognized on either a fixed price or a time and materials basis. Site management and other services, consisting of both network monitoring and equipment maintenance, are carried out in the United Kingdom for a number of emergency service organizations. Revenues for such services are received under contracts with original terms of between three and five years. They provide for fixed prices with respect to network monitoring and variable pricing dependent on the level of equipment maintenance carried out in a given period. Costs of operations for broadcast transmission services consist primarily of employee compensation and related benefits costs, utilities, rental payments under the Site-Sharing Agreement with NTL, circuit costs and repairs and maintenance on both transmission equipment and structures. Site rental operating costs consist primarily of employee compensation and related benefits costs, utilities and repairs and maintenance. The majority of such costs are relatively fixed in nature, with increases in revenue from new installations on existing sites generally being achieved without a corresponding increase in costs. Costs of operations for network services consist primarily of employee compensation and related benefits costs and on-site construction and materials costs. General and administrative expenses consist primarily of office occupancy and related expenses, travel costs, professional and consulting fees, advertising, insurance and employee training and recruitment costs. Corporate development expenses represent costs incurred in connection with acquisitions and development of new business initiatives. These expenses consist primarily of external professional fees related to specific activities and allocated compensation, benefits and overhead costs that are not directly related to the administration or management of CTI's existing lines of business. Depreciation and amortization charges relate to CTI's property and equipment (primarily towers, broadcast transmission equipment and associated buildings) and goodwill recorded in connection with the acquisition of the Home Service Transmission business from the BBC (the "BBC Home Service Transmission Business"). Depreciation of towers is computed with useful lives of 20 to 25 years; depreciation of broadcast transmission equipment is computed with a useful life of 20 years; and depreciation of buildings is computed with useful lives ranging from 20 to 50 years. Amortization of goodwill is computed with a useful life of 20 years. The following information is derived from the Consolidated Profit and Loss Accounts of (i) CTI for periods subsequent to February 28, 1997 (the date of inception of CTI's operations) and (ii) the BBC Home Service Transmission Business for periods prior to that date. For purposes of the following discussion, CTI's results for the month ended March 31, 1997 have been combined with the results of the BBC Home Service Transmission Business for the eleven months ended February 27, 1997, and CTI's results for the nine months ended December 31, 1997 have been combined with its results for the three months ended March 31, 1998. The following discussion presents an analysis of such combined results for the twelve-month periods ended March 31, 1998 and 1997. Results for CTI are not comparable to results from the BBC Home Service Transmission Business due to differences in the carrying amounts of property and equipment and goodwill. As of December 31, 1997, CTI changed its fiscal year end for financial reporting purposes from March 31 to December 31; as such, the results for the three months ended March 31, 1998 are unaudited. 47
CTI uses the U.K. pound sterling as the functional currency for its operations. The following amounts have been translated to U.S. dollars using the average Noon Buying Rate for each period. The following amounts reflect certain adjustments to present the results of operations in accordance with U.S. generally accepted accounting principles ("GAAP"). For the results of the BBC Home Service Transmission Business, such adjustments affect depreciation and amortization expense as a result of differences in the carrying amounts for property and equipment; for CTI, such adjustments affect (1) operating expenses as a result of differences in the accounting for pension costs, and (2) interest expense as a result of the capitalization of interest costs in connection with constructed assets. Twelve Months Ended Twelve Months Ended March 31, 1997 March 31, 1998 ----------------------- ----------------------- Percent Percent of Net of Net Amount Revenues Amount Revenues ----------- ---------- ----------- ---------- (Dollars in thousands) Net revenues: Site rental and broadcast transmission............... $ 112,122 91.7% $ 113,558 89.2% Network services and other.. 10,090 8.3 13,731 10.8 ----------- -------- ----------- -------- Total net revenues........ 122,212 100.0 127,289 100.0 ----------- -------- ----------- -------- Operating expenses: Costs of operations: Site rental and broadcast transmission.............. 61,339 54.7 53,957 47.5 Network services and oth- er........................ 5,912 58.6 6,075 44.2 ----------- -------- ----------- -------- Total cost of operations.. 67,251 55.0 60,032 47.1 General and administrative.. 7,196 5.9 8,626 6.8 Corporate development....... -- -- 2,303 1.8 Depreciation and amortization............... 17,256 14.1 37,382 29.4 ----------- -------- ----------- -------- Operating income.............. 30,509 25.0 18,946 14.9 Other income (expense): Interest and other income... 79 0.1 746 0.6 Interest expense and amortization of deferred financing costs............ (1,434) (1.2) (24,201) (19.0) Income (loss) before income taxes........................ 29,154 23.9 (4,509) (3.5) Provision for income taxes.. -- -- -- -- ----------- -------- ----------- -------- Net income (loss)............. $ 29,154 23.9% $ (4,509) (3.5)% =========== ======== =========== ======== Comparison of Twelve Months Ended March 31, 1998 and Twelve Months Ended March 31, 1997 Consolidated revenues for the twelve months ended March 31, 1998 were $127.3 million, an increase of $5.1 million from the twelve months ended March 31, 1997. This increase was primarily attributable to (1) a $1.4 million increase in broadcast transmission services and site rental revenues and (2) a $3.6 million increase in network services and other revenues. Revenues from the BBC for the twelve months ended March 31, 1998 amounted to $79.5 million, or 62.5% of total revenues, as compared to $85.5 million, or 70.0% of total revenues, for the twelve months ended March 31, 1997. Revenues from NTL for the twelve months ended March 31, 1998 amounted to $11.8 million, or 9.2% of total revenues. Network services revenues for the twelve months ended March 31, 1998 consisted of $10.6 million from network design and development services and $3.1 million from site management and other services. Costs of operations for the twelve months ended March 31, 1998 were $60.0 million, a decrease of $7.2 million from the twelve months ended March 31, 1997. This decrease was primarily attributable to a $7.4 million decrease in broadcast transmission services and site rental costs, partially offset by a $0.2 million increase in network services and other costs. Costs of operations as 48
a percentage of revenues for broadcast transmission services and site rental were 47.5% for the twelve months ended March 31, 1998, as compared to 54.7% for the twelve months ended March 31, 1997. This decrease was attributable to (1) increases in site rental revenues from existing sites with little change in site operating costs; and (2) the elimination, as of February 28, 1997, of certain costs recharged to the BBC Home Service Transmission Business by the BBC. Costs of operations as a percentage of revenues for network services and other were 44.2% for the twelve months ended March 31, 1998, as compared to 58.6% for the twelve months ended March 31, 1997. This decrease was attributable to (1) a higher proportion of broadcast consulting revenues, which result in higher margins than certain other network design and development services and (2) the elimination, as of February 28, 1997, of certain costs recharged to the BBC Home Service Transmission Business by the BBC. Costs of operations for site rental and broadcast transmission for the twelve months ended March 31, 1998 includes non-cash compensation charges for $1.1 million related to the issuance of stock options to certain employees. General and administrative expenses for the twelve months ended March 31, 1998 were $8.6 million, an increase of $1.4 million from the twelve months ended March 31, 1997. As a percentage of revenues, general and administrative expenses were 6.8% and 5.9% for the twelve months ended March 31, 1998 and 1997, respectively. This increase was attributable to costs incurred by CTI as a separate enterprise which were not directly incurred by the BBC Home Service Transmission Business as a part of the BBC. Corporate development expenses for the twelve months ended March 31, 1998 relate primarily to costs incurred in connection with certain projects in Australasia and non-cash compensation charges for $1.8 million related to the issuance of stock options to certain executives. Depreciation and amortization for the twelve months ended March 31, 1998 was $37.4 million, an increase of $20.1 million from the twelve months ended March 31, 1997. Monthly charges for depreciation and amortization increased for periods subsequent to February 28, 1997 due to (i) a decrease in the estimated useful lives for certain transmission and power plant equipment from 25 to 20 years; and (ii) the amortization of goodwill recorded in connection with the acquisition of the BBC Home Service Transmission Business. Interest and other income for the twelve months ended March 31, 1998 resulted primarily from (i) the investment of excess proceeds from amounts drawn under CTI's bank credit facilities in February 1997; and (ii) the investment of cash generated from operations during the period. Interest expense and amortization of deferred financing costs for the twelve months ended March 31, 1998 was $24.2 million. This amount was comprised of (1) $4.9 million related to amounts drawn under the CTI Credit Facility; (2) $15.6 million related to the CTI Bonds; and (3) $3.7 million for the amortization of deferred financing costs. Interest expense and amortization of deferred financing costs of $1.4 million for the twelve months ended March 31, 1997 was attributable to amounts drawn under the CTI Credit Facility. The BBC Home Service Transmission Business did not incur any financing costs as a part of the BBC prior to February 28, 1997. Liquidity and Capital Resources Our business strategy contemplates substantial capital expenditures (1) in connection with the expansion of our tower portfolios by partnering with wireless carriers to assume ownership or control of their existing towers by pursuing build-to-suit opportunities and by pursuing other tower acquisition opportunities and (2) to acquire existing transmission networks globally as opportunities arise. Since its inception, CCIC has generally funded its activities (other than acquisitions and investments) through excess proceeds from contributions of equity capital. CCIC has financed acquisitions and investments with the proceeds from equity contributions, borrowings under our senior credit facilities, 49
issuances of debt securities and the issuance of promissory notes to sellers. Since its inception, CTI has generally funded its activities (other than the acquisition of the BBC Home Service Transmission Business) through cash provided by operations and borrowings under CTI's credit facility. CTI financed the acquisition of the BBC Home Service Transmission Business with the proceeds from equity contributions and the issuance of CTI's 9% bonds. For the years ended December 31, 1996, 1997 and 1998, our net cash provided by (used for) operating activities was ($0.5 million), ($0.6 million) and $45.0 million, respectively. For the years ended December 31, 1996, 1997 and 1998, our net cash provided by financing activities was $21.2 million, $159.8 million and $345.2 million, respectively. Our primary financing-related activities in 1998 included the following: Exchangeable Preferred Stock Offering. On December 16, 1998, we privately placed 200,000 shares of our 12 3/4% Senior Exchangeable Preferred Stock due 2010, with a liquidation preference of $1,000 per share, resulting in net proceeds to us of approximately $193.0 million. We used a portion of the net proceeds of the exchangeable preferred stock offering to repay our outstanding indebtedness under CCI's senior credit facility. We used the remainder of the net proceeds of the exchangeable preferred stock offering to finance a portion of our investment in the Bell Atlantic joint venture. Initial Public Offering. On August 18, 1998, we consummated our initial public offering at a price to the public of $13.00 per share. We sold 12,320,000 shares of our common stock and received proceeds of $151.0 million (after underwriting discounts of $9.1 million but before other expenses of the IPO, which totaled approximately $4.1 million). We used the net proceeds from our IPO to finance a portion of our investment in the Bell Atlantic joint venture. Capital expenditures were $138.8 million for the twelve months ended December 31, 1998, of which $3.7 million were for CCIC, $84.9 million was for CCI and $50.2 million were for CTI. We anticipate that we will build, through the end of 1999, approximately 750 towers in the United States at a cost of approximately $175.0 million and approximately 200 towers in the United Kingdom at a cost of approximately $23.0 million. We also expect that the capital expenditure requirements related to the roll-out of digital broadcast transmission in the United Kingdom will be approximately (Pounds)40.0 million ($66.5 million). In addition to capital expenditures in connection with build-to-suits, we expect to apply a significant amount of capital to finance the cash portion of the consideration being paid in connection with the Proposed Transactions. In connection with the Bell Atlantic joint venture, we contributed, in addition to other consideration, $250.0 million in cash to the joint venture. The joint venture borrowed approximately $180.0 million under a committed $250.0 million revolving credit facility, following which the joint venture made a $380.0 million cash distribution to Bell Atlantic. In connection with the proposed BellSouth transaction, we will pay BellSouth, in addition to other consideration, $430.0 million in cash. We have deposited $50.0 million in an escrow account pending the first closing of the transaction, which we funded through a loan agreement we entered into on March 15, 1999. We expect to use a portion of the net proceeds of our proposed debt and equity offerings to finance this transaction. In connection with the proposed Powertel acquisition, we will pay Powertel $275.0 million in cash. We have deposited $50.0 million, which we funded through the March 15, 1999 loan agreement, in an escrow account to be applied to the purchase price at closing. We expect to use a portion of the net proceeds of our proposed debt and equity offerings to finance this transaction. 50
We expect that the consummation of the 1999 Transactions and the execution of our new tower build, or build-to-suit program will have a material impact on our liquidity. We expect that once integrated, these transactions will have a positive impact on liquidity, but will require some period of time to offset the initial adverse impact on liquidity. In addition, we believe that as new build-to-suit towers become operational and we begin to add tenants, they should result in a long-term increase in liquidity. Our liquidity may also be materially impacted if we fail to consummate the proposed BellSouth transaction or the proposed Powertel acquisition. In the event we consummate our proposed debt and equity offerings and subsequently fail to consummate the proposed BellSouth transaction or the proposed Powertel acquisition, the proceeds of the proposed offerings would no longer be required to be allocated to finance such transactions and would be available to us as additional liquidity. The increase in our liquidity, however, could be somewhat offset by any portion of the escrow payments made in connection with such transactions that we may forfeit as a result of not closing such transactions. See "The Proposed Transactions". To fund the execution of the our business strategy, including the proposed transactions described above, we expect to use the net proceeds of our proposed offerings, the borrowings available under Crown Communication's senior credit facility and the borrowings available under CTI's credit facility. Following consummation of our proposed offerings and assuming the proposed transactions are consummated, we believe we will have sufficient liquidity to fund our operations and pursue our business strategy in the near term. Our business strategy, however, includes the pursuit of additional tower acquisition and build-out opportunities, and we may have additional cash needs as opportunities arise. Some of the opportunities that we are currently pursuing could require significant additional capital. In the event we do not otherwise have cash available, or borrowings under our credit facilities have otherwise been utilized, when an opportunity 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. To the extent we are unable to finance future capital expenditures, we will be unable to achieve our currently contemplated business strategy. As of December 31, 1998, after giving pro forma effect to our proposed debt and equity offerings, we would have had consolidated cash and cash equivalents of $962.6 million (including $6.5 million at CTI), consolidated long-term debt of $729.7 million, consolidated redeemable preferred stock of $201.1 million and consolidated stockholders' equity of $1,114.6 million. As of December 31, 1998, after giving pro forma effect to the proposed offerings and the 1999 Transactions, we would have had consolidated cash and cash equivalents of $49.6 million (including $6.5 million at CTI and $45.9 million at the Bell Atlantic joint venture), consolidated long-term debt of $909.7 million, consolidated redeemable preferred stock of $201.1 million and consolidated stockholders' equity of $1,491.6 million. As of March 1, 1999, Crown Communication and its subsidiaries had unused borrowing availability under its senior credit facility of approximately $54.0 million, and CTI had unused borrowing availability under its credit facility of approximately (Pounds)24.0 million ($39.9 million). As of December 31, 1998, CCI and its subsidiaries and CTI and its subsidiaries had approximately $77.6 million and (Pounds)30.8 million ($51.2 million) of unused borrowing availability, respectively, under CCI's senior credit facility and CTI's credit facility. Upon its formation, the Bell Atlantic joint venture borrowed $180.0 million under a committed $250.0 million credit facility. Crown Communication's senior credit facility, CTI's credit facility and the joint venture's credit facility require that the respective borrowers maintain certain financial covenants; in addition, all three credit facilities place restrictions on the ability of the borrower and its subsidiaries to, among other things, incur debt and 51
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. Prior to May 15, 2003, the interest expense on our 10 5/8% discount notes will be comprised solely of the amortization of original issue discount. Thereafter, the 10 5/8% discount notes will require annual cash interest payments of approximately $26.7 million. Prior to December 15, 2003, we do not expect to pay cash dividends on our exchangeable preferred stock or, if issued, cash interest on the exchange debentures. Thereafter, assuming all dividends or interest have been paid-in-kind, our exchangeable preferred stock or, if issued, the exchange debentures will require annual cash dividend or interest payments of approximately $47.8 million. Annual cash interest payments on the CTI Bonds are (Pounds)11.25 million ($18.7 million). In addition, Crown Communication's senior credit facility and CTI's credit facility will require periodic interest payments on amounts borrowed thereunder. 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 (including our 10 5/8% discount notes and the CTI Bonds), 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. We anticipate that we may need to refinance all or a portion of our indebtedness (including our 10 5/8% discount notes and the CTI Bonds) 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. See "Risk Factors". Compensation Charges Related to Stock Option Grants During the period from April 24, 1998 through July 15, 1998, we granted options to employees and executives for the purchase of 3,236,980 shares of our common stock at an exercise price of $7.50 per share. Of such options, options for 1,810,730 shares vested upon consummation of the IPO and the remaining options for 1,426,250 shares will vest at 20% per year over five years, beginning one year from the date of grant. In addition, we have assigned our right to repurchase shares of our common stock from a stockholder (at a price of $6.26 per share) to two individuals (including a newly-elected director) with respect to 100,000 of such shares. Since the granting of these options and the assignment of these rights to repurchase shares occurred subsequent to the date of the share exchange agreement with CTI's shareholders and at prices substantially below the price to the public in the IPO, we have recorded a non- cash compensation charge related to these options and shares based upon the difference between the respective exercise and purchase prices and the price to the public in the IPO. Such compensation charge will total approximately $18.4 million, of which approximately $10.6 million was recognized upon consummation of the IPO (for such options and shares which vested upon consummation of the IPO), and the remaining $7.8 million is being recognized over five years (approximately $1.6 million per year) through the second quarter of 2003. An additional $1.6 million in non-cash compensation charges will be recognized through the third quarter of 2001 for stock options issued to certain members of CTI's management prior to the consummation of the share exchange. Impact of Recently Issued Accounting Standards In April 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-5, Reporting on the Costs of Start-Up Activities ("SOP 98-5"). SOP 98-5 requires that costs of start-up activities be charged to expense as incurred and broadly defines such costs. We have deferred certain costs incurred in connection with potential business initiatives and new geographic markets, and SOP 98-5 will require that such deferred costs be charged to results of operations upon its adoption. SOP 98-5 is effective for fiscal years beginning after December 15, 1998. We will adopt the requirements of SOP 98-5 as of 52
January 1, 1999. The cumulative effect of the change in accounting principle for the adoption of SOP 98-5 will result in a charge to results of operations in our financial statements for the three months ending March 31, 1999; it is currently estimated that such charge will amount to approximately $2,300,000. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133 requires that derivative instruments be recognized as either assets or liabilities in the consolidated balance sheet based on their fair values. Changes in the fair values of such derivative instruments will be recorded either in results of operations or in other comprehensive income, depending on the intended use of the derivative instrument. The initial application of SFAS 133 will be reported as the effect of a change in accounting principle. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. We will adopt the requirements of SFAS 133 in our financial statements for the three months ending March 31, 2000. We have not yet determined the effect that the adoption of SFAS 133 will have on our consolidated financial statements. Year 2000 Compliance The year 2000 problem is the result of computer programs having been written using two digits (rather than four) to define the applicable year. Any of our computer programs that have date-sensitive software may recognize a date using "00" as 1900 rather than the year 2000, or may not recognize the date at all. This could result in a system failure or miscalculations causing disruption of operations including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. In 1997 we established a year 2000 project to ensure that the issue received appropriate priority and that necessary resources were made available. This project includes the replacement of our worldwide business computer systems with systems that use programs primarily from J.D. Edwards, Inc. The new systems are expected to make approximately 90% of our business computer systems year 2000 compliant and are in production today. Remaining business software programs, including those supplied by vendors, will be made year 2000 compliant through the year 2000 project or they will be retired. None of our other information technology projects has been delayed due to the implementation of the year 2000 project. Our year 2000 project is divided into the following phases: (1) inventorying year 2000 items; (2) assigning priorities to identified items; (3) assessing the year 2000 compliance of items determined to be material to us; (4) repairing or replacing material items that are determined not to be year 2000 compliant; (5) testing material items; and (6) designing and implementing contingency and business continuation plans for each organization and company location. We have completed the inventory and priority assessment phases and are 90% complete with the assessing compliance phase. The remaining items include various third party assurances regarding the year 2000 status of their operations. We are now continuing with the testing phase of the year 2000 project. All critical broadcast equipment and non-information technology related equipment has been tested and is either year 2000 compliant, has been designated as year 2000 ready, or will be repaired or replaced by June 1999. A year 2000 ready designation implies the equipment or system will function without adverse effects beyond year 2000 but may not be aware of the century. All critical information technology systems have been designated year 2000 compliant or are scheduled to be retired or remediated by July 1999. The testing phase is ongoing as hardware or system software is remediated, upgraded or replaced. Testing as well as remediation is scheduled for completion in July 1999. The final phase of our year 2000 project, contingency planning, will be completed and tested to the extent possible by September 1999. 53
We have expended $6.9 million on the year 2000 project through December 31, 1998, of which approximately $6.8 million related to the implementation of the J.D. Edwards Systems and related hardware. Funds for the year 2000 project are provided from a separate budget of $0.6 million for all items. The failure to correct a material year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect our results of operations, liquidity and financial condition. Due to the general uncertainty inherent in the year 2000 problem, resulting in part from the uncertainty of the year 2000 readiness of third-party suppliers and customers, we are unable to determine at this time whether the consequences of year 2000 failures will have a material impact on our results of operations, liquidity or financial condition. The year 2000 project is expected to significantly reduce our level of uncertainty about the year 2000 problem and, in particular, about the year 2000 compliance and readiness of our material business partners. We believe that, with the implementation of new business systems and completion of the project as scheduled, the possibility of significant interruptions of normal operations should be reduced. 54
THE EXCHANGE OFFER Purpose of the Exchange Offer In connection with the sale of the old preferred stock, we entered into a registration rights agreement with the initial purchasers, under which we agreed to use our best efforts to file an exchange offer registration statement under the Securities Act. We are making the exchange offer in reliance on the position of the staff of the Commission as set forth in certain no-action letters. However, we have not sought our own no-action letter. Based upon these interpretations by the staff of the Commission, we believe that a holder of new preferred stock, but not a holder who is our "affiliate" within the meaning of Rule 405 of the Securities Act, who exchanges the old preferred stock for new preferred stock in the exchange offer, generally may offer the new preferred stock for resale, sell the new preferred stock and otherwise transfer the new preferred stock without further registration under the Securities Act and without delivery of a prospectus that satisfies the requirements of Section 10 of the Securities Act. This does not apply, however, to a holder who is our "affiliate" within the meaning of Rule 405 of the Securities Act. We also believe that a holder may offer, sell or transfer the new preferred stock only if the holder acquires the new preferred stock in the ordinary course of its business and is not participating, does not intend to participate and has no arrangement or understanding with any person to participate in a distribution of the new preferred stock. Any holder of the old preferred stock using the exchange offer to participate in a distribution of new preferred stock cannot rely on the no-action letters referred to above. This includes a broker-dealer that acquired old preferred stock directly from us, but not as a result of market-making activities or other trading activities. Consequently, the holder must comply with the registration and prospectus delivery requirements of the Securities Act in the absence of an exemption from such requirements. Each broker-dealer that receives new preferred stock for its own account in exchange for old preferred stock, as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such new preferred stock. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker- dealer in connection with resales of new preferred stock received in exchange for old preferred stock where such old preferred stock were acquired by such broker-dealer as a result of market-making activities or other trading activities. The letter of transmittal states that by acknowledging and delivering a prospectus, a broker-dealer will not be considered to admit that it is an "underwriter" within the meaning of the Securities Act. We have agreed that for a period of 180 days after the expiration date, we will make this prospectus available to broker-dealers for use in connection with any such resale. See "Plan of Distribution". Except as described above, this prospectus may not be used for an offer to resell, resale or other retransfer of new preferred stock. The exchange offer is not being made to, nor will we accept tenders for exchange from, holders of old preferred stock in any jurisdiction in which the exchange offer or the acceptance of it would not be in compliance with the securities or blue sky laws of such jurisdiction. Terms of the Exchange Upon the terms and subject to the conditions of the exchange offer, we will accept any and all old preferred stock validly tendered prior to 5:00 p.m., New York City time, on the expiration date. The date of acceptance for exchange of the old preferred stock, and consummation of the exchange offer, is the exchange date, which will be the first business day following the expiration date (unless 55
extended as described in this document). We will issue, on or promptly after the exchange date, an aggregate liquidation preference of up to $200,000,000 of new preferred stock in exchange for an equal liquidation preference at maturity of outstanding old preferred stock tendered and accepted in connection with the exchange offer. The new preferred stock issued in connection with the exchange offer will be delivered on the earliest practicable date following the exchange date. Holders may tender some or all of their old preferred stock in connection with the exchange offer. The terms of the new preferred stock are identical in all material respects to the terms of the old preferred stock, except that the new preferred stock have been registered under the Securities Act and are issued free from any covenant regarding registration, including the payment of additional interest upon a failure to file or have declared effective an exchange offer registration statement or to consummate the exchange offer by certain dates. The new preferred stock will have the same obligations as the old preferred stock and will be issued under and be entitled to the same benefits under the certificate of designation as the old preferred stock. As of the date of this prospectus, $200,000,000 aggregate liquidation preference of the old preferred stock is outstanding. In connection with the issuance of the old preferred stock, we arranged for the old preferred stock originally purchased by qualified institutional buyers to be issued and transferable in book-entry form through the facilities of The Depository Trust Company, acting as depositary. Except as described under "Book-Entry, Delivery and Form," the new preferred stock will be issued in the form of a global note registered in the name of DTC or its nominee and each holder's interest in it will be transferable in book-entry form through DTC. See "Book-Entry, Delivery and Form." Holders of old preferred stock do not have any appraisal or dissenters' rights in connection with the exchange offer. Old preferred stock which are not tendered for exchange or are tendered but not accepted in connection with the exchange offer will remain outstanding and be entitled to the benefits of the certificate of designations, but will not be entitled to any registration rights under the registration rights agreement. We shall be considered to have accepted validly tendered old preferred stock if and when we have given oral or written notice to the exchange agent. The exchange agent will act as agent for the tendering holders for the purposes of receiving the new preferred stock from us. If we do not accept any tendered old preferred stock for exchange because of an invalid tender, the occurrence of certain other events described in this prospectus or otherwise, we will return certificates for such unaccepted old preferred stock, without expense, to the tendering holder as quickly as possible after the expiration date. Holders who tender old preferred stock will not be required to pay brokerage commissions or fees or, subject to the instructions in the letter of transmittal, transfer taxes with respect to the exchange of old preferred stock. We will pay all charges and expenses, other than certain applicable taxes described below, in connection with the exchange offer. See "--Fees and Expenses". Expiration Date; Extensions; Amendments The term "expiration date" shall mean 5:00 p.m., New York City time, on , 1999, unless extended by us in our sole discretion (but in no event to a date later than , 1999), in which case the term "expiration date" shall mean the latest date and time to which the exchange offer is extended. We reserve the right, in our sole discretion: . to delay accepting any old preferred stock, to extend the offer or to terminate the exchange offer if, in our reasonable judgment, any of the conditions described below shall not have 56
been satisfied, by giving oral or written notice of the delay, extension or termination to the exchange agent, or . to amend the terms of the exchange offer in any manner. If we amend the exchange offer in a manner that we consider material, we will disclose such amendment by means of a prospectus supplement, and we will extend the exchange offer for a period of five to ten business days. If we determine to make a public announcement of any delay, extension, amendment or termination of the exchange offer, we will do so by making a timely release through an appropriate news agency. Conditions to the Exchange Offer Despite any other term of the exchange offer, we will not be required to accept for exchange, or exchange new preferred stock for, any old preferred stock and may terminate the exchange offer as provided in this prospectus before the acceptance of the old preferred stock, if: (1) any action or proceeding is instituted or threatened in any court or by or before any governmental agency with respect to the exchange offer which, in our reasonable judgment, might materially impair our ability to proceed with the exchange offer or materially impair the contemplated benefits of the exchange offer to us, or any material adverse development has occurred in any existing action or proceeding with respect to us or any of our subsidiaries; (2) any change, or any development involving a prospective change, in our business or financial affairs or any of our subsidiaries has occurred which, in our reasonable judgment, might materially impair our ability to proceed with the exchange offer or materially impair the contemplated benefits of the exchange offer to us; (3) any law, statute, rule or regulation is proposed, adopted or enacted, which in our reasonable judgment, might materially impair our ability to proceed with the exchange offer or materially impair the contemplated benefits of the exchange offer to us; or (4) any governmental approval has not been obtained, which approval we shall, in our reasonable discretion, consider necessary for the consummation for the exchange offer as contemplated by this prospectus. The conditions listed above are for our sole benefit and may be asserted by us regardless of the circumstances giving rise to any of these conditions. We may waive these conditions in our reasonable discretion in whole or in part at any time and from time to time. The failure by us at any time to exercise any of the above rights shall not be considered a waiver of such right and such right shall be considered an ongoing right which may be asserted at any time and from time to time. If we determine in our reasonable discretion that any of the conditions are not satisfied, we may: (1) refuse to accept any old preferred stock and return all tendered old preferred stock to the tendering holders, (2) extend the exchange offer and retain all old preferred stock tendered before the expiration of the exchange offer, subject, however, to the rights of holders to withdraw these old notes (See "--Withdrawal of Tenders" below), or (3) waive unsatisfied conditions with respect to the exchange offer and accept all properly tendered old notes which have not been withdrawn. 57
Procedures for Tendering To tender in connection with the exchange offer, a holder must complete, sign and date the letter of transmittal, or a facsimile thereof, have the signatures guaranteed if required by the letter of transmittal and mail or otherwise deliver the letter of transmittal or such facsimile, together with the old preferred stock (unless such tender is being effected pursuant to the procedure for book-entry transfer described below) and any other required documents, to the exchange agent prior to 5:00 p.m., New York City time, on the expiration date. Any financial institution that is a participant in DTC's Book-Entry Transfer Facility system may make book-entry delivery of the old preferred stock by causing DTC to transfer such old preferred stock into the exchange agent's account in accordance with DTC's procedure for such transfer. Although delivery of old preferred stock may be effected through book-entry transfer into the exchange agent's account at DTC, the letter of transmittal (or facsimile thereof), with any required signature guarantees and any other required documents, must, in any case, be transmitted to and received or confirmed by the exchange agent at its addresses set forth under the caption "exchange agent," below, prior to 5:00 p.m., New York City time, on the expiration date. DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. The tender by a holder of old preferred stock will constitute an agreement between us and such holder in accordance with the terms and subject to the conditions set forth herein and in the letter of transmittal. The method of delivery of old preferred stock and the letter of transmittal and all other required documents to the exchange agent is at the election and risk of the holders. Instead of delivery by mail, we recommend that holders use an overnight or hand delivery service. In all cases, holders should allow sufficient time to assure delivery to the exchange agent before the expiration date. No letter of transmittal of old preferred stock should be sent to us. Holders may request their respective brokers, dealers, commercial banks, trust companies or nominees to effect the tenders for such holders. Any beneficial owner whose old preferred stock are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact the registered holder promptly and instruct such registered holder to tender on such beneficial owner's behalf. If such beneficial owner wishes to tender on such owner's own behalf, such owner must, prior to completing and executing the letter of transmittal and delivery of such owner's old preferred stock, either make appropriate arrangements to register ownership of the old preferred stock in such owner's name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time. Signature on a letter of transmittal or a notice of withdrawal, as the case may be, must be guaranteed by an eligible guarantor institution within the meaning of Rule 17Ad-15 under the Exchange Act, unless the old preferred stock tendered pursuant thereto are tendered (1) by a registered holder who has not completed the box entitled "Special Payment Instructions" or "Special Delivery Instructions" on the letter of transmittal, or (2) for the account of an eligible guarantor institution. In the event that signatures on a letter of transmittal or a notice of withdrawal, as the case may be, are required to be guaranteed, such guarantee must be by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or an "eligible guarantor institution". If the letter of transmittal is signed by a person other than the registered holder of any old preferred stock, such old preferred stock must be endorsed by such registered holder or accompanied by a properly completed bond power, in each case signed or endorsed in blank by such registered holder. 58
If the letter of transmittal or any old preferred stock or bond powers are signed or endorsed by trustees, executors, administrators, guardians, attorney- in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and unless waived by us, evidence satisfactory to us of their authority to act in that capacity must be submitted with the letter of transmittal. All questions as to the validity, form, eligibility (including time of receipt) and acceptance and withdrawal of tendered old preferred stock will be determined by us in our sole discretion. We reserve the absolute right to reject any and all old preferred stock not properly tendered or any old preferred stock whose acceptance by us would, in the opinion of our U.S. counsel, be unlawful. We also reserve the right to waive any defects, irregularities or conditions of tender as to any particular old preferred stock either before or after the expiration date. Our interpretation of the terms and conditions of the exchange offer (including the instructions in the letter of transmittal) will be final and binding, on all parties. Unless waived, any defects or irregularities in connection with tenders of old preferred stock must be cured within such time as we shall determine. Although we intend to request the exchange agent to notify holders of defects or irregularities with respect to tenders of old preferred stock, neither we, the exchange agent nor any other person shall have any duty or incur any liability for failure to give such notification. Tenders of old preferred stock will not be considered to have been made until such defects or irregularities have been cured or waived. Any old preferred stock received by the exchange agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the exchange agent to the tendering holders, unless otherwise provided in the letter of transmittal, as soon as practicable following the expiration date. In addition, we reserve the right, as set forth above under the caption "Conditions to the Exchange Offer", to terminate the exchange offer. By tendering, each holder represents to us that, among other things, the new preferred stock acquired in connection with the exchange offer are being obtained in the ordinary course of business of the person receiving such new preferred stock, whether or not such person is the holder, that neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such new preferred stock and that neither the holder nor any such other person is our "affiliate" (as defined in Rule 405 under the Securities Act). If the holder is a broker-dealer which will receive new preferred stock for its own account in exchange of old preferred stock, it will acknowledge that it acquired such old preferred stock as the result of market making activities or other trading activities and it will deliver a prospectus in connection with any resale of such new preferred stock. See "Plan of Distribution". Guaranteed Delivery Procedures A holder who wishes to tender its old preferred stock and: --whose old preferred stock are not immediately available; --who cannot deliver the holder's old preferred stock, the letter of transmittal or any other required documents to the exchange agent prior to the expiration date; or --who cannot complete the procedures for book-entry transfer, before the expiration date, may effect a tender if: --the tender is made through an eligible guarantor institution; --before the expiration date, the exchange agent receives from the eligible guarantor institution a properly completed and duly executed notice of guaranteed delivery by facsimile transmission, mail or hand delivery, the name and address of the holder, the certificate 59
number(s) of the old preferred stock and the principal amount of old preferred stock tendered, stating that the tender is being made thereby and guaranteeing that, within three New York Stock Exchange trading days after the expiration date, the letter of transmittal (or facsimiles thereof) together with the certificate(s) representing the old preferred stock (or a confirmation of book-entry transfer of the old preferred stock into the exchange agent's account at the book-entry transfer facility), and any other documents required by the letter of transmittal will be deposited by the eligible guarantor institution with the exchange agent; and --the exchange agent receives, within three New York Stock Exchange trading days after the expiration date, a properly completed and executed letter of transmittal or facsimile, as well as the certificate(s) representing all tendered old preferred stock in proper form for transfer or a confirmation of book-entry transfer of such old preferred stock into the exchange agent's account at the book-entry transfer facility, and all other documents required by the letter of transmittal. Withdrawal of Tenders Except as otherwise provided herein, tenders of old preferred stock may be withdrawn at any time prior to 5:00 p.m., New York City time, on the expiration date. To withdraw a tender of old preferred stock in connection with the exchange offer, a written facsimile transmission notice of withdrawal must be received by the exchange agent at its address set forth herein prior to 5:00 p.m., New York City time, on the expiration date. Any such notice of withdrawal must: . specify the name of the person who deposited the old preferred stock to be withdrawn, . identify the old preferred stock to be withdrawn (including the certificate number or numbers and principal amount of such old preferred stock), . be signed by the depositor in the same manner as the original signature on the letter of transmittal by which such old preferred stock were tendered (including any required signature guarantees) or be accompanied by documents of transfer sufficient to have the trustee register the transfer of such old preferred stock into the name of the person withdrawing the tender, and . specify the name in which any such old preferred stock are to be registered, if different from that of the depositor. All questions as to the validity, form and eligibility (including time of receipt) of such withdrawal notices will be determined by us, whose determination shall be final and binding on all parties. Any old preferred stock so withdrawn will be considered not to have been validly tendered for purposes of the exchange offer and no new preferred stock will be issued with respect thereto unless old preferred stock so withdrawn are validly re-tendered. Any old preferred stock which have been tendered but which are not accepted for exchange or which are withdrawn will be returned to the holder thereof without cost to such holder as soon as practicable after withdrawal, rejection of tender or termination of the exchange offer. Properly withdrawn old preferred stock may be retendered by following one of the procedures described above under the caption "Procedures for Tendering" at any time prior to the expiration date. Exchange Agent ChaseMellon Shareholder Services, L.L.C. has been appointed as exchange agent in connection with the exchange offer. Questions and requests for assistance, requests for additional copies of this prospectus or of the letter of transmittal should be directed to the exchange agent, at its offices at 2323 Bryan Street, Suite 2300, Dallas, Texas 75201. The exchange agent's telephone number is (214) 965-2220 and facsimile number is (214) 965-2233. 60
Fees and Expenses We will not make any payment to brokers, dealers or others soliciting acceptances of the exchange offer. We will pay certain other expenses to be incurred in connection with the exchange offer, including the fees and expenses of the exchange agent, accounting and certain legal fees. Holders who tender their old preferred stock for exchange will not be obligated to pay any transfer taxes. If, however, new preferred stock are to be delivered to, or are to be issued in the name of, any person other than the registered holder of the old preferred stock tendered, or if tendered old preferred stock are registered in the name of any person other than the person signing the letter of transmittal, or if a transfer tax is imposed for any reason other than the exchange of old preferred stock in connection with the exchange offer, then the amount of any such transfer taxes (whether imposed on the registered holder or any other persons) will be payable by the tendering holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted with the letter of transmittal, the amount of such transfer taxes will be billed directly to such tendered holder. Accounting Treatment The new preferred stock will be recorded at the same carrying value as the old preferred stock as reflected in our accounting records on the date of the exchange. Accordingly, we will not recognize any gain or loss for accounting purposes upon the consummation of the exchange offer. Any expenses of the exchange offer that we paid will be charged against our additional paid-in capital in accordance with generally accepted accounting principles. Consequences of Failures to Properly Tender Old Preferred Stock in the Exchange Issuance of the new preferred stock in exchange for the old preferred stock pursuant to the exchange offer will be made only after timely receipt by the exchange agent of such old preferred stock, a properly completed and duly executed letter of transmittal and all other required documents. Therefore, holders of the old preferred stock desiring to tender such old preferred stock in exchange for new preferred stock should allow sufficient time to ensure timely delivery. We are under no duty to give notification of defects or irregularities with respect to tenders of old preferred stock for exchange. Old preferred stock that are not tendered or that are tendered but we do not accept, will, following consummation of the exchange offer, continue to be subject to the existing restrictions upon transfer thereof under the Securities Act and, upon consummation of the exchange offer, certain registration rights under the registration rights agreement will terminate. In the event the exchange offer is consummated, we will not be required to register the remaining old preferred stock. Remaining old preferred stock will continue to be subject to the following restrictions on transfer: . the remaining old preferred stock may be resold only if registered pursuant to the Securities Act, if any exemption from registration is available thereunder, or if neither such registration nor such exemption is required by law, and .the remaining old preferred stock will bear a legend restricting transfer in the absence of registration or an exemption therefrom. We do not currently anticipate that it will register the remaining old preferred stock under the Securities Act. To the extent that old preferred stock are tendered and accepted in connection with the exchange offer, any trading market for remaining old preferred stock could be adversely affected. 61
INDUSTRY BACKGROUND General We own, operate and manage wireless communications and broadcast transmission infrastructure, including towers and other communications sites, and also provide a full range of complementary network support services. Each of the wireless communications and broadcasting industries is currently experiencing a period of significant change. The wireless communications industry is growing rapidly as new wireless technologies are developed and consumers become more aware of the benefits of wireless services. Wireless technologies are being used in more applications and the cost of wireless services to consumers is declining. A significant number of new competitors in the wireless communications industry have developed as additional frequency spectrum has become available for a wide range of uses, most notably personal communications services. This competition, combined with an increasing reliance on wireless communications by consumers and businesses, has led to an increased demand for higher quality, uninterrupted service and improved coverage, which, in turn, has led to increased demand for communications sites as new carriers develop and construct, or "build out," their networks and existing carriers upgrade and expand their networks to maintain their competitiveness. These trends are affecting the wireless communications industry around the world. As the wireless communications industry has become more competitive, wireless carriers have sought operating and capital efficiencies by outsourcing certain network services and the build-out and operation of new and existing infrastructure and by placing, or "co-locating," their transmission equipment with the equipment of other carriers on multiple tenant towers. The need for co-location has also been driven by the growing trend by municipalities to slow the proliferation of towers. Further, we believe that there has been a fundamental shift in strategy among established wireless carriers relating to infrastructure ownership. We believe that in order to free up capital for the growth and management of their customer bases and expansion of their service offerings, such carriers are beginning to seek to sell their wireless communications infrastructure to, or establish joint ventures with, experienced infrastructure providers that have the ability to manage networks. We believe that those infrastructure providers with a proven track record of providing comprehensive services will be best positioned to successfully acquire access to such wireless communications infrastructure. The television broadcasting industry is experiencing significant change because of the impending widespread deployment of ground-based, or "terrestrial", digital television broadcasting. In the United States, the Federal Communications Commission has required the four major networks (ABC, CBS, NBC and Fox) to commence digital terrestrial television broadcasts in the top ten markets by May 1999 and in the top 30 markets by November 1999. In the United Kingdom, pursuant to the Broadcasting Act 1996, six digital television transmission "multiplexes", which permit the holders to transmit digital television broadcasting services, have been allocated. We successfully began commercial operation of the digital terrestrial television network from an initial 22 transmission sites on November 15, 1998. Australia, France, Germany, Japan, Spain and Sweden are expected to be the next countries to introduce digital terrestrial television, followed by other European nations and later by developing countries. Many countries are expected to start to establish digital services within the next five years. The shift to digital transmission will require network design, development and engineering services and the significant enhancement of existing broadcast transmission infrastructure, including new transmission and monitoring equipment and the modification, strengthening and construction of towers (including over 1,000 tall towers in the United States). In addition, state-run broadcast transmission networks are continuing to be privatized throughout the world. 62
We expect these trends to continue around the world in both the wireless communications and broadcasting industries. We believe that the next logical step in the outsourcing of infrastructure by wireless carriers and broadcasters will be the outsourcing of the operation of their towers and transmission networks, including the transmission of their signals, in much the same way as the BBC has done with its transmission network. This outsourcing will allow carriers to realize additional operating and capital efficiencies and to focus on management of their customer bases and expansion of their service offerings. Management believes that such carriers will only entrust the transmission of their signals to those infrastructure providers, such as us, that have the ability to manage towers and transmission networks and a proven track record of providing end-to-end services to the wireless communications and broadcasting industries. Development of the Tower Industry United States. The U.S. wireless communications industry was transformed in the 1970s through the issuance of licenses by the FCC to provide high quality communications services to vehicle-mounted and hand-held portable telephones, pagers and other devices. The licensees built and began operating wireless networks that were supported by communication sites, transmission equipment and other infrastructure. In the early 1980s, the number of towers began to expand significantly with the development of more advanced wireless communications systems, particularly cellular and paging. Nevertheless, as additional towers were built by the wireless carriers, they often were built for a single purpose rather than as multiple tenant towers. Further, these towers were generally owned and maintained by carriers and were treated as corporate cost centers operated primarily for the purpose of transmitting or receiving such carriers' signals. During the mid-to-late 1980s, a number of independent operators of towers began to emerge. These independent tower operators focused on owning and managing towers with multiple tenants by adding lessees to existing and reconstructed towers. We believe the majority of these operators were small business owners with a small number of local towers and few services other than site rental. In the last five years, however, several larger independent tower operators have emerged as demand for wireless services has continued to grow and as additional high frequency licenses have been awarded for new wireless services (including personal communications services, narrowband paging and wireless local loop), each requiring networks with extensive tower infrastructure. These independent tower operators have sought to acquire smaller operators as well as suitable clusters of towers formerly owned by carriers and broadcasters in order to establish regional and national "tower footprints". Carriers expanding or building a network in a geographic area generally seek to lease space for antennas from a tower company whose footprints comprise strategically located clusters of towers and other communication sites in that area to efficiently and effectively establish service coverage in a given market. Today, towers are owned by a variety of companies, including wireless carriers, local and long distance telecommunications companies, broadcasting companies, independent tower operators, utilities and railroad companies. Despite the increasing demand for towers, the tower industry in the United States remains highly fragmented, with only a few independent tower operators owning a large number of towers. The pace of consolidation has begun to accelerate, however, as the larger independent operators continue to acquire small local operators and purchase towers from wireless communications companies. In addition, wireless carriers are building out new, or filling in existing, tower footprints for new and existing wireless services. Independent operators have also expanded into a number of associated network and communication site services, including the design of communication sites and networks, the selection and acquisition of tower and rooftop sites (including the resolution of zoning and permitting issues) and the construction of towers. Previously, carriers typically handled such services through in-house departments, and local nonintegrated service contractors focused on specific segments such as radio frequency engineering and site acquisition. 63
Broadcast towers in the United States have typically been owned and operated on a fragmented basis. Typically, each network affiliate in each major market owns and operates its own television broadcasting tower. Local stations often have co-located their transmission equipment on these towers. Radio broadcast towers have also typically been erected by each station in a given market. Both television and radio broadcast towers have generally been constructed only for a single user and would require substantial strengthening to house new digital transmission equipment or other analog transmission equipment. As a result, similar to wireless communications towers, such towers historically have been treated as corporate cost centers operated primarily for the purpose of transmitting such broadcasters' signals. United Kingdom. The first towers in the United Kingdom were built for the BBC's medium frequency radio services. Additional towers were built from the 1940s on for transmission of evolving radio and television technologies and services. The size and structure of towers varies widely due to location, antenna requirements and wind loading. Towers built primarily for broadcast transmission are often able to carry wireless communications antennas. Those that are currently incapable of doing so can be strengthened or replaced. Since 1982, the growth of wireless communications in the United Kingdom has led to significant expansion in the number of towers. Historically, there have been four major wireless carriers in the United Kingdom, each of which, in general, built towers for its own use, rather than as multiple tenant owners. These towers are owned and maintained by such carriers and, as in the United States, were treated as corporate cost centers operated primarily for the purpose of transmitting or receiving their signals. With the smaller geographic size of the United Kingdom, as compared to the United States, these carriers typically constructed their tower footprint to provide national coverage. As a result of those national footprints, independent tower owners have not developed as they have in the United States. In addition to wireless communications providers, towers in the United Kingdom are owned by a variety of companies, such as telecommunications companies, utilities and railroad companies. Today, tower owners are upgrading their networks to provide more capacity and better service to their customers, while new entrants to the wireless communications market have sought to acquire rapid access to networks that provide national coverage. With the significant costs associated with the approval process for, and the construction of, new towers, and the significant capital requirements associated with ownership of tower infrastructure, wireless carriers have begun to look to third party tower owners to co-locate their antennas on existing towers, to build, own and operate new towers and to acquire such carriers' portfolios of existing towers. Characteristics of the Tower Industry Management believes that, in addition to the favorable growth and outsourcing trends in the wireless communications and broadcasting industries and high barriers to entry as a result of regulatory and local zoning restrictions associated with new tower sites, tower operators benefit from several favorable characteristics. The ability of tower operators to provide antenna sites to customers on multiple tenant towers provides them with diversification against the specific technology, product and market risks typically faced by any individual carrier. The emergence of new technologies, carriers, products and markets may allow independent tower operators to further diversify against such risks. In addition, tower operators face increased "not-in-my-backyard" sentiment by communities and municipalities, which is reducing the number of opportunities for new towers to be built and driving the trend toward co- location on multiple tenant towers. We believe that independent tower operators also benefit from the contractual nature of the site rental business and the predictability and stability of monthly, recurring revenues. In addition, the site rental business has low variable costs and significant operating leverage. Towers generally are fixed 64
cost assets with minimal variable costs associated with additional tenants. A tower operator can generally expect to experience increasing operating margins when new tenants are added to existing towers. The site rental business typically experiences low tenant churn as a result of the high costs that would be incurred by a wireless carrier were it to relocate an antenna to another site and consequently be forced to re-engineer its network. Moving a single antenna may alter the pre-engineered maximum signal coverage, requiring a reconfigured network at significant cost to maintain the same coverage. Similarly, a television or FM broadcaster would incur significant costs were it to relocate a transmitter because, in order to avoid interruption of its transmissions, it would be necessary for the broadcaster to install and commence operations of a second broadcast site prior to ceasing signal transmission at the first site. In addition, regulatory problems associated with licensing the location of the new antenna with the FCC, in the United States, or being licensed for the location by the Radiocommunications Agency in the United Kingdom, may arise if the new location is at the edge of the wireless carrier's coverage area and if there is a possible adverse impact on other carriers. Municipal approvals are becoming increasingly difficult to obtain and may also affect the carrier's decision to relocate. The costs associated with network reconfiguration and FCC, Radiocommunications Agency and municipal approval and the time required to complete these activities may not be justified by any potential savings in reduced site rental expense. Trends in the Wireless Communications and Broadcasting Industries Our existing and future business opportunities are affected by the ongoing trends within the two major industries we serve, namely the wireless communications industry and the radio and television broadcasting industry. Each of these industries is currently experiencing a period of significant change that we believe is creating an increasing demand for communication sites and related infrastructure and network support services. Wireless Communications The wireless communications industry now provides a broad range of services, including cellular, personal communications services, paging and specialized mobile radio. The industry has benefitted in recent years from increasing demand for its services, and industry experts expect this demand to continue to increase. We believe that more communication sites will be required in the future to accommodate the expected increase in demand for wireless communications services. Further, we see additional opportunities with the development of higher frequency technologies (such as personal communications services), which have a reduced cell range as a result of signal propagation characteristics that require a more dense network of towers. In addition, network services may be required to service the network build-outs of new carriers and the network upgrades and expansion of existing carriers. In addition to the increasing demand for wireless services and the need to develop and expand wireless communications networks, we believe that other trends influencing the wireless communication industry have important implications for independent tower operators. In order to speed new network deployment or expansion and generate efficiencies, carriers are increasingly co-locating transmission equipment with that of other network operators. The trend towards co-location has been furthered by the "not-in-my-backyard" arguments generated by local zoning/planning authorities in opposition to the proliferation of towers. Further, the number of competitors in wireless communications is increasing due to the auction of new spectra and the deployment of new technologies. In this increasingly competitive environment, many carriers are dedicating their capital 65
and operations primarily to those activities that directly contribute to subscriber growth, such as marketing and distribution. These carriers, therefore, have sought to reduce costs and increase efficiency through the outsourcing of infrastructure network functions such as communication site ownership, construction, operation and maintenance. Further, we believe that these carriers are beginning to seek to move their tower portfolios off their balance sheets through sales to, or joint ventures with, experienced tower operators who have the proven capability to provide comprehensive services to the wireless communications industry. United States. Current emerging wireless communications systems, such as personal communications services and specialized mobile radio, represent an immediate and sizable market for independent tower operators and network services providers as carriers build out large nationwide and regional networks. While several personal communications services and specialized mobile radio carriers have already built limited networks in certain markets, these carriers still need to fill in "dead zones" and expand geographic coverage. The Cellular Telecommunications Industry Association estimates that, as of June 1998, there were 57,674 antenna sites in the United States. The Personal Communications Industry Association estimates that the wireless communications industry will construct at least 100,000 new antenna sites over the next 10 years. As a result of advances in digital technology, specialized mobile radio operators, including Nextel, have also begun to design and deploy digital mobile telecommunications networks in competition with cellular carriers. In particular response to the increased competition, cellular operators are re- engineering their networks by increasing the number of sites, locating sites within a smaller radius, filling in "dead zones" and converting from analog to digital cellular service in order to manage subscriber growth, extend geographic coverage and provide competitive services. The demand for communication sites is also being stimulated by the development of new paging applications, such as e-mail and voicemail notification and two-way paging, as well as other wireless data applications. In addition, as wireless communications networks expand and new networks are deployed, we anticipate that demand for microwave transmission facilities that provide "backhaul" of traffic between communications sites to or from a central switching facility will also increase. Licenses are also being awarded, and technologies are being developed, for numerous new wireless applications that will require networks of communication sites. Future potential applications include those that will be deployed by the winners of licenses auctioned in February and March 1998 for local multi-point distribution services, including wireless local loop, wireless cable television, wireless data and wireless Internet access, as well as the forthcoming auctions for personal communications services and local multi-point distribution services. Radio spectrum required for these technologies has, in many cases, already been awarded and licensees have begun to build out and offer services through new wireless systems. Examples of these systems include local loop networks operated by WinStar and Teligent, wireless cable networks operated by companies such as Cellular Vision and CAI Wireless, and data networks being constructed and operated by RAM Mobile Data, MTEL and Ardis. United Kingdom. As in the United States, the development of newer wireless communications technologies, such as personal communications services and digital terrestrial trunked radio, provides tower operators with immediate opportunities for site rental and new tower build out. The four existing national GSM/personal communications services carriers continue to fill in "dead zones" and add capacity to their networks. Also, the carrier that is using the terrestrial trunked radio standard, which is similar to GSM and has been adopted throughout Europe, is deploying a network across the United Kingdom. The United Kingdom's newly-licensed wireless local loop operators have the potential to be important site rental customers. Wireless local loop operators provide telephony services that are comparable to the range and quality of services delivered over the fixed wire networks. This technology is being rapidly deployed as a low-cost alternative to fixed networks. To date, a total of seven spectrum licenses have been awarded to companies planning to deploy 66
wireless loop systems. In addition, the deployment of a new national digital PMR system (using the terrestrial trunked radio standard) for the use of the U.K. emergency services and the announced licensing in early 1999 by the U.K. Government of Universal mobile telecommunications service networks, which will be the third generation of cellular, should create additional demand for antenna space and tower sites. Radio and Television Broadcasting General. There are currently three main transmission delivery methods for television and radio broadcasts: terrestrial, direct-to-home satellite and cable. Terrestrial technology, the most common delivery method in the United States, the United Kingdom and many other countries, relies on signal transmission by wireless telegraphy from a network of ground-based transmitters for direct reception by viewers or listeners through an aerial system. Satellite signals are transmitted to satellites that then beam the signal over a target area (satellite footprint) for reception by a customer's satellite dish. A satellite customer must either purchase or rent a dish and a receiver/decoder and pay subscription fees to the relevant provider. A cable television customer typically rents a receiver/decoder and pays a subscription fee to receive services that are distributed to the home through co-axial or fiber optic cable. Until the 1990s, all three delivery methods used analog technology, which remains the most widespread technology in use today. In the early 1990s, digital technology was developed for radio and television broadcasting and has begun to be introduced for the transmission of radio and television signals. Digital transmission is now possible by terrestrial, satellite and cable methods. Digital technology allows a number of signals to be compressed and interleaved, using a technical process called "multiplexing", before the combined signal is transmitted within a single frequency channel. This process makes the signal more robust, allowing the use of parts of the spectrum unavailable to analog. A greater quantity of audio-visual information can be transmitted with the same amount of frequency spectrum allowing higher resolution or multiple channels to be broadcast. At the point of reception, the compression and interleaving are decoded and individual signals recovered. Some of the principal advantages of digital compared to analog transmission include: (1) greater number, choice and flexibility of broadcasting services offered; (2) scope for greater interactivity on the part of viewers and listeners; (3) greater capacity for pay-television (subscription and pay-per-view) as well as free-to-air services; and (4) enhanced picture quality and sound. The development and timing of implementation of digital transmission technology to the general public is a function of several factors, including technological advancement, cost of equipment and conversion process, quality improvement of visual and sound transmission and demand for terrestrial bandwidth. The transition to digital transmission will involve additional costs to viewers and program and transmission service providers. Viewers will require additional equipment such as set-top boxes or digital televisions. Program providers have begun to re-equip their studios and production facilities with digital technology. United States. Prior to the introduction of digital transmission, the U.S. broadcasting industry had generally been a mature one in terms of demand for transmission tower capacity, although even then opportunities existed for independent tower operators to purchase transmission networks, manage them on behalf of broadcasters under long-term contracts and lease space on broadcasting towers to wireless carriers. 67
The FCC-mandated introduction of digital television broadcasting will provide new opportunities for independent tower operators. The conversion of broadcasting systems from analog to digital technology will require a substantial number of new towers to be constructed to accommodate the new systems and analog equipment displaced from existing towers. Even with digital terrestrial television transmissions, television station owners will continue to broadcast the existing analog signals for a number of years. Broadcasters that own their own tower infrastructure may elect to remove third-party tenants from their towers to make room for their own digital terrestrial television broadcasting equipment. These displaced tenants, and tower owners that are unable to remove existing third party tenants from their towers, will require new towers to accommodate their transmission equipment. The National Association of Broadcasters projects that by the year 2010 approximately 1,400 tall towers will be required to be built, strengthened or modified to support digital terrestrial television broadcasting, with 200 towers required in the top 50 markets within the next five years. Further, because of the need for broadcasters to purchase new transmission equipment to deploy digital terrestrial television, they will have fewer resources to devote to the build out of new tower infrastructure. We believe that these circumstances, along with the relative scarcity of suitable sites and prevalent "not-in-my-backyard" atitudes, will allow experienced tower operators to build and operate multiple tenant broadcast towers to transmit digital terrestrial television broadcasting signals. These towers will also be attractive sites for the distribution of FM radio broadcasts. United Kingdom. The broadcasting industry in the United Kingdom has generally been a mature one in terms of demand for transmission tower capacity. Existing towers provide almost universal coverage for analog transmission, which remains the primary mode of transmission for television and radio programs in the United Kingdom. Most of the BBC's radio services, three Independent National Radio services and many local services are broadcast by analog terrestrial means. Some radio services are also available by satellite and cable for reception on fixed installations, but not portable or mobile sets. Digital television services in the United Kingdom were launched in 1998 from terrestrial transmitters and satellite. The Broadcasting Act of 1996 sets out a framework for the licensing of digital terrestrial multiplexes and an industry interest group has been established to coordinate the establishment of digital television in the United Kingdom. The British Government has allocated six multiplexes for digital terrestrial transmitters: two and one-half of these multiplexes were reserved for the BBC, ITV, Channel 4, S4C and Channel 5, three were awarded to ONdigital (which is a joint venture of Carlton Communications PLC and Granada Group PLC) and the other one-half was awarded to S4C Digital Network. We have been awarded the digital transmission contract for the four multiplexes held by the BBC and ONdigital, while NTL has been awarded the digital transmission contract for the other two multiplexes. Build-out of digital terrestrial transmission equipment in the United Kingdom is being based on existing analog terrestrial infrastructure, including transmission sites and towers. In the initial phase of the deployment of digital terrestrial transmission equipment, 81 analog transmission sites and towers will be upgraded with new transmitters and associated systems required to support digital terrestrial broadcasting. Digital broadcasts from these sites are expected to reach approximately 90% of the U.K. population. It is expected that additional sites will continue to be upgraded until the "vast majority" of viewers can receive digital broadcasts. While no formal timetable has been set for the discontinuation of analog terrestrial television broadcasting, the British Government has announced its intention to review, by 2002, the timing of analog "switch-off". When analog television transmission ceases, large amounts of frequency spectrum will be released. New uses for this spectrum have not yet been defined but applications are likely to include other digital broadcasting applications and mobile communications. The spectrum is inherently suitable for terrestrial transmission, so it is likely that existing towers will be used to provide many of the new services. 68
In September 1995, the BBC launched the United Kingdom's first digital radio service, which is now broadcast to approximately 60% of the U.K. population from 29 transmission sites. Independent local radio licenses for additional digital radio multiplexes are expected to be issued by the end of 1999. To date, existing broadcast towers have been used as transmission sites for the BBC's digital radio service, and it is anticipated that existing towers also will be used for the independent services, often sharing the antennas used for the BBC's digital radio service. While digital radio has the advantage of using a single frequency network, which enables expanded geographic coverage as compared with the multiple frequency networks used for analog radio, to replicate the coverage of analog radio it will be necessary to broadcast digital radio from more sites than at present. Although detailed planning has not yet begun, it is expected that existing towers will provide the necessary sites. As with digital terrestrial television, we believe that ownership of key broadcasting sites across the United Kingdom will allow an experienced operator to provide the infrastructure necessary to accommodate the growth in digital radio at minimum cost. 69
BUSINESS We are a leading owner and operator of wireless communications and broadcast transmission infrastructure. After giving effect to the completion of the recent and proposed transactions, as of December 31, 1998, we owned or managed 6,137 towers, including 4,451 towers in the United States and Puerto Rico and 1,686 towers in the United Kingdom. Our customers currently include many of the world's major wireless communications and broadcast companies, including Bell Atlantic Mobile, BellSouth, AT&T Wireless, Nextel and the BBC. Our strategy is to use our leading domestic and international position to capture the growing consolidation and build-out opportunities created by: . the outsourcing of ownership and management by major wireless carriers; . the need for existing wireless carriers to expand coverage and improve capacity; . the additional demand for towers created by new entrants into the wireless communications industry; . the privatization of state-run broadcast transmission networks; and . the introduction of new digital broadcast transmission technology and wireless technologies. Our two main businesses are leasing antenna space on wireless and broadcast multi-tenant towers and operating broadcast transmission networks. We also provide complementary services to our customers, including network design, radio frequency engineering, site acquisition, site development and construction, antenna installation and network management and maintenance. We believe that our full service capabilities are a key competitive advantage in forming strategic partnerships to acquire large wireless and broadcast tower portfolios and in winning contracts for new tower construction. Our primary business in the United States is the leasing of antenna space to wireless carriers. After completion of the recent and proposed transactions we describe in this prospectus, we will have concentrations of towers, or tower clusters, in 26 of the 50 largest U.S. metropolitan areas, including 23 metropolitan areas east of the Mississippi river. We believe that by owning and managing large tower clusters we are able to offer customers the ability to fulfill rapidly and efficiently their network expansion plans across particular markets or regions. We have entered into agreements with Bell Atlantic and BellSouth that will allow us to control and operate substantially all the towers in their 850 MHz networks. Our primary business in the United Kingdom is the operation of television and radio broadcast transmission networks. Following the 1997 acquisition of the BBC's broadcast and tower infrastructure, we were awarded long-term contracts to provide the BBC and other broadcasters analog and digital transmission services. We also lease antenna space to wireless operators in the United Kingdom on the towers we acquired from the BBC and from various wireless carriers. We believe that these broadcast towers are uniquely situated in locations that wireless carriers seeking to lease antenna space find particularly desirable. We believe our towers are attractive to a diverse range of wireless communications industries, including personal communications services, cellular, ESMR, SMR, paging, and fixed microwave, as well as radio and television broadcasting. In the United States our major customers include AT&T Wireless, Aerial, Bell Atlantic, BellSouth, Motorola, Nextel, PageNet and Sprint PCS. In the United Kingdom our major customers include the BBC, Cellnet, Dolphin, NTL, ONdigital, One2One, Orange, Virgin Radio and Vodafone. We have embarked on a major construction program for our customers to enhance our tower portfolios. In 1998, we constructed 231 towers at an aggregate cost of approximately $46.0 million, and had begun construction of an additional 72 towers as of December 31, 1998. In 1999, we plan to 70
construct between 800 and 1,100 towers at an estimated aggregate cost between $150.0 million and $200.0 million for wireless carriers such as Bell Atlantic, BellSouth and Nextel. The actual number of towers built may be outside that range depending on acquisition opportunities and potential build-to-suit contracts from large wireless carriers. In addition, we were selected to build and operate the world's first digital terrestrial television system in the United Kingdom based on our broadcast engineering expertise. Growth Strategy Our objective is to become the premier global provider of wireless communications and broadcast transmission infrastructure and related services. Our experience in establishing and expanding our existing tower portfolios, our experience in owning and operating both analog and digital transmission networks, our significant relationships with wireless carriers and broadcasters and our ability to offer customers our in-house technical and operational expertise, uniquely position us to capitalize on global growth opportunities. The key elements of our business strategy are to: . Maximize Utilization of Tower Capacity. We are seeking to take advantage of the substantial operating leverage of our site rental business by increasing the number of antenna leases on our owned and managed communications sites. We believe that many of our towers have significant capacity available for additional antenna space rental and that increased utilization of our tower capacity can be achieved at low incremental cost. For example, prior to our purchase of the BBC's broadcast transmission network in 1997, the rental of available antenna capacity on the BBC's premier tower sites was not actively marketed to third parties. We believe there is substantial demand for such capacity. In addition, we believe that the extra capacity on our tower portfolios in the United States and the United Kingdom will be highly desirable to new entrants into the wireless communications industry. Such carriers are able to launch service quickly and relatively inexpensively by designing the deployment of their networks based on our attractive existing tower portfolios. Further, we intend to selectively build and acquire additional towers to improve the coverage of our existing tower portfolios to further increase their attractiveness. We intend to use targeted sales and marketing techniques to increase utilization of and investment return on our existing, newly constructed and acquired towers. . Leverage Expertise of U.S. and U.K. Personnel to Capture Global Growth Opportunities. We are seeking to leverage the skills of our personnel in the United States and the United Kingdom. We believe that our ability to manage networks, including the transmission of signals, will be an important competitive advantage in our pursuit of global growth opportunities, as evidenced by our BBC, One2One, Bell Atlantic, BellSouth and Powertel transactions. With our wireless communications and broadcast transmission network design and radio frequency engineering expertise, we are well positioned (1) to partner with major wireless carriers to assume ownership of their existing towers, (2) to provide new tower construction wireless carriers and broadcasters and (3) to acquire existing broadcast transmission networks that are being privatized around the world. . Partner with Wireless Carriers to Assume Ownership of their Existing Towers. In addition to the joint venture with Bell Atlantic and the transaction with BellSouth, we are continuing to seek to partner with other major wireless carriers to assume ownership of their existing towers directly or through joint ventures or control their towers through contractual arrangements. We believe the primary criteria of such carriers in selecting a company to own and operate their wireless communications infrastructure will be the company's perceived capability to maintain the integrity of their networks, including their transmission signals. Therefore, we believe that those companies with a proven track record of providing end-to-end services will be best positioned to successfully acquire access to such wireless communications infrastructure. We believe that similar opportunities will arise globally as the wireless communications industry further expands. 71
. Provide Build-to-Suit Towers for Wireless Carriers and Broadcasters. As wireless carriers continue to expand and fill-in their service areas, they will require additional communications sites and will have to build new towers where multi-tenant towers are not available. Similarly, the introduction of digital terrestrial television broadcasting in the United States will require the construction of new broadcast towers to accommodate new digital transmission equipment and analog transmission equipment displaced from existing towers. We are aggressively pursuing these opportunities to build new towers for wireless carriers, leveraging on our ability to offer end-to-end services. . Acquire Existing Broadcast Transmission Networks. In 1997, our U.K. subsidiary, CTI, successfully acquired the privatized domestic broadcast transmission network of the BBC. In addition, we are implementing the roll-out of digital television transmission services throughout the United Kingdom. As a result of this experience, we are well positioned to acquire other state-owned analog and digital broadcast transmission networks globally when opportunities arise. These state-owned broadcast transmission networks typically enjoy premier sites giving an acquirer the ability to offer unused antenna capacity to new and existing radio and television broadcasters and wireless carriers, as well as to install new technologies such as digital terrestrial transmission services. In addition, our experience in broadcast transmission services allows us to consider, when attractive opportunities arise, acquiring wireless transmission networks as well as the acquisition of associated wireless communications infrastructure. We are currently pursuing international acquisition and privatization opportunities. . Continue to Decentralize Management Functions. In order to better manage our efforts to add tenants to our towers and our new tower build programs, and in anticipation of the continued growth of our tower portfolios throughout the United States, we have begun and plan to continue decentralizing some management and operational functions. To that end, in addition to our Pittsburgh operating headquarters and regional office, we have opened and staffed five regional offices, including Houston, Louisville, Phoenix, Albany and Puerto Rico. Upon consummation of the recent and proposed transactions we plan to open 10 additional regional offices, five in connection with the joint venture with Bell Atlantic, three in connection with the BellSouth transaction and two in connection with the Powertel acquisition. The principal responsibilities of these offices are to manage the leasing of tower space on a regional basis through a dedicated local sales force, to maintain the towers already located in the region and to implement our commitments to build new towers for wireless carriers in the area. We believe that by moving a significant amount of our operating personnel to regional offices we will be better able to strengthen our relationship with regional carriers, serve our customers more effectively and identify additional opportunities to build new towers for local and regional carriers. 72
The Company CCIC is a holding company that conducts all of its business through its subsidiaries. CCIC's two principal operating subsidiaries are Crown Communication, through which it conducts its U.S. operations, and CTI, through which it conducts its U.K. operations. The following table indicates, as of December 31, 1998, after giving pro forma effect to the 1999 Transactions, the geographic concentration of our 6,137 owned and managed towers and 132 revenue producing rooftop sites: U.S. Towers and Rooftop Sites % of Crown % of Company Communication Bell Atlantic BellSouth Powertel Total U.S. Total Total ------------- ------------- --------- -------- ----- ---------- ------- Towers: Georgia............... -- 22 341 151 514 11.3% 8.2% Florida............... 3 -- 434 76 513 11.3 8.2 Alabama............... -- 9 179 188 376 8.3 6.0 Pennsylvania.......... 219 218(a) -- -- 332 7.3 5.3 Tennessee............. 1 1 202 113 317 6.9 5.1 Louisiana............. 51 13 162 -- 226 5.0 3.6 Mississippi........... 21 8 125 62 216 4.8 3.5 Texas................. 167 43 -- -- 210 4.6 3.4 Kentucky.............. -- -- 191 -- 191 4.2 3.1 South Carolina........ 12 149 10 19 190 4.2 3.0 Indiana............... -- -- 183 -- 183 4.0 2.9 North Carolina........ 11 141 20 -- 172 3.8 2.7 Arizona............... 12 159 -- -- 171 3.8 2.7 New Jersey............ 1 150 -- -- 151 3.3 2.4 New York.............. -- 130 -- -- 130 2.9 2.1 Maryland.............. -- 115 -- -- 115 2.5 1.8 Massachusetts......... -- 80 -- -- 80 1.8 1.3 New Mexico............ 34 37 -- -- 71 1.6 1.1 Virginia.............. 5 66 -- -- 71 1.6 1.1 Connecticut........... -- 37 -- -- 37 * * Ohio.................. 26 -- -- -- 26 * * New Hampshire......... -- 26 -- -- 26 * * Delaware.............. -- 25 -- -- 25 * * West Virginia......... 17 14(b) -- -- 19 * * Puerto Rico........... 14 -- -- -- 14 * * Rhode Island.......... -- 14 -- -- 14 * * All Others............ 15 12 3 41 61 1.3 1.0 --- ----- ----- --- ----- ----- ---- Rooftops(d)............. 78 -- -- -- 78 1.7 1.2 --- ----- ----- --- ----- ----- ---- Total................... 687 1,459(c) 1,850 650 4,529 100.0% 72.2% === ===== ===== === ===== ===== ==== - -------- (a) Includes 105 towers we currently manage. (b) Includes 12 towers we currently manage. (c) Includes 117 towers we currently manage. (d) We manage an additional 1,286 rooftop sites throughout the United States that do not currently produce revenue but are available for leasing to our customers. * Less than 1%. 73
U.K. Towers and Rooftop Sites % of % of Company CTI One2One Total U.K. Total Total --- ------- ----- ---------- ------- Towers: England.................................. 492 767 1,259 72.4% 20.1% Wales.................................... 134 39 173 9.9 2.8 Scotland................................. 151 15 166 9.5 2.6 Northern Ireland......................... 88 -- 88 5.1 1.4 --- --- ----- ----- ---- Rooftops................................... 54 -- 54 3.1 * --- --- ----- ----- ---- Total...................................... 919 821 1,740 100.0% 27.8% === === ===== ===== ==== U.S. Operations Overview Our primary business focus in the United States is the leasing of antenna space on multiple tenant towers and rooftops to a variety of wireless carriers under long-term lease contracts. Supporting our competitive position in the site rental business, we maintain in-house expertise in, and offer our customers, infrastructure and network support services that include network design and communication site selection, site acquisition, site development and construction and antenna installation. We lease antenna space to our customers on our owned and managed towers. We generally receive fees for installing customers' equipment and antennas on a tower and also receive monthly rental payments from customers payable under site rental leases that generally range in length from three to five years. Our U.S. customers include such companies as AT&T Wireless, Aerial Communications, AirTouch Cellular, Arch Communications, Bell Atlantic, BellSouth, Cellular One, Federal Express, Lucent Technologies, Motorola, Nextel, Nokia, PageNet, Skytel, Sprint PCS and TSR Wireless, as well as private network operators and various federal and local government agencies, such as the FBI, the IRS and the U.S. Postal Service. At December 31, 1998, without giving effect to the 1999 Transactions, we owned or managed 609 towers and 78 rooftop sites in the United States and Puerto Rico. These towers and rooftop sites are located in western Pennsylvania (primarily in and around the greater Pittsburgh area), in the southwestern United States (primarily in western Texas), across Puerto Rico and along I-95 in North Carolina and South Carolina. The joint venture with Bell Atlantic controls and operates 1,459 towers. These towers represent substantially all the towers in Bell Atlantic's 850 MHz wireless network in the eastern and southwestern United States and provide coverage of 11 of the top 50 U.S. metropolitan areas including New York, Philadelphia, Boston, Washington D.C. and Phoenix. A substantial majority of these towers are over 100 feet tall and can accommodate multiple tenants. After consummation of the BellSouth transaction, we will control and operate an additional 1,850 towers. These towers represent substantially all the towers in BellSouth's 850 MHz wireless network in the southeastern and midwestern United States and provide coverage of 12 of the top 50 U.S. metropolitan areas, including Miami, Atlanta, Tampa, Nashville and Indianapolis. A substantial majority of these towers are over 100 feet tall and can accommodate multiple tenants. Upon completion of the Powertel acquisition, we will own and operate an additional 650 towers. These towers represent substantially all of Powertel's owned towers in its 1.9 GHz wireless network in the southeastern and midwestern United States. Approximately 90% of these towers are clustered 74
in seven southeastern states providing coverage of such metropolitan areas as Atlanta, Birmingham, Jacksonville, Memphis and Louisville, and a number of major connecting highway corridors in the southeast. These towers are complementary to BellSouth's 850 MHz tower portfolio in the Southeast and have minimal coverage overlap. Substantially all of these towers are over 100 feet tall, were built within the last three years and can such accommodate multiple tenants. We are actively seeking to enter into arrangements with other major wireless carriers and independent tower operators to acquire additional tower footprints. We believe that, like Bell Atlantic, BellSouth and Powertel, other wireless carriers will seek to enter into contractual arrangements with independent tower carriers, such as us, for the ownership or control of their tower footprints. We also plan to leverage our network design expertise to construct new towers. We plan to build towers in areas where carriers' signals fail to transmit in their coverage area. The areas, commonly known as "dead zones", are attractive tower locations. When population density and perceived demand are such that we believe the economics of constructing such towers are justified, we build towers that can accommodate multiple tenants. The multiple tenant design of these towers obviates the need for expensive and time consuming modifications to upgrade undersized towers, saving critical capital and time for carriers facing time-to-market constraints. The towers are also designed to easily add additional customers, and the equipment shelters are built to accommodate another floor for new equipment and air conditioning units when additional capacity is needed. The tower site is zoned for multiple carriers at the time the tower is constructed to allow new carriers to quickly utilize the site. In addition, the towers, equipment shelters and site compounds are engineered to protect and maintain the structural integrity of the site. Our existing contracts for construction of new towers include an agreement with Nextel, under which we have already constructed 67 sites and have an option to construct up to 96 additional sites. In connection with the joint venture, Bell Atlantic and the joint venture entered into a master build-to- suit agreement pursuant to which the joint venture will build and own the next 500 towers to be built for Bell Atlantic's wireless communications business over the next five years. Further, we have agreed to enter into a similar agreement with BellSouth, as part of the BellSouth transaction, to construct at least 500 towers on behalf of BellSouth in the region covered by that transaction over the next five years. See "The 1999 Transactions--Bell Atlantic Joint Venture--Build-to-Suit Agreement" and "--Proposed BellSouth Transaction-- Build-to-Suit Agreement". Site Rental In the United States, we rent antenna space on our owned and managed towers and rooftops to a variety of carriers operating cellular, personal communications services, specialized mobile radio, ESMR, paging and other networks. Tower Site Rental. We lease space to our customers on our owned and managed towers. We generally receive fees for installing customers' equipment and antennas on a tower (as provided in our network services programs) and also receive monthly rental payments from customers payable under site leases. In the United States, the majority of our outstanding customer leases, and the new leases typically entered into by us, have original terms of five years (with three or four optional renewal periods of five years each) and provide for annual price increases based on the Consumer Price Index. We also provide a range of site maintenance services in order to support and enhance our site rental business. We believe that by offering services such as antenna, base station and tower maintenance and security monitoring, we are able to offer quality services to retain our existing customers and attract future customers to our communication sites. We were the first site management company in the United States selected by a major wireless communications company to exclusively manage its tower network and market the network to other carriers for multi-tenant use of their towers. 75
The following table describes, without giving effect to the 1999 Transactions, our top ten revenue producing towers in the United States and Puerto Rico: December Number of 1998 Tenant Monthly Name Location Height (ft) Leases Revenue ---- -------- ----------- --------- -------- Crane.............................. Pennsylvania 450 99 $67,372 Bluebell........................... Pennsylvania 300 110 54,555 Monroeville........................ Pennsylvania 500 63 39,315 Lexington.......................... Kentucky 500 89 38,644 Sandia Crest....................... New Mexico 140 16 26,984 Greensburg......................... Pennsylvania 375 40 26,932 Cranberry.......................... Pennsylvania 400 44 26,455 Cerro de Punta..................... Puerto Rico 220 37 24,988 Beaver............................. Pennsylvania 500 43 25,360 El Yunque.......................... Puerto Rico 200 34 23,500 --- -------- Total..................................................... 575 $354,105 === ======== We have existing master lease agreements with AT&T Wireless, Aerial Communications, Bell Atlantic, Nextel and Sprint PCS, among others, which provide certain terms (including economic terms) that govern new leases entered into by such parties during the term of their master lease agreements, including the lease of space on towers in the Pittsburgh major trading area, which includes greater Pittsburgh and parts of Ohio, West Virginia and western Pennsylvania. Each of the Aerial Communications and Sprint PCS agreements has a 10-year master lease term through December 2006, with one 10-year and one five- year renewal period. Rents are adjusted periodically based on the cumulative Consumer Price Index. Nextel's master lease agreement with us has a 10-year master lease term through October 2006, with two 10-year renewal options. We have also entered into an independent contractor agreement with Nextel. The Bell Atlantic agreement has a 25-year master lease term through December 2020. We have significant site rental opportunities arising out of our existing agreements with Bell Atlantic and Nextel. In our existing lease agreement with Bell Atlantic, we have exclusive leasing rights for 117 existing towers and we currently have sublessees on 58 of these towers in the greater Pittsburgh area. The lease agreement provides that we may sublet space on any of these towers to another carrier subject to certain approval rights of Bell Atlantic. To date, Bell Atlantic has never failed to approve a sublease we have proposed. Upon consummating the joint venture, those 117 towers were among the 1,459 towers contributed to the joint venture; however, since we maintain the right to put sublessees on those 117 towers, revenue resulting from the addition of new tenants on those towers will continue to be realized by us rather than the joint venture. In connection with the Nextel Agreement, as of December 31, 1998, we have the option to own and operate up to 96 additional towers. We also have significant site rental opportunities in connection with the 1999 Transactions. In connection with the joint venture, we entered into a global lease under which Bell Atlantic will lease antenna space on the towers transferred to the joint venture, as well as the towers built pursuant to the build-to-suit agreement. In connection with the BellSouth transaction, we will be paid a monthly site maintenance fee from BellSouth for its use of space on the towers we control. We will also enter into a master lease agreement with the sellers in the Powertel acquisition pursuant to which the sellers will rent space on the acquired towers. In each of the these transactions, we will be permitted to lease additional space on the towers to third parties. See "The 1999 Transactions". 76
Rooftop Site Rental. We are a leading rooftop site management company in the United States. Through our subsidiary, Spectrum, we develop new sources of revenue for building owners by effectively managing all technical aspects of rooftop telecommunications, including two-way radio systems, microwave facilities, fiber optics, wireless cable, paging, rooftop infrastructure services and optimization of equipment location. We also handle billing and collections and all calls and questions regarding the site, totally relieving the building's management of this responsibility. In addition to the technical aspects of site management, we provide operational support for both wireless carriers looking to build out their wireless networks, and building owners seeking to out source their site rental activities. We generally enter into management agreements with building owners and receive a percentage of the revenues generated from the tenant license agreements. Network Services We design, build and operate our own communication sites. We have developed an in-house expertise in certain value-added services that we offer to the wireless communications and broadcasting industries. Because we are a turn-key provider with "end-to-end" design, construction and operating expertise, we offer our customers the flexibility of choosing between the provision of a full ready-to-operate network infrastructure or any of the component services involved therein. Such services include network design and site selection, site acquisition, site development and construction and antenna installation. Network Design and Site Selection. We have extensive experience in network design and engineering and site selection. While we maintain sophisticated network design services primarily to support the location and construction of company-owned multiple tenant towers, we do from time to time provide network design and site selection services to carriers and other customers on a consulting contract basis. Our network design and site selection services provide our customers with relevant information, including recommendations regarding location and height of towers, appropriate types of antennas, transmission power and frequency selection and related fixed network considerations. In 1998, we provided network design services primarily for our own footprints and also for certain customers, including Triton Communications, Nextel, Aerial Communications and Sprint PCS. These customers were typically charged on a time and materials basis. To capitalize on the growing concerns over tower proliferation, we have developed a program called "Network Solutions" through which we will attempt to form strategic alliances with local governments to create a single communications network in their communities. To date our efforts have focused on western Pennsylvania, where we have formed alliances with three municipalities. These alliances are intended to accommodate wireless carriers and local public safety, emergency services and municipal services groups as part of an effort to minimize tower proliferation. By promoting towers designed for co-location, these alliances will reduce the number of towers in communities while serving the needs of wireless carriers and wireless customers. Site Acquisition. In the United States, we are engaged in site acquisition services for our own purposes and for third parties. Based on data generated in the network design and site selection process, a "search ring", generally of a one-mile radius, is issued to the site acquisition department for verification of possible land purchase or lease deals within the search ring. Within each search ring, geographic information systems specialists select the most suitable sites, based on demographics, traffic patterns and signal characteristics. Once a site is selected and the terms of an option to purchase or lease the site are completed, a survey is prepared and the resulting site plan is created. The plan is then submitted to the local zoning/planning board for approval. If the site is approved, our construction department takes over the process of constructing the site. We have provided site acquisition services to several customers, including AT&T Wireless, Aerial Communications, AirTouch Cellular, Bell Atlantic, BellSouth, GTE Mobilnet, Nextel, Omnipoint, Pagemart, Sprint PCS and Teligent. These customers engage us for such site acquisition services on either a fixed price contract or a time and materials basis. 77
Site Development and Construction and Antenna Installation. We have provided site development and construction and antenna installation services to the U.S. communications industry for over 18 years. We have extensive experience in the development and construction of tower sites and the installation of antenna, microwave dishes and electrical and telecommunications lines. Our site development and construction services include clearing sites, laying foundations and electrical and telecommunications lines, and constructing equipment shelters and towers. We have designed and built and presently maintain tower sites for a number of our wireless communications customers and a substantial part of our own tower network. We can provide cost-effective and timely completion of construction projects in part because our site development personnel are cross-trained in all areas of site development, construction and antenna installation. A varied inventory of heavy construction equipment and materials are maintained by us at our 45-acre equipment storage and handling facility in Pittsburgh, which is used as a staging area for projects in major cities in the eastern region of the United States. We generally set prices for each site development or construction service separately. Customers are billed for these services on a fixed price or time and materials basis and we may negotiate fees on individual sites or for groups of sites. We have the capability and expertise to install antenna systems for our paging, cellular, personal communications services, specialized mobile radio, ESMR, microwave and broadcasting customers. As this service is performed, we use our technical expertise to ensure that there is no interference with other tenants. We typically bill for our antenna installation services on a fixed price basis. Our construction management capabilities reflect our extensive experience in the construction of networks and towers. For example, Crown Communication was instrumental in launching networks for Sprint PCS, Nextel and Aerial Communications in the Pittsburgh MTA. In addition, Crown Communication supplied these carriers with all project management and engineering services which included antenna design and interference analyses. In 1998, we provided site development and construction and antenna installation services to approximately 33 customers in the United States, including AT&T Wireless, Bell Atlantic, Nextel and Sprint PCS. Broadcast Site Rental and Services We also provide site rental and related services to customers in the broadcasting industry in the United States. The launch of digital terrestrial television in the United States will require significant expansion and modification of the existing broadcast infrastructure. Because of the significant cost involved in the construction or modification of tall towers, along with the large capital expenditures broadcasters will incur in acquiring digital broadcast equipment, we believe that the television broadcasting industry, which has historically been opposed to locating their equipment on towers with other tenants and third party ownership of broadcast infrastructure, will seek to outsource tower ownership due to cost constraints. See "Industry Background". Our objective is to become a leader in the construction of the approximately 200 tall towers expected to be built in the United States over the next five years. We believe that our experience in providing digital transmission services in the United Kingdom will make us an attractive provider of broadcast services to the major networks and their affiliates. In addition, we will seek to partner with broadcasters and major station ownership groups that own property zoned for tall towers, but that lack sufficient resources and expertise to build a tower. We will then attempt to locate on the tower the transmitters of commercial broadcast television stations and high powered FM radio stations in that market as well as wireless carriers. Electronic news gathering systems benefit from the towers and services we offer. The electronic news gathering trucks, often in the form of local television station news vans with telescoping antennas on their roofs, send live news transmission back to the studio from the scene of an important event. Typically, these vans cannot transmit signals beyond about 25 miles. In addition, if 78
they are shielded from the television transmitter site, they cannot make the connection even at close range. We have developed a repeater system for such news gathering that can be used on many of our towers in western Pennsylvania and expect to develop similar systems in other markets in which we have or develop tower footprints. This system allows the van to send a signal to one of our local towers where the signal is retransmitted back to the television transmitter site. The retransmission of the signal from our tower to the various television transmitter sites is done via a microwave link. We charge the station for the electronic news gathering receiver system at the top of our tower and also charge them for the microwave dish they place on our tower. Our electronic news gathering customers are affiliates of the NBC, ABC, CBS and Fox networks. We also have employees with considerable direct construction experience and market knowledge in the U.S. broadcasting industry, having worked with numerous television networks around the United States, and a number of other local broadcasting companies. We have installed master FM and television systems on buildings across the country. We have supervised the construction and operation of the largest master FM antenna facility in the United States and have engineered and installed two 2,000 foot broadcast towers with master FM antennas. We believe that this experience may help us negotiate favorable construction contracts for both tower and rooftop sites, and to gain an expertise in the complex issues surrounding electronic compatibility and RF engineering. Significant Contracts We have many agreements with telecommunications providers in the United States, including leases, site management contracts and independent contractor agreements. We currently have important contracts with, among others, Bell Atlantic, Nextel and BellSouth. While these agreements currently are important to us, our most significant contracts in the U.S. will result from consummation of the recent and proposed transactions described in this prospectus. In addition, we are party to a contract with the State of New York, which we believe to be the first of its kind, to manage all State-owned real estate for wireless communications purposes for the next 20 years. This contract includes the rights to more than 16,000 structures and rooftops, tens of thousands of miles of rights-of-way and millions of acres of State-owned land. Customers In both our site rental and network services businesses, we work with a number of customers in a variety of businesses including cellular, PCS, ESMR, paging and broadcasting. We work primarily with large national carriers such as Bell Atlantic, BellSouth, Sprint PCS, Nextel and AT&T Wireless. For the year ended December 31, 1998, no customer in the United States accounted for more than 10.0% of our U.S. revenues, other than Nextel, which accounted for approximately 12.5% of our U.S. consolidated revenues. Nextel revenues are expected to grow as we build out Nextel interstate corridor sites. Industry Selected Customers -------- ------------------ Cellular..................... AT&T Wireless, BAM PCS.......................... Sprint PCS, Western Wireless, Powertel Broadcasting................. Hearst Argyle Television, Trinity Broadcasting SMR/ESMR..................... Nextel, SMR Direct Governmental Agencies........ FBI, INS, Puerto Rico Police Private Industrial Users..... IBM, Phillips Petroleum Data......................... Ardis, RAM Mobile Data Paging....................... AirTouch, PageNet, TSR Wireless Utilities.................... Equitable Resources, Nevada Power Other........................ WinStar, Teligent 79
Sales and Marketing Our sales and marketing personnel, located in our regional offices, target carriers expanding their networks, entering new markets, bringing new technologies to market and requiring maintenance or add-on business. All types of wireless carriers are targeted including broadcast, cellular, paging, personal communications services, microwave and two-way radio. We are also interested in attracting 9-1-1, federal, state, and local government agencies, as well as utility and transportation companies to locate on existing sites. Our objective is to pre-sell capacity on our towers by promoting sites prior to construction. Rental space on existing towers is also aggressively marketed and sold. We utilize numerous public and proprietary databases to develop detailed target marketing programs directed at auction block license awardees, existing tenants and specific market groups. Mailings focus on regional build outs, new sites and services. The use of databases, such as those with information on sites, demographic data, licenses and deployment status, coupled with measured coverage data and radio frequency coverage prediction software, allows our sales and marketing personnel to target specific carriers' needs for specific sites. To foster productive relationships with our major existing tenants and potential tenants, we have formed a team of account relationship managers. These managers work to develop new tower construction, site leasing services and site management opportunities, as well as ensure that customers' emerging needs are translated into new site products and services. The marketing department maintains our visibility within the wireless communications industry through regular advertising and public relations efforts including actively participating in trade shows and generating regular press releases, newsletters and targeted mailings (including promotional flyers). Our promotional activities range from advertisements and site listings in industry publications to maintaining a presence at national trade shows. Potential clients are referred to our Web site, which contains information about us as well as site listings. In addition, our sites are listed on the Cell Site Express Web site. This Web site enables potential tenants to locate existing structures by latitude, longitude or address. Clients can easily contact us via e-mail through the Web site or Cell Site Express. Our network services capabilities are marketed in conjunction with our tower footprints. To follow up on targeted mailings and to cold-call on potential clients, we have established a telemarketing department. Telemarketers field inbound and outbound calls and forward leads to local sales representatives or relationship managers for closure. Local sales representatives are stationed in each cluster to develop and foster close business relationships with decision-makers in each customer organization. Sales professionals work with marketing specialists to develop sales presentations targeting specific client demands. In addition to a dedicated, full-time sales and marketing staff, a number of senior managers spend a significant portion of their efforts on sales and marketing activities. These managers call on existing and prospective customers and also seek greater visibility in the industry through speaking engagements and articles in national publications. Furthermore, many of these managers have been recognized as industry experts, are regularly quoted in articles and are called on to testify at local hearings and to draft local zoning ordinances. Public and community relations efforts include coordinating community events, such as working with amateur radio clubs to supply emergency and disaster recovery communications, charitable event sponsorship, and promoting charitable donations through press releases. Competition In the United States, we compete with other independent tower owners, some of which also provide site rental and network services; wireless carriers, which own and operate their own tower networks; service companies that provide engineering and site acquisition services; and other 80
potential competitors, such as utilities, outdoor advertisers and broadcasters, some of which have already entered the tower industry. Wireless carriers that own and operate their own tower networks generally are substantially larger and have greater financial resources than we have. We believe that tower location, capacity, price, quality of service and density within a geographic market historically have been and will continue to be the most significant competitive factors affecting tower rental companies. We also compete for acquisition and new tower construction opportunities with wireless carriers, site developers and other independent tower operating companies and believe that competition for tower site acquisitions will increase and that additional competitors will enter the tower market, some of which may have greater financial resources than us. The following is a list of the independent tower companies that we compete with in the United States: American Tower Corporation, Pinnacle Towers, SpectraSite, SBA Communications, WesTower, Unisite, LCC International and Lodestar Communications. The following companies are primarily competitors for our rooftop site management activities in the United States: AAT, APEX, Commsite International, JJS Leasing, Inc., Motorola, Signal One, Subcarrier Communications, Tower Resources Management and Unisite. We believe that the majority of our competitors in the site acquisition business operate within local market areas exclusively, while a small minority of firms appear to offer their services nationally, including SBA Communications Corporation, Whalen & Company and Gearon & Company (a subsidiary of American Tower Corporation). We offer our services nationwide and we believe we are currently one of the largest providers of site development services to the U.S. and international markets. The market includes participants from a variety of market segments offering individual, or combinations of, competing services. The field of competitors includes site acquisition consultants, zoning consultants, real estate firms, right-of-way consulting firms, construction companies, tower owners/managers, radio frequency engineering consultants, telecommunications equipment vendors (which provide turnkey site development services through multiple subcontractors) and carriers' internal staff. We believe that carriers base their decisions on site development services on certain criteria, including a company's experience, track record, local reputation, price and time for completion of a project. We believe that we compete favorably in these areas. U.K. Operations Overview We own and operate, through our 80% interest in CTI, one of the world's most established television and radio transmission networks and are expanding our leasing of antenna space on our towers to a variety of wireless carriers. We provide transmission services for four of the six digital terrestrial television services in the U.K., two BBC analogue television services, six national BBC radio services (including the first digital audio broadcast service in the United Kingdom), 37 local BBC radio stations and two national commercial radio services through our network of transmitters, which reach 99.4% of the U.K. population. These transmitters are located on approximately 1,300 towers, more than half of which we own and the balance of which are licensed to us under a site-sharing agreement with NTL, our principal competitor in the United Kingdom. We have also secured long-term contracts to provide digital television transmission services to the BBC and ONdigital. See "--Significant Contracts". In addition to providing transmission services, we also lease antenna space on our transmission infrastructure to various communications service providers and provide telecommunications network installation and maintenance services and engineering consulting services. Our core revenue generating activity in the United Kingdom is the analog terrestrial transmission of radio and television programs broadcast by the BBC. CTI's business, which was formerly owned 81
by the BBC, was privatized under the Broadcasting Act 1996 and sold to CTI in February 1997. At the time the BBC home service transmission business was acquired, CTI entered into a 10-year transmission contract with the BBC for the provision of terrestrial analog television and analog and digital radio transmission services in the United Kingdom. In the twelve months ended December 31, 1998, approximately 60.6% of CTI's consolidated revenues were derived from the provision of services to the BBC. At December 31, 1998, we owned, leased or licensed 861 transmission sites on which we operated 865 towers, including the 102 towers we acquired in the Millennium acquisition. In addition, as of December 31, 1998 we were constructing eight new towers on existing sites and had 112 site acquisition projects in process for new tower sites. We have 54 revenue producing rooftop sites that are occupied by our transmitters but are not available for leasing to our customers. Our sites are located throughout England, Wales, Scotland and Northern Ireland. We expect to significantly expand our existing tower portfolios in the United Kingdom by building and acquiring additional towers. We believe our existing tower network encompasses many of the most desirable tower locations in the United Kingdom for wireless communications. However, due to the shorter range over which communications signals carry (especially newer technologies such as PCN) as compared to broadcast signals, wireless communications providers require a denser portfolio of towers to cover a given area. Therefore, in order to increase the attractiveness of our tower portfolios to wireless communications providers, we will seek to build or acquire new communications towers. Using our team of over 300 engineers with state-of-the-art network design and radio frequency engineering expertise, we locate sites and design towers that will be attractive to multiple tenants. We seek to leverage such expertise by entering into new tower construction contracts with various carriers, such as BT, Cable & Wireless Communications, Cellnet, Dolphin, Energis, Highway One, One2One, Orange and Scottish Telecom, thereby securing an anchor tenant for a site before incurring capital expenditures for the site build-out. As of December 31, 1998, we were building eight towers that we will own. In addition, we expect to make strategic acquisitions of existing communications sites (primarily those owned by wireless carriers) in order to expand our infrastructure and to further leverage our site management experience. On March 5, 1999, CTI entered into an agreement with One2One pursuant to which CTI will manage, develop and, at its option, acquire 821 towers. These towers represent substantially all the towers in One2One's nationwide 900 MHz wireless network in the United Kingdom. These towers will allow CTI to market a nationwide network of towers to third generation wireless carriers in the United Kingdom following the completion of the pending auction of such licenses by the U.K. government. We believe that we generally have significant capacity on our towers in the United Kingdom. Although approximately 133 of our towers are poles with limited capacity, we typically will be able to build new towers that will support multiple tenants on these sites (subject to the applicable planning process). We intend to upgrade these limited capacity sites where we believe we can achieve appropriate returns to merit the necessary capital expenditure. For example, in connection with a contract with Vodafone, we are upgrading 68 of these sites with limited capacity. See "--Significant Contracts--Vodafone". Approximately 59 of our sites are used for medium frequency broadcast transmissions. At this frequency, the entire tower is used as the transmitting antenna and is therefore electrically "live". Such towers are therefore unsuitable for supporting other tenant's communications equipment. However, medium frequency sites generally have substantial ground area available for the construction of new multiple tenant towers. Transmission Business Analog. For the twelve months ended December 31, 1998, CTI generated approximately 52.8% of its revenues from the provision of analog broadcast transmission services to the BBC. Pursuant to 82
the BBC analog transmission contract, we provide terrestrial transmission services for the BBC's analog television and radio programs and certain other related services (including BBC digital radio) for an initial 10-year term through March 31, 2007. See "--Significant Contracts". For the twelve months ended December 31, 1998, the BBC analog transmission contract generated revenues of approximately (Pounds)49.4 million ($82.1 million) for us. In addition to the BBC analog transmission contract, we have separate contracts to provide maintenance and transmission services for two national radio stations, Virgin Radio and Talk Radio. These contracts are for periods of eight years commencing from, respectively, March 31, 1993 and February 4, 1995. We own all of the transmission equipment used for broadcasting the BBC's domestic radio and television programs, whether located on one of CTI's sites or on an NTL or other third-party site. As of December 31, 1998, CTI had 3,465 transmitters, of which 2,196 were for television broadcasting and 1,269 were for radio. A few of our most powerful television transmitters together cover the majority of the U.K. population. The coverage achieved by the less powerful transmitters is relatively low, but is important to the BBC's ambition of attaining universal coverage in the United Kingdom. This is illustrated by the following analysis of the population coverage of our analog television transmitters: Combined Number of sites population (ranked by coverage) coverage -------------------- ---------- 1 (Crystal Palace).......................... 21% top 16...................................... 79 top 26...................................... 86 top 51...................................... 92 all......................................... 99.4 All of our U.K. transmitters are capable of unmanned operation and are maintained by mobile maintenance teams from 27 bases located across the United Kingdom. Access to the sites is strictly controlled for operational and security reasons, and buildings at 140 of the sites are protected by security alarms connected to CTI's Technical Operations Centre at Warwick. The site- sharing agreement provides us with reciprocal access rights to NTL's broadcast transmission sites on which we have equipment. Certain of our transmitters that serve large populations or important geographic areas have been designated as priority transmitters. These transmitters have duplicated equipment so that a single failure will not result in total loss of service but will merely result in an output-power reduction that does not significantly degrade the service to most viewers and listeners. Digital. We have entered into contracts with the holders (including the BBC) of four of the six digital terrestrial television multiplexes allocated by the U.K. government to design, build and operate their digital transmission networks. In connection with the implementation of digital terrestrial television, new transmission infrastructure will be required. We have committed to invest approximately (Pounds)100.0 million ($170.0 million) for the build out of new infrastructure to support digital terrestrial television over the next two years, (Pounds)55.3 million ($92.0 million) of which we had already invested by December 31, 1998. By the year 2000, 81 transmission sites will need to be upgraded with new transmitters and associated systems to support digital terrestrial television. Of these sites, 49 are owned by us with the remainder owned by NTL. An arrangement similar to that of the site-sharing agreement is being negotiated to govern the particular issues arising out of the sharing of digital transmission sites between NTL and us. 83
We successfully began commercial operation of the digital terrestrial television networks from an initial 22 transmission sites on November 15, 1998. This launch marks the first stage of the project to introduce the digital broadcast system that will eventually replace conventional analog television services in the United Kingdom. As the network size expands during 1999, the number of viewers who are able to receive the service will increase significantly. We have accepted an invitation from the U.K. television regulator, the Independent Television Commission, to play a major role in planning further digital terrestrial television network extensions to be built in the year 2000 and beyond. We are currently the sole provider of transmission services for digital radio broadcasts in the United Kingdom. In September 1995, the BBC launched its initial DAB scheme over our transmission network, and this service is now broadcast to approximately 60% of the U.K. population. A license for an independent national digital radio network was awarded to the Digital One consortium during 1998 and it is expected that this service will commence during 1999. We are in negotiations to provide accommodation and access to masts and antennas at 24 transmission sites to support the launch of Digital One. In addition, local digital radio licenses will be awarded during 1999. We believe we are well positioned to become the transmission service provider to the winners of such licenses. Site Rental The BBC transmission network provides a valuable initial portfolio of towers for the creation of wireless communications networks. As of December 31, 1998, approximately 200 companies rented antenna space on approximately 405 of CTI's 919 towers and rooftops. These site rental agreements have normally been for three to 12 years and are generally subject to rent reviews every three years. Site sharing customers are generally charged annually in advance, according to rate cards that are based on the antenna size and position on the tower. Our largest site rental customer in the United Kingdom is NTL under the site- sharing agreement. This agreement generated approximately (Pounds)592,000 ($984,400) of site rental revenue in December 1998. We also provide a range of site maintenance services in order to support and enhance our U.K. site rental business. We believe that by offering services such as antenna, base station and tower maintenance and monitoring, we are able to offer quality services to retain our existing customers and attract future customers to our communications sites. We complement our U.K. transmission experience with our site management experience in the United States to provide customers with a top-of-the-line package of service and technical support. The following table describes our top ten revenue producing towers in the United Kingdom: Number of CTI's Tenant December 1998 Name Location Height(ft) Leases Monthly Revenue ---- ------------ ---------- --------- ------------------------ Brookmans Park.......... S.E. England 147 19 (Pounds) 25,026 $ 41,613 Bow Brickhill........... S.E. England 197 13 17,479 29,064 Mendip.................. S.W. England 924 19 16,534 27,493 Hannington.............. S. England 440 15 12,267 20,398 Crystal Palace.......... London 653 14 11,638 19,352 Wrotham................. S. England 379 14 11,385 18,931 Waltham................. C. England 954 10 10,750 17,875 Redruth................. S.W. England 500 18 10,523 17,498 Heathfield.............. S. England 443 15 10,296 17,120 Oxford.................. C. England 507 14 9,973 16,583 --- --------------- -------- Total......................................... 151 (Pounds)135,871 $225,927 === =============== ======== 84
Other than NTL, CTI's largest (by revenue) site rental customers consist mainly of wireless carriers such as Cellnet, One2One, Orange and Vodafone. Revenues from these non-BBC sources are expected to become an increasing portion of CTI's total U.K. revenue base, as the acquired BBC home service transmission business is no longer constrained by governmental restrictions on the BBC's commercial activities. We believe that the demand for site rental from communication service providers will increase in line with the expected growth of these communication services in the United Kingdom. We have master lease agreements with all of the major U.K. telecommunications site users including BT, Cable & Wireless Communications, Cellnet, Dolphin, Energis, Highway One, One2One, Orange, Scottish Telecom and Vodafone. These agreements typically specify the terms and conditions (including pricing and volume discount plans) under which these customers have access to all sites within our U.K. portfolio. Customers make orders for specific sites using the standard terms included in the master lease agreements. As of December 31, 1998, there were approximately 400 applications in process for installations at existing sites under such agreements. Network Services CTI provides broadcast and telecommunications engineering services to various customers in the United Kingdom. We retained all the BBC home service transmission business employees upon CTI's acquisition. Accordingly, we have engineering and technical staff of the caliber and experience necessary not only to meet the requirements of our current customer base, but also to meet the challenges of developing digital technology. Within the United Kingdom, CTI has worked with several telecommunications operations on design and build projects as they roll-out their networks. CTI has had success in bidding for broadcast consulting contracts, including, over the last four years, in Thailand, Taiwan, Poland and Sri Lanka. With the expertise of our engineers and technical staff, we are a turn-key provider to the wireless communications and broadcast industries. We can provide customers with a ready-to-operate network infrastructure or any of the component services involved therein. Such services include network design and site selection, site acquisition, site development and antenna installation. Network Design and Site Selection. We have extensive experience in network design and engineering and site selection. While we maintain sophisticated network design services primarily to support the location and construction of multiple tenant towers that we own, from time to time we do provide network design and site selection services to carriers and other customers on a consulting contract basis. Our network design and site selection services provide our customers with relevant information including recommendations regarding location and height of towers, appropriate types of antennas, transmission power and frequency selection and related fixed network considerations. Site Acquisition. In the United Kingdom, we are involved in site acquisition services for our own purposes and for third parties. We recognize that the site acquisition phase often carries the highest risk for a project. To ensure the greatest possible likelihood of success and timely acquisition, we combine a desktop survey of potential barriers to development with a physical site search that includes initial design analyses, CDM assessments and, where necessary, line-of-sight surveys. We leverage off our experience in site acquisition and co-location when meeting with local planning authorities. Site Development and Antenna Installation. We use a combination of external and internal resources for site construction. Our engineers are experienced in both construction techniques and construction management, ensuring an efficient and simple construction phase. Selected civil contractors are managed by CTI staff for the ground works phase. Specialist erection companies, with 85
whom we have a long association, are used for tower installation. Final antenna installation is undertaken by our own experienced teams. Site Management and Other Services. We also provide complete site management, preventive maintenance, fault repair and system management services to the Scottish Ambulance Service. We also maintain a mobile radio system for the Greater Manchester Police and provide maintenance and repair services for transmission equipment and site infrastructure. Significant Contracts CTI's principal analog broadcast transmission contract is the BBC analog transmission contract. CTI also has entered into two digital television transmission contracts, the BBC digital transmission contract and the ONdigital digital transmission contract. CTI also provides facilities to NTL (in its capacity as a broadcast transmission provider to non-CTI customers) under the site-sharing agreement. CTI also has long-term service agreements with broadcast customers such as Virgin Radio and Talk Radio. In addition, CTI has several agreements with telecommunications providers, including leases, site management contracts and independent contractor agreements. CTI has entered into contracts to design and build infrastructure for customers such as Cellnet, One2One, Orange, Scottish Telecom and Vodafone. BBC Analog Transmission Contract CTI entered into a 10-year transmission contract with the BBC for the provision of terrestrial analog television and analog and digital radio transmission services in the United Kingdom at the time the BBC home service transmission business was acquired, which contract was subsequently amended on July 16, 1998 to incorporate a small number of minor modifications requested by the BBC. The BBC analog transmission contract provides for charges of approximately (Pounds)46.5 million ($77.3 million) to be payable by the BBC to CTI for the year ended March 31, 1998 and each year thereafter to the termination date, adjusted annually at the inflation rate less 1%. In addition, for the duration of the contract an annual payment of (Pounds)300,000 ($498,840) is payable by the BBC for additional broadcast-related services. At the BBC's request, since October 1997, the number of television broadcast hours has been increased to 24 hours per day for the BBC's two national television services, which has added over (Pounds)500,000 ($831,400) annually to the payments made by the BBC to us. The BBC analog transmission contract also provides for CTI to be liable to the BBC for "service credits" (i.e., rebates of its charges) in the event that certain standards of service are not attained as a result of what the contract characterizes as "accountable faults" or the failure to meet certain "response times" in relation to making repairs at certain key sites. We believe that CTI is well-equipped to meet the BBC's service requirements by reason of the collective experience its existing management gained while working with the BBC. Following completion of three formal six-month performance reviews, CTI achieved a 100% "clean sheet" performance, incurring no service credit penalties. The initial term of the BBC analog transmission contract ends on March 31, 2007. Thereafter, the BBC analog transmission contract may be terminated with 12 months' prior notice by either of the parties, expiring on March 31 in any contract year, from and including March 31, 2007. It may also be terminated earlier: (1) by mutual agreement between CTI and the BBC, (2) by one party upon the bankruptcy or insolvency of the other party within the meaning of section 123 of the Insolvency Act 1986, (3) upon certain force majeure events with respect to the contract as a whole or with respect to any site (in which case the termination will relate to that site only), 86
(4) by the non-defaulting party upon a material breach by the other party and (5) upon the occurrence of certain change of control events. BBC Commitment Agreement On February 28, 1997, in connection with the acquisition of the BBC home service transmission business, we, TdF, TeleDiffusion de France S.A., which is the parent company of TdF and DFI ("TdF Parent"), and the BBC entered into the BBC commitment agreement, whereby we and TdF agreed (1) not to dispose of any shares in CTSH or any interest in such shares (or enter into any agreement to do so) until February 28, 2000; and (2) to maintain various minimum indirect ownership interests in CTI and CTSH for periods ranging from three to five years commencing February 28, 1997. These provisions restrict our ability and the ability of TdF to sell, transfer or otherwise dispose of their respective CTSH shares (and, indirectly, their CTI shares). The restrictions do not apply to disposals of which the BBC has been notified in advance and to which the BBC has given its prior written consent, which, subject to certain exceptions, consent shall not be unreasonably withheld or delayed. The BBC commitment agreement also required TdF Parent and us to enter into a services agreements with CTI. The original services agreement entered into by TdF Parent and CTI on February 28, 1997 (pursuant to which TdF makes available certain technical consultants, executives and engineers to CTI) was amended on August 21, 1998 to extend the original minimum term of services provided from three years to seven years, commencing February 28, 1997, thereafter terminable on 12-month's prior notice given by CTI to TdF after February 28, 2003. See "The Roll-Up--Roll-Up Arrangements--CTI Series Agreement". ONdigital Digital Transmission Contract In 1997, the Independent Television Commission awarded ONdigital three of the five available commercial digital terrestrial television multiplexes for new program services. We bid for and won the 12 year contract from ONdigital to build and operate its digital television transmission network. The contract provides for approximately (Pounds)20.0 million ($34.0 million) of revenue per year from 2001 to 2008, with lesser amounts payable before and after these years and with service credits repayable for performance below agreed thresholds. BBC Digital Transmission Contract In 1998, we bid for and won the 12 year contract from the BBC to build and operate its digital terrestrial television transmission network. This contract provides for approximately (Pounds)10.5 million ($17.8 million) of revenue per year (assuming the BBC commits to the full digital terrestrial television roll- out contemplated by the BBC digital transmission contract) during the 12 year period, with service credits repayable for performance below agreed thresholds. There is a termination provision during the three-month period following the fifth anniversary of our commencement of digital terrestrial transmission services for the BBC exercisable by the BBC but only if the BBC's Board of Governors determines, in its sole discretion, that digital television in the United Kingdom does not have sufficient viewership to justify continued digital television broadcasts. Under this provision, the BBC will pay us a termination fee in cash that substantially recovers our capital investment in the network, and any residual ongoing operating costs and liabilities. Like the BBC analog transmission contract, the contract is terminable upon the occurrence of certain change of control events. BT Digital Distribution Contract Under the BBC digital transmission contract and the ONdigital digital transmission contract, in addition to providing digital terrestrial transmission services, CTI has agreed to provide for the distribution of the BBC's and ONdigital's broadcast signals from their respective television studios to 87
CTI's transmission network. Consequently, in May 1998, CTI entered into a 12 year distribution contract with British Telecommunications plc (with provisions for extending the term), in which British Telecom has agreed to provide fully duplicated, fiber-based, digital distribution services, with penalties for late delivery and service credits for failure to deliver 99.99% availability. Site-Sharing Agreement In order to optimize service coverage and enable viewers to receive all analog UHF television services using one receiving antenna, the BBC, as the predecessor to CTI, and NTL made arrangements to share all UHF television sites. This arrangement was introduced in the 1960s when UHF television broadcasting began in the United Kingdom. In addition to service coverage advantages, the arrangement also minimizes costs and avoids the difficulties of obtaining additional sites. Under the site-sharing agreement, the party that is the owner, lessee or licensee of each site is defined as the "station owner". The other party, the sharer, is entitled to request a license to use certain facilities at that site. The site-sharing agreement and each site license provide for the station owner to be paid a commercial license fee in accordance with the site-sharing agreement ratecard and for the sharer to be responsible, in normal circumstances, for the costs of accommodation and equipment used exclusively by it. The site-sharing agreement may be terminated with five years' prior notice by either of the parties and expires on December 31, 2005 or on any tenth anniversary of that date. It may also be terminated (1) following a material breach by either party which, if remediable, is not remedied within 30 days of notice of such breach by the non-breaching party, (2) on the bankruptcy or insolvency of either party and (3) if either party ceases to carry on a broadcast transmission business or function. Negotiations are in progress between NTL and us to amend the site-sharing agreement to account for the build-out of digital transmission sites and equipment, a new rate card related to site sharing fees for new digital facilities and revised operating and maintenance procedures related to digital equipment. Vodafone On April 16, 1998, under Vodafone's master lease agreement with us, Vodafone agreed to locate antennas on 122 of our existing communication sites in the United Kingdom. The first 39 sites had been completed by the end of December 1998. This included 4 sites at which a new tower had been constructed to replace an existing structure of limited capacity. The remaining sites are expected to be completed by end of July 1999 and will include the construction of a further 60 replacement towers. After their upgrade, these sites will be able to accommodate additional tenants. Customers For the twelve months ended December 31, 1998, the BBC accounted for approximately 60.6% of CTI's consolidated revenues. This percentage has decreased from 64.6% for the twelve months ended March 31, 1998 and is expected to continue to decline as CTI continues to expand its site rental business. CTI provides all four U.K. PCN/cellular operators (Cellnet, One2One, Orange and Vodafone) with infrastructure services and also provides fixed telecommunications operators, such as BT, Cable & Wireless Communications, Energis and Scottish Telecom, with microwave links and backhaul infrastructure. The following is a list of some of CTI's leading site rental customers by industry segment. 88
Industry Selected Customers -------- ------------------ Broadcasting............ BBC, NTL, Virgin Radio, Talk Radio, XFM PMR/TETRA............... National Band 3, Dolphin PCN..................... Orange, One2One Data.................... RAM Mobile Data, Cognito Paging.................. Hutchinson, Page One Governmental Agencies... Ministry of Defense Cellular................ Vodafone, Cellnet Public Telecommunications..... British Telecom, Cable & Wireless Communications Other................... Aerial Sites, Health Authorities Utilities............... Welsh Water, Southern Electric Sales and Marketing We have 20 sales and marketing personnel in the United Kingdom who identify new revenue-generating opportunities, develop and maintain key account relationships, and tailor service offering to meet the needs of specific customers. An excellent relationship has been maintained with the BBC, and successful new relationships have been developed with many of the major broadcast and wireless carriers in the United Kingdom. We have begun to actively cross-sell our products and services so that, for example, site rental customers are also offered build-to-suit services. Competition NTL, the privatized engineering division of the IBA and now a subsidiary of NTL Inc. (formerly International CableTel Inc.), is CTI's primary competition in the terrestrial broadcast transmission market in the United Kingdom. NTL provides analog transmission services to ITV, Channels 4 and 5, and S4C. It also has been awarded the transmission contract for the new DTT multiplex service from Digital 3 & 4 Limited, and a similar contract for the DTT service for SDN (CTI has been awarded similar contracts for the BBC and ONdigital-- serving a total of four multiplexes compared with NTL's two). Since its creation in 1991, NTL has diversified from its core television broadcasting business using its transmission infrastructure to enter into the radio transmission and telecommunications sectors. Although CTI and NTL are direct competitors, they have reciprocal rights to the use of each others' sites for broadcast transmission usage in order to enable each of them to achieve the necessary country-wide coverage. This relationship is formalized by the site-sharing agreement entered into in 1991, the time at which NTL was privatized. NTL also offers site rental on approximately 1,000 of its sites (some of which are managed on behalf of third parties). Like CTI, NTL offers a full range of site-related services to its customers, including installation and maintenance. CTI believes its towers to be at least as well situated as NTL's and that it will be able to expand its own third-party site-sharing penetration. CTI also believes that its penetration of this market has to date lagged behind NTL only because of the governmental restrictions on the commercial activities of CTI's business prior to its privatization. All four U.K. mobile operators own site infrastructure and lease space to other users. Their openness to sharing with direct competitors varies by operator. Cellnet and Vodafone have agreed to cut site costs by jointly developing and acquiring sites in the Scottish Highlands. BT and Cable & Wireless Communications are both major site sharing customers but also compete by leasing their own sites to third parties. British Telecom's position in the market is even larger when considered in combination with its interest in Cellnet. Several other companies compete in the market for site rental. These include British Gas, Racal Network Systems, Aerial Sites Plc, Relcom Aerial Services and the Royal Automobile Club. Some companies own sites initially developed for their own networks, while others are developing sites specifically to exploit this market. 89
CTI faces competition from a large number of companies in the provision of network services. The companies include NTL, specialty consultants and equipment manufacturers such as Nortel and Ericsson. Properties In the United States, our interests in our tower sites are comprised of a variety of fee interests, leasehold interests created by long-term lease agreements, private easements and easements, licenses or rights-of-way granted by government entities. In rural areas, a tower site typically consists of a three- to five-acre tract, which supports towers, equipment shelters and guy wires to stabilize the structure. Less then 3,000 square feet are required for a self-supporting tower structure of the kind typically used in metropolitan areas. Our land leases generally have five- or ten-year terms and frequently contain one or more renewal options. Some land leases provide "trade-out" arrangements whereby we allow the landlord to use tower space in lieu of paying all or part of the land rent. As of December 31, 1998, we had approximately 384 land leases. Pursuant to the senior credit facility, our senior lenders have liens on a substantial number of our land leases and other property interests in the United States. In the United Kingdom, tower sites range from less than 400 square feet for a small rural TV booster station to over 50 acres for a high-power radio station. As in the United States, the site accommodates the towers, equipment buildings or cabins and, where necessary, guy wires to support the structure. Land is either owned freehold, which is usual for the larger sites, or is held on long- term leases that generally have terms of 21 years or more. Legal Proceedings We are occasionally involved in legal proceedings that arise in the ordinary course of business. Most of these proceedings are appeals by landowners of zoning and variance approvals of local zoning boards. While the outcome of these proceedings cannot be predicted with certainty, management does not expect any pending matters to have a material adverse effect on our financial condition or results of operations. We are currently in discussions with the Department of Labor to settle an investigation it has conducted into employment practices put into place prior to our acquisition of Crown Communication. Upon notification by the Department of Labor of its investigation, the practices were ceased. We anticipate the settlement to be approximately $200,000. Employees At March 1, 1999, we employed 928 people worldwide. Other than in the United Kingdom, we are not a party to any collective bargaining agreements. In the United Kingdom, we are party to a collective bargaining agreement with the Broadcast, Entertainment, Cinematographic and Technicians Union. This agreement establishes bargaining procedures relating to the terms and conditions of employment for all of CTI's non-management staff. We have not experienced any strikes or work stoppages, and management believes that our employee relations are satisfactory. Regulatory Matters United States Federal Regulations. Both the FCC and FAA regulate towers used for wireless communications transmitters and receivers. Such regulations control the siting and marking of towers and may, depending on the characteristics of particular towers, require registration of tower facilities. Wireless communications devices operating on towers are separately regulated and independently licensed based upon the particular frequency used. 90
The FCC, in conjunction with the FAA, has developed standards to consider proposals for new or modified antenna structures. These standards mandate that the FCC and the FAA consider the height of proposed antenna structures, the relationship of the structure to existing natural or man-made obstructions and the proximity of the antenna structures to runways and airports. Proposals to construct or to modify existing antenna structures above certain heights are reviewed by the FAA to ensure the structure will not present a hazard to aviation. The FAA may condition its issuance of a no-hazard determination upon compliance with specified lighting and/or marking requirements. The FCC will not license the operation of wireless telecommunications devices on towers unless the tower is in compliance with the FAA's rules and is registered with the FCC, if necessary. The FCC will not register a tower unless it has been cleared by the FAA. The FCC may also enforce special lighting and painting requirements. Owners of wireless transmissions towers may have an obligation to maintain painting and lighting to conform to FAA and FCC standards. Tower owners may also bear the responsibility of notifying the FAA of any tower lighting outage. The Company generally indemnifies its customers against any failure to comply with applicable regulatory standards. Failure to comply with the applicable requirements may lead to civil penalties. The 1996 Telecom Act limits certain state and local zoning authorities' jurisdiction over the construction, modification and placement of towers. The new law prohibits any action that would (1) discriminate between different providers of personal wireless services or (2) prohibit or have the effect of prohibiting the provision of personal wireless service. Finally, the 1996 Telecom Act requires the federal government to help licensees for wireless communications services gain access to preferred sites for their facilities. This may require that federal agencies and departments work directly with licensees to make federal property available for tower facilities. Local Regulations. Local regulations include city and other local ordinances, zoning restrictions and restrictive covenants imposed by community developers. These regulations vary greatly, but typically require tower owners to obtain approval from local officials or community standards organizations prior to tower construction. Local zoning authorities generally have been hostile to construction of new transmission towers in their communities because of the height and visibility of the towers. Licenses Under the Communications Act of 1934. We hold, through certain of our subsidiaries, licenses for radio transmission facilities granted by the FCC, including licenses for common carrier microwave and commercial mobile radio services, including SMR and paging facilities, as well as private mobile radio services including industrial/business radio facilities, which are subject to additional regulation by the FCC. We are required to obtain the FCC's approval prior to the transfer of control of any of our FCC licenses. Consummation of the IPO and the Roll-Up would have resulted in a transfer of control of us under the FCC's rules and policies if, after such transactions, over 50% of our voting stock would have been owned by new stockholders. We, as the parent company of the licensees of common carrier and commercial mobile radio services facilities, are also subject to Section 310(b)(4) of the Communications Act of 1934, as amended, which would limit us to a maximum of 25% foreign ownership absent a ruling from the FCC that foreign ownership in excess of 25% is in the public interest. In light of the World Trade Organization Agreement on Basic Telecommunications Services, which took effect on February 5, 1998, the FCC has determined that such investments are generally in the public interest if made by individuals and entities from WTO-member nations. We are over 25% foreign owned by companies headquartered in France, the United Kingdom and New Zealand. See "Principal and Selling Stockholders". Each of these nations is a signatory to the WTO agreement. The FCC has granted approval of up to 49.9% foreign ownership of us, at least 25% of which will be from WTO-member nations. 91
United Kingdom Telecommunications systems and equipment used for the transmission of signals over radio frequencies have to be licensed in the United Kingdom. These licenses are issued on behalf of the British Government by the Secretary of State for Trade and Industry under the Telecommunications Act 1984 and the Wireless Telegraphy Acts 1949, 1968 and 1998. CTI has a number of such licenses under which it runs the telecommunications distribution and transmission systems which are necessary for the provision of its transmission services. CTI's operations are subject to comprehensive regulation under the laws of the United Kingdom. Licenses under the Telecommunications Act 1984 CTI has the following three licenses under the Telecommunications Act 1984: Transmission License. The transmission license is a renewable license to run telecommunications systems for the transmission via wireless telegraphy of broadcasting services. This license is for a period of at least twenty-five years from January 23, 1997, and is CTI's principal license. Its main provisions include: (1) a price control condition covering the provision of all analog radio and television transmission services to the BBC under the BBC analog transmission agreement (for an initial price of approximately (Pounds)44 million for regulated elements of the services provided by CTI under the BBC analog transmission agreement in the year ended March 31, 1997, subject to an increase cap which is 1% below the rate of increase in the Retail Price Index over the previous calendar year). The current price control condition applies until March 31, 2006; (2) a change of control provision which requires notification of acquisitions of interest in CTI of more than 20% by a public telecommunications operator or any Channel 3 or Channel 5 licensee, which acquisitions entitle the Secretary of State to revoke the license; (3) a site sharing requirement requiring CTI to provide space on its towers to analog and digital broadcast transmission operators and including a power for OFTEL, as the regulator, to determine prices if there is failure between the site owner and the prospective site sharer to agree to a price; (4) a fair trading provision enabling OFTEL to act against anti- competitive behavior by the licensee; and (5) a prohibition on undue preference or discrimination in the provision of the services it is required to provide third parties under the transmission license. OFTEL has made a determination with respect to a complaint made by Classic FM and NTL in respect of certain charges, imposed previously by the BBC under the site-sharing agreement with NTL for the use by Classic FM of BBC radio antennas and passed on to Classic FM by NTL. OFTEL's position is that the site-sharing agreement did not cover charges for new services to customers such as Classic FM, thereby enabling OFTEL to intervene and determine the appropriate rate under the "applicable rate" mechanism in CTI's transmission license. This procedure could result in the fees NTL pays to CTI for site sharing facilities for Classic FM, currently calculated under the site-sharing agreement, being determined at a reduced rate and otherwise not being covered by the terms of any existing contract which could lead to a diminution of CTI's income of approximately (Pounds)300,000 per annum (equivalent to approximately 0.4% of revenues and 1.0% of EBITDA for the fiscal year ended March 31, 1997). CTI has applied for leave to obtain a judicial review of this decision. In addition, CTI has made a provision of approximately (Pounds)1.9 million relating to any rate adjustment imposed by OFTEL with respect to previous charges for Classic FM under the site-sharing agreement. 92
CTI is discussing with OFTEL certain amendments to CTI's Telecommunications Act transmission license to ensure that the price control condition accommodates the provision by CTI of additional contractually agreed upon services to the BBC in return for additional agreed upon payments. See "Risk Factors--We Are Subject to Extensive Regulations Which Could Change at Any Time and Which We Could Fail to Comply With ". The Secretary of State has designated the transmission license a public telecommunications operator license in order to reserve to himself certain emergency powers for the protection of national security. This designation is, however, limited to this objective. CTI does not have a full domestic public telecommunications operator license and does not require one for its current activities. The Department of Trade and Industry has, nevertheless, indicated that it would be willing to issue CTI such a license. As a result CTI would gain wider powers to provide services to third parties including public switched voice telephony and satellite uplink and would grant CTI powers to build out its network over public property (so-called "code powers"). General Telecom License. The general telecom license is a general license to run telecommunications systems and authorizes CTI to run all the necessary telecommunications systems to convey messages to its transmitter sites (e.g., via leased circuits or using its own microwave links). The license does not cover the provision of public switched telephony networks (which would require a public telecommunications operator license as described above). Satellite License. The satellite license is a license to run telecommunications systems for the provision of satellite telecommunication services and allows the conveyance via satellite of messages, including data and radio broadcasting. The license excludes television broadcasting direct to the home via satellite although distribution via satellite of television broadcasting services which are to be transmitted terrestrially is permitted. Licenses under the Wireless Telegraphy Acts 1949, 1968 and 1998 CTI has a number of licenses under the Wireless Telegraphy Acts 1949, 1968 and 1998, authorizing the use of radio equipment for the provision of certain services over allocated radio frequencies including: (i) a broadcasting services license in relation to the transmission services provided to the BBC, Virgin Radio and Talk Radio; (ii) a fixed point-to-point radio links license; (iii) two DAB test and development licenses; and (iv) digital terrestrial television test and development licenses. All the existing licenses under the Wireless Telegraphy Acts 1949, 1968 and 1998 have to be renewed annually with the payment of a significant fee. The BBC, Virgin Radio and Talk Radio have each contracted to pay their portion of these fees. ONdigital is obligated under the ONdigital digital transmission contract to pay most of their portion of these fees. Environmental Matters Our operations are subject to foreign, federal, state and local laws and regulations relating to the management, use, storage, disposal, emission, and remediation of, and exposure to, hazardous and nonhazardous substances, materials and wastes. As an owner and operator of real property, we are subject to certain environmental laws that impose strict, joint and several liability for the cleanup of on-site or off-site contamination relating to existing or historical operations, and also could be subject to personal injury or property damage claims relating to such contamination. We are potentially subject to cleanup liabilities in both the United States and the United Kingdom. 93
We are also subject to regulations and guidelines that impose a variety of operational requirements relating to radio frequency emissions. The potential connection between radio frequency emissions and certain negative health effects, including some forms of cancer, has been the subject of substantial study by the scientific community in recent years. To date, the results of these studies have been inconclusive. Although we have not been subject to any claims relating to radio frequency emissions, we have established operating procedures designed to reduce employee exposures to radio frequency emissions and are presently evaluating certain of our towers and transmission equipment in the United States and the United Kingdom to determine whether radio frequency emission reductions are possible. In addition, we are subject to licensing, registration and related requirements concerning tower siting, construction and operation. In the United States, the FCC's decision to license a proposed tower may be subject to environmental review pursuant to the National Environmental Policy Act of 1969, which requires federal agencies to evaluate the environmental impacts of their decisions under certain circumstances. The FCC regulations implementing the Act place responsibility on each applicant to investigate any potential environmental effects of a proposed operation and to disclose any significant effects on the environment in an environmental assessment prior to commencing construction. In the event the FCC determines that a proposed tower would have a significant environmental impact, the FCC would be required to prepare an environmental impact statement. This process could significantly delay or prevent the registration or construction of a particular tower, or make tower construction more costly. In certain jurisdictions, local laws or regulations may impose similar requirements. We believe that we are in substantial compliance with all applicable environmental laws. Nevertheless, there can be no assurance that the costs of compliance with existing or future environmental laws will not have a material adverse effect on our business, results of operations, or financial condition. 94
THE 1999 TRANSACTIONS Bell Atlantic Joint Venture On March 31, 1999, Bell Atlantic Mobile, certain of its affiliates, CCIC and CCA Investment Corp., our wholly owned indirect subsidiary ("CCAIC"), formed a joint venture to own and operate a significant majority of Bell Atlantic's towers. We own approximately 61.5% of the joint venture and Bell Atlantic and certain of its affiliates own the remaining 38.5% along with a 0.001% interest in the joint venture's operating subsidiary. For financial reporting purposes, we intend to consolidate the joint venture's results of operations and financial condition with our own. We manage the day-to-day operations of the joint venture. The joint venture will actively seek to add additional tenants to its towers in order to increase its revenues. The joint venture will also construct and own new towers that are needed by Bell Atlantic's wireless communications business. In addition, the joint venture will have the right to pursue the next 300 non-BAM new tower builds that we identify in the territories in which the joint venture will operate. See "--Build-to-Suit Agreement" and "--Global Lease". The joint venture will have regional offices that will be staffed primarily with our employees to perform marketing, billing, operations and maintenance functions. The following descriptions of the agreements related to the joint venture are summaries of the material portions of those agreements. These descriptions are qualified in their entirety by reference to the complete texts of the agreements, each of which is available as set forth under the heading "Available Information". Formation Agreement Formation of the Joint Venture. Pursuant to the formation agreement, CCAIC contributed $250.0 million in cash and approximately 15.6 million shares of our common stock (valued at $197.0 million) to the joint venture. Bell Atlantic and its affiliates transferred approximately 1,459 (56 of which are under construction) towers along with related assets and liabilities to the joint venture. The joint venture borrowed $180.0 million under a committed $250.0 million revolving credit facility and made a $380.0 million cash distribution to Bell Atlantic. Concurrently with the formation of the joint venture, Bell Atlantic and the joint venture entered into a master build-to-suit agreement, a global lease and a transitional services agreement and we entered into a services agreement with the joint venture. Terms and Conditions. In connection with its contribution of assets and liabilities to the joint venture, Bell Atlantic made certain representations and warranties to the joint venture concerning the contributed assets and liabilities. In general, the joint venture will have until June 30, 2000 to raise any claims for indemnification for breaches of the representations and warranties by Bell Atlantic. However, Bell Atlantic's indemnification obligations are subject to a number of significant limitations including a per occurrence deductible of $25,000, an aggregate deductible of $7.5 million and an absolute cap of $195.0 million. Build-to-Suit Agreement In connection with the formation of the joint venture, Bell Atlantic and the joint venture entered into the build-to-suit agreement. Pursuant to the build- to-suit agreement and subject to certain conditions, Bell Atlantic and the joint venture agreed that (1) the next 500 towers to be built for Bell Atlantic's wireless communications business will be constructed and owned by the joint venture and (2) immediately thereafter the joint venture will have a right of first refusal to construct the next 200 additional towers to be built for Bell Atlantic. Bell Atlantic is required to submit these 700 site proposals to the joint venture during the five-year period following the formation of the joint venture; 95
however, the five-year period will be extended for additional one-year periods, until 700 site proposals are submitted to the joint venture. The joint venture will be required to build towers in the general vicinity of the locations proposed by Bell Atlantic. Upon completion of a tower, it will become subject to the global lease (as discussed below). Space not leased by Bell Atlantic or its affiliates on each tower is available for lease by the joint venture to third parties. The build-to-suit agreement sets out various time periods for Bell Atlantic to identify its tower needs within certain search areas, and for the joint venture to locate sites and to thereafter complete site acquisition and development work, including permitting and construction. Global Lease In connection with the formation of the joint venture, Bell Atlantic and the joint venture will enter into the global lease. All of the 1,459 towers acquired by the joint venture from Bell Atlantic and its affiliates, and all towers constructed by the joint venture pursuant to the build-to-suit agreement, will be governed by the global lease. The average monthly rent paid by Bell Atlantic on each of the 1,459 towers contributed to the joint venture by Bell Atlantic will be approximately $1,850. Minimum monthly rents on the towers built pursuant to the build-to-suit agreement will range from $1,250 to $1,833 depending on the region in which the tower is located. These rents may increase based on the amount of Bell Atlantic's equipment to be installed at a site. Rents are subject to annual increase based on the consumer price index, subject to certain adjustments. For all sites, the initial lease term is ten years. Bell Atlantic has the right to extend any lease for three additional five-year terms and one additional term of four years and eleven months. Each lease will automatically renew for an option term unless Bell Atlantic notifies the joint venture at least six months before the then current term expires. Space not leased by Bell Atlantic or its affiliates on each tower is available for lease by the joint venture to third parties. Operating Agreements In connection with the formation of the joint venture, Bell Atlantic and CCAIC entered into limited liability company operating agreements that establish and govern the limited liability companies comprising the joint venture. Governance. The business and affairs of the joint venture will be managed by its managers under the supervision of a board of representatives. Each manager will be selected by CCAIC. Members of the board of representatives will be selected by each of Bell Atlantic and CCAIC in proportion to their ownership interests in the joint venture. The board of representatives initially will have six members, with two selected by Bell Atlantic and four selected by CCAIC. So long as Bell Atlantic maintains at least a 5.0% interest in the joint venture, it will maintain the right to designate at least one member of the board of representatives. The managers will operate the joint venture on a day-to-day basis. In general, the managers will have the power and authority to take all necessary or appropriate actions to conduct the joint venture's business in accordance with its then current business plan. Actions requiring the approval of the board of representatives generally will be authorized upon the affirmative vote of a majority of the members of the board of representatives. However, the following actions will require the mutual consent of Bell Atlantic and CCAIC, either by written consent or by the approval of representatives of each of Bell Atlantic and CCAIC at a meeting of the board of representatives: . engaging in any business other than owning, acquiring, constructing, leasing and operating communications towers in the United States; . taking any voluntary action that would cause the joint venture to be insolvent or voluntarily entering into a bankruptcy proceeding; 96
. incurring any debt other than the joint venture's credit facility and ordinary course trade payables; . incurring any liens; . issuing any additional equity interests in the joint venture; . becoming liable with respect to contingent obligations such as guarantees or the obligation to make take-or-pay or similar payments; . failing to preserve the joint venture's existence under Delaware law or its qualification to do business in each jurisdiction in which such qualification is necessary or desirable; . mergers or consolidations; . sales of assets outside the ordinary course; . entry into contracts with affiliates except in the ordinary course and on an arm's-length basis; . any dividends or distributions; provided, if the joint venture has been dissolved and the joint venture's credit facility has been repaid in full, Bell Atlantic's consent will not be required; . the determination of the methodology to be used in calculating payments under the management agreement and the services agreement pursuant to which we will manage and provide services to the joint venture; . approval of the business plan; . entry into contracts that (1) restrict the business activities of the joint venture in any geographic area, (2) contain exclusivity provisions, (3) are inconsistent with any of the agreements entered into in connection with the formation of the joint venture or (4) provide for the purchase or sale of goods or services involving an amount in excess of $10.0 million per year; and . exercising any voting rights with respect to the shares of our common stock held by the joint venture; provided, if Bell Atlantic and CCAIC do not agree as to how the shares should be voted, the shares will be voted pro rata with all shares of our common stock voted on the matter. Restrictions on Transfers of Interests; Rights of First Refusal; Tag-Along Rights. Except for transfers to wholly owned affiliates, neither Bell Atlantic nor CCAIC may transfer its interest in the joint venture to a third party unless it first offers its interest to the other on terms and conditions, including price, no less favorable than the terms and conditions on which it proposes to sell its interest to the third party. In addition, if Bell Atlantic or CCAIC wishes to transfer its interest in the joint venture to a third party, the other party will have the right to require the third party, as a condition to the sale, to purchase a pro rata portion of its interest in the joint venture on the same terms and conditions, including price. Bell Atlantic may only transfer its 0.001% interest in the operating subsidiary of the joint venture to its wholly owned affiliates or in connection with a merger or consolidation transaction to which Bell Atlantic or Bell Atlantic Corporation is a party. Dissolution of the Joint Venture. We have agreed with Bell Atlantic that upon a dissolution of the joint venture, in satisfaction of our respective interests in the joint venture, we would receive all the assets and liabilities of the joint venture other than the approximately 15.6 million shares of our common stock held by the joint venture and Bell Atlantic would receive all of the shares of our common stock held by the joint venture and a payment from us, equal to 14.0% of the fair market value of the assets and liabilities of the joint venture (other than our common stock), to be made in cash or our common stock (at our election). In certain limited circumstances, we may elect to participate in an increased value on the shares of our common stock held by the joint venture. Bell Atlantic would continue to retain its 0.001% interest in the joint venture's operating subsidiary. For so 97
long as it retains such interest, the operations formerly included in the joint venture would remain subject to the operating restrictions set forth under "-- Governance". A dissolution of the joint venture may be triggered (1) by Bell Atlantic at any time following the third anniversary of the formation of the joint venture and (2) by us at any time following the fourth anniversary of its formation; however, if we trigger the dissolution prior to the seventh anniversary, we may be required to make additional cash payments to Bell Atlantic. Transitional Services Agreement; Services Agreement In connection with the formation of the joint venture, Bell Atlantic and the joint venture entered into a transitional services agreement pursuant to which Bell Atlantic will provide the joint venture with services necessary to ensure a smooth transition of the business to the joint venture. In addition, we and the joint venture entered into a services agreement pursuant to which we will provide the joint venture with certain services. Proposed BellSouth Transaction On March 5, 1999, we entered into a preliminary agreement, the letter agreement, with BellSouth Mobility Inc., BellSouth Telecommunications Inc. and certain of its affiliates. Subject to approval by BellSouth's Board of Directors, the letter agreement sets forth the terms of our agreement under which BellSouth will sell to us, in a taxable sale pursuant to a master sublease agreement, their 1,850 wireless communications towers for $610.0 million, consisting of $430.0 million in cash and approximately 9.1 million shares of our common stock (valued at $180.0 million), subject to adjustments. The aggregate consideration will be subject to increase if BellSouth transfers more than 1,850 towers to us in connection with the transaction. We will be responsible for managing, maintaining and leasing the available space on BellSouth's wireless communications towers located throughout Indiana, Kentucky, Louisiana, Mississippi, Alabama, Arkansas, Florida, Georgia and Tennessee. While we will have complete responsibility for the towers, and their monitoring and maintenance, BellSouth will continue to fully own its communications components including switching equipment, shelters and cell site facilities. BellSouth will pay a fee of $1,200 per month per site to us for its services on existing and build-to-suit towers. The transaction is expected to close in a series of closings, beginning in the second quarter of 1999, and is expected to be fully closed no later than eight months thereafter. In connection with our entering into the letter agreement we have placed $50.0 million in an escrow account which will be returned to us at the first stage of the multi-stage closing. There can be no assurance, however, that the proposed BellSouth transaction will be consummated on the terms described in this document or at all. See "Risk Factors--We May Not Consummate the 1999 Transactions." The following description of the agreements related to the proposed BellSouth transaction are summaries of the material portions of those agreements. These descriptions are qualified in their entirety by reference to the complete text of the agreements, each of which is available as set forth under the heading "Available Information". Letter Agreement General. Pursuant to the letter agreement, a newly formed subsidiary of ours, that we call Crown Castle South Inc. ("CCSI"), will receive rights to lease, sublease, design, develop, contract, operate, market and manage approximately 1,850 tower sites owned by BellSouth Mobility Inc., BellSouth Telecommunications Inc. and certain of BellSouth's affiliates, or to be constructed on behalf of BellSouth, in Indiana, Kentucky, Louisiana, Mississippi, Alabama, Arkansas, Florida, Georgia and Tennessee, which we call the territory, in exchange for aggregate consideration of $610.0 million, consisting of $430.0 million in cash and approximately 9.1 million shares of our common stock (valued at $180.0 million), subject to adjustments. 98
The terms and conditions of the sublease of the 1,850 sites by BellSouth to CCSI are set forth in an agreement, which we call the Sublease, to be entered into between BellSouth and CCSI and us. Further, we have agreed to enter into a site management agreement, pursuant to which we will agree to provide certain management services on sites which are not part of the 1,850 towers contemplated by the Sublease, because of restrictions on transfer, and which will be designated by BellSouth. The letter agreement further contemplates a build-to-suit agreement to be entered into by BellSouth and CCSI pursuant to which CCSI will develop and construct at least 500 towers in the territory over a period of five years, which period will be extended for an additional two- year period in the event CCSI has not completed at least 500 tower builds within the initial five-year time period. The letter agreement provides that the transaction will require further documentation including the preparation, acceptance and delivery of a definitive agreement to sublease, which we call the Agreement to Sublease, the terms of which have not yet been fully negotiated. Consideration. Pursuant to the letter agreement, we will pay to BellSouth the sum of $324,324.32 for each site leased or subleased to CCSI pursuant to the Sublease. In the event that subleases covering the full 1,850 towers are transferred to CCSI as contemplated by the letter agreement, the aggregate consideration payable to BellSouth will consist of $430.0 million in cash and $180.0 million in our common stock; provided, however, that we will retain the option to increase the cash portion of the aggregate consideration by up to $30.0 million and decrease the equity portion to not less than $150.0 million. Such option must be exercised by us prior to the first closing. The number of shares of our common stock included in the consideration will be approximately 9.1 million shares and was determined using the average closing price of our common stock on the 30 trading days immediately preceding March 5, 1999, which we call the initial share price. While the letter agreement contemplates the sublease by BellSouth of approximately 1,850 sites to CCSI, in the event that additional sites are subleased to CCSI, the consideration paid for the next 250 sites will be payable in cash only. If CCSI subleases more than 2,100 sites from BellSouth in connection with the Sublease, consideration for any additional towers will be payable in shares of our common stock. The letter agreement further provides that if the average closing price of our common stock during the 30 day period immediately preceding the first anniversary of the final closing which we call the subsequent share price is less than the initial share price, then we will, at our option, (1) pay BellSouth cash in an amount, which we call the make-up amount, equal to (x) the difference between the initial share price and the subsequent share price multiplied by (y) the number of shares issued as part of the consideration less (z) the gross proceeds from all sales of such shares prior to the first anniversary of the final closing or (2) issue to BellSouth the number of shares of our common stock equal to the make-up amount divided by the subsequent share price; in each case not to exceed $50.0 million in cash or $75.0 million in common stock. Pursuant to the letter agreement, the consideration will be subject to adjustment based on the amount we are required to pay in calendar year 1999 for ground rent on sites contemplated by the letter agreement. If a post-closing audit demonstrates that the amount we are required to pay, in aggregate, for such ground rents exceeds $11.4 million, BellSouth will be required to pay to CCSI an amount equal to a certain multiple of the amount by which the rents exceed $11.4 million, not to exceed $45.0 million. Escrow Payment. In connection with the signing of the letter agreement, we deposited the amount of $50.0 million into an escrow account. Upon approval of the proposed BellSouth transaction by BellSouth's Board of Directors, BellSouth will be entitled to receive the escrow payment in full in the event that: . we and BellSouth fail to execute the Agreement to Sublease within 90 days of the date of the letter agreement (and BellSouth has negotiated the operative documents in good faith) or 99
. the Agreement to Sublease is executed but the initial closing fails to occur as a result of any breach of the Agreement to Sublease by us or CCSI or any failure of us or CCSI to satisfy the closing conditions set forth in the Agreement to Sublease. Upon consummation of the first closing, the escrow payment will be returned to us. Further, if BellSouth's Board of Directors fails to approve the proposed BellSouth transaction within the applicable time period, the escrow payment will be returned to us. BellSouth has agreed to seek the approval of its Board of Directors as soon as practicable, but no later than April 26, 1999. In the event that BellSouth's Board of Directors does not approve the proposed BellSouth transaction within 90 days of the letter agreement, and if at any time within one year following expiration or termination of the letter agreement BellSouth transfers, sells, assigns, leases, subleases or otherwise disposes of all or substantially all of the tower assets contemplated by the letter agreement, BellSouth will be required to pay to us an amount equal to the greater of (1) $15.0 million or (2) one-half of the amount by which the total consideration received by BellSouth pursuant to such transfer, sale, assignment, lease or sublease exceeds the total consideration that would have been paid to BellSouth by us pursuant to the letter agreement. Closings. In connection with the letter agreement, we and BellSouth have agreed that the sublease of the sites pursuant to the Sublease will be consummated in a series of closings not to exceed a period of eight months and will include a minimum number of sites to be included in each closing, the first of which is expected to take place on May 31, 1999. BellSouth has agreed to use all commercially reasonable efforts to sublease approximately 250 sites at each closing, grouped so as to be located in contiguous regions, until all sites have been subleased prior to or at the final closing. The sites to be included on the initial closing date will be located in Kentucky and Indiana. Termination Right. The letter agreement provides that in the event that any one of the closings contemplated by the proposed BellSouth transaction is not consummated due to our or CCSI's failure to comply with all conditions, covenants and representations required of them, in addition to any other remedies BellSouth may have at equity or law, BellSouth will have the right to require us to pay to BellSouth a termination fee of $50.0 million to terminate all agreements between the parties, and at BellSouth's option, to rescind all prior closings. If BellSouth elects to rescind the prior closings, payment of the termination fee shall be made by netting it against the amounts previously paid to BellSouth at the previous closings, and BellSouth shall return to us any amount which is in excess of the termination fee. Sublease Pursuant to the letter agreement, the parties fully and completely agreed upon the terms of the Sublease. General. Pursuant to the terms of the Sublease, BellSouth has agreed to grant a lease to CCSI, pursuant to which CCSI will lease (or sublease) the land, tower and improvements which we call the subleased property at each site other than certain space reserved by BellSouth and space utilized by third parties under existing subleases. BellSouth has agreed to lease to CCSI all its sites in the territory except where it is legally prohibited from doing so and except for sites that are specifically excluded from the Sublease. BellSouth expects that the number of sites available for sublease will be approximately 1,850. The sites constructed pursuant to the build-to-suit agreement, as described below, will also be made part of and subject to the Sublease. Pursuant to the Sublease, CCSI will be entitled to use the subleased property of each site for constructing, installing, operating, managing, maintaining and marketing the tower and improvements on each site, including leasing space to third party tenants. BellSouth has agreed to pay CCSI a site 100
maintenance charge of $1,200 per month per site, subject to an increase of five percent (5%) per year for the first ten (10) years following the applicable commencement date of the sublease on such site. If, after the tenth anniversary following each commencement date, the then current site maintenance charge is below the market rate, then such site maintenance charge will automatically be increased on such anniversary and each anniversary thereafter by the consumer price index. If the then site maintenance charge is above the market rate, then such site maintenance charge will be automatically reset at ninety percent (90%) of such agreed upon market rate and will increase on each following anniversary by the then current annual market rate of increase for comparable properties. CCSI has agreed to pay as rent to BellSouth the ground rents relating to each site that is leased by BellSouth, and rent of $1.00 per year for sites that are owned by BellSouth. In addition, CCSI has agreed to sublease available space to any party to existing colocation agreements with BellSouth; provided that CCSI will receive all rents and other economic benefits from the parties to such colocation agreements. Term. The term of the Sublease will be one hundred (100) years for sites owned by BellSouth and, for sites leased by BellSouth, one day less than the term of the underlying ground lease. CCSI will be responsible for negotiating and obtaining extensions or renewals of the ground leases. In addition, if CCSI is able to acquire a fee simple interest in a site, CCSI has agreed to transfer such fee simple interest to BellSouth for $1.00, in which event CCSI will pay no ground rent as of the date fee simple title vests in BellSouth. Reserved Space. Under the Sublease, BellSouth has reserved space on each site. The reserved space generally relates to the portion of the site, including space on the tower, in use by BellSouth and its affiliates. In certain circumstances and subject to certain conditions described in the Sublease, BellSouth has the right to increase the number of antennas on its reserved space to 12, without increasing the related site maintenance payment, on up to 120 towers. BellSouth also has the right to substitute the reserved space for other available space on the tower, as well as a right of first refusal and right of substitution as to available space which CCSI intends to sublease to any third party. If BellSouth ceases using its reserved space on a site and elects to assign, sublet or otherwise transfer the interest in the reserved space on such site, CCSI will have the right to, at any time, acquire BellSouth's interest in the applicable reserved space by paying to BellSouth consideration of (1) $5,000 (subject to increase based on the consumer price index) plus (2) a grant to BellSouth of the right to receive up to thirty-five percent (35%) of all gross revenues payable to CCSI in respect of such reserved space. BellSouth will have the right to put to CCSI its rights in its reserved space with respect to a site, and thereby add such space to the Sublease; provided that the number of sites subject to such a put right may not exceed the greater of one and one half percent (1 1/2%) or thirty (30) of the total sites. In such event, BellSouth will assign to CCSI all its rights in the reserved space on that site and will thereafter no longer be responsible for the related site maintenance charge. Withdrawal Right. After the tenth anniversary of the first closing, BellSouth will have the right, subject to certain notice requirements, to withdraw its rights on any site. In such case, BellSouth will assign to CCSI all its rights, including the ground lease and any reserved space, with respect to any withdrawn site and shall no longer be responsible for the related site maintenance charge. Termination. The Sublease may be terminated by each party in the event of certain breaches by the other party, including the failure to timely make required payments under the Sublease, breaches of covenants and other agreements in the Sublease, breaches of representations and warranties and insolvency. In the case of BellSouth's right to terminate, BellSouth may terminate the Sublease as to an applicable site following a breach (and failure to cure) relating to that particular 101
site. BellSouth may terminate the entire Sublease upon the occurrence of unwaived defaults by CCSI in respect of more than fifty (50) sites during any consecutive five-year period. Build-to-Suit Agreement In connection with the letter agreement, BellSouth agreed to enter into the build-to-suit agreement with us and CCSI pursuant to which CCSI will develop and construct all towers built in the territory on behalf of BellSouth for a period of five years. If CCSI has not constructed at least 500 towers over the five year period following the signing of the build-to-suit agreement, the term of the build-to-suit agreement will be extended for up to an additional two years until such time as CCSI has constructed 500 towers. BellSouth will be required, pursuant to the build-to-suit agreement, to submit to CCSI all proposals to develop and construct tower sites within the territory until CCSI has completed construction of 500 towers. CCSI will be required to develop and construct tower sites in locations that satisfy BellSouth's engineering requirements. Upon substantial completion of a tower site, the site will become subject to and part of the Sublease. The build-to-suit agreement will provide that space not reserved by BellSouth on each tower will be available for lease by CCSI to third parties. Site Maintenance Agreement In connection with the Agreement to Sublease, the parties will enter into a site maintenance agreement whereby CCSI will perform certain identified services at those sites in the territory which are not leased or subleased to CCSI pursuant to the Sublease and which sites are designated by BellSouth for inclusion in the site maintenance agreement. Pursuant to the letter agreement, we and BellSouth have agreed that BellSouth will pay to us a site maintenance fee of $333.00 per site per month, increased annually by the consumer price index, for sites designated under the site maintenance agreement. Further, the parties have agreed that the total number of sites to be covered by the site management agreement will not exceed 100 sites. Site Marketing Agreement On March 25, 1998, we and BellSouth entered into the site marketing agreement pursuant to which we market BellSouth's sites located in Kentucky. In connection with the letter agreement, we agreed to renew the site marketing agreement, the term of which ended on February 15, 1999, and to extend the scope of the agreement to include the entire territory. Registration Rights Agreement As a condition to the letter agreement, we have agreed to enter into a registration rights agreement whereby we will grant to BellSouth certain demand and piggyback registration rights in respect of shares of our common stock we pay to BellSouth as consideration for the proposed BellSouth transaction. Proposed Powertel Acquisition On March 15, 1999, we and a newly formed wholly owned indirect subsidiary ("CCP"), entered into an asset purchase agreement with Powertel, Inc. and five of its subsidiaries (collectively, "Powertel"), pursuant to which the parties agreed that we would purchase from Powertel approximately 650 towers and related assets and liabilities. We will pay to Powertel aggregate consideration of $275.0 million (subject to adjustment based on the amount of towers actually tendered to us at closing) for the 650 towers. At closing, Powertel will pay us a credit against the purchase price in an aggregate amount of $383,000, as consideration for our acceptance of certain towers containing site leases which may require revenue received from 102
Powertel or its affiliates to be shared with the site lessors. We call the purchase price, less this purchase price credit, the closing price. Pursuant to the asset purchase agreement, we have placed $50.0 million in escrow to be applied to the closing price. In the event that Powertel has fulfilled all conditions precedent to closing and we are unable or unwilling to deliver the balance of the closing price, Powertel will receive up to the full $50.0 million as liquidated damages. See"--Asset Purchase Agreement", "--Escrow Agreement" and "Risk Factors--We May Not Consummate the 1999 Transactions". Pursuant to the asset purchase agreement, at closing Powertel will assign and we will assume five master site agreements, pursuant to which Powertel or its affiliates will agree to pay us monthly rent of $1,800 per tower for continued use of space Powertel occupies on the towers. This per tower amount is subject to increase on each fifth anniversary of the agreement and as Powertel adds equipment to these towers. Although the proposed Powertel acquisition is expected to be consummated on or before June 4, 1999, the asset purchase agreement is subject to a number of significant conditions. There can be no assurance that the proposed Powertel acquisition will be consummated on the terms described in this document or at all. See "Risk Factors--We May Not Consummated the 1999 Transactions". The following descriptions of the agreements related to the proposed Powertel acquisition are summaries of the material portions of those agreements. These descriptions are qualified in their entirety by reference to the complete text of the agreements, each of which is available as set forth under the heading "Available Information". Asset Purchase Agreement Purchase Price. Pursuant to the asset purchase agreement, we will pay the closing price in cash on or before June 4, 1999, the closing date, to Powertel for Powertel's tower structures, rights to tower sites, related assets and rights under applicable governmental permits. The purchase price is subject to adjustment up or down based on the actual number of sites tendered at closing. The asset purchase agreement provides that sites considered defective or incomplete, will not be tendered at closing, and consequently, the purchase price will be reduced by an amount equal to $423,077 for each such rejected site. Terms and Conditions. In connection with the proposed Powertel acquisition, we and Powertel are making certain representations and warranties which must be true on the closing date in order for the transaction to be consummated. Other conditions which must be satisfied on the closing date include: . compliance by us and Powertel with the asset purchase agreement; . absence of litigation; . receipt of regulatory approvals; and . absence of any material adverse effect with respect to the Powertel assets and assumed liabilities. In addition, pursuant to the asset purchase agreement, we have deposited $50.0 million in cash with SunTrust Bank Atlanta as escrow agent. At closing, the escrow deposit will be delivered to Powertel and credited against the closing price. However, we have agreed that the escrow deposit will be forfeited to Powertel in the event that we are unable to receive adequate financing to consummate the acquisition and thus are unable to close the acquisition in a timely manner. As a condition to the asset purchase agreement, we have agreed to use our reasonable best efforts to have a registration statement relating to such financing declared effective as expeditiously as possible. Further, upon the occurrence of certain events, we are required to provide Powertel with 103
adequate written assurance that we have at least one alternative financing source, which in Powertel's sole judgment provides it assurance that we will have on hand a minimum of an additional $225.0 million in cash to apply to the purchase price at closing. Such financing assurance must be received by Powertel within five days of the occurrence of certain events including: . our failure to file the registration statement before March 19, 1999; . the withdrawal or abandonment of the registration statement or the decision not to proceed with the offerings; . our failure to commence presentations to institutional investors by May 15, 1999 or, after commencement of such presentations, termination or abandonment of such presentations and failure to proceed to pricing of the offerings. In the event we are required to provide Powertel with a financing assurance, Powertel will have five days to accept or reject it. If Powertel rejects the financing assurance, we will have ten days from receipt of the rejection to deliver the $225.0 million balance of the closing price to the escrow agent, who will deliver the entire closing price to Powertel at closing. However, if we are unable or unwilling to deliver the additional sum into escrow, Powertel will have the right to unilaterally terminate the asset purchase agreement, and receive, as its sole remedy, from the escrow deposit liquidated damages in the amount of $10.0 million on or prior to May 15, 1999 or $25.0 million after May 15, 1999 but prior to June 4, 1999. If on June 4, 1999, Powertel has fulfilled all of its obligations and conditions precedent to closing in all material respects and has not defaulted or breached its obligations under the asset purchase agreement, and we have failed to deliver the additional sum into escrow or are otherwise unable or unwilling to deliver the purchase price, Powertel will receive as liquidated damages the entire amount of the escrow deposit. Master Site Agreement On the closing date, the parties to the asset purchase agreement and certain of Powertel's affiliates will enter into master site agreements governing all towers acquired pursuant to the asset purchase agreement. Pursuant to the master site agreements, Powertel or certain affiliates will agree to continue to lease the space it currently occupies on the towers to be acquired by us. The monthly rent paid by Powertel for each tower will be $1,800. Such monthly payment is subject to increase based on an agreed upon schedule if and when Powertel adds equipment to a site. Nonetheless, the monthly rent, including additional rents related to the addition of certain equipment, shall be increased on each fifth anniversary of the agreement up to an amount that is 115% of the rent paid during the preceding five year period. The master site agreements provide that space not occupied by Powertel on the acquired towers can be leased to third parties at our sole option. Pursuant to the master site agreements, the term of each tower lease will be ten years. Powertel has the right to extend any site lease for up to three additional five year periods. Each site lease will automatically renew for an option term unless Powertel notifies us of its intent not to renew at least 180 days prior to the end of the then current term. Proposed One2One Transaction On March 5, 1999, we entered into the framework agreement with One2One, pursuant to which CTI has agreed to manage, develop and, at its option, acquire up to 821 towers. These towers represent substantially all the towers in One2One's 1800 MHz nationwide wireless network in the United Kingdom. Approximately one-half of these 821 towers can accommodate additional tenants. We expect to upgrade or replace the other towers as demand for space on such towers arises. We believe that the cost of upgrading or replacing any single tower will not exceed $40,000. 104
CTI will be responsible for managing and leasing available space on the towers, and will receive all the income from any such third party leases. The term of the management arrangements will be for up to 25 years. During the three-year period following the closing, CTI will have the right, at its option, to acquire for (Pounds)1.00 per site One2One's interest in the 821 towers, to the extent such interests can be assigned. One2One has also agreed to include as part of the Framework Agreement, including CTI's right to acquire sites during the three-year period, any new One2One towers constructed during the term of the agreement. Framework Agreement Terms and Conditions. The 821 existing towers will be managed by CTI pursuant to a management contract with an initial term of 10 years, which is extendable at CTI's option for an additional 15 years. CTI will also assume all liabilities in connection with the 821 existing towers. During the three-year period following the closing One2One will assign to CTI, at CTI's option, One2One's interest in the sites on which the 821 existing towers are located. For sites where the underlying ground lease is not assignable, the management contract will continue in effect. CTI also has the right during this three-year option period to assume ownership of any new One2One towers which are built by or for One2One during the option period. Consideration. As consideration for the framework agreement, One2One will receive varying rent-free periods of site use depending on the type of tower site as follows: . The 821 existing towers. One2One will enter into a 25 year site sharing agreement with CTI permitting One2One to continue to occupy the 821 existing towers. This agreement will be rent-free until March 2007 (with a retroactive adjustment to April 1998). After the expiration of this initial period, One2One will pay to CTI an annually indexed rental fee (based on (Pounds)3,750.0 per site index adjusted from 1999) plus a further additional compensatory payment to CTI in the event that CTI is chosen as the contractor with respect to fewer than 250 new One2One sites. See "-- One2One ADC Contract". . New One2One sites. One2One will also enter into 25 year site sharing agreements with CTI to occupy all new One2One towers and pay CTI an annually indexed rental fee (based on (Pounds)4,000.0 per site index adjusted from 1999) after an initial rent-free period of fifteen years. . 166 CTI towers currently under lease by One2One. One2One currently occupies 166 CTI sites under a master lease agreement. This master lease will be modified to allow One2One to occupy these sites rent-free from April 1998 until March 2000. The framework agreement is conditional upon the approvals of both One2One and CTI's board of directors and senior creditors. One2One ADC Contract In connection with the framework agreement, CTI entered into a separate contract with One2One under which CTI will provide acquisition, design and construction services for up to 250 new One2One sites. If One2One requests CTI's services with respect to all 250 sites, CTI will be paid aggregate fees in excess of (Pounds)7.0 million. CTI also believes that some of the new sites will be new builds, which are known as greenfield sites, under the framework agreement, and thus CTI will be eligible to assume ownership of these greenfield sites following their construction, pursuant to the terms of the framework agreement. 105
THE PROPOSED OFFERINGS On March 16, 1999, we filed a Registration Statement on Form S-1 in connection with a proposed concurrent public underwritten offering of $475,000,000 of our common stock, $.01 par value, and $300,000,000 of our Senior Discount Notes due 2011. We expect to use the proceeds of these proposed offerings to repay indebtedness incurred to finance a portion of the proposed BellSouth transaction and the proposed Powertel acquisition, to finance the balance of the proposed BellSouth transaction and the proposed Powertel acquisition and for general corporate purposes. We cannot guarantee, however, that these proposed offerings will be consummated on the terms contained in the S-1 Registration Statement or at all. 106
MANAGEMENT Directors and Executive Officers The following table sets forth certain information, as of March 1, 1999, with respect to persons who serve as directors or executive officers and other key personnel of the Company: Name Age Positions with the Company ---- --- -------------------------- Ted B. Miller, Jr....... 47 Chief Executive Officer and Vice Chairman of the Board of Directors David L. Ivy............ 52 President and Director Charles C. Green, III... 52 Executive Vice President and Chief Financial Officer John L. Gwyn............ 50 Executive Vice President E. Blake Hawk........... 49 Executive Vice President and General Counsel Wesley D. Cunningham.... 39 Senior Vice President, Corporate Controller and Chief Accounting Officer Edward W. Wallander..... 41 Senior Vice President and Chief Information Officer John P. Kelly........... 41 President and Chief Operating Officer of CCI Alan Rees............... 55 Chief Operating Officer and Director of CTSH George E. Reese......... 48 Chief Financial Officer, Secretary and Director of CTSH Michel Azibert.......... 43 Director Bruno Chetaille......... 44 Director Robert A. Crown......... 44 Director Carl Ferenbach.......... 56 Chairman of the Board of Directors Randall A. Hack......... 51 Director Robert F. McKenzie...... 55 Director William A. Murphy....... 31 Director Jeffrey H. Schutz....... 47 Director Pursuant to our certificate of incorporation and by-laws, our Board of Directors, other than those directors who may be elected by holders of any series of preferred stock or holders of the Class A common stock, are classified into three classes of directors, denoted as class 1, class 2 and class 3. Messrs. Ferenbach, Schutz and McKenzie are class 1 directors. Messrs. Crown, Murphy and Ivy are class 2 directors, and Messrs. Hack and Miller are class 3 directors. The terms of class 1, class 2 and class 3 directors expire at the annual meetings of stockholders to be held in 1999, 2000 and 2001, respectively. See "Description of Capital Stock--Certificate of Incorporation and By-laws--Classified Board of Directors and Related Provisions". Messrs. Azibert and Chetaille were elected to the Board of Directors by the holders of the Class A common stock upon consummation of the Roll-Up. Ted B. Miller, Jr. has been the Chief Executive Officer since November 1996, Vice Chairman of the Board of Directors since August 1997 and a director of CCIC since 1995. Mr. Miller co-founded CTC in 1994. He was the President of CCIC and CTC from November 1996 to August 1997. Mr. Miller has been the Managing Director, Chief Executive Officer of CTI since February 1997 and has served as Chairman of the Board of CTI since August 1998. In 1986, Mr. Miller founded Interstate Realty Corporation, a real estate development and consulting company, and has been its President and Chief Executive Officer since inception. Mr. Miller is a director and/or an officer of each wholly owned subsidiary of CCIC. David L. Ivy has been the President of CCIC since August 1997, and was elected as a director of CCIC in June 1997. From October 1996 to August 1997, he served as Executive Vice President and Chief Financial Officer of CCIC. Since 1995, he has been the President of DLI, Inc., a real estate 107
consulting company. From 1993 to 1995, Mr. Ivy was a senior executive with, and later the President and Chief Operating Officer of, J. E. Robert Companies, where he managed a joint venture with Goldman, Sachs & Co. that was established to acquire distressed assets from financial institutions. From 1987 to 1993, Mr. Ivy served as Chairman of the Board of Directors of Interstate. Mr. Ivy is a director of each wholly owned subsidiary of CCIC. Charles C. Green, III has been an Executive Vice President and Chief Financial Officer of CCIC since September 1997. Mr. Green was the President and Chief Operating Officer of Torch Energy Advisors Incorporated, a major energy asset management and outsourcing company, from 1993 to 1995, and Vice Chairman of the Board of Directors and Chief Investment Officer from 1995 to 1996. From 1992 to September 1997, he was an officer, and later the Executive Vice President and Chief Financial Officer, of Bellwether Exploration Company, an oil and gas exploration and production company and an affiliate of Torch. From 1982 to 1992, Mr. Green was President, Chief Operating Officer and Chief Financial Officer of Treptow Development Company, a real estate development company. Mr. Green currently serves on the Board of Directors of Teletouch Communications, Inc. He has been a Chartered Financial Analyst since 1974. Mr. Green is a director and/or officer of each wholly owned subsidiary of CCIC. John L. Gwyn has been an Executive Vice President of CCIC since August 1997. From February to August 1997, Mr. Gwyn served as Senior Vice President of CCIC and CTC. From 1994 to February 1997, Mr. Gwyn was a Vice President and Director of Commercial Real Estate Asset Management of Archon Group, L.P., a real estate asset management company and a wholly owned subsidiary of Goldman, Sachs & Co. From 1989 to 1993, he was a Senior Vice President of The Robert C. Wilson Company, a mortgage banking company. E. Blake Hawk has been Executive Vice President and General Counsel since February 1999. Mr. Hawk was an attorney with Brown, Parker & Leahy, LLP in Houston, Texas from 1980 to 1999 and became a partner with the firm in 1986. Mr. Hawk has been board certified in tax law by the Texas Board of Legal Specialization since 1984 and has been a Certified Public Accountant since 1976. Wesley D. Cunningham has been a Senior Vice President of CCIC since March 1999 and Chief Accounting Officer of CCIC since April 1998. He has been the Corporate Controller of CCIC since February 1997. Mr. Cunningham was the Assistant Corporate Controller of Drilex International Inc., an oil field services company, from 1996 to January 1997. From 1990 to 1996, he was the Manager of Financial Reporting of Maxxam Inc., an aluminum, forest products and real estate company. He has been a Certified Public Accountant since 1984. Mr. Cunningham is an officer of each wholly owned subsidiary of CCIC. Edward W. Wallander has been Senior Vice President and Chief Information Officer of CCIC since April 1998. From August 1990 to April 1998, Mr. Wallander worked for PNC Bank in various capacities including Senior Vice President and Chief Operating Officer of PNC Brokerage Corp. Prior to PNC Bank, Mr. Wallander was a commercial real estate lender for Mellon Bank, N.A. and a Certified Public Accountant for Ernst & Young, L.L.P. John Kelly has been the President of CCI since December 1998. From January 1990 to July 1998, Mr. Kelly was the President and Chief Operating Officer of Atlantic Cellular Company L.P. ("Atlantic Cellular"). From December 1995 to July 1998, Mr. Kelly was also President and Chief Operating Officer of Hawaiian Wireless, Inc., an affiliate of Atlantic Cellular. Mr. Kelly has served on the board of directors of the Cellular Association of California as well as the Vermont Telecommunications Application Center. 108
Alan Rees has been the Chief Operating Officer of CTSH and each of its wholly owned subsidiaries since February 1997. He was elected as a director of CTSH and each of its wholly owned subsidiaries in May 1997. From 1994 to 1997, Mr. Rees served as the General Manager of Transmission for the broadcast transmission division of the BBC. George E. Reese has been the Chief Financial Officer and Secretary of CTSH and each of its wholly owned subsidiaries since February 1997. He was elected as a director of CTSH and each of its wholly owned subsidiaries in May 1997. Since April 1995, Mr. Reese has served as President of Reese Ventures, Inc., an international investment consulting firm, which he established in 1995. From 1972 to 1995, Mr. Reese was employed by Ernst & Young, L.L.P. where he was named Partner In Charge of the Houston office's energy department and was appointed Managing Partner of the firm's operations in the former Soviet Union. Mr. Reese was a founder of the Council on Foreign Investment in Russia and was a founding member of the American Chamber of Commerce in Russia. Michel Azibert has been a director of CCIC since August 1998. Mr. Azibert has been International Director of TdF Parent since 1989 and Chief Executive Officer of TdF since 1994. Mr. Azibert took an active role in the preparation of the Media Law enacted in France in 1986. Pursuant to the governance agreement, Mr. Azibert was elected as one of the two directors elected by the holders of the Class A common stock. Bruno Chetaille has been as a director of CCIC since August 1998. Mr. Chetaille has been Chairman and Chief Executive Officer of TdF Parent since 1992. Prior to 1992, Mr. Chetaille was a technical advisor to the President of the French Republic for four years. Pursuant to the governance agreement, Mr. Chetaille was elected as one of the two directors elected by the holders of the Class A common stock. Robert A. Crown founded Crown Communications in 1980 and was President from its inception until December 1998. Mr. Crown is Chairman of the Board of Crown Communication Inc. and was elected as a director of CCIC in August 1997. Mr. Crown has been responsible for the initial construction in Pittsburgh of the Cellular One system, as well as a substantial portion of the Bell Atlantic Mobile system in Pittsburgh. He also negotiated one of the first complete end- to-end build-outs for Nextel for the Pittsburgh MTA. Pursuant to the Stockholders Agreement, Mr. Crown was the nominee of the Crown Parties for election as a director of the Company. Mr. Crown is a director of CCI and each of its wholly owned subsidiaries. Carl Ferenbach was elected as the Chairman of the Board of Directors of CCIC in April 1997. Since its founding in 1986, Mr. Ferenbach has been a Managing Director of Berkshire Partners LLC, a private equity investment firm that manages five investment funds with approximately $1.6 billion of capital. Mr. Ferenbach has also served as: a Managing Director of Berkshire Investors LLC since its formation in 1996; a Managing Director of Third Berkshire Managers LLC, the general partner of Third Berkshire Associates Limited Partnership, the general partner of Berkshire Fund III, A Limited Partnership, since its formation in 1997 (and was previously an individual general partner of Berkshire Fund III since its formation in 1992); and a Managing Director of Fourth Berkshire Associates LLC the general partner of Berkshire Fund IV, Limited Partnership ("Berkshire Fund IV, collectively with Berkshire Fund III and Berkshire Investors, the "Berkshire Group") since formation in 1996. In addition, Mr. Ferenbach currently serves on the Board of Directors of Wisconsin Central Transportation Corporation, Tranz Rail Limited, English, Welsh & Scottish Railway Limited, Australian Transport Network Limited and U.S. Can Corporation. Pursuant to the Stockholders Agreement, Mr. Ferenbach was the nominee of Berkshire Group for election as a director of CCIC. 109
Randall A. Hack was elected as a director of CCIC in February 1997. Since January 1995, Mr. Hack has been a member of Nassau Capital L.L.C., an investment management firm. From 1990 to 1994, he was the President and Chief Executive Officer of Princeton University Investment Company, which manages the endowment for Princeton University. Mr. Hack also serves on the Board of Directors of several private companies. Pursuant to the Stockholders Agreement, Mr. Hack was the nominee of Nassau Group for election as a director of CCIC. Robert F. McKenzie was elected as a director of CCIC in 1996. From 1990 to 1994, Mr. McKenzie was the Chief Operating Officer and a director of OneComm, Inc., a mobile communications provider that he helped found in 1990. From 1980 to 1990, he held general management positions with Northern Telecom, Inc. and was responsible for the marketing and support of its Meridian Telephone Systems and Distributed Communications networks to businesses throughout the western United States. Mr. McKenzie also serves on the Board of Directors of Centennial Communications Corporation. William A. Murphy has been a director of CCIC since August 1998. Mr. Murphy has been a Director of Mergers & Acquisitions at Salomon Smith Barney since 1997. From 1990 to 1997, Mr. Murphy held various positions in Mergers & Acquisitions with Salomon Smith Barney. Jeffrey H. Schutz was elected as a director of CCIC in 1995. Mr. Schutz has been a General Partner of Centennial Fund IV and Centennial Fund V, each a venture capital investing fund, since 1994 and 1996, respectively. Mr. Schutz also serves on the Board of Directors of Preferred Networks, Inc. and several other private companies. Pursuant to the Stockholders Agreement, Mr. Schutz was the nominee of Centennial Group for election as a director of CCIC. Board Committees Our Board of Directors has an executive committee, a compensation committee, a finance and audit committee and a nominating and corporate governance committee. The executive committee, composed of Messrs. Azibert, Crown, Ferenbach, Hack, Miller and Schutz, acts in lieu of the full Board in emergencies or in cases where immediate and necessary action is required and the full Board cannot be assembled. The compensation committee, composed of Messrs. Ferenbach, McKenzie and Schutz, establishes salaries, incentives and other forms of compensation for executive officers and administers incentive compensation and benefit plans provided for employees. The finance and audit committee, composed of Messrs. Hack, McKenzie and Murphy, reviews our audit policies and oversees the engagement of our independent auditors, as well as developing financing strategies for us and approving outside suppliers to implement these strategies. The nominating and corporate governance committee, composed of Messrs. Azibert, Ferenbach, McKenzie and Miller, is responsible for nominating new Board members and for an annual review of Board performance. Pursuant to the stockholders agreement, the holders of the Class A common stock have the right to appoint at least one member to each of the executive and nominating and corporate governance committees. Directors' Compensation and Arrangements All of our non-management directors receive compensation for their service as directors ($15,000 and options for 5,000 shares of common stock per year), and are reimbursed for expenses incidental to attendance at such meetings. In September 1997, our Board of Directors approved a fee of $150,000 per annum to the Berkshire Group (half of which is to be paid by CTI) for general consulting services and for the services of Mr. Ferenbach as Chairman of the Board. In addition, Mr. McKenzie received approximately $10,000 in 1996 for specific consulting assignments requested by the Chief Executive Officer. Messrs. Ferenbach and Schutz are indemnified by the respective entities which they represent on our Board of Directors. 110
Executive Compensation The following table sets forth the cash and non-cash compensation paid by or incurred on behalf of us to our chief executive officer and the four other executive officers (collectively, the "named executive officers") for each of the three years ended December 31, 1998. Summary Compensation Table Number of Securities All Other Underlying Compen- Options/ sation Name and Principal Position Year Salary ($) Bonus ($) SARs (#)(a) ($) --------------------------- ---- ---------- --------- ----------- --------- Ted B. Miller, Jr........... 1998 $325,000 $300,000 3,013,000 $ -- Chief Executive Officer and 1997 281,575 626,250 625,000 -- Vice Chairman of the Board of Directors 1996 152,600 75,000 -- -- David L. Ivy................ 1998 $225,000 $150,000 1,455,000 $ -- President and Director 1997 200,000 300,000 250,000 -- 1996 37,500(b) -- 175,000 35,000(c) Charles C. Green, III ...... 1998 $235,000 $ 56,250 940,000 $ -- Executive Vice President and 1997 75,000(d) -- 250,000 -- Chief Financial Officer 1996 -- -- -- -- John L. Gwyn................ 1998 $185,000 $131,250 250,000 $ -- Executive Vice President 1997 160,424(e) -- 225,000 -- 1996 -- -- -- -- Alan Rees................... 1998 $225,722(f) $ -- 718,307 $ -- Chief Operating Officer and 1997 225,722 84,646 -- -- Director of CTSH 1996 -- -- -- -- - -------- (a) All awards are for options to purchase the number of shares of common stock indicated. (b) Mr. Ivy began working for CCIC on October 1, 1996, at an annual salary of $150,000. (c) Mr. Ivy worked as a consultant to CCIC from May 1996 to September 1996 before joining the Company as an employee in October 1996. (d) Mr. Green began working for CCIC on September 1, 1997, at an annual salary of $225,000. (e) Mr. Gwyn began working for CCIC on February 3, 1997, at an annual salary of $175,000. (f) Mr. Rees began working for CTSH on February 28, 1997 at an annual salary of $225,722. 111
Option/SAR Grants In Last Fiscal Year Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term(a) ----------------------------------------------- ----------------------- Number of Securities % of Total Underlying Options/ Options/ SARs SARs Granted to Exercise Granted Employees in or Base Expiration Name (#) Fiscal Year Price ($/Sh) Date 5% ($) 10% ($) ---- ---------- ------------ ------------ ---------- ---------- ---------- Ted B. Miller, Jr....... 700,000 5.2% $ 2.31 1/23/08 328,000 2.4 7.50 1/28/08 210,000 1.6 5.78 4/23/08 140,000 1.0 2.31 4/23/08 1,035,000 7.7 13.00 7/1/08 600,000 4.5 7.50 7/1/08 David L. Ivy............ 280,000 2.1% $ 2.31 1/23/08 225,000 1.6 7.50 1/28/08 70,000 0.5 2.31 4/24/08 545,000 0.4 13.00 7/1/08 335,000 0.2 7.50 7/1/08 Charles C. Green, III... 75,000 0.5% $ 7.50 1/28/08 350,000 2.5 7.50 7/1/08 515,000 3.8 13.00 7/1/08 John L. Gwyn............ 40,000 0.3% $ 7.50 1/28/08 175,000 1.3 13.00 7/1/08 35,000 .2 7.50 7/1/08 Alan Rees............... 116,666 0.9% $ 2.31 1/30/08 116,666 0.9 3.00 1/30/08 116,667 0.9 3.90 1/30/08 28,308 0.2 0.00 5/19/08 90,000 0.7 7.50 7/1/08 250,000 1.9 13.00 7/1/08 - -------- (a) The potential realizable value assumes a per-share market price at the time of the grant to be approximately equal to the exercise price with an assumed rate of appreciation of 5% and 10%, respectively, compounded annually for 10 years. 112
The following table details the December 31, 1998 year end estimated value of each named executive officer's unexercised stock options. All unexercised options are to purchase the number of shares of common stock indicated. Aggregated Option/SAR Exercises In Last Fiscal Year And Year-End Option/SAR Values Number of Securities Underlying Unexercised Value of Unexercised Options/ In-the-Money Options/ SARs at Year-End(#) SARs at Year-End ($) Shares Acquired Value Exercisable (E)/ Exercisable (E)/ Name on Exercise (#) Realized ($) Unexercisable (U)(a) Unexercisable (U)(b) ---- --------------- ------------ ---------------------- --------------------- Ted B. Miller, Jr....... -- -- 2,868,000(E) $ (E) 1,115,000(U) (U) David L. Ivy............ -- -- 1,275,000(E) (E) 605,000(U) (U) Charles C. Green, III... -- -- 675,000(E) (E) 515,000(U) (U) John L. Gwyn............ -- -- 170,500(E) (E) 304,500(U) (U) Alan Rees............... -- -- 118,308(E) (E) 599,999(U) (U) - -------- (a) The estimated value of exercised in-the-money stock options held at the end of 1998 assumes a per-share fair market value of $ and per-share exercise prices of $.40, $2.40, $4.20 and as applicable. Severance Agreements We have entered into severance agreements with Messrs. Miller, Ivy, Green, Gwyn, Rees, Reese and Hawk. Pursuant to the severance agreements, we are required to provide severance benefits to these executives if they are terminated by us without cause (as defined in the severance agreements) or the executives terminate with good reason (as defined in the severance agreements) (collectively, a "qualifying termination"). The severance agreements provide for enhanced severance benefits if the executives incur a qualifying termination within the two-year period following a change in control (as defined in the severance agreements). Upon a qualifying termination that does not occur during the change in control period, an eligible executive is entitled to (1) a lump sum payment equal to two times the sum of his base salary and annual bonus, (2) continued coverage under specified welfare benefit programs for two years and (3) immediate vesting of any outstanding options and restricted stock awards. Upon a qualifying termination during the change in control period, an eligible executive is entitled to (1) receive a lump sum payment equal to three times the sum of his base salary and annual bonus, (2) continued coverage under specified welfare benefit programs for three years and (3) immediate vesting of any outstanding options and restricted stock awards. Crown Arrangements We have entered into a memorandum of understanding with Mr. Crown and a related services agreement. Pursuant to the services agreement, Mr. Crown has agreed to continue to serve in a consulting capacity to (and as Chairman of) CCI for a two-year period expiring on December 9, 2000, and we have agreed, for such two-year period, to pay Mr. Crown cash compensation of $300,000 113
annually, along with certain executive perquisites. At the end of such two-year period, we will pay Mr. Crown a severance benefit of $300,000. At the time of entering to the memorandum of understanding, we also agreed to vest all of Mr. Crown's existing stock options; to immediately grant Mr. Crown options to purchase 50,000 shares of common stock at $7.50 per share; and, upon the closing of the IPO, to grant Mr. Crown options to purchase 625,000 shares of common stock at the price to public in the IPO ($13.00 per share). Stock Option Plans 1995 Stock Option Plan We have adopted the 1995 stock option plan, which was reamended on July 1, 1998. The purpose of the 1995 stock option plan is to advance our interests by providing additional incentives and motivations which help us to attract, retain and motivate employees, directors and consultants. The description set forth below summarizes the general terms of the 1995 stock option plan and the options granted pursuant to the 1995 stock option plan. Pursuant to the 1995 stock option plan, we can grant options to purchase up to 18,000,000 shares of common stock. Options granted under the 1995 stock option plan may either be incentive stock options, or ISOs, under Section 422 of the Code or nonqualified stock options. The price at which a share of common stock may be purchased upon exercise of an option granted under the 1995 stock option plan will be determined by the Board of Directors and, in the case of nonqualified stock options, may be less than the fair market value of the common stock on the date that the option is granted. The exercise price may be paid in cash, in shares of common stock (valued at fair market value at the date of exercise), in option rights (valued at the excess of the fair market value of the common stock at the date of exercise over the exercise price) or by a combination of such means of payment, as may be determined by the Board. Our employees, directors or consultants (including those of our subsidiaries and affiliates) are eligible to receive options under the 1995 stock option plan (although only certain employees are eligible to receive ISOs). The 1995 stock option plan is administered by the Board and the Board is authorized to interpret and construe the 1995 stock option plan. Subject to the terms of the 1995 stock option plan, the Board is authorized to select the recipients of options from among those eligible, to establish the number of shares that may be issued under each option and to take any actions specifically contemplated or necessary or advisable for the administration of the 1995 stock option plan. No options may be granted under the 1995 stock option plan after July 31, 2005, which is ten years from the date the 1995 stock option plan was originally adopted and approved by our Board and stockholders. The 1995 stock option plan will remain in effect until all options granted under the 1995 stock option plan have been exercised or expired. The Board, in its discretion, may terminate the 1995 stock option plan at any time with respect to any shares of common stock for which options have not been granted. The 1995 stock option plan may be amended by the Board without the consent of our stockholders, other than as to a material increase in benefits, an increase in the number of shares that may be subject to options under the 1995 stock option plan or a change in the class of individuals eligible to receive options under the 1995 stock option plan. However, no change in any option previously granted under the 1995 stock option plan may be made which would impair the rights of the holder of such option without the approval of the holder. Pursuant to the 1995 stock option plan, options are exercisable during the period specified in each option agreement or certificate; provided, however, that no option is exercisable later than ten years from the date the option is granted. Options generally have been exercisable over a period of ten years from the grant date and vested in equal installments over a four or five year period of 114
service with us as an employee. A change in control generally accelerates the vesting of options granted to employees and some of the options vest upon the achievement of specific business goals or objectives. An option generally must be exercised within 12 months of a holder ceasing to be involved as our employee, director or consultant as a result of death and within three months if the cessation is for other reasons; however, these periods can be extended by decision of the Board (other than in the case of an ISO). Shares of common stock subject to forfeited or terminated options again become available for option awards. The Board may, subject to certain restrictions in the 1995 stock option plan (and, in the case of an ISO, in Section 422 of the Code), extend or accelerate the vesting or exercisability of an option or waive restrictions in an option agreement or certificate. The 1995 stock option plan provides that the total number of shares covered by the 1995 stock option plan, the number of shares covered by each option, and the exercise price per share under each option will be proportionately adjusted in the event of a recapitalization, stock split, dividend, or a similar transaction. No grant of any option will constitute realized taxable income to the grantee. Upon exercise of a nonqualified option, the holder will recognize ordinary income in an amount equal to the excess of the fair market value of the stock received over the exercise price paid therefor and the tax basis in any shares of common stock received pursuant to the exercise of such option will be equal to the fair market value of the shares on the exercise date if the exercise price is paid in cash. We will generally have a deduction in parity with the amount realized by the holder. We have the right to deduct and withhold applicable taxes relating to taxable income realized by the holder upon exercise of a nonqualified option and may withhold cash, shares or any combination in order to satisfy or secure its withholding tax obligation. An ISO is not subject to taxation as income to the employee at the date of grant or exercise and we do not get a business deduction as to an ISO; provided, the stock is not sold within two years after the ISO was granted and one year after the ISO was exercised. The ISO is effectively taxed at capital gain rates upon the sale of the stock by the employee. However, if the stock acquired upon exercise of an ISO is sold within two years of the ISO grant date or one year exercise of the date, then it is taxed the same as a nonqualified option. Upon the exercise of an ISO, the difference between the value of the stock and the exercise price is recognized as a preference item for alternative minimum tax purposes. 115
As of December 31, 1998, options to purchase a total of 13,082,220 shares of common stock have been granted. Options for 572,825 shares of common stock have been exercised, options for 282,750 shares have been forfeited and options for 12,226,645 shares remain outstanding. The following table sets forth the exercise price and number of outstanding options as well as the number of those options which are vested and exercisable as of December 31, 1998: Amount Exercise Amount Vested and Price Outstanding Exercisable -------- ----------- ----------- $0.40 345,000 345,000(a) 1.20 43,750 43,750 1.60 50,000 50,000 2.40 175,000 175,000 3.09 5,385 -- 4.03 5,385 -- 4.20 1,630,625 1,463,625 4.76 23,135 23,135 5.24 5,385 -- 5.97 28,000 -- 6.00 107,200 107,200 7.50 5,633,030 2,805,630 7.77 28,000 -- 10.08 28,000 -- 11.31 75,000 -- 11.50 75,000 -- 11.94 125,000 -- 12.50 253,750 128,750 13.00 3,590,000 90,000 ----- ---------- --------- Total N/A 12,226,645 5,232,090 ===== ========== ========= - -------- (a) Represents options held by Mr. Miller. Except for the options for 23,135 shares with an exercise price of $4.76 per share and options for 3,036,250 shares with an exercise price of $7.50, the exercise prices for all of the options were equal to or in excess of the estimated fair value of the common stock at the dates on which the numbers of shares and the exercise prices were determined; as such, in accordance with the "intrinsic value based method" of accounting for stock options, we did not recognize compensation cost related to the grant of these options. The options for 23,135 shares with an exercise price of $4.76 were issued in 1998 in exchange for services received from nonemployees; as such, we will account for the issuance of these options in 1998 based on the fair value of the services received. Options for 3,036,250 shares granted at an exercise price of $7.50 per share (which is below the estimated fair market value at the date of grant) were included in the group of options which vested at the consummation of the initial public offering of common stock. We will account for these options in 1998 based upon the fair market value of services received. The remaining options for 2,731,230 shares granted at an exercise price of $7.50 per share (which is below the estimated fair market value at the date of grant) were granted in 1998 and generally are taken into account and vest over five years. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Compensation Charges Related to Stock Option Grants". The options granted include ISOs for 627,750 shares with an exercise price of $7.50 per share. As of December 31, 1998, ISOs for 81,250 shares have been forfeited and none of the outstanding ISOs are exercisable. 116
CTSH Stock Option Plans CTSH has established certain stock option plans for the benefit of its employees. Upon consummation of the Roll-Up in August 1998, all of the outstanding options to purchase shares of capital stock of CTSH granted pursuant to the CTSH stock option plans were converted into and replaced by options to purchase shares of our common stock. Our Board of Directors has adopted each of the CTSH option plans. Options granted under the CTSH stock options plans may be adjusted at the discretion or, in the case of options granted under the CTSH share bonus plan, the CTSH Trustee to take into account any variation of our share capital subject to the written confirmation of our auditors that the adjustment in their opinion is fair and reasonable. The description set forth below summarizes the general terms of each of the various plans that constitute the CTSH stock options plans. Included in CTI's operating expenses for the nine months ended September 30, 1998 are noncash compensation charges for (Pounds)2.5 million ($4.2 million) related to the issuance of stock options to certain executives and employees. CTSH All Employee Share Option Scheme. All outstanding options granted pursuant to the Castle Transmission Services (Holdings) Ltd. All Employee Share Option Scheme are vested. These options may only be exercised in full and on one occasion. Outstanding options granted pursuant to the CTSH all employee plan will lapse if not exercised by the earlier of: (1) the first anniversary of the option holder's death, (2) six months following the termination of the option holder's employment, (3) six months following the earlier of (a) a change of control, (b) the sanctioning by the U.K. courts of a compromise or arrangement pursuant to U.K. Companies Act 1985 section 425 that affects our common stock, (c) a person becoming bound or entitled to acquire our common stock under U.K. Companies Act 1985 sections 428-430 or (d) notice of a general meeting of our stockholders at which a resolution will be proposed for the purpose of our voluntary winding-up (each of the foregoing, a corporate event), (4) the option holder being adjudicated bankrupt under U.K. law, (5) the surrender of the option or (6) the seventh anniversary of the grant. At the time of the Roll-up there were outstanding options to purchase 285,250 shares of common stock at a price of $2.37 per share, of which an initial refundable deposit of $1.20 per share has already been paid by each participant. No additional options will be granted under the CTSH All Employee plan in the future. CTSH Management Plan. All outstanding options granted pursuant to the Castle Transmission Services (Holdings) Ltd. Unapproved Share Option Scheme will vest on the earlier of: (1) March 1, 2000 or, if the option holder was not an eligible employee (as defined in the plan) on March 1, 1997, the third anniversary of the date on which the option was granted, (2) the death of the option holder, (3) the termination of the option holder's employment (other than a termination for cause, or the voluntary resignation of the option holder), 117
(4) corporate event or (5) the sale of the subsidiary or business of ours in which the option holder is employed. Once vested, these options may be exercised in whole or in part at the discretion of the option holder prior to the lapsing of the option. All options granted pursuant to the CTSH management plan will lapse on the earlier of: (1) the first anniversary of the option holder's death, (2) six months after the termination of the option holder's employment (other than a termination for cause, or the voluntary resignation of the option holder), (3) immediately upon any other termination of employment, (4) six months following a corporate event, (5) the option holder being adjudicated bankrupt under U.K. law, (6) the surrender of the option, (7) failure to satisfy any performance condition established by the board of directors of CTI or (8) the seventh anniversary of the grant of the option. Currently, there are outstanding options to purchase 1,649,844 shares of common stock at prices ranging from (Pounds)1.43 ($2.39) to (Pounds)6.04 ($10.08) per share. No additional options will be granted under the CTSH Management Plan in the future. CTSH Bonus Share Plan. In connection with the Castle Transmission Services (Holdings) Ltd. Bonus Share Plan, CTSH has executed the Employee Benefit Trust, a discretionary settlement for the benefit of past and present CTI employees, directors and their families. CTI employees and directors are able to participate in the CTSH Bonus Share Plan by foregoing a portion of their annual bonuses awarded by us in consideration for options to purchase shares of our common stock held by the CTSH Trust at predetermined prices per share depending upon the year in which the investment is made. The predetermined price for 1997 investment was (Pounds)13.00 ($21.70) per unit (each of which will be converted into seven shares of common stock upon consummation of the Roll-Up), and the CTI board has determined that the predetermined price for any investment in 1998 and 1999 will be (Pounds)16.90 ($28.21) and (Pounds)21.97 ($36.68) respectively. All outstanding options granted pursuant to the CTSH Bonus Share Plan are vested and may be exercised in whole or in part at the discretion of the option holder prior to the lapsing of the option. All options will lapse on the earlier of: (1) the first anniversary of the option holder's death, (2) six months after the termination of the option holder's employment, (3) six months following a corporate event, (4) the option holder being adjudicated bankrupt under U.K. law, (5) the surrender of the option or (6) the seventh anniversary of the grant of the option. In order to satisfy the demand created by the exercise of options granted pursuant to the CTSH Bonus Share Plan, the CTSH Trustee has been granted a call option by us to purchase up to 118
149,709 shares of common stock from us at a price of (Pounds)1.86 ($3.11) per share, the funds for which are to be contributed to the CTSH trust by CTSH (which has already provided for such payment in its financial statements). Currently there are outstanding options to purchase 149,709 shares of common stock from the CTSH Trustee for a nominal sum upon exercise. Following the Offering, CTI employees and directors will continue to be able to effectively invest a proportion of their annual bonuses in our common stock under the CTSH Bonus Share Plan for the fiscal years 1998 and 1999. Thereafter, no additional options will be granted under the CTSH Bonus Share Plan. Grants under the CTSH Bonus Share Plan are determined by converting monetary awards into options to purchase shares at predetermined prices. CTSH Option Grants to Certain Executives. In January and April of 1998, CTSH granted options to purchase a total of 300,000 ordinary shares and 299,700,000 preference shares of CTSH to Ted B. Miller, Jr., David L. Ivy and George E. Reese. These options are vested in full and have converted into options to purchase 1,890,000 shares of our common stock at an exercise price of (Pounds)1.43 and 210,000 shares of our common stock at an exercise price of (Pounds)3.57. Upon the Roll-Up, the exercise prices were set in U.S. dollars at $2.31 for the (Pounds)1.43 exercise price and $5.96 for the (Pounds)3.57 exercise price. 119
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 1995 Investments On January 11, 1995, Ted B. Miller, Jr., Edward C. Hutcheson, Jr., Centennial Fund IV, Berkshire Fund III, A Limited Partnership (via Berkshire Fund III Investment Corp.), and certain trusts and natural persons which are now members of Berkshire Investors LLC and J. Landis Martin collectively invested $8,790,000 in return for CTC's common stock or, in some cases, preferred stock or convertible notes of CTC. The proceeds received on January 11, 1995 were used by us for the acquisition of towers and ancillary assets from PCI and for working capital. Pursuant to a securities exchange agreement, dated as of April 27, 1995, such parties effectively made CCIC the holding company of CTC and converted some of the obligations of CTC into capital stock of CCIC. As a result of the exchange of CTC capital stock for CCIC capital stock, such parties received shares of common stock, or, in some cases, preferred stock, of CCIC. In July 21, 1995, Robert F. McKenzie became a party by amendment to the securities exchange agreement and received shares of preferred stock of CCIC. 1996 Investments Pursuant to a securities purchase agreement, dated as of July 15, 1996, among Berkshire Fund III Group, Centennial Fund IV, J. Landis Martin, Edward C. Hutcheson, Jr., Robert F. McKenzie and us, we privately placed 864,568 shares of our Series B convertible preferred stock, par value $.01 per share, for an aggregate purchase price of $10,374,816. Berkshire Fund III Group paid $6,000,000 for 500,000 shares, Centennial Fund IV paid $3,724,812 for 310,401 shares, Mr. Martin paid $500,004 for 41,667 shares, Mr. Hutcheson paid $99,996 for 8,333 shares and Mr. McKenzie paid $50,004 for 4,167 shares. The proceeds received on July 15, 1996 were used for (a) the purchase of the towers and microwave and specialized mobile radio businesses from Motorola in Puerto Rico, (b) an option payment relating to the acquisition of TEA and TeleStructures and (c) working capital. 1997 Investments Pursuant to a securities purchase agreement, dated as of February 14, 1997, among Centennial Fund V and Centennial Entrepreneurs Fund V, L.P. (collectively, the "Centennial Fund V Investors"), Berkshire Fund IV, Limited Partnership (via Berkshire Fund IV Investment Corp.), and certain trusts and natural persons which are members of Berkshire Investors LLC (collectively, the "Berkshire Fund IV Group" and, together with Berkshire Fund III Group, the "Berkshire Partners Group"), PNC Venture Corp., Nassau Capital Partners II L.P. ("Nassau Capital"), NAS Partners I L.L.C. ("NAS Partners"), Fay, Richwhite Communications Limited ("Fay Richwhite"), J. Landis Martin, Robert F. McKenzie and us, we privately placed 3,529,832 shares of its Series C convertible preferred stock, par value $.01 per share for an aggregate purchase price of $74,126,472. Centennial Fund V Investors paid $15,464,001 for 736,381 shares, Berkshire Fund IV Group paid $21,809,991 for 1,038,571 shares, PNC Venture Corp. paid $6,300,000 for 300,000 shares, Nassau Group paid an aggregate of $19,499,991 for 928,571 shares, Fay Richwhite paid $9,999,990 for 476,190 shares, Mr. Martin paid $999,999 for 47,619 shares and Mr. McKenzie paid $52,500 for 2,500 shares. The proceeds received on February 14, 1997 were used by us to fund a portion of our investment in CTI. 120
In March 1997, Edward C. Hutcheson, Jr. exercised stock options for 345,000 shares of common stock. We repurchased these shares and 308,435 shares of his existing Class A common stock for $3,422,118. In May 1997, in connection with our acquisition of the stock of TeleStructures, TEA and TeleShare, Inc., we issued 535,710 shares of common stock to the shareholders of those companies: 241,070 shares to Bruce W. Neurohr, 241,070 shares to Charles H. Jones and 53,570 shares to Terrel W. Pugh. In June 1997, Messrs. Miller and Ivy received special bonuses, related to their services in structuring and negotiating our investment in CTI, including arranging the consortium partners who participated with us in the CTI transaction, of $600,000 and $300,000, respectively. In August 1997, Robert A. Crown and Barbara Crown sold the assets of Crown Communications to, and merged CNSI and CMSI with, our subsidiaries. As consideration for these transactions, the Crowns received a cash payment of $25.0 million, our promissory note aggregating approximately $76.2 million, approximately $2.3 million to pay certain taxes (part of which amount was paid in September 1997 as a dividend to stockholders of record of CNSI on August 14, 1997), and 7,325,000 shares of common stock. In addition, we assumed approximately $26.0 million of indebtedness of the Crown's business. We repaid the seller note in full on October 31, 1997. Robert A. Crown and Barbara Crown are both parties to the stockholders agreement and are subject to its restrictions. Pursuant to a securities purchase agreement, dated as of August 13, 1997, among American Home Assurance Company and their affiliates, New York Life Insurance Company, The Northwestern Mutual Life Insurance Company, PNC Venture Corp., J. Landis Martin and us, we privately placed 292,995 shares of its senior convertible preferred stock for an aggregate purchase price of $29,299,500, together with warrants to purchase 585,990 shares of common stock at $7.50 per share (subject to adjustment, including weighted average antidilution adjustments). American Home Assurance Company and its affiliates paid $15,099,500 for 150,995 shares and warrants to purchase 301,990 shares of common stock. New York Life Insurance Company and The Northwestern Mutual Life Insurance Company each paid $6,000,000 for 60,000 shares and warrants to purchase 120,000 shares of common stock. PNC Venture Corp. paid $2,000,000 for 20,000 shares and warrants to purchase 40,000 shares of common stock. Mr. Martin paid $200,000 for 2,000 and warrants to purchase 4,000 shares of common stock. The proceeds received on August 13, 1997 were used by us to fund a portion of the Crown merger and working capital. Pursuant to a securities purchase agreement, dated as of October 31, 1997, among Berkshire Partners Group, Centennial Fund V Investors, Nassau Group, Fay Richwhite, Harvard Private Capital Holdings, Inc. ("Harvard"), Prime VIII, L.P. ("Prime") and the prior purchasers of senior convertible preferred stock (other than affiliates of American Home Assurance), an additional 364,500 shares of senior convertible preferred stock were issued for an aggregate purchase price of $36,450,000, together with warrants to purchase 729,000 shares of common stock at $7.50 per share (subject to adjustment, including weighted average antidilution adjustments). Berkshire Partners Group paid $3,500,000 for 35,000 shares and warrants to purchase 70,000 shares of common stock. Centennial V Investors paid $1,000,000 for 10,000 shares and warrants to purchase 20,000 shares of common stock. Nassau Group and Fay Richwhite each paid $2,500,000 for 25,000 shares and warrants to purchase 50,000 shares of common stock. Harvard paid $14,950,000 for 149,500 shares and warrants to purchase 299,000 shares of common stock. Prime paid $5,000,000 for 50,000 shares and warrants to purchase 100,000 shares of common stock. American Home Assurance paid $1,500,000 for 15,000 shares and warrants to purchase 30,000 shares of common stock. New York Life Insurance Company paid $300,000 for 3,000 shares and warrants to purchase 6,000 shares of 121
common stock. The Northwestern Mutual Life Insurance Company paid $4,000,000 for 40,000 shares and warrants to purchase 80,000 shares of common stock. PNC Venture Corp. paid $1,000,000 for 10,000 shares and warrants to purchase 20,000 shares of common stock. J. Landis Martin paid $200,000 for 2,000 shares and warrants to purchase 4,000 shares of Common Stock. Other Transactions Robert J. Coury, a former director of Crown Communication, and Crown Communication were party to a management consulting agreement beginning in October 1997 through January 1999. Pursuant to a Memorandum of Understanding dated July 3, 1998, the compensation payable pursuant to such consulting agreement was increased to $20,000 per month and Mr. Coury was granted options to purchase 60,000 shares of common stock at $7.50 per share. See "Management-- Executive Compensation--Crown Arrangements". We have recorded a noncash compensation charge of $0.3 million related to the issuance of these stock options. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Compensation Charges Related to Stock Option Grants". In connection with the Crown Merger, Mr. Coury acted as financial advisor to the Crowns and received a fee for such services, paid by the Crowns. We lease office space in a building formerly owned by our Vice Chairman and Chief Executive Officer. Lease payments for such office space amounted to $313,008, $130,000 and $50,000 for the years ended December 31, 1998, 1997 and 1996, respectively. The amount of space leased increased from 6,497 square feet at $23.80 per square foot (or $154,836 in annual rent) to 19,563 square feet at $16.00 per square foot (or $313,008 in annual rent) pursuant to a lease agreement effective November 1, 1997. The lease term is for a period of five years with an option to terminate in the third year or to renew at $18.40 per square foot. Interstate Realty Corporation, a company owned by our Vice Chairman and Chief Executive Officer, received a commission of $62,000 in connection with this new lease. Crown Communication leases its equipment storage and handling facility in Pittsburgh from Idlewood Road Property Company, a Pennsylvania limited partnership. HFC Development Corp., a Pennsylvania corporation owned by Mr. Crown's parents, is the general partner of Idlewood. The annual rent for the property is $180,000. On August 10, 1998, Michel Azibert, who was elected as a director of CCIC in August 1998, acquired 50,000 shares of common stock from an existing stockholder of CCIC for $6.26 per share pursuant to a purchase right assigned to him by CCIC. We recorded a noncash compensation charge of $0.3 million related to the transfer of the purchase right. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Compensation Charges Related to Stock Option Grants". On February 28, 1997, CTI and TdF Parent entered into the CTI services agreement pursuant to which TdF Parent agreed to provide certain consulting services to CTI in consideration for a minimal annual fee of (Pounds)400,000 ($665,120) and reimbursement for reasonable out-of-pocket expenses. TdF Parent has agreed to, among other things, provide the services of ten executives or engineers to CTI on a part-time basis and to provide a benchmarking review of CTI. In addition, TdF Parent has agreed to provide additional services relating to research, development and professional training on terms (including as to price) to be determined. The term of the CTI services agreement is expected to be extended for four additional years (to February 28, 2004) and thereafter will be terminable on 12-month's prior notice given by CTI to TdF after February 28, 2003. In connection with the financing arrangements relating to the Proposed JV, we paid an aggregate of $100,000 to Centennial Fund IV, L.P., Centennial Fund V, L.P. and Centennial Entrepreneurs Fund V, L.P. 122
We have entered into a memorandum of understanding with Mr. Crown and a related services agreement. Pursuant to the services agreement, Mr. Crown agreed to continue to serve in a consulting capacity to (and as Chairman of) CCI for a two-year period ending December 9, 2000, and we have agreed, for such two-year period, to pay Mr. Crown cash compensation of $300,000 annually, along with certain executive perquisites. At the end of the two-year period, we will pay Mr. Crown a severance benefit of $300,000. Agreements with TdF Related to the Roll-Up Governance Agreement On August 21, 1998, we entered into a governance agreement with TdF and DFI (the "Governance Agreement") to provide for certain rights and obligations of each party with respect to our governance. Super-Majority Voting Requirements In general, until August 21, 2003, a super majority vote of our Board of Directors is required for us or any of our subsidiaries to take any of the following actions: . amendments to the certificate of incorporation or by-laws; . acquisitions or investments of more than $20.0 million; . dispositions for more than $20.0 million; . significant strategic alliances; . the incurrence of debt unless certain leverage ratios have been met; . any transaction with a party to the stockholders agreement or any of our affiliates; . the issuance of any equity securities; . any transaction that would result in any person holding 50% or more of our voting securities or equity interests; . any sale of all or substantially all of our assets; . any action by us relating to our dissolution or bankruptcy; and . any amendments to our rights plan. TdF Veto Rights In general, until August 21, 2003, TdF's consent will be required for us or any of our subsidiaries to take any of the following actions: . significant acquisitions or investments; . strategic alliances with certain third parties; and . significant dispositions. In addition, until August 21, 2008, TdF's consent generally will be required for us or any of our subsidiaries to take any of the following actions: . amendments to the certificate of incorporation or bylaws; . the issuance of any new class of security or of additional shares of Class A common stock; 123
. any transaction that would result in any person holding 50% or more of our voting securities or equity interests; . any sale of all or substantially all of our assets; and . the issuance to any person of equity securities representing 25% or more of our outstanding equity securities. TdF Preemptive Rights Except in certain circumstances, if we issue any equity securities (other than equity that is mandatorily exchangeable for debt, such as the exchangeable preferred stock) to any person, we must offer TdF the right to purchase, at the same cash price and on the same other terms proposed, up to the amount of such equity securities as would be necessary for TdF and its affiliates to maintain their consolidated ownership percentage in us. See "Risk Factors". TdF Standstill; Transfer Restrictions; Voting TdF and its affiliates will not, without the prior written consent of the Board; . acquire beneficial ownership of any of our voting securities if their ownership interest would be greater than the Relevant Percentage; . propose that TdF or any of its affiliates enter into any business combination involving us; . make any "solicitation" of "proxies" (as such terms are used in Regulation 14A promulgated under the Exchange Act) to vote or consent with respect to any of our voting securities in opposition to the recommendation of a super majority vote of the Board; . except in accordance with the terms of the stockholders agreement, seek election to or seek to place a representative on the Board or seek the removal of any member of the Board; . (a) solicit, seek to effect, negotiate with or provide nonpublic information to any other person with respect to or (b) otherwise make any public announcement or proposal with respect to, any form of business combination (with any person) involving a change of control of CCIC or the acquisition of a substantial portion of the voting securities and/or equity securities or assets of CCIC or any subsidiary of CCIC; or . publicly disclose any intention, plan or arrangement, or provide advice or assistance to any person, inconsistent with the foregoing. In general, if TdF or any of its affiliates seek to transfer 5% or more of our voting securities, we will have the right to purchase all, or any part in excess of such 5%, of such voting securities for cash at the price at which they are to be transferred. These limitations do not apply to certain transactions including underwritten public offerings and sales under Rule 144. Whenever TdF has the right to vote any of our voting securities and a "proxy- contest" exists or any proposal for the election of any member to the Board has received a negative vote, which in either case, had been recommended by a super majority vote of the Board, TdF has agreed to vote all of our voting securities held by it in the manner recommended by a super majority vote of the Board. The standstill, transfer restriction and voting provisions described above will cease to apply on or before August 21, 2003. In addition, the standstill and voting provisions will be suspended during any period from the date of the commencement by any person (other than TdF or any of its affiliates) of an unsolicited offer to the date of closing, abandonment or termination of all such offers (including any offer commence by TdF or any member of the TdF Group following such suspension) and will thereafter be reinstated as in effect prior to the commencement of any such unsolicited offer. TdF CTSH Option If (1) the Board overrides a veto by TdF of a business combination or (2) an unsolicited offer by any person (other than TdF or any of its affiliates) has commenced or occurred, TdF will have the 124
option us to (x) acquire for cash all of the CTSH shares beneficially owned by us at their fair market value or (y) sell for cash to us all of the CTSH shares and warrants beneficially owned by TdF at their fair market value. Immediately prior to the consummation of any business combination or unsolicited offer, TdF may require us to purchase one-half of the shares of Class A common stock held by TdF and its affiliates for cash at the offer price per share of common stock pursuant to the business combination or unsolicited offer. Put and Call Rights TdF Put Right. TdF will have the right to require us (1) to purchase all (except for one CTSH Ordinary Share) of the CTSH Shares beneficially owned by TdF and its affiliates in exchange for shares of Class A common stock at the Exchange Ratio and (2) to issue in exchange for the TdF CTSH Warrants for a number of shares of Class A common stock at the Exchange Ratio and 100,000 shares of Class A common stock, subject to adjustment in certain circumstances. Company Call Right. On August 21, 2000, unless the weighted average price per share of common stock over the five trading days immediately preceding August 21, 2000, is less than or equal to $12 (as adjusted for any stock split or similar transaction), we will have the right to require TdF to transfer and deliver to us all (except for one CTSH Ordinary Share) of the TdF CTSH Shares and the TdF CTSH Warrants beneficially owned by TdF and its affiliates in exchange for a number of shares of Class A common stock at the Exchange Ratio and 100,000 shares of Class A common stock, subject to adjustment in certain circumstances. Stockholders Agreement On August 21, 1998, we entered into the Stockholders Agreement (the "Stockholders Agreement") with certain of our stockholders (the "Stockholders") to provide for the certain rights and obligations of us and the Stockholders with respect to our governance and the stockholders' shares of common stock or Class A common stock, as the case may be. Governance Board Representation. (a) So long as the TdF Group holds at least 5.0% of our common stock, TdF will have the right to appoint one director and generally will have the right to appoint two directors; (b) so long as Robert A. Crown, Barbara Crown, certain trusts established by them and their permitted transferees have beneficial ownership of at least 555,555 shares of common stock, they will have the right to elect one director; (c) so long as Ted B. Miller, Jr. and his permitted transferees maintains an ownership interest, they will have the right to elect one director; (d) our chief executive officer will have the right to elect one director; (e) so long as the ownership interest of Centennial Fund IV, L.P., Centennial Fund V, L.P., Centennial Entrepreneurs Fund V, L.P., their affiliates and respective partners is at least 5.0%, they will have the right to elect one director; (f) so long as the ownership interest of the Berkshire Group is at least 5.0%, the Berkshire Group will have the right to elect one director; (g) so long as the ownership interest of Nassau Capital Partners II, L.P., NAS Partners I, L.L.C., their affiliates and their respective partners is not less than the ownership interest of the Nassau Group immediately following the closing of the IPO, the Nassau Group will have the right to elect one director; and (h) all directors other than the designees will be nominated in accordance with our certificate of incorporation and by- laws. Solicitation and Voting of Shares. With respect to each meeting of our stockholders at which directors are to be elected, we will use our best efforts to solicit from our stockholders eligible to vote in the election of directors proxies in favor of the nominees selected in accordance with the 125
provisions of the Stockholders Agreement (including the inclusion of each director nominee in management's slate of nominees and in the proxy statement prepared by our management in respect of each annual meeting, vote or action by written consent). Each Stockholder will vote its shares in favor of the election of the persons nominated pursuant to the provisions described in "--Board Representation" above to serve the Board and against the election of any other person nominated to be a director. Committees of the Board. Each of the nominating and corporate governance committee and the executive committee will contain, so long as TdF is qualified, at least one director that is a TdF designee. Registration Rights; Tag-Along Rights Subject to certain exceptions, limitations and the suspension of such rights by us under certain conditions, the Stockholders have been granted certain piggy-back registration rights, demand registration rights, S-3 registration rights and tag-along rights with respect to their shares of Common Stock. Subject to certain exceptions, if at any time Stockholders holding at least 2% of our voting securities (the "Initiating Stockholder(s)") determine to sell or transfer 2% or more of the voting securities then issuable or outstanding to a third party who is not an affiliate of any of the Initiating Stockholders, Stockholders may have the opportunity and the right to sell to the purchasers in such proposed transfer (upon the same terms and conditions as the Initiating Stockholders) up to that number of Shares owned by such Stockholder equaling the product of (a) a fraction, the numerator of which is the number of Shares owned by such Stockholder as of the date of such proposed transfer and the denominator of which is the aggregate number of Shares owned by the Initiating Stockholders and by all Stockholders exercising tag-along rights multiplied by (b) the number of securities to be offered. CTSH Shareholders' Agreement On August 21, 1998, CCIC, TdF and CTSH entered into a Shareholders' Agreement to govern the relationship between CCIC and TdF as Shareholders of CTSH (the "CTSH Shareholders' Agreement). Corporate Governance. The Board of CTSH will be comprised of six directors, of which CCIC and TdF will each have the right to appoint and remove two directors with the remaining two directors to be mutually agreed upon by CCIC and TdF. CCIC has the right to nominate the chairman, chief executive officer, chief operating officer and chief financial officer of CTSH, subject to approval buy a super majority vote of the Board of CCIC. The affirmative vote of a majority of the Board, including a director nominated by CCIC and a director nominated by TdF, is necessary for the adoption of a resolution. Further, the prior written consent of each of CCIC and TdF, in their capacities as shareholders, is required for the following actions, among others: . significant acquisitions and dispositions; . issuance of new shares; . entry into transactions with shareholders, except pursuant to the CTI Services Agreement and/or the CTI Operating Agreement; . entry into new lines of business; 126
. capital expenditures outside the budget; . entry into banking and other financing facilities; . entry into joint venture arrangements; . payment of dividends, except for (1) dividends payable in respect of CTSH's redeemable preferred shares and (2) dividends permitted by CTSH's financing facilities; and . establishing a public market for CTSH shares. Similar governance arrangements also apply to CTSH's subsidiaries. If either CCIC or TdF vetoes a transaction (either at Board or shareholder level), the other shareholder is entitled to pursue that transaction in its own right and for its own account. Transfer Provisions. Subject to certain exceptions, neither CCIC nor TdF may transfer any interest in shares held in CTSH to a third party. Transfers of shares to affiliated companies are permitted, subject to certain conditions. No shares may be transferred if such transfer would (a) entitle the BBC to terminate either of the BBC contracts, (b) subject CTSH to possible revocation of its licenses under the Telecommunications Act 1984 or the Wireless Telegraphy Acts 1949, 1968 and 1998 or (c) cause CCIC or TdF to be in breach of the Commitment Agreement between TdF, TdF Parent, the BBC and us (under which we and TdF have agreed to maintain certain minimum ownership levels in CTSH for a period of five years). See "Business--U.K. Operations--Significant Contracts--BBC Commitment Agreement". In addition, shares may be sold to a third party, subject to a right of first refusal by the other party, after the later of (a) the second anniversary of the closing of the Roll-up, and (b) the expiration of the period for the completion of the TdF Put Right or the Company Call Right. If CCIC purchases TdF's shares pursuant to such right of first refusal, it may elect (instead of paying the consideration in cash) to discharge the consideration by issuing its Common Stock at a discount of 15% to its market value. If the right of first refusal is not exercised, the selling shareholder must procure and offer on the same terms for the shares held by the other party. If the Company elects to issue Common Stock to TdF pursuant to the right of first refusal, TdF will be entitled to certain demand registration rights and tag along rights. TdF Put Right. TdF has the right to put its shares of CTSH to CCIC for cash (the "TdF Put Right") if there is a change of control of CCIC. Such right is exercisable if (a) TdF has not exchanged its shares pursuant to the Governance Agreement by the second anniversary of the closing of the Roll-Up, or (b) prior to the second anniversary of the closing of the Roll-Up, if TdF has ceased to be Qualified for the purposes of the Governance Agreement. The consideration payable on the exercise of the TdF Put Right will be an amount agreed between CCIC and TdF or, in the absence of agreement, the fair market value as determined by an independent appraiser. TdF Exit Right. TdF also has the right after the earlier of (a) the second anniversary of the closing of the Roll-Up, or (b) TdF ceasing to be Qualified for purposes of the Governance Agreement, to require CCIC, upon at least six months' notice, to purchase all, but not less than all, of the shares it beneficially owns in CTSH (the "TdF Exit Right"). The consideration to be paid to TdF, and the manner in which it is calculated, upon exercise of the TdF Exit Right is substantially the same as described upon exercise of the TdF Put Right. CCIC is entitled to discharge the consideration payable on the exercise of the TdF Exit Right either in cash or by issuing Common Stock to TdF at a discount of 15% to its market value. If CCIC elects to issue Common Stock to TdF on the exercise of the TdF Exit Right, TdF will be entitled to certain demand registration rights and tag-along rights. 127
CCIC Deadlock Right. CCIC has the right to call TdF's shares of CTSH, subject to certain procedural requirements, for cash if, after the third anniversary of the closing of the Roll-Up, TdF refuses on three occasions during any consecutive six-month period to agree to the undertaking by CTSH of certain types of transactions (including acquisitions and disposals) that would fall within CTSH's core business (the "CCIC Deadlock Right"). The consideration due on the exercise of the CCIC Deadlock Right is payable in cash, the fair market value of the TdF interest to be determined in the same manner described above upon exercise of the TdF Put or Exit Rights. CCIC Shotgun Right. Provided that TdF has not, pursuant to the Governance Agreement, exchanged its share ownership in CTSH for shares of CCIC, CCIC may (a) by notice expiring on August 21, 2003, or (b) at any time within 45 days of CCIC becoming aware of a TdF Change of Control (as defined in the Governance Agreement) offer to purchase TdF's shares in CTSH. TdF is required to either sell its shares or agree to purchase CCIC's shares in CTSH at the same price contained in CCIC's offer for TdF's shares of CTSH. The consummation of any transfer of shares between CCIC and TdF pursuant to any of the transfer provisions described above is subject to the fulfillment of certain conditions precedent, including obtaining all necessary governmental and regulatory consents. Termination. The Shareholders' Agreement terminates if either CCIC or TdF ceases to be qualified. CCIC remains qualified on the condition that it holds at least 10% of the share capital of CTSH. CTI Services Agreement On February 28, 1997, CTI and TdF Parent entered into a Services Agreement pursuant to which TdF Parent agreed to provide certain consulting services to CTI in consideration for a minimum annual fee of (Pounds)400,000 ($665,120) and reimbursement for reasonable out-of-pocket expenses. This agreement was amended and restated on August 21, 1998 (the "CTI Services Agreement"). TdF Parent has agreed to, among other things, provide the services of ten executives or engineers to CTI on a part-time basis and to provide a benchmarking review of CTI. In addition, TdF Parent has agreed to provide additional services relating to research, development and professional training on terms (including as to price) to be determined. Following February 28, 2003, the CTI Services Agreement will be terminable on 12-month's prior notice given by CTI to TdF. CTI Operating Agreement The following summary of the terms of the CTI Operating Agreement is subject to the negotiation of definitive documentation, although we expect such agreement to have the general terms described herein. Under the CTI Operating Agreement, we will be permitted to develop business opportunities relating to terrestrial wireless communications (including the transmission of radio and television broadcasting) anywhere in the world except the United Kingdom. CTI will be permitted to develop such business opportunities solely in the United Kingdom. We and TdF also intend to establish, pursuant to the CTI Operating Agreement, a joint venture to develop digital terrestrial transmission services in the United States. See "Business--U.S. Operations--Network Services-- Broadcast Site Rental and Services". The CTI Operating Agreement will also establish a framework for the provision of business support and technical services to us and our subsidiaries (other than CTI) in connection with the development of any international business by us. TdF will have the right, if called upon to do so by CTSH or us, to provide all or part of such services to us and our subsidiaries (other than CTI) in connection with the provision of broadcast transmission services. 128
PRINCIPAL STOCKHOLDERS The table below sets forth certain information, as of March 1, 1999, with respect to the beneficial ownership of capital stock by (1) each person whom we know to be the beneficial owner of more than 5% of any class or series of our capital stock, (2) each of our directors and executive officers and all directors and executive officers as a group and (3) this table also gives effect to shares that may be acquired pursuant to options and warrants, as described in the footnotes below. Shares Percentage Beneficially of Total Executive Officers and Owned Voting Directors(a) Title of Class Number(b) Percent Power(c) - ---------------------- -------------- ------------ ------- ---------- Ted B. Miller, Jr. ...... Common Stock(d) 4,036,097 4.7 4.1 David L. Ivy............. Common Stock(e) 1,395,000 1.7 1.5 Charles C. Green, III.... Common Stock(f) 675,000 * * John L. Gwyn............. Common Stock(g) 173,000 * * John P. Kelly(h)......... Common Stock -- -- -- E. Blake Hawk............ Common Stock -- -- -- Alan Rees(i)............. Common Stock(j) 188,308 * * Robert A. Crown(k)....... Common Stock(l) 5,782,500 7.0 6.1 Michel Azibert(m)........ Common Stock(n) 60,000 * * Bruno Chetaille(o)....... Common Stock(p) 10,000 * * Carl Ferenbach(q)........ Common Stock(r) 20,740,805 24.9 21.9 Randall A. Hack(s)....... Common Stock(t) 5,085,080 6.1 5.4 Robert F. McKenzie(u).... Common Stock(v) 202,500 * * William A. Murphy(w)..... Common Stock(x) 10,000 * * Jeffrey H. Schutz(y)..... Common Stock(z) 9,842,040 11.8 10.4 Directors and Executive Officers as a group (15 persons total)...... Common Stock(aa) 48,200,330 58.5 51.5 Berkshire(bb) Berkshire Fund III, A Limited Partnership..... Common Stock(cc) 6,095,450 7.3 6.5 Berkshire Fund IV, Limited Partnership..... Common Stock(dd) 12,996,055 15.6 13.8 Berkshire Investors LLC.. Common Stock(ee) 1,619,300 1.9 1.7 Candover(ff) Candover Investments, plc..................... Common Stock 2,329,318 2.8 2.5 Candover (Trustees) Limited................. Common Stock 208,317 * * Candover Partners Limited................. Common Stock 8,792,565 10.6 9.3 Centennial(gg) Centennial Fund IV, L.P.(hh)................ Common Stock 5,965,340 7.2 6.3 Centennial Fund V, L.P.(ii)................ Common Stock 3,731,285 4.5 3.9 Centennial Entrepreneurs Fund V, L.P.(jj)........ Common Stock 115,415 * * Nassau(kk) Nassau Capital Partners II, L.P................. Common Stock(ll) 5,023,825 6.0 5.3 NAS Partners I, L.L.C.... Common Stock(mm) 31,255 * * Digital Future Investments B.V.(nn).... Class A Common Stock 11,340,000 100.0 12.0 - -------- * Less than 1%. (a) Except as otherwise indicated, the address of each person in this table is c/o Crown Castle International Corp., 510 Bering Drive, Suite 500, Houston, TX 77057. (b) In determining the number and percentage of shares beneficially owned by each person, shares that may be acquired by such person pursuant to options, warrants or convertible stock exercisable or convertible within 60 days of the date 129
hereof are deemed outstanding for purposes of determining the total number of outstanding shares for such person and are not deemed outstanding for such purpose for all other stockholders. To the best of our knowledge, except as otherwise indicated, beneficial ownership includes sole voting and dispositive power with respect to all shares. (c) In determining Percentage of Total Voting Power, shares of common stock that may be acquired upon conversion of the Class A common stock into shares of common stock are taken into account. (d) Includes options for 2,868,000 shares of common stock. A trust for the benefit of Mr. Miller's children holds 99,995 shares of common stock. (e) Includes options for 1,275,000 shares of common stock. (f) Represents options for 675,000 shares of common stock. (g) Includes options for 170,500 shares of common stock. (h) Mr. Kelly's principal business address is c/o Crown Communication Inc., 375 Southpointe Blvd., Canonsburg, PA 19317. (i) Mr. Rees's principal business address is c/o Castle Transmission International Ltd., Warwick Technology Park, Heathcote Lane, Warwick CV346TN, United Kingdom. (j) Includes options for 118,308 shares of common stock. (k) Mr. Crown's principal business address is c/o Crown Communication Inc., 375 Southpointe Blvd., Canonsburg, PA 19317. (l) Includes 1,939,375 shares of common stock owned by Mr. Crown, 1,749,375 shares of common stock owned by his spouse, over which she has sole voting and dispositive power, 125,000 shares of common stock that are jointly owned, 915,625 shares of common stock owned by a grantor retained annuity trust for Mr. Crown, 915,625 shares of common stock owned by a grantor retained annuity trust for Ms. Crown and options for 137,500 shares of common stock. (m) Mr. Azibert's principal business address is c/o TeleDiffusion de France International S.A., 10 Rue d'Oradour sur Glane, 75732 Paris 15 France. (n) Includes options for 10,000 shares of common stock. (o) Mr. Chetaille's principal business address is c/o TeleDiffusion de France International S.A., 10 Rue d'Oradour sur Glane, 75732 Paris 15 France. (p) Represents options for 10,000 shares of common stock. (q) Mr. Ferenbach's principal business address is c/o Berkshire Partners LLC, One Boston Place, Suite 3300, Boston, MA 02108. (r) Represents options for 30,000 shares of common stock and 20,710,805 shares of common stock beneficially owned by members of the Berkshire Group. Mr. Ferenbach disclaims beneficial ownership of such shares, except to the extent of his pecuniary interest therein. (s) Mr. Hack's principal business address is c/o Nassau Capital LLC, 22 Chambers St., Princeton, NJ 08542. (t) Represents options for 30,000 shares of common stock and 5,055,080 shares of common stock beneficially owned by members of the Nassau Group. Mr. Hack disclaims beneficial ownership of such shares. (u) Mr. McKenzie's principal business address is P.O. Box 1133, 1496 Bruce Creek Road, Eagle, CO 81631. (v) Includes options for 109,375 shares of common stock. (w) Mr. Murphy's principal business address is c/o Salomon Smith Barney, Victoria Plaza, 111 Buckingham Palace Road, London, England. (x) Represents options for 10,000 shares of common stock. (y) Mr. Schutz's principal business address is c/o The Centennial Funds, 1428 Fifteenth Street, Denver, CO 80202-1318. Mr. Schutz is a general partner of each of Holdings IV and Holdings V. However, neither Mr. Schutz nor any other general partner of either Holdings IV or Holdings V, acting alone, has voting or investment power with respect to our securities directly beneficially held by Centennial Fund IV, Centennial Fund V and Centennial Entrepreneurs Fund, and, as a result, Mr. Schutz disclaims beneficial ownership of our securities directly beneficially owned by such funds, except to the extent of his pecuniary interest therein. (z) Represents options for 30,000 shares of common stock and 9,812,040 shares of common stock beneficially owned by members of the Centennial Group. Mr. Schutz disclaims beneficial ownership of such shares. (aa) Includes options for 5,523,683 shares of common stock and warrants for 120,000 shares of common stock. (bb) Berkshire Group has approximately 22.0% of the total voting power of common stock. Carl Ferenbach, Chairman of our Board of Directors and a director of CCIC, is a Managing Director of Berkshire Investors; a Managing Director of Third Berkshire Managers the general partner of Third Berkshire Associates, the general partner of Berkshire Fund III; and a Managing Director of Fourth Berkshire Associates, the general partner of Berkshire Fund IV. The principal business address of the Berkshire Group is c/o Berkshire Partners LLC, One Boston Place, Suite 3300, Boston, MA 02108-401. (cc) Includes warrants for 35,935 shares of common stock. (dd) Includes warrants for 29,255 shares of common stock. (ee) Includes warrants for 4,810 shares of common stock. (ff) Candover Group has approximately 12.0% of the total voting power of common stock. G. Douglas Fairservice is a Director of each entity in the Candover Group. The principal business address of Candover Partners is 20 Old Bailey, London EC4M 7LM, United Kingdom. 130
(gg) Centennial Fund IV, Centennial Fund V and Centennial Enterpreneurs Fund collectively have had approximately 10.4% of the total voting power of common stock. (hh) Holdings IV is the sole general partner of Centennial Fund IV, and, accordingly, Holdings IV may be deemed to control Centennial Fund IV and possess indirect beneficial ownership of our securities directly beneficially held by Fund IV. The principal business address of Centennial Fund IV and Holdings IV is 1428 Fifteenth Street, Denver, Colorado 80202- 1318. (ii) Holdings V is the sole general partner of Centennial Fund V, and, accordingly, Holdings V may be deemed to control Centennial Fund V and possess indirect beneficial ownership of our securities directly beneficially held by Centennial Fund V. The common stock indicated as held by Centennial Fund V includes 19,400 shares obtainable upon exercise of warrants. The principal business address of Centennial Fund V and Holdings V is 1428 Fifteenth Street, Denver, Colorado 80202-1318. (jj) Holdings V is the sole general partner of Centennial Entrepreneurs Fund V, and, accordingly, may be deemed to control Centennial Entrepreneurs Fund V and possess indirect beneficial ownership of our securities directly beneficially held by Centennial Entrepreneurs Fund V. The common stock indicated as held by Centennial Entrepreneurs Fund V includes 600 shares obtainable upon exercise of warrants. The principal business address of Centennial Entrepreneurs V is 1428 Fifteenth Street, Denver, Colorado 80202-1318. (kk) Nassau Group has approximately 5.3% of the total voting power of common stock. Randall Hack, a director of CCIC, is a member of Nassau Capital L.L.C., an affiliate of Nassau Group. The principal business address of Nassau Capital Partners II, L.P. is 22 Chambers Street, Princeton, NJ 08542. (ll) Includes warrants for 49,690 shares of common stock. (mm) Includes warrants for 310 shares of common stock. (nn) Digital Future Investments B.V. is an affiliate of TeleDiffusion de France International S.A. TdF will retain ownership of 20% of the shares of capital stock of CTSH. Pursuant to the share exchange agreement and subject to certain conditions, TdF has the right to exchange its shares of capital stock of CTSH for 17,443,500 shares of our Class A common stock (which is convertible into 17,443,500 shares of common stock). DFI currently has 12.0% of the total voting power of common stock. Combined, TdF and DFI would have 25.7% of the Voting Power of common stock. The principal business address of DFI is c/o TeleDiffusion de France International S.A., 10 Rue d'Oradour sur Glane, 75732 Paris 15 France. 131
DESCRIPTION OF SECURITIES This description of the securities being offered has five parts: . Description of the Exchangeable Preferred Stock; . Description of the Exchange Debentures; . Certain Definitions; . Book-Entry, Delivery and Form; and . Registration Rights and Liquidated Damages. You should read all five parts of this Description of Securities for a description of the provisions of the instruments governing the securities, the form in which the securities are expected to be issued and certain mechanics for trading of the securities. Although this description is provided for your reference, you are strongly encouraged to read the Certificate of Designations governing the Exchangeable Preferred Stock, and the Exchange Indenture governing the Exchange Debentures for the complete terms and provisions of the securities being offered. In addition, you should be aware that the General Corporation Law of the State of Delaware also governs the Exchangeable Preferred Stock and the ability of the Company to pay dividends on the Exchangeable Preferred Stock. See "Description of Capital Stock" and "Risk Factors--Ability to Pay Dividends on the Exchangeable Preferred Stock". Description of the Exchangeable Preferred Stock You can find the definitions of certain terms used in this description under the subheading "Certain Definitions". In this description, the word "Company" refers only to Crown Castle International Corp. and not to any of its subsidiaries. The Old Preferred Stock was and the New Preferred Stock will be issued under a Certificate of Designations, Preferences and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof (the "Certificate of Designations"), a copy of which is filed as an exhibit to the Registration Statement of which this Prospectus is a part. The following description is a summary of the material provisions of the Certificate of Designations and does not restate that agreement in its entirety. We urge you to read the Certificate of Designations because it, and not this description, defines your rights as holders of the Exchangeable Preferred Stock. Copies of the Certificate of Designations are available as set forth below under the subheading "Additional Information". This description is qualified in its entirety by reference to the Company's Amended and Restated Certificate of Incorporation, which will include the Certificate of Designations and the definitions therein of certain terms used below. The Certificate of Designations authorized the Company to issue 400,000 shares of Exchangeable Preferred Stock with a liquidation preference of $1,000 per share (the "Liquidation Preference"). The Old Preferred Stock was and the New Preferred Stock will, when issued, be fully paid and nonassessable and Holders will have no preemptive rights in connection therewith. The liquidation preference of the Exchangeable Preferred Stock is not necessarily indicative of the price at which shares of the Exchangeable Preferred Stock will actually trade at or after the time of their issuance, and the Exchangeable Preferred Stock may trade at prices below its liquidation preference. The market price of the Exchangeable Preferred Stock can be expected to fluctuate with changes in the financial markets and economic conditions, the financial condition and prospects of the Company and other facts that generally influence the market prices of securities. 132
As of the Issue Date, all of our subsidiaries other than (1) CTSH and its subsidiaries and (2) Crown Castle Investment Corp. and Crown Castle Investment Corp. (II) and their subsidiaries, through which we intend to hold our interest in the Proposed JV, were "Restricted Subsidiaries". However, under the circumstances described below under the subheading "Certain Covenants-- Restricted Payments," we will be permitted to designate certain of our other subsidiaries as "Unrestricted Subsidiaries". Unrestricted Subsidiaries will not be subject to most of the restrictive covenants in the Certificate of Designations. Transfer Agent The transfer agent for the Exchangeable Preferred Stock is ChaseMellon Shareholder Services, L.L.C. unless and until a successor is selected by the Company (the "Transfer Agent"). Ranking The Exchangeable Preferred Stock ranks senior in right of payment to all classes or series of the Company's capital stock as to dividends and upon liquidation, dissolution or winding up of the Company. Without the consent of the Holders of at least two-thirds of the then outstanding Exchangeable Preferred Stock, the Company may not authorize, create (by way of reclassification or otherwise) or issue: (1) any class or series of capital stock of the Company ranking senior to the Exchangeable Preferred Stock ("Senior Securities"); (2) any obligation or security convertible or exchangeable into, or evidencing a right to purchase, shares of any class or series of Senior Securities. Notwithstanding the foregoing, the Company may, without the consent of the Holders of the Exchangeable Preferred Stock, authorize, create (by way of reclassification or otherwise) or issue: (1) any class or series of capital stock of the Company ranking on a parity with the Exchangeable Preferred Stock ("Parity Securities"); or (2) any obligation or security convertible or exchangeable into, or evidencing a right to purchase, shares of any class or series of Parity Securities. Dividends When the Board of Directors declares dividends out of legally available Company funds, the Holders of the Exchangeable Preferred Stock, who are Holders of record as of the preceding March 1, June 1, September 1, and December 1 (each, a "Record Date"), will be entitled to receive cumulative preferential dividends at the rate per share of 12 3/4% per annum. Dividends on the Exchangeable Preferred Stock will be payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year (each, a "Dividend Payment Date"), commencing on March 15, 1999. On or prior to December 15, 2003, the Company may, at its option, pay dividends: (1) in cash; or (2) in additional fully-paid and non-assessable shares of Exchangeable Preferred Stock (including fractional stock) having an aggregate Liquidation Preference equal to the amount of such dividends. After December 15, 2003, the Company will pay dividends in cash only. The Company does not expect to pay any dividends in cash before December 15, 2003. 133
Dividends payable on the Exchangeable Preferred Stock will be: (1) computed on the basis of a 360-day year comprised of twelve 30-day months; and (2) accrue on a daily basis. For a discussion of certain federal income tax considerations relevant to the payment of dividends on the Exchangeable Preferred Stock, see "Certain Federal Income Tax Considerations--Dividends on Exchangeable Preferred Stock". Dividends on the Exchangeable Preferred Stock will accrue whether or not: (1) the Company has earnings or profits; (2) there are funds legally available for the payment of such dividends; or (3) dividends are declared. Dividends will accumulate to the extent they are not paid on the Dividend Payment Date for the quarterly period to which they relate. Accumulated unpaid dividends will accrue dividends at the rate of 12 3/4% per annum. The Company must take all actions required or permitted under Delaware law to permit the payment of dividends on the Exchangeable Preferred Stock. For any dividend period, the Company will not declare or pay upon, or set any sum apart for the payment of dividends upon any outstanding Exchangeable Preferred Stock unless it has declared and paid upon, or declared and set apart a sufficient sum for the payment of dividends upon, all outstanding Exchangeable Preferred Stock for all preceding dividend periods. Unless the Company has declared and paid upon, or declared and set apart a sufficient sum for the payment of, full cumulative dividends on all outstanding Exchangeable Preferred Stock due for all past dividend periods, then: (1) no dividend (other than a dividend payable solely in stock of any class of stock ranking junior to the Exchangeable Preferred Stock as to the payment of dividends and as to rights in liquidation, dissolution or winding up of the affairs of the Company (any such stock, "Junior Securities")) shall be declared or paid upon, or any sum set apart for the payment of dividends upon, any Junior Securities; (2) no other distribution shall be declared or made upon, or any sum set apart for the payment of any distribution upon, any Junior Securities; (3) no Junior Securities shall be purchased, redeemed or otherwise acquired or retired for value (excluding an exchange for other Junior Securities) by the Company or any of its Restricted Subsidiaries; (4) no warrants, rights, calls or options to purchase any Junior Securities shall be directly or indirectly issued by the Company or any of its Restricted Subsidiaries; and (5) no monies shall be paid into or set apart or made available for a sinking or other like fund for the purchase, redemption or other acquisition or retirement for value of any Junior Securities by the Company or any of its Restricted Subsidiaries. Holders of the Exchangeable Preferred Stock will not be entitled to any dividends, whether payable in cash, property or stock, in excess of the full cumulative dividends as herein described. In addition, the Senior Discount Notes Indenture contains restrictions on the ability of the Company to pay dividends on the Exchangeable Preferred Stock. Moreover, existing Indebtedness and anticipated future Indebtedness of our subsidiaries and joint ventures restricts or will restrict our access to the cash flow of those entities. Any future agreements relating to Indebtedness to which the Company or any of its Subsidiaries becomes a party may contain similar restrictions and provisions. See "Risk Factors--Substantial Leverage; Restrictions Imposed by the Terms of Our Indebtedness" and "Risk Factors-- Holding Company Structure; Dependence on Dividends to Meet Cash Requirements or Pay Dividends". 134
Voting Rights Holders of record of the Exchangeable Preferred Stock will have no voting rights, except as required by law and as provided in the Certificate of Designations. Under the Certificate of Designations, the number of members of the Company's Board of Directors will immediately and automatically increase by two, and the Holders of a majority of the outstanding Exchangeable Preferred Stock, voting separately as a class together with holders of all other Parity Securities having similar voting rights, may elect two members to the Board of Directors of the Company, upon the occurrence of any of the following events (each, a "Voting Rights Triggering Event"): (1) the accumulation of accrued and unpaid dividends on the outstanding Exchangeable Preferred Stock (or after December 15, 2003, such dividends are not paid in cash) in an amount equal to six full quarterly dividends (whether or not consecutive); (2) failure by the Company or any of its Restricted Subsidiaries to comply with any mandatory redemption obligation with respect to the Exchangeable Preferred Stock, the failure to make an Asset Sale Offer or Change of Control Offer in accordance with the provisions of the Certificate of Designations and/or the failure to repurchase Exchangeable Preferred Stock pursuant to such offers; (3) failure by the Company to make a Change of Control Offer or to repurchase any Exchangeable Preferred Stock pursuant to a Change of Control Offer in reliance on the last paragraph under the caption "Repurchase at the Option of Holders--Change of Control" or failure by the Company to make an Asset Sale Offer or to repurchase any Exchangeable Preferred Stock pursuant to an Asset Sale Offer in reliance on the last paragraph under the caption "Repurchase at the Option of Holders--Asset Sales"; (4) failure by the Company or any of its Restricted Subsidiaries to comply with any of the other covenants or agreements set forth in the Certificate of Designations and the continuance of such failure for 30 consecutive days after notice to the Company by Holders of record of the Exchangeable Preferred Stock representing 25% of the outstanding shares of the Exchangeable Preferred Stock; (5) defaults under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Significant Subsidiaries (or the payment of which is guaranteed by the Company or any of its Significant Subsidiaries) whether such Indebtedness or guarantee now exists, or is created after the Closing Date, which default (i) is caused by a failure to pay the principal amount of such Indebtedness at final maturity after giving effect to any applicable grace period (a "Payment Default") or (ii) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $20.0 million or more; or (6) certain events of bankruptcy or insolvency with respect to the Company or any of its Significant Subsidiaries. The term of office of the directors elected as a result of a Voting Rights Triggering Event will continue until all dividends in arrears on the Exchangeable Preferred Stock are paid in full and all other Voting Rights Triggering Events have been cured or waived, at which time the term of office of any such directors shall terminate. In addition, as provided above under "--Ranking," the Company may not authorize, create (by way of reclassification or otherwise) or issue any Senior Securities (other than Disqualified Stock), or any obligation or security convertible into or evidencing the right to purchase Senior Securities (other than Disqualified Stock), without the consent of the Holders of at least two- thirds of the then outstanding Exchangeable Preferred Stock, in each case, voting as a single class. 135
Under Delaware law, holders of preferred stock are entitled to vote as a class upon a proposed amendment to the certificate of incorporation if the amendment would (a) increase or decrease the par value of the shares of that class of preferred stock or (b) alter or change the powers, preferences or special rights of the shares of that class of preferred stock in a way that would affect the holders of that preferred stock adversely. Exchange On any Dividend Payment Date, the Company may exchange all and not less than all of the shares of then outstanding Exchangeable Preferred Stock for the Company's 12 3/4% Exchange Debentures due 2010 (the "Exchange Debentures") if: (1) on the date of the exchange, there are no accumulated and unpaid dividends on the Exchangeable Preferred Stock (including the dividend payable on that date) or other contractual impediments to the exchange; (2) there are sufficient legally available funds; (3) the exchange does not immediately cause: (a) a Default (as defined in the Exchange Indenture); and (b) a default or event of default under any material instrument governing Indebtedness of the Company, including without limitation the Senior Discount Notes, outstanding at the time; (4) the Exchange Indenture has been qualified under the Trust Indenture Act, if qualification is required at the time of exchange; and (5) the Company has delivered a written opinion to the Exchange Trustee (as defined herein) stating that all conditions to the exchange have been satisfied. The Senior Discount Notes Indenture currently restricts the exchange of the Exchangeable Preferred Stock and may restrict the Company's ability to exchange the Exchangeable Preferred Stock in the future. See "Description of Certain Indebtedness--The Notes". In addition, existing Indebtedness and anticipated future Indebtedness of our subsidiaries and joint ventures restricts or will restrict our access to the cash flow from those entities. Any future agreements relating to Indebtedness to which we or any of our subsidiaries or joint ventures become a party may contain similar restrictions and provisions. See "Risk Factors--Holding Company Structure; Dependence on Dividends to Meet Cash Requirements or Pay Dividends". Upon any exchange pursuant to the preceding paragraph, and subject to the second succeeding sentence of this paragraph, holders of outstanding Exchangeable Preferred Stock will be entitled to receive: (1) $1.00 principal amount of Exchange Debentures for each $1.00 of the aggregate Liquidation Preference; plus (2) without duplication, any accrued and unpaid dividends. The Exchange Debentures will be: (1) issued in registered form, without coupons; (2) issued in principal amounts of $1,000 and integral multiples thereof to the extent possible; and (3) issuable in principal amounts less than $1,000 so that each holder of Exchangeable Preferred Stock will receive interests representing the entire amount of Exchange Debentures to which such holder's share of Exchangeable Preferred Stock entitle such holder, provided that the Company may pay cash in lieu of issuing an Exchange Debenture having a principal amount less than $1,000. 136
For a description of the Exchange Debentures, see "--Description of the Exchange Debentures". The Company or a Company representative will send notice of the intention to exchange by first class mail, postage prepaid, to each Holder of record of Exchangeable Preferred Stock at its registered address not more than 60 days nor less than 30 days prior to the Exchange Date. In addition to any information required by law or by the applicable rules of any exchange upon which Exchangeable Preferred Stock may be listed or admitted to trading, the notice will state: (1) the Exchange Date; (2) the place or places where certificates for such stock are to be surrendered for exchange, including any procedures applicable to exchanges to be accomplished through book-entry transfers; and (3) that dividends on the Exchangeable Preferred Stock to be exchanged will cease to accrue on the Exchange Date. If notice of any exchange has been properly given, and if on or before the Exchange Date the Exchange Debentures have been duly executed and authenticated and an amount in cash or additional Exchangeable Preferred Stock (as applicable) equal to all accrued and unpaid dividends, if any, thereon to the Exchange Date has been deposited with the Transfer Agent, then on and after the close of business on the Exchange Date: (1) the Exchangeable Preferred Stock to be exchanged will no longer be considered outstanding and may subsequently be issued in the same manner as the other authorized but unissued preferred stock, including as Parity Securities, but not as the same class as the Exchangeable Preferred Stock; and (2) all rights of the Holders as stockholders of the Company will cease, except their right to receive upon surrender of their certificates the Exchange Debentures and all accrued and unpaid dividends, if any, thereon to the Exchange Date. Mandatory Redemption On December 15, 2010 (the "Mandatory Redemption Date"), the Company will be required to redeem (subject to it having sufficient legally available funds) all outstanding Exchangeable Preferred Stock at a price in cash equal to the Liquidation Preference, plus accrued and unpaid dividends, if any, to the date of redemption. The Company will not be required to make sinking fund payments with respect to the Exchangeable Preferred Stock. The Company must take all actions required or permitted under Delaware law to permit such redemption. The Senior Discount Notes Indenture currently restricts the redemption of the Exchangeable Preferred Stock. See "Description of Certain Indebtedness--The Notes". In addition, existing Indebtedness and anticipated future Indebtedness of our subsidiaries and joint ventures restricts or will restrict our access to the cash flow from those entities. Any future agreements relating to Indebtedness to which we or any of our subsidiaries become a party may contain similar restrictions and provisions. See "Risk Factors--Holding Company Structure; Dependence on Dividends to Meet Cash Requirements or Pay Dividends". Optional Redemption During the first 36 months after the Issue Date, the Company may on any one or more occasions redeem up to 35% of the aggregate Liquidation Preference of the Exchangeable Preferred Stock then outstanding at a redemption price of 112.750% of the Liquidation Preference thereof, plus accrued and unpaid dividends and Liquidated Damages thereon, if any, to the redemption date, with the net cash proceeds of one or more Public Equity Offerings or Strategic Equity Investments; provided that: 137
(1) at least $130.0 million aggregate Liquidation Preference of Exchangeable Preferred Stock remains outstanding immediately after the occurrence of such redemption (excluding Exchangeable Preferred Stock held by the Company and its Subsidiaries); and (2) the redemption must occur within 60 days of the date of the closing of the Public Equity Offering or Strategic Equity Investment. Except pursuant to the preceding paragraph, the Exchangeable Preferred Stock will not be redeemable at the Company's option prior to December 15, 2003. On or after December 15, 2003, the Company may redeem all or any part of the Exchangeable Preferred Stock upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of the Liquidation Preference) set forth below plus accrued and unpaid dividends and Liquidated Damages thereon, if any, to the applicable redemption date, if redeemed during the twelve-month period beginning on December 15 of the years indicated below: Year Percentage ---- ---------- 2003.............................................................. 106.375% 2004.............................................................. 104.781% 2005.............................................................. 103.188% 2006.............................................................. 101.594% 2007 and thereafter............................................... 100.000% The Senior Discount Notes Indenture currently restricts the redemption of the Exchangeable Preferred Stock and additional indebtedness may restrict the Company's ability to redeem the Exchangeable Preferred Stock in the future. See "Description of Certain Indebtedness". Selection and Notice If less than all of the Exchangeable Preferred Stock is to be redeemed at any time, the Transfer Agent will select Exchangeable Preferred Stock for redemption as follows: (1) if the Exchangeable Preferred Stock is listed, in compliance with the requirements of the principal national securities exchange on which the Exchangeable Preferred Stock is listed; or (2) if the Exchangeable Preferred Stock is not so listed, on a pro rata basis, by lot or by such method as the Transfer Agent shall deem fair and appropriate. No Exchangeable Preferred Stock with a Liquidation Preference of $1,000 or less shall be redeemed in part. Notices of redemption shall be mailed by first class mail at least 30 but not more than 60 days before the redemption date to each Holder of Exchangeable Preferred Stock to be redeemed at its registered address. Notices of redemption may not be conditional. If any Exchangeable Preferred Stock is to be redeemed in part only, the notice of redemption that relates to that Exchangeable Preferred Stock shall state the portion of the Liquidation Preference thereof to be redeemed. A new certificate with an aggregate Liquidation Preference equal to the unredeemed portion of the original certificate evidencing Exchangeable Preferred Stock presented for redemption will be issued in the name of the Holder thereof upon cancellation of the original certificate. Exchangeable Preferred Stock called for redemption becomes due on the date fixed for redemption. On and after the redemption date, dividends cease to accrue on Exchangeable Preferred Stock or portions thereof called for redemption. Liquidation Rights Each Holder of the Exchangeable Preferred Stock will be entitled to payment, out of the assets of the Company available for distribution, of an amount equal to the Liquidation Preference per Exchangeable Preferred Stock held by such Holder, plus accrued and unpaid dividends, if any, to the 138
date fixed for liquidation, dissolution, winding up or reduction or decrease in capital stock, before any distribution is made on any Junior Securities, including, without limitation, common stock of the Company, upon any: (1) voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company; or (2) reduction or decrease in the Company's capital stock resulting in a distribution of assets to the holders of any class or series of the Company's capital stock (a "reduction or decrease in capital stock"). After payment in full of the Liquidation Preference and all accrued dividends, if any, to which Holders of Exchangeable Preferred Stock are entitled, such Holders may not further participate in any distribution of assets of the Company. However, neither the voluntary sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Company nor the consolidation or merger of the Company with or into one or more corporations will be a voluntary or involuntary liquidation, dissolution or winding up of the Company or reduction or decrease in capital stock, unless such sale, conveyance, exchange or transfer is in connection with a liquidation, dissolution or winding up of the business of the Company or reduction or decrease in capital stock. The Certificate of Designations will not contain any provision requiring funds to be set aside to protect the Liquidation Preference of the Exchangeable Preferred Stock, although such Liquidation Preference will be substantially in excess of the par value of the Exchangeable Preferred Stock. Repurchase at the Option of Holders Change of Control If a Change of Control occurs, each Holder of Exchangeable Preferred Stock will have the right to require the Company to repurchase all or any part (but not any fractional shares) of such Holder's Exchangeable Preferred Stock pursuant to the offer described below (the "Change of Control Offer"). In the Change of Control Offer, the Company will offer a payment in cash equal to 101% of the aggregate Liquidation Preference of Exchangeable Preferred Stock repurchased plus accrued and unpaid dividends and Liquidated Damages thereon, if any (subject to the right of Holders of record on the relevant record date to receive dividends and Liquidated Damages, if any, due on the relevant dividend payment date), to the date of purchase (the "Change of Control Payment"). Within 30 days following any Change of Control, the Company will mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase Exchangeable Preferred Stock on the date specified in such notice, which date shall be no earlier than 30 days and no later than 60 days from the date such notice is mailed (the "Change of Control Payment Date"), pursuant to the procedures required by the Certificate of Designations and described in such notice. On the Change of Control Payment Date, the Company will, to the extent lawful: (1) accept for payment all Exchangeable Preferred Stock or portions thereof properly tendered pursuant to the Change of Control Offer; (2) deposit with the Paying Agent an amount equal to the Change of Control Payment in respect of all Exchangeable Preferred Stock or portions thereof so tendered; and (3) deliver or cause to be delivered to the Transfer Agent the Exchangeable Preferred Stock so accepted together with an Officers' Certificate stating the aggregate Liquidation Preference of Exchangeable Preferred Stock or portions thereof being purchased by the Company. The Company will promptly mail to each Holder of Exchangeable Preferred Stock so tendered the Change of Control Payment for such Exchangeable Preferred Stock, and the Transfer Agent will 139
promptly authenticate and mail (or cause to be transferred by book entry) to each Holder a new certificate representing the Exchangeable Preferred Stock equal in Liquidation Preference to any unpurchased portion of the Exchangeable Preferred Stock surrendered, if any. The Change of Control provisions described above will be applicable whether or not any other provisions of the Certificate of Designations are applicable. The Company will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations applicable to any Change of Control Offer. To the extent that the provisions of any such securities laws or securities regulations conflict with the provisions of the covenant described above, the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under the covenant described above by virtue thereof. The Change of Control purchase feature is a result of negotiations between the Company and the Initial Purchasers. Management has no present intention to engage in a transaction involving a Change of Control, although it is possible that the Company would decide to do so in the future. Subject to the limitations discussed below, the Company could, in the future, enter into certain transactions, including acquisitions, refinancings or other recapitalizations, that would not constitute a Change of Control under the Certificate of Designations, but that could increase the amount of Indebtedness outstanding at such time or otherwise affect the Company's capital structure. Restrictions on the ability of the Company to incur additional Indebtedness are contained in the covenants described under "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock". Such restrictions can only be waived with the consent of the Holders of a majority in Liquidation Preference of the Exchangeable Preferred Stock then outstanding. Except for the limitations contained in such covenants, however, the Certificate of Designations will not contain any covenants or provisions that may afford holders of the Exchangeable Preferred Stock protection in the event of certain highly leveraged transactions. The Senior Discount Notes Indenture currently prohibits the Company from repurchasing any Exchangeable Preferred Stock. In addition, existing Indebtedness and anticipated future Indebtedness of the Company's subsidiaries and joint ventures restricts or will restrict the Company's access to the cash flow from its subsidiaries and joint ventures. Any future agreements relating to Indebtedness to which the Company or any of its subsidiaries or joint ventures becomes a party may contain similar restrictions and provisions. In the event that a Change of Control occurs at a time when the Company is prohibited or prevented from repurchasing Exchangeable Preferred Stock, the Company could seek the consent of the applicable lenders to allow such repurchase or could attempt to refinance the borrowings that contain such prohibition. If the Company does not obtain such a consent or repay such borrowings, the Company will remain prohibited from repurchasing the Exchangeable Preferred Stock. In such case, the Company's failure to purchase tendered Exchangeable Preferred Stock would constitute a Voting Rights Triggering Event. Future Indebtedness of the Company and its Subsidiaries may contain prohibitions on the repurchase of the Exchangeable Preferred Stock and on the occurrence of certain events that would constitute a Change of Control or may require such Indebtedness to be repurchased upon a Change of Control. Finally, the Company's ability to pay cash to the Holders of Exchangeable Preferred Stock following the occurrence of a Change of Control may be limited by the Company's then existing financial resources, including its ability to access the cash flow of its Subsidiaries. See "Risk Factors--Repurchase of the Exchangeable Preferred Stock or the Exchange Debentures Upon a Change of Control" and "Risk Factors--Holding Company Structure; Dependence on Dividends to Meet Cash Requirements or Pay Dividends". There can be no assurance that sufficient funds will be available when necessary to make any required repurchases. The Company will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the Certificate of Designations applicable to a Change 140
of Control Offer made by the Company and purchases all Exchangeable Preferred Stock validly tendered and not withdrawn under such Change of Control Offer. The provisions under the Certificate of Designations relative to the Company's obligation to make an offer to repurchase the Exchangeable Preferred Stock as a result of a Change of Control may be waived or modified with the written consent of the Holders of a majority in Liquidation Preference of the Exchangeable Preferred Stock then outstanding. The definition of Change of Control includes a phrase relating to the sale, lease, transfer, conveyance or other disposition of "all or substantially all" of the assets of the Company and its Restricted Subsidiaries taken as a whole. Although there is a developing body of case law interpreting the phrase "substantially all," there is no precise established definition of the phrase under applicable law. Accordingly, the ability of a Holder of Exchangeable Preferred Stock to require the Company to repurchase such Exchangeable Preferred Stock as a result of a sale, lease, transfer, conveyance or other disposition of less than all of the assets of the Company and its Subsidiaries taken as a whole to another Person or group may be uncertain. Notwithstanding the foregoing, the Certificate of Designations will provide that the Company may not repurchase any Exchangeable Preferred Stock pursuant to this provision unless such repurchase complies with the restricted payments covenant contained in the Senior Discount Notes Indenture; provided that if the Company does not make a Change of Control Offer or does not repurchase any Exchangeable Preferred Stock pursuant to a Change of Control Offer, then such failure shall constitute a Voting Rights Triggering Event. Asset Sales The Company will not, and will not permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless: (1) the Company (or the Restricted Subsidiary, as the case may be) receives consideration at the time of such Asset Sale at least equal to the fair market value (evidenced by a resolution of the Board of Directors set forth in an Officers' Certificate delivered to the Transfer Agent) of the assets or Equity Interests issued or sold or otherwise disposed of; and (2) except in the case of a Tower Asset Exchange, at least 75% of the consideration therefor received by the Company or such Restricted Subsidiary is in the form of cash or Cash Equivalents. For purposes of this provision, each of the following shall be deemed to be cash: (1) any liabilities (as shown on the Company's or such Restricted Subsidiary's most recent balance sheet), of the Company or any Restricted Subsidiary (other than contingent liabilities and liabilities that are by their terms subordinated to the Exchangeable Preferred Stock or any guarantee thereof) that are assumed by the transferee of any such assets pursuant to a customary novation agreement that releases the Company or such Restricted Subsidiary from further liability; and (2) any securities, notes or other obligations received by the Company or any such Restricted Subsidiary from such transferee that are converted by the Company or such Restricted Subsidiary into cash within 20 days of the applicable Asset Sale (to the extent of the cash received). Within 365 days after the receipt of any Net Proceeds from an Asset Sale, the Company or the applicable Restricted Subsidiary may apply such Net Proceeds to: (1) reduce any Indebtedness of the Company; (2) reduce any Indebtedness of any of the Company's Restricted Subsidiaries; 141
(3) the acquisition of all or substantially all the assets of a Permitted Business; (4) the acquisition of Voting Stock of a Permitted Business from a Person that is not a Subsidiary of the Company; provided, that, after giving effect thereto, the Company or its Restricted Subsidiary owns a majority of such Voting Stock and designates such Permitted Business as a Restricted Subsidiary; or (5) the making of a capital expenditure or the acquisition of other long- term assets that are used or useful in a Permitted Business. Pending the final application of any such Net Proceeds, the Company may temporarily reduce revolving credit borrowings or otherwise invest such Net Proceeds in any manner that is not prohibited by the Certificate of Designations. Any Net Proceeds from Asset Sales that are not applied or invested as provided in the first sentence of this paragraph will be deemed to constitute "Excess Proceeds". When the aggregate amount of Excess Proceeds exceeds $10.0 million, the Company will be required to make an offer to all holders of Senior Discount Notes and may be required to make such offer to holders of other Indebtedness of the Company then outstanding (a "Senior Asset Sale Offer") to purchase the maximum principal amount of the Senior Discount Notes and such other Indebtedness, if applicable, that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the principal amount or accreted value thereof, as the case may be, plus accrued and unpaid interest to the date of purchase, in accordance with the procedures set forth in the Senior Discount Notes Indenture and in the instruments governing such other Indebtedness. To the extent that the aggregate amount of Senior Discount Notes and such other Indebtedness tendered pursuant to a Senior Asset Sale Offer is less than the remaining Excess Proceeds ("Remaining Excess Proceeds") and the sum of (A) such amount of Remaining Excess Proceeds and (B) the Remaining Excess Proceeds from any subsequent Senior Asset Sale Offers exceeds $3.0 million, the Company will be required to make an offer to all Holders of Exchangeable Preferred Stock and all holders of Parity Securities containing provisions similar to those set forth in the Certificate of Designations with respect to offers to purchase with the proceeds of sales of assets (an "Asset Sale Offer") to purchase the maximum Liquidation Preference of Exchangeable Preferred Stock and such Parity Securities that may be purchased out of such Remaining Excess Proceeds, at an offer price in cash in an amount equal to 100% of the Liquidation Preference thereof plus accrued and unpaid dividends and Liquidated Damages thereon, if any, to the date of purchase (subject to the right of Holders of record on the relevant record date to receive dividends and Liquidated Damages, if any, due on the relevant Dividend Payment Date), in accordance with the procedures set forth in the Certificate of Designations and such Parity Securities. To the extent that any Remaining Excess Proceeds remain after consummation of an Asset Sale Offer, the Company may use such Excess Proceeds for any purpose not otherwise prohibited by the Certificate of Designations. If the aggregate Liquidation Preference of Exchangeable Preferred Stock and such Parity Securities tendered into such Asset Sale Offer surrendered by Holders thereof exceeds the amount of Remaining Excess Proceeds, the Transfer Agent shall select the Exchangeable Preferred Stock and such Parity Securities to be purchased on a pro rata basis. Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset at zero. The Asset Sale provisions described above will be applicable whether or not any other provisions of the Certificate of Designations are applicable. The Company will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations applicable to any Asset Sale Offer. To the extent that the provisions of any such securities laws or securities regulations conflict with the provisions of the covenant described above, the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under the covenant described above by virtue thereof. 142
The Senior Discount Notes Indenture currently prohibits the Company form repurchasing any Exchangeable Preferred Stock. In addition, existing Indebtedness and anticipated future Indebtedness of our subsidiaries and joint ventures restricts or will restrict our access to the cash flow from those entities. Any future agreements relating to Indebtedness to which we or any of our subsidiaries or joint ventures become a party may contain similar restrictions and provisions. Notwithstanding the foregoing, the Certificate of Designations will provide that the Company may not repurchase any Exchangeable Preferred Stock pursuant to this provision unless such repurchase complies with the restricted payments covenant contained in the Senior Discount Notes Indenture; provided that if the Company does not make an Asset Sale Offer or does not repurchase any Exchangeable Preferred Stock pursuant to an Asset Sale Offer, then such failure shall constitute a Voting Rights Triggering Event. Certain Covenants Restricted Payments The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly: (1) declare or pay any dividend or make any other payment or distribution on account of the Company's Junior Securities or any warrants, options or other rights to acquire Junior Securities (other than any debt security that is convertible into, or exchangeable for, Junior Securities) or any of the Company's Restricted Subsidiaries' Equity Interests (including, without limitation, any payment in connection with any merger or consolidation involving the Company or any of its Restricted Subsidiaries) or to the direct or indirect holders of the Company's Junior Securities or any warrants, options or other rights to acquire Junior Securities (other than any debt security that is convertible into, or exchangeable for, Junior Securities) or any of the Company's Restricted Subsidiaries' Equity Interests in their capacity as such (other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of the Company or to the Company or a Restricted Subsidiary of the Company); (2) purchase, redeem or otherwise acquire or retire for value (including without limitation, in connection with any merger or consolidation involving the Company) any Junior Securities of the Company or any warrants, options or other rights to acquire Junior Securities (other than any debt security that is convertible into, or exchangeable for, Junior Securities) or any Equity Interests of any direct or indirect parent of the Company (other than any such Equity Interests owned by the Company or any Restricted Subsidiary of the Company and other than the Exchangeable Preferred Stock); or (3) make any Restricted Investment, (all such payments and other actions set forth in clauses (1) through (3) above being collectively referred to as "Restricted Payments"), unless, at the time of and after giving effect to such Restricted Payment: (1) no Voting Rights Triggering Event shall have occurred and be continuing or would occur as a consequence thereof; and (2) the Company would have been permitted to incur at least $1.00 of additional indebtedness pursuant to the Debt to Adjusted Consolidated Cash Flow Ratio test set forth in the first paragraph of the covenant described below under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock"; provided that the Company and its Restricted Subsidiaries will not be required to comply with this clause (2) in order to make any Restricted Investment; and (3) such Restricted Payment, together with the aggregate amount of all other Restricted Payments made by the Company and its Restricted Subsidiaries after the Issue Date (excluding 143
Restricted Payments permitted by clauses (2) and (3) of the next succeeding paragraph), is less than the sum, without duplication, of: (a) 50% of the Consolidated Net Income of the Company for the period (taken as one accounting period) from the beginning of the first fiscal quarter commencing after the Issue Date to the end of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit); plus (b) 100% of the aggregate net cash proceeds received by the Company since the Issue Date as a contribution to its common equity capital or from the issue or sale of Equity Interests of the Company (other than Disqualified Stock and except to the extent such net cash proceeds are used to incur new Indebtedness outstanding pursuant to clause (10) of the second paragraph of the covenant described below under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock") or from the issue or sale of Disqualified Stock or debt securities of the Company that have been converted into such Equity Interests (other than Equity Interests (or Disqualified Stock or convertible debt securities) sold to a Subsidiary of the Company and other than Disqualified Stock or convertible debt securities that have been converted into Disqualified Stock); plus (c) to the extent that any Restricted Investment that was made after the Issue Date is sold for cash or otherwise liquidated or repaid for cash, the lesser of (A) the cash return of capital with respect to such Restricted Investment (less the cost of disposition, if any) and (B) the initial amount of such Restricted Investment; plus (d) to the extent that any Unrestricted Subsidiary of the Company and all of its Subsidiaries are designated as Restricted Subsidiaries after the Issue Date, the lesser of (A) the fair market value of the Company's Investments in such Subsidiaries as of the date of such designation, or (B) the sum of (x) the fair market value of the Company's Investments in such Subsidiaries as of the date on which such Subsidiaries were originally designated as Unrestricted Subsidiaries and (y) the amount of any Investments made in such Subsidiaries subsequent to such designation (and treated as Restricted Payments) by the Company or any Restricted Subsidiary; provided that: (i) in the event the Unrestricted Subsidiaries designated as Restricted Subsidiaries are CTSH and its Subsidiaries, the references in clauses (A) and (B) of this clause (d) to fair market value of the Company's Investments in such Subsidiaries shall mean the amount by which the fair market value of all such Investments exceeds 34.3% of the fair market value of CTSH and its Subsidiaries as a whole; and (ii) in the event the Unrestricted Subsidiaries designated as Restricted Subsidiaries are CCAIC and its Subsidiaries, the references in clauses (A) and (B) of this clause (d) to fair market value of the Company's Investments in such Subsidiaries shall mean the amount by which the fair market value of all such Investments exceeds $250.0 million; plus (e) 50% of any dividends received by the Company or a Restricted Subsidiary after the Issue Date from an Unrestricted Subsidiary of the Company, to the extent that such dividends were not otherwise included in Consolidated Net Income of the Company for such period. The foregoing provisions will not prohibit: (1) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment would have complied with the provisions of the Certificate of Designations; (2) the making of any Investment or the redemption, repurchase, retirement, defeasance or other acquisition of any Equity Interests of the Company in exchange for, or out of the net cash 144
proceeds of the sale after the Issue Date (other than to a Subsidiary of the Company) of, any Equity Interests of the Company (other than any Disqualified Stock); provided that such net cash proceeds are not used to incur new Indebtedness pursuant to clause (10) of the second paragraph of the covenant described below under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock"); and provided further that, in each such case, the amount of any such net cash proceeds that are so utilized shall be excluded from clause (3) (b) of the preceding paragraph; (3) the payment of any dividend by a Restricted Subsidiary of the Company to the holders of its Equity Interests on a pro rata basis; or (4) the repurchase, redemption or other acquisition or retirement for value of any Equity Interests of the Company or any Restricted Subsidiary of the Company held by any member of the Company's (or any of its Restricted Subsidiaries') management pursuant to any management equity subscription agreement or stock option agreement in effect as of the Issue Date; provided that the aggregate price paid for all such repurchased, redeemed, acquired or retired Equity Interests shall not exceed (a) $500,000 in any twelve-month period and (b) $5.0 million in the aggregate. The Board of Directors may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such designation would not cause a Voting Rights Triggering Event; provided that in no event shall the businesses operated by the Company's Restricted Subsidiaries as of November 20, 1997 be transferred to or held by an Unrestricted Subsidiary. For purposes of making such determination, all outstanding Investments by the Company and its Restricted Subsidiaries (except to the extent repaid in cash) in the Subsidiary so designated will be deemed to be Restricted Payments at the time of such designation and will reduce the amount available for Restricted Payments under the first paragraph of this covenant. All such outstanding Investments will be deemed to constitute Investments in an amount equal to the fair market value of such Investments at the time of such designation. Such designation will only be permitted if such Restricted Payment would be permitted at such time and if such Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary if such designation would not cause a Voting Rights Triggering Event. The amount of all Restricted Payments (other than cash) shall be the fair market value on the date of the Restricted Payment of the asset(s) or securities proposed to be transferred or issued by the Company or the applicable Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair market value of any property, assets or Investments required by this covenant to be determined shall be determined by the Board of Directors whose resolution with respect thereto shall be delivered to the Transfer Agent. Incurrence of Indebtedness and Issuance of Preferred Stock The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to (collectively, "incur") any Indebtedness (including Acquired Debt) and that the Company will not issue any Disqualified Stock and will not permit any of its Restricted Subsidiaries to issue any shares of preferred stock; provided, that the Company may incur Indebtedness (including Acquired Debt) or issue shares of Disqualified Stock and the Company's Restricted Subsidiaries may incur Indebtedness if, in each case, the Company's Debt to Adjusted Consolidated Cash Flow Ratio at the time of incurrence of such Indebtedness or the issuance of such Disqualified Stock, after giving pro forma effect to such incurrence or issuance as of such date and to the use of proceeds therefrom as if the same had occurred at the beginning of the most recently ended four full fiscal quarter period of the Company for which internal financial statements are available, would have been no greater than 7.5 to 1. 145
The provisions of the first paragraph of this covenant will not apply to the incurrence of any of the following items of Indebtedness or to the issuance of any of the following items of Disqualified Stock or preferred stock (collectively, "Permitted Debt"): (1) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness (including Indebtedness under Credit Facilities) in an aggregate principal amount (with letters of credit being deemed to have a principal amount equal to the maximum potential liability of the Company and its Restricted Subsidiaries thereunder) at any one time outstanding not to exceed the greater of (x) $200.0 million less the aggregate amount of all Net Proceeds of Asset Sales applied to repay Indebtedness under a Credit Facility pursuant to the covenant described above under the caption "--Repurchase at the Option of Holders--Asset Sales" and (y) 70% of the Eligible Receivables that are outstanding as of such date of incurrence; (2) the incurrence by the Company and its Restricted Subsidiaries of the Existing Indebtedness; (3) the issuance by the Company of preferred stock represented by the Exchangeable Preferred Stock and the incurrence by the Company of Indebtedness represented by the Exchange Debentures; (4) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness represented by Capital Lease Obligations, mortgage financings or purchase money obligations, in each case incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvement of property, plant or equipment used in the business of the Company or such Restricted Subsidiary, in an aggregate principal amount, including all Permitted Refinancing Indebtedness incurred to refund, refinance or replace any other Indebtedness incurred pursuant to this clause (4), not to exceed $10.0 million at any one time outstanding; (5) the incurrence by the Company or any of its Restricted Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund Indebtedness of the Company or any of its Restricted Subsidiaries or Disqualified Stock of the Company (other than intercompany Indebtedness) that was permitted by the Certificate of Designations to be incurred under the first paragraph hereof or clauses (2) or (3) or this clause (5) of this paragraph; (6) the incurrence by the Company or any of its Restricted Subsidiaries of intercompany Indebtedness between or among the Company and any of its Restricted Subsidiaries; provided, that (A) any subsequent issuance or transfer of Equity Interests that results in any such Indebtedness being held by a Person other than the Company or a Restricted Subsidiary and (B) any sale or other transfer of any such Indebtedness to a Person that is not either the Company or a Restricted Subsidiary shall be deemed, in each case, to constitute an incurrence of such Indebtedness by the Company or such Restricted Subsidiary, as the case may be; (7) the incurrence by the Company or any of its Restricted Subsidiaries of Hedging Obligations that are incurred for the purpose of fixing or hedging interest rate risk with respect to any floating rate Indebtedness that is permitted by the terms of the Certificate of Designations to be outstanding or currency exchange risk; (8) the guarantee by the Company or any of its Restricted Subsidiaries of Indebtedness of the Company or a Restricted Subsidiary of the Company that was permitted to be incurred by another provision of the Certificate of Designations; (9) the incurrence by the Company or any of its Restricted Subsidiaries of Acquired Debt in connection with the acquisition of assets or a new Subsidiary and the incurrence by the Company's Restricted Subsidiaries of Indebtedness as a result of the designation of an Unrestricted Subsidiary as a Restricted Subsidiary; provided that, in the case of any such incurrence of Acquired Debt, such Acquired Debt was incurred by the prior owner of such assets 146
or such Restricted Subsidiary prior to such acquisition by the Company or one of its Restricted Subsidiaries and was not incurred in connection with, or in contemplation of, such acquisition by the Company or one of its Restricted Subsidiaries; and provided further that, in the case of any incurrence pursuant to this clause (9), as a result of such acquisition by the Company or one of its Restricted Subsidiaries, the Company's Debt to Adjusted Consolidated Cash Flow Ratio at the time of incurrence of such Acquired Debt, after giving pro forma effect to such incurrence as if the same had occurred at the beginning of the most recently ended four full fiscal quarter period of the Company for which internal financial statements are available, would have been less than the Company's Debt to Adjusted Consolidated Cash Flow Ratio for the same period without giving pro forma effect to such incurrence; (10) the incurrence by the Company of Indebtedness not to exceed, at any one time outstanding, the sum of (i) 2.0 times the aggregate net cash proceeds plus (ii) 1.0 times the fair market value of non-cash proceeds (evidenced by a resolution of the Board of Directors set forth in an Officers' Certificate delivered to the Transfer Agent), in each case, from the issuance and sale, other than to a Subsidiary, of Equity Interests (other than Disqualified Stock) of the Company since the Issue Date (less the amount of such proceeds used to make Restricted Payments as provided in clause (3)(b) of the first paragraph or clause (2) of the second paragraph of the covenant described above under the caption "--Restricted Payments"); provided that such Indebtedness does not mature prior to the Stated Maturity of the Exchangeable Preferred Stock and the Weighted Average Life to Maturity of such Indebtedness is longer than that of the Exchangeable Preferred Stock; and (11) the incurrence by the Company or any of its Restricted Subsidiaries of additional Indebtedness and/or the issuance by the Company of Disqualified Stock in an aggregate principal amount, accreted value or liquidation preference, as applicable, at any time outstanding, not to exceed an amount equal to $100.0 million less the aggregate amount of all Investments made pursuant to clause (12) of the definition of Permitted Investments; provided that, notwithstanding the foregoing, the aggregate principal amount, accreted value or liquidation preference, as applicable, permitted to be incurred or issued pursuant to this clause (11) shall not be reduced to less than $25.0 million. For purposes of determining compliance with this covenant, in the event that an item of Indebtedness meets the criteria of more than one of the categories of Permitted Debt described in clauses (1) through (11) above or is entitled to be incurred pursuant to the first paragraph of this covenant, the Company shall, in its sole discretion, classify (or later reclassify in whole or in part) such item of Indebtedness in any manner that complies with this covenant. Accrual of interest, accretion or amortization of original issue discount and the payment of interest in the form of additional Indebtedness will not be deemed to be an incurrence of Indebtedness for purposes of this covenant. Dividend and Other Payment Restrictions Affecting Subsidiaries The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary to: (1) pay dividends or make any other distributions to the Company or any of its Restricted Subsidiaries on its Capital Stock or with respect to any other interest or participation in, or measured by, its profits; (2) pay any indebtedness owed to the Company or any of its Restricted Subsidiaries; (3) make loans or advances to the Company or any of its Restricted Subsidiaries; or (4) transfer any of its properties or assets to the Company or any of its Restricted Subsidiaries. 147
However, the foregoing restrictions will not apply to encumbrances or restrictions existing under or by reason of: (1) Existing Indebtedness or Indebtedness under the Senior Credit Facility, in each case as in effect on the Issue Date, and any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings thereof; provided that such amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings are no more restrictive, taken as a whole, with respect to such dividend and other payment restrictions than those contained in the applicable series of Existing Indebtedness or in the Senior Credit Facility, in each case as in effect on the Issue Date; (2) encumbrances and restrictions applicable to any Unrestricted Subsidiary, as the same are in effect as of the date on which such Subsidiary becomes a Restricted Subsidiary, and as the same may be amended, modified, restated, renewed, increased, supplemented, refunded, replaced or refinanced; provided that such amendments, modifications, restatements, renewals, increases, supplements, refundings, replacement or refinancings are no more restrictive, taken as a whole, with respect to such dividend and other payment restrictions than those contained in the applicable series of Indebtedness of such Subsidiary as in effect on the date on which such Subsidiary becomes a Restricted Subsidiary; (3) any Indebtedness (incurred in compliance with the covenant under the heading "--Incurrence of Indebtedness and Issuance of Preferred Stock") or any agreement pursuant to which such Indebtedness is issued if the encumbrance or restriction applies only in the event of a payment default or default with respect to a financial covenant contained in such Indebtedness or agreement and such encumbrance or restriction is not materially more disadvantageous to the holders of the Exchangeable Preferred Stock than is customary in comparable financings (as determined by the Company) and the Company determines that any such encumbrance or restriction will not materially affect the Company's ability to pay dividends or the Liquidation Preference on the Exchangeable Preferred Stock; (4) the Certificate of Designations; (5) applicable law; (6) any instrument governing Indebtedness or Capital Stock of a Person acquired by the Company or any of its Restricted Subsidiaries as in effect at the time of such acquisition (except to the extent such Indebtedness was incurred in connection with or in contemplation of such acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired, provided that, in the case of Indebtedness, such Indebtedness was permitted by the terms of the Certificate of Designations to be incurred; (7) by reason of customary non-assignment provisions in leases or licenses entered into in the ordinary course of business; (8) purchase money obligations for property acquired in the ordinary course of business that impose restrictions of the nature described in clause (4) in the prior paragraph on the property so acquired; (9) the provisions of agreements governing Indebtedness incurred pursuant to clause (4) of the second paragraph of the covenant described above under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock"; (10) any agreement for the sale of a Restricted Subsidiary that restricts that Restricted Subsidiary pending its sale; (11) Permitted Refinancing Indebtedness, provided that the restrictions contained in the agreements governing such Permitted Refinancing Indebtedness are no more restrictive, taken as a whole, than those contained in the agreements governing the Indebtedness being refinanced; 148
(12) Liens that limit the right of the debtor to transfer the assets subject to such Liens; (13) provisions with respect to the disposition or distribution of assets or property in joint venture agreements and other similar agreements; and (14) restrictions on cash or other deposits or net worth imposed by customers under contracts entered into in the ordinary course of business. Merger, Consolidation or Sale of Assets The Company may not consolidate or merge with or into (whether or not the Company is the surviving corporation), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions, to another corporation, Person or entity unless: (1) the Company is the surviving corporation or the entity or the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia; (2) the entity or Person formed by or surviving any such consolidation or merger (if other than the Company) or the entity or Person to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made assumes all the obligations of the Company under the Exchangeable Preferred Stock and the Certificate of Designations; (3) immediately after such transaction no Voting Rights Triggering Event exists; and (4) except in the case of a merger of the Company with or into a Wholly Owned Restricted Subsidiary of the Company and except in the case of a merger entered into solely for the purpose of reincorporating the Company in another jurisdiction, (a) in the case of a merger or consolidation in which the Company is the surviving corporation, the Company's Debt to Adjusted Consolidated Cash Flow Ratio, at the time of such transaction after giving pro forma effect thereto as if such transaction had occurred at the beginning of the most recently ended four full fiscal quarter period of the Company for which internal financial statements are available, would have been less than the Company's Debt to Adjusted Consolidated Cash Flow Ratio for the same period without giving pro forma effect to such transaction, or (b) in the case of any other such transaction the Debt to Adjusted Consolidated Cash Flow of the entity or Person formed by or surviving any such consolidation or merger (if other than the Company), or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made, at the time of such transaction after giving pro forma effect thereto as if such transaction had occurred at the beginning of the most recently ended four full fiscal quarter period of such entity or Person for which internal financial statements are available, would have been less than the Company's Debt to Adjusted Consolidated Cash Flow Ratio for the same period without giving pro forma effect to such transaction; provided that for purposes of determining the Debt to Adjusted Consolidated Cash Flow Ratio of any such entity or Person for purposes of this clause (b) such entity or Person shall be substituted for the Company in the definition of Debt to Adjusted Consolidated Cash Flow Ratio and the defined terms included therein under the caption "--Certain Definitions". Transactions with Affiliates The Company will not, and will not permit any of its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any transaction, contract, 149
agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless: (1) such Affiliate Transaction is on terms that are no less favorable to the Company or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction by the Company or such Restricted Subsidiary with an unrelated Person; and (2) the Company delivers to the Transfer Agent: (a) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $1.0 million, a resolution of the Board of Directors set forth in an Officers' Certificate certifying that such Affiliate Transaction complies with clause (i) above and that such Affiliate Transaction has been approved by a majority of the disinterested members of the Board of Directors; and (b) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $10.0 million, an opinion as to the fairness to the Holders of such Affiliate Transaction from a financial point of view issued by an accounting, appraisal or investment banking firm of national standing. The following items shall not be deemed to be Affiliate Transactions and therefore will not be subject to the provisions of the prior paragraph: (1) any employment arrangements with any executive officer of the Company or a Restricted Subsidiary that is entered into by the Company or any of its Restricted Subsidiaries in the ordinary course of business and consistent with compensation arrangements of similarly situated executive officers at comparable companies engaged in Permitted Businesses; (2) transactions between or among the Company and/or its Restricted Subsidiaries; (3) payment of directors fees in an aggregate annual amount not to exceed $25,000 per Person; (4) Restricted Payments that are permitted by the provisions of the Certificate of Designations described above under the caption "--Restricted Payments"; (5) the issuance or sale of Equity Interests (other than Disqualified Stock) of the Company; and (6) transactions pursuant to the provisions of the Governance Agreement, the Rights Agreement, the Stockholders' Agreement, the CTSH Shareholders' Agreement, the CTI Services Agreement, the CTI Operating Agreement and the Crown Transition Agreements, as the same are in effect on the Issue Date. Limitation on Issuances and Sales of Capital Stock of Restricted Subsidiaries The Company: (1) will not, and will not permit any Restricted Subsidiary of the Company to, transfer, convey, sell, lease or otherwise dispose of any Equity Interests in any Restricted Subsidiary of the Company to any Person (other than the Company or a Wholly Owned Restricted Subsidiary of the Company); and (2) will not permit any Restricted Subsidiary of the Company to issue any of its Equity Interests (other than, if necessary, shares of its Capital Stock constituting directors' qualifying shares) to any Person other than to the Company or a Wholly Owned Restricted Subsidiary of the Company, unless, in each such case: (a) as a result of such transfer, conveyance, sale, lease or other disposition or issuance such Restricted Subsidiary no longer constitutes a Subsidiary and (b) the 150
cash Net Proceeds from such transfer, conveyance, sale, lease or other disposition or issuance are applied in accordance with the covenant described above under the caption "--Repurchase at the Option of Holders--Asset Sales". Senior Subordinated Debt So long as any Exchangeable Preferred Stock is outstanding, the Company shall not incur any Indebtedness, other than the Exchange Debentures and New Exchange Debentures, that is expressly made subordinated in right of payment to any Senior Debt unless such Indebtedness, by its terms and by the terms of any agreement or instrument pursuant to which such Indebtedness is outstanding, is expressly made pari passu with, or subordinate in right of payment to, the Exchange Debentures pursuant to provisions substantially similar to those contained in the Exchange Indenture; provided that the foregoing limitations shall not apply to distinctions between categories of Senior Debt that exist by reason of any Liens or Guarantees arising or created in respect of some but not all Senior Debt. Business Activities The Company will not, and will not permit any Subsidiary to, engage in any business other than Permitted Businesses, except to such extent as would not be material to the Company and its Subsidiaries taken as a whole. Reports Whether or not required by the rules and regulations of the Securities and Exchange Commission (the "Commission"), so long as any Exchangeable Preferred Stock is outstanding, the Company will furnish to the Holders of Exchangeable Preferred Stock: (1) all quarterly and annual financial information that would be required to be contained in a filing with the Commission on Forms 10-Q and 10-K if the Company were required to file such Forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" that describes the financial condition and results of operations of the Company and its consolidated Subsidiaries (showing in reasonable detail, in the footnotes to the financial statements and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" (in each case to the extent not prohibited by the Commission's rules and regulations), (a) the financial condition and results of operations of the Company and its Restricted Subsidiaries separate from the financial condition and results of operations of the Unrestricted Subsidiaries of the Company and (b) the Tower Cash Flow for the most recently completed fiscal quarter and the Adjusted Consolidated Cash Flow for the most recently completed four-quarter period) and, with respect to the annual information only, a report thereon by the Company's certified independent accountants; and (2) all current reports that would be required to be filed with the Commission on Form 8-K if the Company were required to file such reports, in each case within the time periods specified in the Commission's rules and regulations. In addition, following the consummation of the exchange offer contemplated by the Registration Rights Agreement, whether or not required by the rules and regulations of the Commission, the Company will file a copy of all such information and reports with the Commission for public availability within the time periods specified in the Commission's rules and regulations (unless the Commission will not accept such a filing) and make such information available to securities analysts and prospective investors upon request. 151
Transfer and Exchange A Holder may transfer or exchange Exchangeable Preferred Stock in accordance with the Certificate of Designations. The Registrar and the Transfer Agent may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Company may require a Holder to pay any taxes and fees required by law. The Company is not required to transfer or exchange any shares of Exchangeable Preferred Stock selected for redemption. Also, the Company is not required to transfer or exchange any share of Exchangeable Preferred Stock for a period of 15 days before a selection of Exchangeable Preferred Stock to be redeemed. The registered Holder of a share of Exchangeable Preferred Stock will be treated as the owner of it for all purposes. Amendment, Supplement and Waiver Except as provided in the next two succeeding paragraphs, the Certificate of Designations or the Exchangeable Preferred Stock may be amended or supplemented with the consent of the Holders of at least a majority in aggregate Liquidation Preference of the Exchangeable Preferred Stock then outstanding (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, Exchangeable Preferred Stock), and any existing default or compliance with any provision of the Certificate of Designations or the Exchangeable Preferred Stock may be waived with the consent of the Holders of a majority in aggregate Liquidation Preference of the then outstanding Exchangeable Preferred Stock (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, Exchangeable Preferred Stock). Without the consent of each Holder affected, an amendment or waiver may not (with respect to any shares of Exchangeable Preferred Stock held by a non- consenting Holder): (1) alter the voting rights with respect to the Exchangeable Preferred Stock or reduce the number of shares of Exchangeable Preferred Stock whose Holders must consent to an amendment, supplement or waiver; (2) reduce the Liquidation Preference of or change the Mandatory Redemption Date of any Exchangeable Preferred Stock or alter the provisions with respect to the redemption (but not any required repurchase in connection with an Asset Sale Offer or Change of Control Offer) of the Exchangeable Preferred Stock; (3) reduce the rate of or change the time for payment of dividends on any Exchangeable Preferred Stock; (4) waive a default in the payment of dividends on the Exchangeable Preferred Stock; (5) make any Exchangeable Preferred Stock payable in any form or money other than that stated in the Certificate of Designations; (6) waive a redemption payment (but not any payment upon a required repurchase in connection with an Asset Sale Offer or Change of Control Offer) with respect to any Exchangeable Preferred Stock; or (7) make any change in the foregoing amendment and waiver provisions. Notwithstanding the foregoing, without the consent of any Holder of Exchangeable Preferred Stock, the Company may (to the extent permitted by Delaware law) amend or supplement the Certificate of Designations: (1) to cure any ambiguity, defect or inconsistency; (2) to provide for uncertificated Exchangeable Preferred Stock in addition to or in place of certificated Exchangeable Preferred Stock; 152
(3) to provide for the assumption of the Company's obligations to Holders of Exchangeable Preferred Stock in the case of a merger or consolidation; or (4) to make any change that would provide any additional rights or benefits to the Holders of Exchangeable Preferred Stock or that does not adversely affect the legal rights under the Certificate of Designations of any such Holder. Reissuance Exchangeable Preferred Stock redeemed or otherwise acquired by the Company will assume the status of authorized but unissued preferred stock and may thereafter be reissued in the same manner as the other authorized but unissued preferred stock, including as Parity Securities, but not as the same class as the Exchangeable Preferred Stock. Description of the Exchange Debentures You can find the definitions of certain terms used in this description under the subheading "Certain Definitions". In this description, the word "Company" refers only to Crown Castle International Corp. and not to any of its subsidiaries. The Exchange Debentures will, if and when issued, be issued pursuant to an Indenture (the "Exchange Indenture") between the Company and United States Trust Company of New York, as trustee (the "Trustee"). The terms of the Exchange Debentures include those stated in the Exchange Indenture and those made part of the Exchange Indenture by reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The following description is a summary of the material provisions of the Exchange Indenture. It does not restate the Exchange Indenture in its entirety. We urge you to read the Exchange Indenture because it, and not this description, defines your rights as holders of these Exchange Debentures. Copies of the proposed form of Exchange Indenture are available as set forth below under the subheading "Additional Information". These Exchange Debentures: . will be general unsecured obligations of the Company; . will be subordinated in right of payment to all existing and future Senior Debt of the Company; and . will be senior in right of payment to all existing and future subordinated Indebtedness of the Company other than future subordinated Indebtedness that ranks on a parity with the Exchange Debentures. As of September 30, 1998, we had total Senior Debt of approximately $232.8 million. As indicated above and as discussed in detail below under the subheading "Subordination", payments on the Exchange Debentures will be subordinated to the prior payment in full in cash or Cash Equivalents (other than cash equivalents of the type referred to in clauses (3) and (4) of the definition thereof) of all Senior Debt. The Exchange Indenture will permit us to incur additional Senior Debt. In addition, our only significant asset is the outstanding capital stock of our subsidiaries, and we rely on payments from our subsidiaries to be able to meet our obligations. In the event of a bankruptcy, liquidation or reorganization of any of our subsidiaries, such subsidiaries would pay the holders of their debt and their trade creditors before they would be able to distribute any of their assets to us. As of the Issue Date, all of our subsidiaries (other than CTSH and its subsidiaries and Crown Castle Investment Corp. and its subsidiaries) will be "Restricted Subsidiaries". However, under the circumstances described below under the subheading "Certain Covenants--Restricted Payments", we will be permitted to designate certain of our other Subsidiaries as "Unrestricted Subsidiaries". Unrestricted Subsidiaries will not be subject to most of the restrictive covenants in the Exchange Indenture. 153
Principal, Maturity and Interest The Company will issue Exchange Debentures in denominations of $1,000 and integral multiples of $1,000. The Exchange Debentures will mature on December 15, 2010. Interest on these Exchange Debentures will accrue at the rate of 12 3/4% per annum and will be payable semi-annually in arrears on June 15 and December 15. The Company will make each interest payment to the Holders of record of these Exchange Debentures on the immediately preceding June 1 and December 1. On or prior to December 15, 2003, the Company may, at its option, pay interest: (1) in cash; or (2) in additional Exchange Debentures having an aggregate principal amount equal to the amount of such interest. After December 15, 2003, the Company will pay interest in cash only. The Company does not expect to pay any interest in cash before December 15, 2003. Interest on these Exchange Debentures will accrue from the date of original issuance or, if interest has already been paid, from the date it was most recently paid. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. Methods of Receiving Payments on the Exchange Debentures If a Holder has given wire transfer instructions to the Company, the Company will make all principal, premium and interest and Liquidated Damages, if any, payments on those Exchange Debentures in accordance with those instructions. All other payments on these Exchange Debentures will be made at the office or agency of the Paying Agent and Registrar within the City and State of New York unless the Company elects to make interest payments by check mailed to the Holders at their address set forth in the register of Holders. Paying Agent and Registrar for the Exchange Debentures The Exchange Trustee will initially act as Paying Agent and Registrar. The Company may change the Paying Agent or Registrar without prior notice to the Holders of the Exchange Debentures, and the Company or any of its Subsidiaries may act as Paying Agent or Registrar. Transfer and Exchange A Holder may transfer or exchange Exchange Debentures in accordance with the Exchange Indenture. The Registrar and the Exchange Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Company may require a Holder to pay any taxes and fees required by law or permitted by the Exchange Indenture. The Company is not required to transfer or exchange any Senior Subordinated Exchange Debenture selected for redemption. Also, the Company is not required to transfer or exchange any Senior Subordinated Exchange Debenture for a period of 15 days before a selection of Exchange Debentures to be redeemed. The registered Holder of a Senior Subordinated Exchange Debenture will be treated as the owner of it for all purposes. Subordination The payment of principal, premium, interest, Liquidated Damages, if any, and any other Obligations on, or relating to, the Exchange Debentures will be subordinated to the prior payment in full in cash or Cash Equivalents (other than cash equivalents of the type referred to in clauses (3) and (4) of the definition thereof) of all Senior Debt of the Company. 154
The holders of Senior Debt will be entitled to receive payment in full in cash or Cash Equivalents (other than cash equivalents of the type referred to in clauses (3) and (4) of the definition thereof) of all Obligations due in respect of Senior Debt (including interest after the commencement of any such proceeding at the rate specified in the applicable Senior Debt) before the Holders of Exchange Debentures will be entitled to receive any payment or distribution of any kind or character with respect to any Obligations on, or relating to, the Exchange Debentures (except that Holders of Exchange Debentures may receive and retain Permitted Junior Securities and payments made from the trust described under the caption "--Legal Defeasance and Covenant Defeasance" so long as the deposit of amounts therein satisfied the relevant conditions specified in the Exchange Indenture at the time of such deposit), in the event of any distribution to creditors of the Company: (1) in a liquidation or dissolution of the Company; (2) in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property; (3) in an assignment for the benefit of creditors; or (4) in any marshalling of the Company's assets and liabilities. The Company also may not make any payment or distribution of any kind or character with respect to any Obligations on, or with respect to, the Exchange Debentures or acquire any of the Exchange Debentures for cash or property or otherwise (except in Permitted Junior Securities or from the trust described under the caption "--Legal Defeasance and Covenant Defeasance") if: (1) a payment default on Designated Senior Debt occurs and is continuing beyond any applicable period of grace; or (2) any other default occurs and is continuing on Designated Senior Debt that permits holders of the Designated Senior Debt to accelerate its maturity immediately without further notice (except such notice as may be required to effect such acceleration) or the expiration of any applicable grace periods and the Exchange Trustee receives a notice of such default (a "Payment Blockage Notice") from the holders of such Designated Senior Debt or their Representative. Payments on the Exchange Debentures may and shall be resumed: (1) in the case of a payment default, upon the date on which such default is cured or waived; or (2) in case of a nonpayment default, upon the earlier of (x) the date on which all nonpayment defaults are cured or waived, (y) 179 days after the date of delivery of the applicable Payment Blockage Notice or (z) the date on which the Exchange Trustee receives notice from the holders of such Designated Senior Debt or their Representative rescinding the Payment Blockage Notice, unless the maturity of any Designated Senior Debt has been accelerated. No new Payment Blockage Notice may be delivered by the holders of any Designated Senior Debt or their Representative unless and until 360 days have elapsed since the effectiveness of the immediately prior Payment Blockage Notice. No nonpayment default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Exchange Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice unless such default shall have been cured or waived for a period of not less than 90 consecutive days. The Company must promptly notify holders of Senior Debt if payment of the Exchange Debentures are accelerated because of an Event of Default. 155
As a result of the subordination provisions described above, in the event of a bankruptcy, liquidation or reorganization of the Company, Holders of Exchange Debentures may recover less ratably than creditors of the Company who are holders of Senior Debt. See "Risk Factors--Subordination of the Exchangeable Preferred Stock". Optional Redemption During the first 36 months after the Issue Date, the Company may on any one or more occasions redeem up to 35% of the aggregate principal amount of Exchange Debentures then outstanding at a redemption price of 112.750% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the redemption date, with the net cash proceeds of one or more Public Equity Offerings or Strategic Equity Investments; provided that: (1) at least $162.5 million aggregate principal amount of Exchange Debentures remains outstanding immediately after the occurrence of such redemption (excluding Exchange Debentures held by the Company and its Subsidiaries); and (2) the redemption must occur within 60 days of the date of the closing of the Public Equity Offering or Strategic Equity Investment. Except pursuant to the preceding paragraph, the Exchange Debentures will not be redeemable at the Company's option prior to December 15, 2003. On or after December 15, 2003, the Company may redeem all or any part of the Exchange Debentures upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of the principal amount) set forth below plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the applicable redemption date, if redeemed during the twelve-month period beginning on December 15 of the years indicated below: Year Percentage ---- ---------- 2003.............................................................. 106.375% 2004.............................................................. 104.781% 2005.............................................................. 103.188% 2006.............................................................. 101.594% 2007 and thereafter............................................... 100.000% The Senior Discount Notes Indenture currently restricts the redemption of the Exchange Debentures and additional indebtedness may restrict the Company's ability to redeem the Exchange Debentures in the future. See "Description of Certain Indebtedness". Selection and Notice If less than all of the Exchange Debentures are to be redeemed at any time, the Exchange Trustee will select Exchange Debentures for redemption as follows: (1) if the Exchange Debentures are listed, in compliance with the requirements of the principal national securities exchange on which the Exchange Debentures are listed; or (2) If the Exchange Debentures are not so listed, on a pro rata basis, by lot or by such method as the Exchange Trustee shall deem fair and appropriate. No Senior Subordinated Exchange Debenture of $1,000 or less shall be redeemed in part. Notices of redemption shall be mailed by first class mail at least 30 but not more than 60 days before the redemption date to each Holder of Exchange Debentures to be redeemed at its registered address. Notices of redemption may not be conditional. If any Exchange Debentures are to be redeemed in part only, the notice of redemption that relates to that Exchange Debentures shall state the portion of the principal amount thereof to be 156
redeemed. A new certificate with an aggregate principal amount equal to the unredeemed portion of the original certificate evidencing Exchange Debentures presented for redemption will be issued in the name of the Holder thereof upon cancellation of the original certificate. Exchange Debentures called for redemption become due on the date fixed for redemption. On and after the redemption date, interest ceases to accrue on Exchange Debentures or portions thereof called for redemption. Mandatory Redemption The Company is not required to make mandatory redemption or sinking fund payments with respect to the Exchange Debentures. Repurchase at the Option of Holders Change of Control If a Change of Control occurs, each Holder of Exchange Debentures will have the right to require the Company to repurchase all or any part (but not any fractional shares) of such Holder's Exchange Debentures pursuant to the offer described below (the "Change of Control Offer"). In the Change of Control Offer, the Company will offer a payment in cash equal to 101% of the aggregate principal amount of Exchangeable Preferred Stock repurchased plus accrued and unpaid interest and Liquidated Damages thereon, if any (subject to the right of Holders of record on the relevant record date to receive dividends and Liquidated Damages, if any, due on the relevant dividend payment date), to the date of purchase (the "Change of Control Payment"). Within 30 days following any Change of Control, the Company will mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase Exchange Debentures on the date specified in such notice, which date shall be no earlier than 30 days and no later than 60 days from the date such notice is mailed (the "Change of Control Payment Date"), pursuant to the procedures required by the Exchange Indenture and described in such notice. On the Change of Control Payment Date, the Company will, to the extent lawful: (1) accept for payment all Exchange Debentures or portions thereof properly tendered pursuant to the Change of Control Offer; (2) deposit with the Paying Agent an amount equal to the Change of Control Payment in respect of all Exchange Debentures or portions thereof so tendered; and (3) deliver or cause to be delivered to the Exchange Trustee the Exchange Debentures so accepted together with an Officers' Certificate stating the aggregate principal amount of Exchange Debentures or portions thereof being purchased by the Company. The Company will promptly mail to each Holder of Exchange Debentures so tendered the Change of Control Payment for such Exchange Debentures, and the Exchange Trustee will promptly authenticate and mail (or cause to be transferred by book entry) to each Holder a new certificate representing the Exchange Debentures equal in principal amount to any unpurchased portion of the Exchange Debentures surrendered, if any. The Change of Control provisions described above will be applicable whether or not any other provisions of the Exchange Indenture are applicable. The Company will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations applicable to any Change of Control Offer. To the extent that the provisions of any such securities laws or securities regulations conflict with the provisions of the covenant described above, the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under the covenant described above by virtue thereof. 157
The Change of Control purchase feature is a result of negotiations between the Company and the Initial Purchasers. Management has no present intention to engage in a transaction involving a Change of Control, although it is possible that the Company would decide to do so in the future. Subject to the limitations discussed below, the Company could, in the future, enter into certain transactions, including acquisitions, refinancings or other recapitalizations, that would not constitute a Change of Control under the Exchange Indenture, but that could increase the amount of Indebtedness outstanding at such time or otherwise affect the Company's capital structure. Restrictions on the ability of the Company to incur additional Indebtedness are contained in the covenants described under "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock". Such restrictions can only be waived with the consent of the Holders of a majority in principal amount of the Exchange Debentures then outstanding. Except for the limitations contained in such covenants, however, the Exchange Indenture will not contain any covenants or provisions that may afford holders of the Exchange Debentures protection in the event of certain highly leveraged transactions. The Senior Discount Notes Indenture currently prohibits the Company from repurchasing any Exchange Debentures. In addition, existing Indebtedness and anticipated future Indebtedness of the Company's subsidiaries and joint ventures restricts or will restrict the Company's access to the cash flow from its subsidiaries and joint ventures. Any future agreements relating to Indebtedness to which the Company or any of its subsidiaries or joint ventures become a party may contain similar restrictions and provisions. In the event that a Change of Control occurs at a time when the Company is prohibited or prevented from repurchasing Exchange Debentures, the Company seek the consent of the applicable lenders to allow such repurchase or could attempt to refinance the borrowings that contain such prohibition. If the Company does not obtain such a consent or repay such borrowings, the Company will remain prohibited from repurchasing the Exchange Debentures. In such case, the Company's failure to purchase tendered Exchange Debentures would constitute an Event of Default under the Exchange Indenture which would, in turn, constitute a default under the Senior Discount Notes Indenture. Future Indebtedness of the Company and its Subsidiaries may contain prohibitions on the repurchase of the Exchange Debentures and on the occurrence of certain events that would constitute a Change of Control or may require such Indebtedness to be repurchased upon a Change of Control. Finally, the Company's ability to pay cash to the Holders of Exchange Debentures following the occurrence of a Change of Control may be limited by the Company's then existing financial resources, including its ability to access the cash flow of its Subsidiaries. See "Risk Factors--Repurchase of the Exchangeable Preferred Stock or the Exchange Debentures Upon a Change of Control" and "Risk Factors--Holding Company Structure; Dependence on Dividends to Meet Cash Requirements or Pay Dividends". There can be no assurance that sufficient funds will be available when necessary to make any required repurchases. The Company will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the Exchange Indenture applicable to a Change of Control Offer made by the Company and purchases all Exchange Debentures validly tendered and not withdrawn under such Change of Control Offer. The provisions under the Exchange Indenture relative to the Company's obligation to make an offer to repurchase the Exchange Debentures as a result of a Change of Control may be waived or modified with the written consent of the Holders of a majority in principal amount of the Exchange Debentures then outstanding. The definition of Change of Control includes a phrase relating to the sale, lease, transfer, conveyance or other disposition of "all or substantially all" of the assets of the Company and its Restricted Subsidiaries taken as a whole. Although there is a developing body of case law interpreting the phrase "substantially all," there is no precise established definition of the phrase under applicable law. Accordingly, the ability of a Holder of Exchange Debentures to require the 158
Company to repurchase such Exchange Debentures as a result of a sale, lease, transfer, conveyance or other disposition of less than all of the assets of the Company and its Subsidiaries taken as a whole to another Person or group may be uncertain. Asset Sales The Company will not, and will not permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless: (1) the Company (or the Restricted Subsidiary, as the case may be) receives consideration at the time of such Asset Sale at least equal to the fair market value (evidenced by a resolution of the Board of Directors set forth in an Officers' Certificate delivered to the Exchange Trustee) of the assets or Equity Interests issued or sold or otherwise disposed of; and (2) except in the case of a Tower Asset Exchange, at least 75% of the consideration therefor received by the Company or such Restricted Subsidiary is in the form of cash or Cash Equivalents. For purposes of this provision, each of the following shall be deemed to be cash: (1) any liabilities (as shown on the Company's or such Restricted Subsidiary's most recent balance sheet), of the Company or any Restricted Subsidiary (other than contingent liabilities and liabilities that are by their terms subordinated to the Exchange Debentures or any guarantee thereof) that are assumed by the transferee of any such assets pursuant to a customary novation agreement that releases the Company or such Restricted Subsidiary from further liability; and (2) any securities, notes or other obligations received by the Company or any such Restricted Subsidiary from such transferee that are converted by the Company or such Restricted Subsidiary into cash within 20 days of the applicable Asset Sale (to the extent of the cash received). Within 365 days after the receipt of any Net Proceeds from an Asset Sale, the Company or the applicable Restricted Subsidiary may apply such Net Proceeds to: (1) reduce any Indebtedness of the Company that constitutes Senior Debt; (2) reduce any Indebtedness of any of the Company's Restricted Subsidiaries; (3) the acquisition of all or substantially all the assets of a Permitted Business; (4) the acquisition of Voting Stock of a Permitted Business from a Person that is not a Subsidiary of the Company; provided, that, after giving effect thereto, the Company or its Restricted Subsidiary owns a majority of such Voting Stock and designates such Permitted Business as a Restricted Subsidiary; or (5) the making of a capital expenditure or the acquisition of other long- term assets that are used or useful in a Permitted Business. Pending the final application of any such Net Proceeds, the Company may temporarily reduce revolving credit borrowings or otherwise invest such Net Proceeds in any manner that is not prohibited by the Exchange Indenture. Any Net Proceeds from Asset Sales that are not applied or invested as provided in the first sentence of this paragraph will be deemed to constitute "Excess Proceeds". When the aggregate amount of Excess Proceeds exceeds $10.0 million, the Company will be required to make an offer to all holders of Senior Discount Notes and may be required to make such offer to holders of other Senior Debt of the Company then outstanding (a "Senior Asset Sale Offer") to purchase the maximum principal amount of the Senior Discount Notes and such other Senior Debt, if applicable, 159
that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the principal amount or accreted value thereof, as the case may be, plus accrued and unpaid interest to the date of purchase, in accordance with the procedures set forth in the Senior Discount Notes Indenture and in the instruments governing such other Senior Debt. To the extent that the aggregate amount of Senior Discount Notes and such other Senior Debt tendered pursuant to a Senior Asset Sale Offer is less than the remaining Excess Proceeds ("Remaining Excess Proceeds") and the sum of (A) such amount of Remaining Excess Proceeds and (B) the Remaining Excess Proceeds from any subsequent Senior Asset Sale Offers exceeds $3.0 million, the Company will be required to make an offer to all Holders of Exchange Debentures and all holders of other senior subordinated Indebtedness of the Company containing provisions similar to those set forth in the Exchange Indenture with respect to offers to purchase with the proceeds of sales of assets (an "Asset Sale Offer") to purchase the maximum principal amount of Exchange Debentures and such other senior subordinated Indebtedness of the Company that may be purchased out of the Remaining Excess Proceeds, at an offer price in cash in an amount equal to 100% of the principal amount thereof plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of purchase (subject to the right of Holders of record on the relevant record date to receive interest and Liquidated Damages, if any, due on the relevant interest payment date), in accordance with the procedures set forth in the Exchange Indenture and such other senior subordinated Indebtedness of the Company. To the extent that any Remaining Excess Proceeds remain after consummation of an Asset Sale Offer, the Company may use such Excess Proceeds for any purpose not otherwise prohibited by the Exchange Indenture. If the aggregate principal amount of Exchange Debentures and such other senior subordinated Indebtedness of the Company tendered into such Asset Sale Offer surrendered by Holders thereof exceeds the amount of Remaining Excess Proceeds, the Exchange Trustee shall select the Exchange Debentures and such other senior subordinated Indebtedness to be purchased on a pro rata basis. Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset at zero. The Asset Sale provisions described above will be applicable whether or not any other provisions of the Exchange Indenture are applicable. The Company will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations applicable to any Asset Sale Offer. To the extent that the provisions of any such securities laws or securities regulations conflict with the provisions of the covenant described above, the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under the covenant described above by virtue thereof. The Senior Discount Notes Indenture currently prohibits the Company form repurchasing any Exchange Debentures. In addition, existing Indebtedness and anticipated future Indebtedness of our subsidiaries and joint ventures restricts or will restrict our access to the cash flow from those entities. Any future agreements relating to Indebtedness to which we or any of our subsidiaries or joint ventures become a party may contain similar restrictions and provisions. Certain Covenants Restricted Payments The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly: (1) declare or pay any dividend or make any other payment or distribution on account of the Company's or any of its Restricted Subsidiaries' Equity Interests (including, without limitation, any payment in connection with any merger or consolidation involving the Company or any of its Restricted Subsidiaries) or to the direct or indirect holders of the Company's or any of its Restricted Subsidiaries' Equity Interests in their capacity as such (other than dividends or 160
distributions payable in Equity Interests (other than Disqualified Stock) of the Company or to the Company or a Restricted Subsidiary of the Company); (2) purchase, redeem or otherwise acquire or retire for value (including without limitation, in connection with any merger or consolidation involving the Company) any Equity Interests of the Company or any direct or indirect parent of the Company (other than any such Equity Interests owned by the Company or any Restricted Subsidiary of the Company and other than the Exchangeable Preferred Stock); (3) make any payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value any Indebtedness that is subordinated to the Exchange Debentures, except a payment of interest or the payment of principal at Stated Maturity; or (4) make any Restricted Investment, (all such payments and other actions set forth in clauses (1) through (4) above being collectively referred to as "Restricted Payments"), unless, at the time of and after giving effect to such Restricted Payment: (1) no Default shall have occurred and be continuing or would occur as a consequence thereof; and (2) the Company would have been permitted to incur at least $1.00 of additional indebtedness pursuant to the Debt to Adjusted Consolidated Cash Flow Ratio test set forth in the first paragraph of the covenant described below under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock"; provided that the Company and its Restricted Subsidiaries will not be required to comply with this clause (2) in order to make any Restricted Investment; and (3) such Restricted Payment, together with the aggregate amount of all other Restricted Payments made by the Company and its Restricted Subsidiaries after the Issue Date (excluding Restricted Payments permitted by clauses (2), (3) and (4) of the next succeeding paragraph), is less than the sum, without duplication, of: (a) 50% of the Consolidated Net Income of the Company for the period (taken as one accounting period) from the beginning of the first fiscal quarter commencing after the Issue Date to the end of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit); plus (b) 100% of the aggregate net cash proceeds received by the Company since the Issue Date as a contribution to its common equity capital or from the issue or sale of Equity Interests of the Company (other than Disqualified Stock and except to the extent such net cash proceeds are used to incur new Indebtedness outstanding pursuant to clause (10) of the second paragraph of the covenant described below under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock") or from the issue or sale of Disqualified Stock or debt securities of the Company that have been converted into such Equity Interests (other than Equity Interests (or Disqualified Stock or convertible debt securities) sold to a Subsidiary of the Company and other than Disqualified Stock or convertible debt securities that have been converted into Disqualified Stock); plus (c) to the extent that any Restricted Investment that was made after the Issue Date is sold for cash or otherwise liquidated or repaid for cash, the lesser of (A) the cash return of capital with respect to such Restricted Investment (less the cost of disposition, if any) and (B) the initial amount of such Restricted Investment; plus (d) to the extent that any Unrestricted Subsidiary of the Company and all of its Subsidiaries are designated as Restricted Subsidiaries after the Issue Date, the lesser of (A) the fair market value of the Company's Investments in such Subsidiaries as of the date of such designation, or (B) the sum of (x) the fair market value of the Company's Investments 161
in such Subsidiaries as of the date on which such Subsidiaries were originally designated as Unrestricted Subsidiaries and (y) the amount of any Investments made in such Subsidiaries subsequent to such designation (and treated as Restricted Payments) by the Company or any Restricted Subsidiary; provided that: (i) in the event the Unrestricted Subsidiaries designated as Restricted Subsidiaries are CTSH and its Subsidiaries, the references in clauses (A) and (B) of this clause (d) to fair market value of the Company's Investments in such Subsidiaries shall mean the amount by which the fair market value of all such Investments exceeds 34.3% of the fair market value of CTSH and its Subsidiaries as a whole; and (ii) in the event the Unrestricted Subsidiaries designated as Restricted Subsidiaries are CCAIC and its Subsidiaries, the references in clauses (A) and (B) of this clause (d) to fair market value of the Company's Investments in such Subsidiaries shall mean the amount by which the fair market value of all such Investments exceeds $250.0 million; plus (e) 50% of any dividends received by the Company or a Restricted Subsidiary after the Issue Date from an Unrestricted Subsidiary of the Company, to the extent that such dividends were not otherwise included in Consolidated Net Income of the Company for such period. The foregoing provisions will not prohibit: (1) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment would have complied with the provisions of the Exchange Indenture; (2) the making of any Investment or the redemption, repurchase, retirement, defeasance or other acquisition of any subordinated Indebtedness or Equity Interests of the Company in exchange for, or out of the net cash proceeds of the sale after the Issue Date (other than to a Subsidiary of the Company) of, any Equity Interests of the Company (other than any Disqualified Stock); provided that such net cash proceeds are not used to incur new Indebtedness pursuant to clause (x) of the second paragraph of the covenant described below under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock"); and provided further that, in each such case, the amount of any such net cash proceeds that are so utilized shall be excluded from clause (3) (b) of the preceding paragraph; (3) the defeasance, redemption, repurchase or other acquisition of subordinated Indebtedness with the net cash proceeds from an incurrence of Permitted Refinancing Indebtedness; (4) the payment of any dividend by a Restricted Subsidiary of the Company to the holders of its common Equity Interests on a pro rata basis; or (5) the repurchase, redemption or other acquisition or retirement for value of any Equity Interests of the Company or any Restricted Subsidiary of the Company held by any member of the Company's (or any of its Restricted Subsidiaries') management pursuant to any management equity subscription agreement or stock option agreement in effect as of the Issue Date; provided that the aggregate price paid for all such repurchased, redeemed, acquired or retired Equity Interests shall not exceed (a) $500,000 in any twelve-month period and (b) $5.0 million in the aggregate. The Board of Directors may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such designation would not cause a Default; provided that in no event shall the businesses operated by the Company's Restricted Subsidiaries as of November 20, 1997 be transferred to or held by an Unrestricted Subsidiary. For purposes of making such determination, all outstanding Investments by the Company and its Restricted Subsidiaries (except to the extent repaid 162
in cash) in the Subsidiary so designated will be deemed to be Restricted Payments at the time of such designation and will reduce the amount available for Restricted Payments under the first paragraph of this covenant. All such outstanding Investments will be deemed to constitute Investments in an amount equal to the fair market value of such Investments at the time of such designation. Such designation will only be permitted if such Restricted Payment would be permitted at such time and if such Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary if such designation would not cause a Default. The amount of all Restricted Payments (other than cash) shall be the fair market value on the date of the Restricted Payment of the asset(s) or securities proposed to be transferred or issued by the Company or the applicable Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair market value of any property, assets or Investments required by this covenant to be determined shall be determined by the Board of Directors whose resolution with respect thereto shall be delivered to the Exchange Trustee. Incurrence of Indebtedness and Issuance of Preferred Stock The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, incur any Indebtedness (including Acquired Debt) and that the Company will not issue any Disqualified Stock and will not permit any of its Restricted Subsidiaries to issue any shares of preferred stock; provided, that the Company may incur Indebtedness (including Acquired Debt) or issue shares of Disqualified Stock and the Company's Restricted Subsidiaries may incur Indebtedness if, in each case, the Company's Debt to Adjusted Consolidated Cash Flow Ratio at the time of incurrence of such Indebtedness or the issuance of such Disqualified Stock, after giving pro forma effect to such incurrence or issuance as of such date and to the use of proceeds therefrom as if the same had occurred at the beginning of the most recently ended four full fiscal quarter period of the Company for which internal financial statements are available, would have been no greater than 7.5 to 1. The provisions of the first paragraph of this covenant will not apply to the incurrence of any of the following items of Indebtedness or to the issuance of any of the following items of Disqualified Stock or preferred stock (collectively, "Exchange Debentures Permitted Debt"): (1) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness (including Indebtedness under Credit Facilities) in an aggregate principal amount (with letters of credit being deemed to have a principal amount equal to the maximum potential liability of the Company and its Restricted Subsidiaries thereunder) at any one time outstanding not to exceed the greater of (x) $200.0 million less the aggregate amount of all Net Proceeds of Asset Sales applied after the Issue Date to repay Indebtedness under a Credit Facility pursuant to the covenant described above under the caption "--Repurchase at the Option of Holders--Asset Sales" and (y) 70% of the Eligible Receivables that are outstanding as of such date of incurrence; (2) the incurrence by the Company and its Restricted Subsidiaries of the Existing Indebtedness; (3) the incurrence by the Company of Indebtedness represented by the Exchange Debentures; (4) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness represented by Capital Lease Obligations, mortgage financings or purchase money obligations, in each case incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvement of property, plant or equipment used in the business of the Company or such Restricted Subsidiary, in an aggregate principal amount, including all 163
Permitted Refinancing Indebtedness incurred to refund, refinance or replace any other Indebtedness incurred pursuant to this clause (4), not to exceed $10.0 million at any one time outstanding; (5) the incurrence by the Company or any of its Restricted Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund Indebtedness of the Company or any of its Restricted Subsidiaries or Disqualified Stock of the Company (other than intercompany Indebtedness) that was permitted by the Exchange Indenture to be incurred under the first paragraph hereof or clauses (2) or (3) or this clause (5) of this paragraph; (6) the incurrence by the Company or any of its Restricted Subsidiaries of intercompany Indebtedness between or among the Company and any of its Restricted Subsidiaries; provided, that (i) if the Company is the obligor on such Indebtedness, such Indebtedness is expressly subordinated to the prior payment in full in cash of all Obligations with respect to the Exchange Debentures and (ii)(A) any subsequent issuance or transfer of Equity Interests that results in any such Indebtedness being held by a Person other than the Company or a Restricted Subsidiary and (B) any sale or other transfer of any such Indebtedness to a Person that is not either the Company or a Restricted Subsidiary shall be deemed, in each case, to constitute an incurrence of such Indebtedness by the Company or such Restricted Subsidiary, as the case may be; (7) the incurrence by the Company or any of its Restricted Subsidiaries of Hedging Obligations that are incurred for the purpose of fixing or hedging interest rate risk with respect to any floating rate Indebtedness that is permitted by the terms of the Exchange Indenture to be outstanding or currency exchange risk; (8) the guarantee by the Company or any of its Restricted Subsidiaries of Indebtedness of the Company or a Restricted Subsidiary of the Company that was permitted to be incurred by another provision of the Exchange Indenture; (9) the incurrence by the Company or any of its Restricted Subsidiaries of Acquired Debt in connection with the acquisition of assets or a new Subsidiary and the incurrence by the Company's Restricted Subsidiaries of Indebtedness as a result of the designation of an Unrestricted Subsidiary as a Restricted Subsidiary; provided that, in the case of any such incurrence of Acquired Debt, such Acquired Debt was incurred by the prior owner of such assets or such Restricted Subsidiary prior to such acquisition by the Company or one of its Restricted Subsidiaries and was not incurred in connection with, or in contemplation of, such acquisition by the Company or one of its Restricted Subsidiaries; and provided further that, in the case of any incurrence pursuant to this clause (9), as a result of such acquisition by the Company or one of its Restricted Subsidiaries, the Company's Debt to Adjusted Consolidated Cash Flow Ratio at the time of incurrence of such Acquired Debt, after giving pro forma effect to such incurrence as if the same had occurred at the beginning of the most recently ended four full fiscal quarter period of the Company for which internal financial statements are available, would have been less than the Company's Debt to Adjusted Consolidated Cash Flow Ratio for the same period without giving pro forma effect to such incurrence; (10) the incurrence by the Company of Indebtedness not to exceed, at any one time outstanding, the sum of (i) 2.0 times the aggregate net cash proceeds plus (ii) 1.0 times the fair market value of non-cash proceeds (evidenced by a resolution of the Board of Directors set forth in an Officers' Certificate delivered to the Exchange Trustee), in each case, from the issuance and sale, other than to a Subsidiary, of Equity Interests (other than Disqualified Stock) of the Company since the Issue Date (less the amount of such proceeds used to make Restricted Payments as provided in clause (3)(b) of the first paragraph or clause (2) of the second paragraph of the covenant described above under the caption "--Restricted Payments"); provided that such Indebtedness does not mature prior to the Stated Maturity of the Exchange 164
Debentures and the Weighted Average Life to Maturity of such Indebtedness is longer than that of the Exchange Debentures; and (11) the incurrence by the Company or any of its Restricted Subsidiaries of additional Indebtedness and/or the issuance by the Company of Disqualified Stock in an aggregate principal amount, accreted value or liquidation preference, as applicable, at any time outstanding, not to exceed an amount equal to $100.0 million less the aggregate amount of all Investments made pursuant to clause (12) of the definition of Permitted Investments; provided that, notwithstanding the foregoing, the aggregate principal amount, accreted value or liquidation preference, as applicable, permitted to be incurred or issued pursuant to this clause (11) shall not be reduced to less than $25.0 million. For purposes of determining compliance with this covenant, in the event that an item of Indebtedness meets the criteria of more than one of the categories of Exchange Debentures Permitted Debt described in clauses (1) through (11) above or is entitled to be incurred pursuant to the first paragraph of this covenant, the Company shall, in its sole discretion, classify (or later reclassify in whole or in part) such item of Indebtedness in any manner that complies with this covenant. Any Indebtedness incurred pursuant to clause (1) of the second paragraph under the caption "Incurrence of Indebtedness and Issuance of Preferred Stock" in the Certificate of Designations will be deemed to have been incurred under clause (1) above on the Exchange Date. Accrual of interest, accretion or amortization of original issue discount and the payment of interest in the form of additional Indebtedness will not be deemed to be an incurrence of Indebtedness for purposes of this covenant. Dividend and Other Payment Restrictions Affecting Subsidiaries The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary to (1) pay dividends or make any other distributions to the Company or any of its Restricted Subsidiaries on its Capital Stock or with respect to any other interest or participation in, or measured by, its profits; (2) pay any indebtedness owed to the Company or any of its Restricted Subsidiaries; (3) make loans or advances to the Company or any of its Restricted Subsidiaries; or (4) transfer any of its properties or assets to the Company or any of its Restricted Subsidiaries. However, the foregoing restrictions will not apply to encumbrances or restrictions existing under or by reason of: (1) Existing Indebtedness or Indebtedness under the Senior Credit Facility, in each case as in effect on the Issue Date, and any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings thereof; provided that such amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings are no more restrictive, taken as a whole, with respect to such dividend and other payment restrictions than those contained in the applicable series of Existing Indebtedness or in the Senior Credit Facility, in each case as in effect on the Issue Date; (2) encumbrances and restrictions applicable to any Unrestricted Subsidiary, as the same are in effect as of the date on which such Subsidiary becomes a Restricted Subsidiary, and as the same may be amended, modified, restated, renewed, increased, supplemented, refunded, replaced or refinanced; provided that such amendments, modifications, restatements, renewals, increases, supplements, refundings, replacement or refinancings are no more restrictive, taken 165
as a whole, with respect to such dividend and other payment restrictions than those contained in the applicable series of Indebtedness of such Subsidiary as in effect on the date on which such Subsidiary becomes a Restricted Subsidiary; (3) any Indebtedness (incurred in compliance with the covenant under the heading "--Incurrence of Indebtedness and Issuance of Preferred Stock") or any agreement pursuant to which such Indebtedness is issued if the encumbrance or restriction applies only in the event of a payment default or default with respect to a financial covenant contained in such Indebtedness or agreement and such encumbrance or restriction is not materially more disadvantageous to the holders of the Exchange Debentures than is customary in comparable financings (as determined by the Company) and the Company determines that any such encumbrance or restriction will not materially affect the Company's ability to pay dividends or the Liquidation Preference on the Exchange Debentures; (4) the Exchange Indenture and the Exchange Debentures; (5) applicable law; (6) any instrument governing Indebtedness or Capital Stock of a Person acquired by the Company or any of its Restricted Subsidiaries as in effect at the time of such acquisition (except to the extent such Indebtedness was incurred in connection with or in contemplation of such acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired, provided that, in the case of Indebtedness, such Indebtedness was permitted by the terms of the Exchange Indenture to be incurred; (7) by reason of customary non-assignment provisions in leases or licenses entered into in the ordinary course of business; (8) purchase money obligations for property acquired in the ordinary course of business that impose restrictions of the nature described in clause (4) in the prior paragraph on the property so acquired; (9) the provisions of agreements governing Indebtedness incurred pursuant to clause (4) of the second paragraph of the covenant described above under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock"; (10) any agreement for the sale of a Restricted Subsidiary that restricts that Restricted Subsidiary pending its sale; (11) Permitted Refinancing Indebtedness, provided that the restrictions contained in the agreements governing such Permitted Refinancing Indebtedness are no more restrictive, taken as a whole, than those contained in the agreements governing the Indebtedness being refinanced; (12) Liens that limit the right of the debtor to transfer the assets subject to such Liens; (13) provisions with respect to the disposition or distribution of assets or property in joint venture agreements and other similar agreements; and (14) restrictions on cash or other deposits or net worth imposed by customers under contracts entered into in the ordinary course of business. Merger, Consolidation or Sale of Assets The Company may not consolidate or merge with or into (whether or not the Company is the surviving corporation), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions, to another corporation, Person or entity unless: (1) the Company is the surviving corporation or the entity or the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, 166
assignment, transfer, lease, conveyance or other disposition shall have been made is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia; (2) the entity or Person formed by or surviving any such consolidation or merger (if other than the Company) or the entity or Person to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made assumes all the obligations of the Company under the Exchange Debentures and the Exchange Indenture pursuant to a supplemental indenture in a form reasonably satisfactory to the Exchange Trustee; (3) immediately after such transaction no Default exists; and (4) except in the case of a merger of the Company with or into a Wholly Owned Restricted Subsidiary of the Company and except in the case of a merger entered into solely for the purpose of reincorporating the Company in another jurisdiction, the Company or the entity or Person formed by or surviving any such consolidation or merger (if other than the Company), or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made will, at the time of such transaction after giving pro forma effect thereto as if such transaction had occurred at the beginning of the applicable four-quarter period, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Debt to Adjusted Consolidated Cash Flow Ratio test set forth in the first paragraph of the covenant described above under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock". Transactions with Affiliates The Company will not, and will not permit any of its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any transaction, contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless: (1) such Affiliate Transaction is on terms that are no less favorable to the Company or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction by the Company or such Restricted Subsidiary with an unrelated Person; and (2) the Company delivers to the Exchange Trustee: (a) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $1.0 million, a resolution of the Board of Directors set forth in an Officers' Certificate certifying that such Affiliate Transaction complies with clause (i) above and that such Affiliate Transaction has been approved by a majority of the disinterested members of the Board of Directors; and (b) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $10.0 million, an opinion as to the fairness to the Holders of such Affiliate Transaction from a financial point of view issued by an accounting, appraisal or investment banking firm of national standing. The following items shall not be deemed to be Affiliate Transactions and therefore will not be subject to the provisions of the prior paragraph: (1) any employment arrangements with any executive officer of the Company or a Restricted Subsidiary that is entered into by the Company or any of its Restricted Subsidiaries in the ordinary course of business and consistent with compensation arrangements of similarly situated executive officers at comparable companies engaged in Permitted Businesses; (2) transactions between or among the Company and/or its Restricted Subsidiaries; (3) payment of directors fees in an aggregate annual amount not to exceed $25,000 per Person; 167
(4) Restricted Payments that are permitted by the provisions of the Exchange Indenture described above under the caption "--Restricted Payments"; (5) the issuance or sale of Equity Interests (other than Disqualified Stock) of the Company; and (6) transactions pursuant to the provisions of the Governance Agreement, the Rights Agreement, the Stockholders' Agreement, the CTSH Shareholders' Agreement, the CTI Services Agreement, the CTI Operating Agreement and the Crown Transition Agreements, as the same are in effect on the Issue Date. Limitation on Issuances and Sales of Capital Stock of Restricted Subsidiaries The Company: (1) will not, and will not permit any Restricted Subsidiary of the Company to, transfer, convey, sell, lease or otherwise dispose of any Equity Interests in any Restricted Subsidiary of the Company to any Person (other than the Company or a Wholly Owned Restricted Subsidiary of the Company); and (2) will not permit any Restricted Subsidiary of the Company to issue any of its Equity Interests (other than, if necessary, shares of its Capital Stock constituting directors' qualifying shares) to any Person other than to the Company or a Wholly Owned Restricted Subsidiary of the Company, unless, in each such case: (a) as a result of such transfer, conveyance, sale, lease or other disposition or issuance such Restricted Subsidiary no longer constitutes a Subsidiary and (b) the cash Net Proceeds from such transfer, conveyance, sale, lease or other disposition or issuance are applied in accordance with the covenant described above under the caption "--Repurchase at the Option of Holders--Asset Sales". Senior Subordinated Debt So long as any Exchange Debentures are outstanding, the Company will not incur any Indebtedness that is expressly made subordinated in right of payment to any Senior Debt unless such Indebtedness, by its terms and by the terms of any agreement or instrument pursuant to which such Indebtedness is outstanding, is expressly made pari passu with, or subordinate in right of payment to, the Exchange Debentures pursuant to provisions substantially similar to those contained in the Exchange Indenture; provided that the foregoing limitations shall not apply to distinctions between categories of Senior Debt that exist by reason of any Liens or Guarantees arising or created in respect of some but not all Senior Debt. Business Activities The Company will not, and will not permit any Subsidiary to, engage in any business other than Permitted Businesses, except to such extent as would not be material to the Company and its Subsidiaries taken as a whole. Reports Whether or not required by the rules and regulations of the Securities and Exchange Commission (the "Commission"), so long as any Exchange Debentures are outstanding, the Company will furnish to the Holders of Exchange Debentures: (1) all quarterly and annual financial information that would be required to be contained in a filing with the Commission on Forms 10-Q and 10-K if the Company were required to file such Forms, including a "Management's Discussion and Analysis of Financial Condition and Results 168
of Operations" that describes the financial condition and results of operations of the Company and its consolidated Subsidiaries (showing in reasonable detail, in the footnotes to the financial statements and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" (in each case to the extent not prohibited by the Commission's rules and regulations), (a) the financial condition and results of operations of the Company and its Restricted Subsidiaries separate from the financial condition and results of operations of the Unrestricted Subsidiaries of the Company and (b) the Tower Cash Flow for the most recently completed fiscal quarter and the Adjusted Consolidated Cash Flow for the most recently completed four-quarter period) and, with respect to the annual information only, a report thereon by the Company's certified independent accountants; and (2) all current reports that would be required to be filed with the Commission on Form 8-K if the Company were required to file such reports, in each case within the time periods specified in the Commission's rules and regulations. In addition, following the consummation of the exchange offer contemplated by the Registration Rights Agreement, whether or not required by the rules and regulations of the Commission, the Company will file a copy of all such information and reports with the Commission for public availability within the time periods specified in the Commission's rules and regulations (unless the Commission will not accept such a filing) and make such information available to securities analysts and prospective investors upon request. Transfer and Exchange A Holder may transfer or exchange Exchange Debentures in accordance with the Exchange Indenture. The Registrar and the Exchange Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Company may require a Holder to pay any taxes and fees required by law. The Company is not required to transfer or exchange any Senior Subordinated Exchange Debenture selected for redemption. Also, the Company is not required to transfer or exchange any Senior Subordinated Exchange Debenture for a period of 15 days before a selection of Exchange Debentures to be redeemed. The registered Holder of a Senior Subordinated Exchange Debenture will be treated as the owner of it for all purposes. Amendment, Supplement and Waiver Except as provided in the next two succeeding paragraphs, the Exchange Indenture or the Exchange Debentures may be amended or supplemented with the consent of the Holders of a majority of the aggregate principal amount of the Exchange Debentures then outstanding (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, Exchange Debentures) or, if no Exchange Debentures are outstanding, the holders of a majority in Liquidation Preference of the Exchangeable Preferred Stock then outstanding (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, Exchangeable Preferred Stock), and any existing default or compliance with any provision of the Exchange Indenture or the Exchange Debentures may be waived with the consent of the Holders of a majority of the aggregate principal amount of the then outstanding Exchange Debentures (including consents obtained in connection with a tender offer or exchange offer for Exchange Debentures) or, if no Exchange Debentures are outstanding, the holders of a majority in Liquidation Preference of the Exchangeable Preferred Stock then outstanding (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, Exchangeable Preferred Stock). 169
Without the consent of each Holder affected, an amendment or waiver may not (with respect to any Exchange Debentures held by a non-consenting Holder): (1) reduce the principal amount of Exchange Debentures whose Holders must consent to an amendment, supplement or waiver; (2) reduce the principal of or change the fixed maturity of any Senior Subordinated Exchange Debenture or alter the provisions with respect to the redemption (but not any required repurchase in connection with an Asset Sale Offer or Change of Control Offer) of the Exchange Debentures; (3) reduce the rate of or change the time for payment of interest on any Senior Subordinated Exchange Debenture; (4) waive a Default in the payment of principal of or premium, if any, or interest on the Exchange Debentures (except a rescission of acceleration of the Exchange Debentures by the Holders of a majority in aggregate principal amount of the Exchange Debentures and a waiver of the payment default that resulted from such acceleration); (5) make any Senior Subordinated Exchange Debenture payable in money other than that stated in the Exchange Debentures; (6) make any change in the provisions of the Exchange Indenture relating to waivers of past Defaults or the rights of Holders of Exchange Debentures to receive payments of principal of or premium, if any, or interest on the Exchange Debentures; (7) waive a redemption payment (but not any payment upon a required repurchase in connection with an Asset Sale Offer or Change of Control Offer) with respect to any Senior Subordinated Exchange Debenture; (8) except as provided under the caption "--Legal Defeasance and Covenant Defeasance" or in accordance with the terms of any Subsidiary Guarantee, release a Subsidiary Guarantor from its obligations under its Subsidiary Guarantee or make any change in a Subsidiary Guarantee that would adversely affect the Holders of the Exchange Debentures; or (9) make any change in the foregoing amendment and waiver provisions. Notwithstanding the foregoing, without the consent of any Holder of Exchange Debentures, the Company and the Exchange Trustee may amend or supplement the Exchange Indenture or the Exchange Debentures: (1) to cure any ambiguity, defect or inconsistency; (2) to provide for uncertificated Exchange Debentures in addition to or in place of certificated Exchange Debentures; (3) to provide for the assumption of the Company's obligations to Holders of Exchange Debentures in the case of a merger or consolidation; (4) to make any change that would provide any additional rights or benefits to the Holders of Exchange Debentures or that does not adversely affect the legal rights under the Exchange Indenture of any such Holder; or (5) to comply with requirements of the Commission in order to effect or maintain the qualification of the Exchange Indenture under the Trust Indenture Act. Events of Default and Remedies Each of the following is an Event of Default: (1) default for 30 days in the payment when due of interest on, or Liquidated Damages with respect to, the Exchange Debentures; (2) default in payment when due of the principal of or premium, if any, on the Exchange Debentures; 170
(3) failure by the Company or any of its Subsidiaries for 30 days after notice to comply with the provisions described under the caption "--Certain Covenants--Merger, Consolidation or Sale of Assets" or failure by the Company to consummate a Change of Control Offer or Asset Sale Offer in accordance with the provisions of the Exchange Indenture applicable thereto; (4) failure by the Company or any of its Subsidiaries for 60 days after notice to comply with any of its other agreements in the Exchange Indenture or the Exchange Debentures; (5) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Significant Subsidiaries (or the payment of which is guaranteed by the Company or any of its Significant Subsidiaries) whether such Indebtedness or guarantee now exists, or is created after the Issue Date, which default (a) is caused by a failure to pay principal of or premium, if any, or interest on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (a "Payment Default") or (b) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $20.0 million or more; (6) failure by the Company or any of its Significant Subsidiaries to pay final judgments aggregating in excess of $20.0 million, which judgments are not paid, discharged or stayed for a period of 60 consecutive days; or (7) certain events of bankruptcy or insolvency with respect to the Company or any of its Significant Subsidiaries. If any Event of Default occurs and is continuing, the Exchange Trustee or the Holders of at least 25% of the aggregate principal amount of the then outstanding Exchange Debentures may declare all the Exchange Debentures to be due and payable immediately. Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy or insolvency, with respect to the Company, all outstanding Exchange Debentures will become due and payable without further action or notice. Holders of the Exchange Debentures may not enforce the Exchange Indenture or the Exchange Debentures except as provided in the Exchange Indenture. Subject to certain limitations, Holders of a majority of the aggregate principal amount of the then outstanding Exchange Debentures may direct the Exchange Trustee in its exercise of any trust or power. The Holders of a majority of the aggregate principal amount of the Exchange Debentures then outstanding by notice to the Exchange Trustee may on behalf of the Holders of all of the Exchange Debentures waive any existing Default or Event of Default and its consequences under the Exchange Indenture except a continuing Default or Event of Default in the payment of interest on, or the principal of, the Exchange Debentures. The Exchange Indenture provides that if a Default occurs and is continuing and is known to the Exchange Trustee, the Exchange Trustee must mail to each holder of the Exchange Debentures notice of the Default within 90 days after it occurs. Except in the case of a Default in the payment of principal of or interest on any Senior Subordinated Exchange Debenture, the Exchange Trustee may withhold notice if and so long as a committee of its trust officers determines that withholding notice is not opposed to the interest of the holders of the Exchange Debentures. In addition, the Company is required to deliver to the Exchange Trustee, within 90 days after the end of each fiscal year, a certificate indicating whether the signers thereof know of any Default that occurred during the previous year. The Company is also required to deliver to the Exchange Trustee, forthwith after the occurrence thereof, written notice of any event that would constitute a Default, the status thereof and what action the Company is taking or proposes to take in respect thereof. 171
No Personal Liability of Directors, Officers, Employees and Stockholders No director, officer, employee, incorporator or stockholder of the Company, as such, shall have any liability for any obligations of the Company under the Exchange Debentures, the Exchange Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Exchange Debentures by accepting a Senior Subordinated Exchange Debenture waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Exchange Debentures. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the Commission that such a waiver is against public policy. Legal Defeasance and Covenant Defeasance The Company may, at its option and at any time, elect to have all of its obligations discharged with respect to the outstanding Exchange Debentures ("Legal Defeasance") except for: (1) the rights of Holders of outstanding Exchange Debentures to receive payments in respect of the principal of, premium, if any, and interest and Liquidated Damages on such Exchange Debentures when such payments are due from the trust referred to below; (2) the Company's obligations with respect to the Exchange Debentures concerning issuing temporary Exchange Debentures, registration of Exchange Debentures, mutilated, destroyed, lost or stolen Exchange Debentures and the maintenance of an office or agency for payment and money for security payments held in trust; (3) the rights, powers, trusts, duties and immunities of the Exchange Trustee and the Company's obligations in connection therewith; and (4) the Legal Defeasance provisions of the Exchange Indenture. In addition, the Company may, at its option and at any time, elect to have the obligations of the Company released with respect to certain covenants that are described in the Exchange Indenture ("Covenant Defeasance") and thereafter any omission to comply with such obligations shall not constitute a Default or Event of Default with respect to the Exchange Debentures. In the event Covenant Defeasance occurs, certain events (not including non-payment and bankruptcy, receivership, rehabilitation and insolvency events with respect to the Company) described under "--Events of Default and Remedies" will no longer constitute an Event of Default with respect to the Exchange Debentures. In order to exercise either Legal Defeasance or Covenant Defeasance: (1) the Company must irrevocably deposit with the Exchange Trustee, in trust, for the benefit of the Holders of the Exchange Debentures, cash in United States dollars, non-callable Government Securities, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium, if any, and interest and Liquidated Damages on the outstanding Exchange Debentures on the stated maturity or on the applicable redemption date, as the case may be, and the Company must specify whether the Exchange Debentures are being defeased to maturity or to a particular redemption date; (2) in the case of Legal Defeasance, the Company shall have delivered to the Exchange Trustee an opinion of counsel in the United States reasonably acceptable to the Exchange Trustee confirming that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the Issue Date, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel shall confirm that, the Holders of the outstanding Exchange Debentures will 172
not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (3) in the case of Covenant Defeasance, the Company shall have delivered to the Exchange Trustee an opinion of counsel in the United States reasonably acceptable to the Exchange Trustee confirming that the Holders of the outstanding Exchange Debentures will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (4) no Default or Event of Default shall have occurred and be continuing on the date of such deposit (other than a Default or Event of Default resulting from the borrowing of funds to be applied to such deposit) or insofar as Events of Default from bankruptcy or insolvency events with respect to the Company are concerned, at any time in the period ending on the 91st day after the date of deposit; (5) such Legal Defeasance or Covenant Defeasance will not result in a breach or violation of, or constitute a default under any material agreement or instrument (other than the Exchange Indenture) to which the Company or any of its Restricted Subsidiaries is a party or by which the Company or any of its Restricted Subsidiaries is bound; (6) the Company must have delivered to the Exchange Trustee an opinion of counsel to the effect that after the 91st day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; (7) the Company must deliver to the Exchange Trustee an Officers' Certificate stating that the deposit was not made by the Company with the intent of preferring the Holders of Exchange Debentures over the other creditors of the Company with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others; and (8) the Company must deliver to the Exchange Trustee an Officers' Certificate and an opinion of counsel, each stating that all conditions precedent provided for relating to the Legal Defeasance or the Covenant Defeasance have been complied with. Concerning the Exchange Trustee The Exchange Indenture contains certain limitations on the rights of the Exchange Trustee, should it become a creditor of the Company, to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The Exchange Trustee will be permitted to engage in other transactions; however, if it acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the Commission for permission to continue or resign. The Holders of a majority of the aggregate principal amount of the then outstanding Exchange Debentures will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Exchange Trustee, subject to certain exceptions. The Exchange Indenture provides that in case an Event of Default shall occur (which shall not be cured), the Exchange Trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the Exchange Trustee will be under no obligation to exercise any of its rights or powers under the Exchange Indenture at the request of any Holder of Exchange Debentures, unless such Holder shall have offered to the Exchange Trustee security and indemnity satisfactory to it against any loss, liability or expense. 173
Additional Information Anyone who receives this Prospectus may obtain a copy of the Certificate of Designations, the Exchange Indenture and the Registration Rights Agreement without charge by writing to Crown Castle International Corp., 510 Bering Drive, Suite 500, Houston, Texas 77057, Attention: Chief Financial Officer. Certain Definitions Set forth below are certain defined terms used in the Certificate of Designations and the Exchange Indenture. Reference is made to the Certificate of Designations and the Exchange Indenture for a full disclosure of all such terms, as well as any other capitalized terms used herein for which no definition is provided. "Acquired Debt" means, with respect to any specified Person: (1) Indebtedness or Disqualified Stock of any other Person existing at the time such other Person is merged with or into or became a Subsidiary of such specified Person, including, without limitation, Indebtedness incurred in connection with, or in contemplation of, such other Person merging with or into or becoming a Subsidiary of such specified Person; and (2) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person. "Adjusted Consolidated Cash Flow" has the meaning given to such term in the definition of "Debt to Adjusted Consolidated Cash Flow Ratio". "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided that beneficial ownership of 10% or more of the Voting Stock of a Person shall be deemed to be control. "Asset Sale" means: (1) the sale, lease, conveyance or other disposition of any assets or rights (including, without limitation, by way of a sale and leaseback) provided that the sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company and its Subsidiaries taken as a whole will be governed by the provisions of the Certificate of Designations or the Exchange Indenture, as applicable, described above under the respective captions "--Repurchase at the Option of Holders-- Change of Control" and/or the provisions described above under the respective captions "--Repurchase at the Option of Holders--Merger, Consolidation or Sale of Assets" and not by the provisions of the Asset Sale covenant; and (2) the issue or sale by the Company or any of its Restricted Subsidiaries of Equity Interests of any of the Company's Subsidiaries (other than directors' qualifying shares or shares required by applicable law to be held by a Person other than the Company or a Restricted Subsidiary), in the case of either clause (1) or (2), whether in a single transaction or a series of related transactions (a) that have a fair market value in excess of $1.0 million or (b) for net proceeds in excess of $1.0 million. Notwithstanding the foregoing, the following items shall not be deemed to be Asset Sales: (1) a transfer of assets by the Company to a Restricted Subsidiary or by a Restricted Subsidiary to the Company or to another Restricted Subsidiary; 174
(2) an issuance of Equity Interests by a Subsidiary to the Company or to another Restricted Subsidiary; (3) a Restricted Payment that is permitted by the covenant described above under the respective captions "--Certain Covenants--Restricted Payments"; (4) grants of leases or licenses in the ordinary course of business; and (5) disposals of Cash Equivalents. "Berkshire Group" means Berkshire Fund III, A Limited Partnership, Berkshire Fund IV, Limited Partnership, Berkshire Investors LLC and Berkshire Partners LLC. "Broker-Dealer" means any broker or dealer registered under the Exchange Act. "Capital Lease Obligation" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP. "Capital Stock" means: (1) in the case of a corporation, corporate stock; (2) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock; (3) in the case of a partnership or limited liability company, partnership or membership interests (whether general or limited); and (4) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "Cash Equivalents" means: (1) United States dollars; (2) securities issued or directly and fully guaranteed or insured by the United States government or any agency or instrumentality thereof (provided that the full faith and credit of the United States is pledged in support thereof) having maturities of not more than six months from the date of acquisition; (3) certificates of deposit and eurodollar time deposits with maturities of six months or less from the date of acquisition, bankers' acceptances with maturities not exceeding six months and overnight bank deposits, in each case with any lender party to the Senior Credit Facility or with any domestic commercial bank having capital and surplus in excess of $500.0 million and a Thompson Bank Watch Rating of "B" or better; (4) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (2) and (3) above entered into with any financial institution meeting the qualifications specified in clause (3) above; (5) commercial paper having the highest rating obtainable from Moody's Investors Service, Inc. or Standard & Poor's Ratings Group and in each case maturing within six months after the date of acquisition; and (6) money market funds at least 95% of the assets of which constitute Cash Equivalents of the kinds described in clauses (1)-(5) of this definition. "CCAIC" means CCA Investment Corp., which is an indirect wholly owned Subsidiary of the Company and was formed to hold the Company's Equity Interests in Crown Atlantic Holding Company LLC. 175
"Centennial Group" means Centennial Fund IV, L.P., Centennial Fund V, L.P. and Centennial Entrepreneurs Fund V, L.P. "Change of Control" means the occurrence of any of the following: (1) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Company and its Restricted Subsidiaries, taken as a whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange Act) other than a Principal or a Related Party of a Principal; (2) the adoption of a plan relating to the liquidation or dissolution of the Company; (3) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any "person" (as defined above), other than the Principals and their Related Parties, becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition), directly or indirectly, of more than 50% of the Voting Stock of the Company (measured by voting power rather than number of shares); provided that transfers of Equity Interests in the Company between or among the beneficial owners of the Company's Equity Interests and/or Equity Interests in CTSH, in each case as of November 20, 1997, will not be deemed to cause a Change of Control under this clause (3) so long as no single Person together with its Affiliates acquires a beneficial interest in more of the Voting Stock of the Company than is at the time collectively beneficially owned by the Principals and their Related Parties; (4) the first day on which a majority of the members of the Board of Directors of the Company are not Continuing Directors; or (5) the Company consolidates with, or merges with or into, any Person, or any Person consolidates with, or merges with or into, the Company, in any such event pursuant to a transaction in which any of the outstanding Voting Stock of the Company is converted into or exchanged for cash, securities or other property, other than any such transaction where (x) the Voting Stock of the Company outstanding immediately prior to such transaction is converted into or exchanged for Voting Stock (other than Disqualified Stock) of the surviving or transferee Person constituting a majority of the outstanding shares of such Voting Stock of such surviving or transferee Person (immediately after giving effect to such issuance) or (y) the Principals and their Related Parties own a majority of such outstanding shares after such transaction. "Consolidated Cash Flow" means, with respect to any Person for any period, the Consolidated Net Income of such Person for such period plus: (1) provision for taxes based on income or profits of such Person and its Restricted Subsidiaries for such period, to the extent that such provision for taxes was included in computing such Consolidated Net Income; plus (2) consolidated interest expense of such Person and its Restricted Subsidiaries for such period, whether paid or accrued and whether or not capitalized (including, without limitation, amortization of debt issuance costs and original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments (if any) pursuant to Hedging Obligations), to the extent that any such expense was deducted in computing such Consolidated Net Income; plus 176
(3) depreciation, amortization (including amortization of goodwill and other intangibles and other non- cash expenses (excluding any such non-cash expense to the extent that it represents an accrual of or reserve for cash expenses in any future period) of such Person and its Restricted Subsidiaries for such period to the extent that such depreciation, amortization and other non-cash expenses were deducted in computing such Consolidated Net Income; minus (4) non-cash items increasing such Consolidated Net Income for such period (excluding any items that were accrued in the ordinary course of business), in each case on a consolidated basis and determined in accordance with GAAP. "Consolidated Indebtedness" means, with respect to any Person as of any date of determination, the sum, without duplication, of: (1) the total amount of Indebtedness of such Person and its Restricted Subsidiaries; plus (2) the total amount of Indebtedness of any other Person, to the extent that such Indebtedness has been Guaranteed by the referent Person or one or more of its Restricted Subsidiaries; plus (3) the aggregate liquidation value of all Disqualified Stock of such Person and all preferred stock of Restricted Subsidiaries of such Person, in each case, determined on a consolidated basis in accordance with GAAP. "Consolidated Net Income" means, with respect to any Person for any period, the aggregate of the Net Income of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided that: (1) the Net Income (but not loss) of any Person other than the Company that is not a Restricted Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid in cash to the referent Person or a Restricted Subsidiary thereof; (2) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded; (3) the cumulative effect of a change in accounting principles shall be excluded; and (4) the Net Income (but not loss) of any Unrestricted Subsidiary shall be excluded whether or not distributed to the Company or one of its Restricted Subsidiaries. "Consolidated Tangible Assets" means, with respect to the Company, the total consolidated assets of the Company and its Restricted Subsidiaries, less the total intangible assets of the Company and its Restricted Subsidiaries, as shown on the most recent internal consolidated balance sheet of the Company and such Restricted Subsidiaries calculated on a consolidated basis in accordance with GAAP. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of the Company who: (1) was a member of such Board of Directors on the Issue Date; (2) was nominated for election or elected to such Board of Directors with the approval of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election; or (3) is a designee of a Principal or was nominated by a Principal. "Credit Facilities" means one or more debt facilities (including, without limitation, the Senior Credit Facility) or commercial paper facilities with banks or other institutional lenders providing for revolving credit loans, term loans, receivables financing (including through the sale of receivables to 177
such lenders or to special purpose entities formed to borrow from such lenders against such receivables) or letters of credit, in each case, as amended, restated, modified, renewed, refunded, replaced or refinanced in whole or in part from time to time. "Crown Transition Agreements" means collectively (i) the Crown Memorandum of Understanding among the Company, Robert A. Crown and Barbara A. Crown, dated as of July 2, 1998, (ii) the Crown Services Agreement between the Company and Robert A. Crown, dated as of July 2, 1998 and (iii) the Registration Rights Crown Side Letter Agreement, among the Company, Robert A. Crown and Barbara A. Crown, dated as of August 18, 1998. "CTI" means Castle Transmission International Limited. "CTI Operating Agreement" means the memorandum of understanding among the Company, CTSH, CTI and TdF, dated as of August 21, 1998, relating to the development of certain business opportunities outside of the United States and the provision of certain business support and technical services in connection therewith. "CTI Services Agreement" means the amended and restated services agreement between CTI and TdF, dated as of August 21, 1998, relating to the provisions of certain services to CTI. "CTSH" means Castle Transmission Services (Holdings) Ltd and its successors. "CTSH Shareholders' Agreement" means the agreement entered into by the Company, CTSH and TdF, dated as of August 21, 1998, to govern the relationship between the Company and TdF as shareholders of CTSH. "Debt to Adjusted Consolidated Cash Flow Ratio"means, as of any date of determination, the ratio of: (1) the Consolidated Indebtedness of the Company as of such date to (2) the sum of (a) the Consolidated Cash Flow of the Company for the four most recent full fiscal quarters ending immediately prior to such date for which internal financial statements are available, less the Company's Tower Cash Flow for such four-quarter period, plus (b) the product of four times the Company's Tower Cash Flow for the most recent quarterly period (such sum being referred to as "Adjusted Consolidated Cash Flow"), in each case determined on a pro forma basis after giving effect to all acquisitions or dispositions of assets made by the Company and its Subsidiaries from the beginning of such four-quarter period through and including such date of determination (including any related financing transactions) as if such acquisitions and dispositions had occurred at the beginning of such four- quarter period. For purposes of making the computation referred to above, (i) acquisitions that have been made by the Company or any of its Restricted Subsidiaries, including through mergers or consolidations and including any related financing transactions, during the reference period or subsequent to such reference period and on or prior to the Calculation Date shall be deemed to have occurred on the first day of the reference period and Consolidated Cash Flow for such reference period shall be calculated without giving effect to clause (ii) of the proviso set forth in definition of Consolidated Net Income, and (ii) the Consolidated Cash Flow attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of prior to Calculation Date, shall be excluded. "Default" means any event that is, or with the passage of time or the giving of notice or both would be, an Event of Default. "Designated Senior Debt" with respect to the Exchange Debentures means: (1) any Indebtedness under or in respect of the Senior Credit Facility; 178
(2) any Indebtedness outstanding under the Senior Discount Notes Indenture; and (3) any other Senior Debt permitted under the Exchange Indenture the principal amount of which is $25.0 million or more and that has been designated by the Company in the instrument or agreement relating to the same as "Designated Senior Debt". "Disqualified Stock" means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable, in each case, at the option of the holder thereof), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the Holder thereof, in whole or in part, on or prior to the date that is 91 days after the date on which the Exchangeable Preferred Stock or Exchange Debentures mature; provided, however, that any Capital Stock that would constitute Disqualified Stock solely because the holders thereof have the right to require the Company to repurchase such Capital Stock upon the occurrence of a Change of Control or an Asset Sale shall not constitute Disqualified Stock if the terms of such Capital Stock provide that the Company may not repurchase or redeem any such Capital Stock pursuant to such provisions unless such repurchase or redemption complies with the covenant described above under the caption "--Certain Covenants--Restricted Payments". "Eligible Indebtedness" means any Indebtedness other than (i) Indebtedness in the form of, or represented by, bonds or other securities or any guarantee thereof and (ii) Indebtedness that is, or may be, quoted, listed or purchased and sold on any stock exchange, automated trading system or over-the-counter or other securities market (including, without prejudice to the generality of the foregoing, the market for securities eligible for resale pursuant to Rule 144A under the Securities Act). "Eligible Receivables" means the accounts receivable (net of any reserves and allowances for doubtful accounts in accordance with GAAP) of the Company and its Restricted Subsidiaries that are not more than 60 days past their due date and that were entered into in the ordinary course of business on normal payment terms as shown on the most recent internal consolidated balance sheet of the Company and such Restricted Subsidiaries, all calculated on a consolidated basis in accordance with GAAP. "Equity Interests" means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock). "Exchange Date" means the date on which the Company exchanges all but not less than all of the Exchangeable Preferred Stock for Exchange Debentures. "Exchange Offer" means exchange and issuance by the Company of New Preferred Stock or New Exchange Debentures, as the case may be, which shall be registered pursuant to a Registration Statement, in an amount equal to (i) the aggregate Liquidation Preference of all shares of Exchangeable Preferred Stock that are tendered by the Holders thereof or (ii) the aggregate principal amount of all Exchange Debentures that are tendered by the Holders thereof, as the case may be, in connection with such exchange and issuance. "Exchange Offer Registration Statement" means the Registration Statement relating to the Exchange Offer, including the related Prospectus. "Existing Indebtedness" means Indebtedness of the Company and its Subsidiaries (other than Indebtedness under the Senior Credit Facility) in existence on the Issue Date, until such amounts are repaid. 179
"GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect on the Issue Date. "Governance Agreement" means the agreement among the Company, TdF and its affiliates, dated as of August 21, 1998, to provide for certain rights and obligations of the Company, TdF and its affiliates with respect to the management of the Company. "Guarantee" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, by way of a pledge of assets or through letters of credit or reimbursement agreements in respect thereof), of all or any part of any Indebtedness. "Hedging Obligations" means, with respect to any Person, the obligations of such Person under: (1) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements; and (2) other agreements or arrangements designed to protect such Person against fluctuations in interest rates or currency exchange rates. "Indebtedness" means, with respect to any Person, any indebtedness of such Person, whether or not contingent, in respect of: (1) borrowed money; (2) evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof); (3) banker's acceptances; (4) representing Capital Lease Obligations; (5) the balance deferred and unpaid of the purchase price of any property; or (6) representing any Hedging Obligations, except any such balance that constitutes an accrued expense or trade payable, if and to the extent any of the foregoing indebtedness (other than letters of credit and Hedging Obligations) would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, as well as all Indebtedness of others secured by a Lien on any asset of such Person whether or not such Indebtedness is assumed by such Person (the amount of such Indebtedness as of any date being deemed to be the lesser of the value of such property or assets as of such date or the principal amount of such Indebtedness of such other Person so secured) and, to the extent not otherwise included, the Guarantee by such Person of any Indebtedness of any other Person. The amount of any Indebtedness outstanding as of any date shall be (i) the accreted value thereof, in the case of any Indebtedness issued with original issue discount, and (ii) the principal amount thereof, together with any interest thereon that is more than 30 days past due, in the case of any other Indebtedness. "Investments" means, with respect to any Person, all investments by such Person in other Persons (including Affiliates) in the forms of direct or indirect loans (including guarantees of Indebtedness or other obligations), advances or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business), purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities, together with all items that are or would be classified as investments on a balance sheet prepared in 180
accordance with GAAP. If the Company or any Restricted Subsidiary of the Company sells or otherwise disposes of any Equity Interests of any direct or indirect Subsidiary of the Company or a Restricted Subsidiary of the Company issues any of its Equity Interests such that, in each case, after giving effect to any such sale or disposition, such Person is no longer a Restricted Subsidiary of the Company, the Company shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Equity Interests of such Subsidiary not sold or disposed of in an amount determined as provided in the final paragraph of the covenant described above under the respective captions "--Certain Covenants--Restricted Payments". "Issue Date" means the closing date for the sale and original issuance of the Exchangeable Preferred Stock. "Joint Venture Operating Agreement" means the Crown Atlantic Holding Company LLC Operating Agreement to be entered into by the Company and BAM, substantially in the form attached to the Certificate of Designations. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). "Nassau Group" means Nassau Capital Partners II, L.P. and NAS Partners I, L.L.C. "Net Income" means, with respect to any Person, the net income (loss) of such Person, determined in accordance with GAAP and before any reduction in respect of preferred stock dividends, excluding, however: (1) any gain or loss, together with any related provision for taxes on such gain or loss, realized in connection with (a) any Asset Sale (including, without limitation, dispositions pursuant to sale and leaseback transactions) or (b) the disposition of any securities by such Person or any of its Restricted Subsidiaries or the extinguishment of any Indebtedness of such Person or any of its Restricted Subsidiaries; and (2) any extraordinary gain or loss, together with any related provision for taxes on such extraordinary gain or loss. "Net Proceeds" means the aggregate cash proceeds received by the Company or any of its Restricted Subsidiaries in respect of any Asset Sale (including, without limitation, any cash received upon the sale or other disposition of any non- cash consideration received in any Asset Sale), net of: (1) the direct costs relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees, and sales commissions) and any relocation expenses incurred as a result thereof; (2) taxes paid or payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements); (3) amounts required to be applied to the repayment of Indebtedness (other than Indebtedness under a Credit Facility) secured by a Lien on the asset or assets that were the subject of such Asset Sale; (4) all distributions and other payments required to be made to minority interest holders in Restricted Subsidiaries as a result of such Asset Sale; 181
(5) the deduction of appropriate amounts provided by the seller as a reserve in accordance with GAAP against any liabilities associated with the assets disposed of in such Asset Sale and retained by the Company or any Restricted Subsidiary after such Asset Sale and (6) without duplication, any reserves that the Company's Board of Directors determines in good faith should be made in respect of the sale price of such asset or assets for post closing adjustments; provided that in the case of any reversal of any reserve referred to in clause (5) or (6) above, the amount so reserved shall be deemed to be Net Proceeds from an Asset Sale as of the date of such reversal. "New Exchange Debentures" means the Company's 12 3/4% Exchange Debentures due 2010 issued pursuant to the Exchange Indenture (i) in the Exchange Offer or (ii) in connection with a resale of Exchange Debentures in reliance on a Shelf Registration Statement. "New Preferred Stock" means the Company's 12 3/4% Exchangeable Preferred Stock due 2010 issued pursuant to the Certificate of Designations (i) in the Exchange Offer or (ii) in connection with a resale of Exchangeable Preferred Stock in reliance on a Shelf Registration Statement. "Non-Recourse Debt" means Indebtedness: (1) as to which neither the Company nor any of its Restricted Subsidiaries (a) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Indebtedness), (b) is directly or indirectly liable (as a guarantor or otherwise), or (c) constitutes the lender; (2) no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness of the Company or any of its Restricted Subsidiaries to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity; and (3) as to which the lenders have been notified in writing that they will not have any recourse to the stock or assets of the Company or any of its Restricted Subsidiaries (except that this clause (3) will not apply to any Indebtedness incurred by CTSH and its Subsidiaries prior to August 21, 1998). "Obligations" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Permitted Business" means any business conducted by the Company, its Restricted Subsidiaries or CTSH and its Subsidiaries on the Issue Date and any other business related, ancillary or complementary to any such business. "Permitted Investments" means: (1) Liens securing Senior Debt; (2) any Investment in the Company or in a Restricted Subsidiary of the Company; (3) any Investment in Cash Equivalents; (4) any Investment by the Company or any Restricted Subsidiary of the Company in a Person, if as a result of such Investment (i) such Person becomes a Restricted Subsidiary of the Company or (ii) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Company or a Restricted Subsidiary of the Company; 182
(5) any Restricted Investment made as a result of the receipt of non-cash consideration from an Asset Sale that was made pursuant to and in compliance with the covenant described above under the respective captions "--Repurchase at the Option of Holders--Asset Sales"; (6) any acquisition of assets solely in exchange for the issuance of Equity Interests (other than Disqualified Stock) of the Company; (7) receivables created in the ordinary course of business; (8) loans or advances to employees made in the ordinary course of business not to exceed $1.0 million at any one time outstanding; (9) securities and other assets received in settlement of trade debts or other claims arising in the ordinary course of business; (10) purchases of additional Equity Interests in CTSH for cash pursuant to the Governance Agreement as the same is in effect on the Issue Date for aggregate cash consideration not to exceed $20.0 million since the Issue Date; (11) the Investment of up to an aggregate of $100.0 million of the net proceeds from the sale of the Exchangeable Preferred Stock (i) to be used to consummate the formation of the Crown Atlantic Holding Company LLC joint venture with BAM or (ii) if the Company does not consummate the formation of the Crown Atlantic Holding Company LLC joint venture with BAM, in one or more other Subsidiaries of the Company (which may be Unrestricted Subsidiaries of the Company), each of which derives or expects to derive a majority of its revenues from one or more Permitted Businesses (each such Investment being measured as of the date made and without giving effect to subsequent changes in value). (12) Additional Investments with the net proceeds from the sale of the Exchangeable Preferred Stock in an aggregate amount equal to (x) the gross proceeds from the sale of the Exchangeable Preferred Stock, minus (y) the aggregate amount of Investments made or permitted to be made pursuant to clause (11) of this paragraph, minus (z) the aggregate amount of Indebtedness incurred and/or Disqualified Stock issued pursuant to clause (11) of the second paragraph under the caption "Certain Covenants-- Incurrence of Indebtedness and Issuance of Preferred Stock" (each such Investment being measured as of the date made and without giving effect to subsequent changes in value). (13) other Investments in Permitted Businesses not to exceed an amount equal to $10.0 million plus 10% of the Company's Consolidated Tangible Assets at any one time outstanding (each such Investment being measured as of the date made and without giving effect to subsequent changes in value). "Permitted Junior Securities" means Equity Interests in the Company or debt securities that are subordinated to all Senior Debt (and any debt securities issued in exchange for Senior Debt) to substantially the same extent as, or to a greater extent than, the Exchange Debentures are subordinated to Senior Debt pursuant to the Exchange Indenture. "Permitted Refinancing Indebtedness" means any Indebtedness of the Company or any of its Restricted Subsidiaries or Disqualified Stock of the Company issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness of the Company or any of its Restricted Subsidiaries (other than intercompany Indebtedness) or Disqualified Stock of the Company; provided that: (1) the principal amount, initial accreted value or liquidation preference, as applicable, of such Permitted Refinancing Indebtedness does not exceed the principal amount, accreted value or liquidation preference, as applicable, of, plus accrued interest or accumulated dividends on, the Indebtedness or Disqualified Stock so extended, refinanced, renewed, replaced, defeased or refunded (plus the amount of expenses and prepayment premiums incurred in connection therewith); 183
(2) such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness or Disqualified Stock being extended, refinanced, renewed, replaced, defeased or refunded; (3) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the Exchange Debentures, such Permitted Refinancing Indebtedness is subordinated in right of payment to, the Exchange Debentures on terms at least as favorable to the Holders of Exchange Debentures as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and (4) such Indebtedness is incurred either by the Company or by the Restricted Subsidiary who is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded or such Disqualified Stock is issued by the Company. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or agency or political subdivision thereof (including any subdivision or ongoing business of any such entity or substantially all of the assets of any such entity, subdivision or business). "Principals" means Berkshire Group, Centennial Group, Nassau Group, TdF and any Related Party of the foregoing. "Prospectus" means the prospectus included in a Registration Statement at the time such Registration Statement is declared effective, as amended or supplemented by any prospectus supplement and by all other amendments thereto, including post-effective amendments, and all material incorporated by reference into such Prospectus. "Public Equity Offering" means an underwritten primary public offering of common stock of the Company pursuant to an effective registration statement under the Securities Act. "Registration Rights Agreement" means the registration rights agreement to be entered into by the Company on or before the Issue relating to the registration of the Exchangeable Preferred Stock and the Exchange Debentures with the Commission. "Registration Statement" means any registration statement of the Company relating to an offering of New Preferred Stock or New Exchange Debentures, as the case may be, that is filed pursuant to the provisions of the Registration Rights Agreement, and includes the Prospectus included therein, all amendments and supplements thereto (including post-effective amendments) and all exhibits and material incorporated by reference therein. "Related Party" with respect to any Principal means: (1) any controlling stockholder, 80% (or more) owned Subsidiary of such Principal; or (2) any trust, corporation, partnership or other entity, the beneficiaries, stockholders, members, partners, owners or Persons beneficially holding an 80% or more controlling interest of which consist of such Principal and/or such other Persons referred to in the immediately preceding clause (1). "Restricted Investment" means an Investment other than a Permitted Investment. "Restricted Subsidiary" of a Person means any Subsidiary of the referent Person that is not an Unrestricted Subsidiary. 184
"Rights Agreement" means the agreement between the Company and ChaseMellon Shareholders Services, L.L.C., as rights agent, dated as of August 21, 1998, relating to the dividend declared by the Company consisting of the right to purchase 1/1000th of a share of the Company's Series A Participating Cumulative Preferred Stock, par value $.01 per share. "Senior Credit Facility" means that certain Amended and Restated Loan Agreement, dated as of July 10, 1998, by and among Key Corporate Capital Inc. and PNC Bank, National Association, as arrangers and agents for the financial institutions listed therein, and Crown Communication Inc. and Crown Castle International Corp. de Puerto Rico, including any related notes, guarantees, collateral documents, instruments and agreements executed in connection therewith, and in each case as amended, modified, renewed, refunded, replaced or refinanced from time to time. "Senior Debt" means: (1) all Indebtedness outstanding under the Senior Credit Facility and all Hedging Obligations (including guarantees thereof) with respect thereto of the Company, whether outstanding on the Issue Date or thereafter incurred; (2) all Indebtedness outstanding under the Senior Discount Notes or any Guarantees thereof, as the case may be; (3) any other Indebtedness permitted to be incurred by the Company or any of its Restricted Subsidiaries under the terms of the Certificate of Designations or the Exchange Indenture, as applicable, unless the instrument under which such Indebtedness is incurred expressly provides that it is on a parity with or subordinated in right of payment to the Exchange Debentures; and (4) all Obligations with respect to the preceding clauses (1), (2) and (3) (including any interest accruing subsequent to the filing of a petition of bankruptcy at the rate provided for in the documentation with respect thereto, whether or not such interest is an allowed claim under applicable law). Notwithstanding anything to the contrary in the foregoing, Senior Debt will not include: (1) any liability for federal, state, local or other taxes owed or owing by the Company or the Restricted Subsidiaries; (2) any Indebtedness of the Company or any Restricted Subsidiary to any of its Subsidiaries; (3) any trade payables; (4) any Indebtedness that is incurred in violation of the Certificate of Designations or the Exchange Indenture, as applicable (but only to the extent so incurred); or (5) any Capitalized Lease Obligations. "Senior Discount Notes Indenture" means that certain Indenture, dated as of November 20, 1997, governing the Company's 105/8% Senior Discount Notes due 2007. "Exchangeable Preferred Stock" means (i) the 12 3/4% Exchangeable Preferred Stock due 2010 of the Company issued on the Issue Date, (ii) any and all additional fully-paid and non-assessable shares of 12 3/4% Exchangeable Preferred Stock due 2010 of the Company issued after the Issue Date as payment of dividends in accordance with the provisions under the caption "Description of Exchangeable Preferred Stock--Dividends" and (iii) any and all shares of New Preferred Stock. "Exchange Debentures" means (i) the 12 3/4% Exchange Debentures due 2010 of the Company issued on the Exchange Date, (ii) any and all additional 12 3/4% Exchange Debentures due 2010 of the Company issued after the Exchange Date as payment of interest in accordance with the provisions under the caption "Description of Senior Subordinated Debentures--Principal, Maturity and Interest" and (iii) any and all shares of New Exchange Debentures. 185
"Shelf Registration Statement" means the Shelf Registration Statement as defined in the Registration Rights Agreement. "Significant Subsidiary" means, with respect to any Person, any Restricted Subsidiary of such Person that would be a "significant subsidiary" of such Person as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Securities Act, as such Regulation is in effect on the date hereof, except that all references to "10 percent" in Rule 1-02(w)(1), (2) and (3) shall mean "5 percent" and that all Unrestricted Subsidiaries of the Company shall be excluded from all calculations under Rule 1-02(w). "Stated Maturity" means, with respect to any installment of interest or principal on any series of Indebtedness, the date on which such payment of interest or principal was scheduled to be paid in the original documentation governing such Indebtedness, and shall not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof. "Stockholders' Agreement" means the agreement among the Company and certain stockholders of the Company, dated as of August 21, 1998, to provide for certain rights and obligations of the Company and such stockholders with respect to the governance of the Company and such stockholders' shares of Common Stock and/or Class A Common Stock of the Company. "Strategic Equity Investment" means a cash contribution to the common equity capital of the Company or a purchase from the Company of common Equity Interests (other than Disqualified Stock), in either case by or from a Strategic Equity Investor and for aggregate cash consideration of at least $50.0 million. "Strategic Equity Investor" means a Person engaged in a Permitted Business whose Total Equity Market Capitalization exceeds $1.0 billion. "Subsidiary" means, with respect to any Person: (1) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof); and (2) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or of one or more Subsidiaries of such Person (or any combination thereof). "TdF" means TeleDiffusion de France International S.A. "Total Equity Market Capitalization" of any Person means, as of any day of determination, the sum of: (1) the product of (A) the aggregate number of outstanding primary shares of common stock of such Person on such day (which shall not include any options or warrants on, or securities convertible or exchangeable into, shares of common stock of such person) multiplied by (B) the average closing price of such common stock listed on a national securities exchange or the Nasdaq National Market System over the 20 consecutive business days immediately preceding such day; plus (2) the liquidation value of any outstanding shares of preferred stock of such Person on such day. 186
"Tower Asset Exchange" means any transaction in which the Company or one of its Restricted Subsidiaries exchanges assets for Tower Assets and/or cash or Cash Equivalents where the fair market value (evidenced by a resolution of the Board of Directors set forth in an Officers' Certificate delivered to the Transfer Agent and/or the Exchange Trustee, as appropriate) of the Tower Assets and cash or Cash Equivalents received by the Company and its Restricted Subsidiaries in such exchange is at least equal to the fair market value of the assets disposed of in such exchange. "Tower Assets" means wireless transmission towers and related assets that are located on the site of a transmission tower. "Tower Cash Flow" means, for any period, the Consolidated Cash Flow of the Company and its Restricted Subsidiaries for such period that is directly attributable to site rental revenue or license fees paid to lease or sublease space on communication sites owned or leased by the Company, all determined on a consolidated basis and in accordance with GAAP. Tower Cash Flow will not include revenue or expenses attributable to non-site rental services provided by the Company or any of its Restricted Subsidiaries to lessees of communication sites or revenues derived from the sale of assets. "Unrestricted Subsidiary" means (i) any Subsidiary of the Company that is designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution; but only to the extent that such Subsidiary: (1) has no Indebtedness other than Non-Recourse Debt; (2) is not party to any agreement, contract, arrangement or understanding with the Company or any Restricted Subsidiary of the Company unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to the Company or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Company; (3) is a Person with respect to which neither the Company nor any of its Restricted Subsidiaries has any direct or indirect obligation (x) to subscribe for additional Equity Interests or (y) to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels of operating results; (4) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of the Company or any of its Restricted Subsidiaries; and (5) has at least one director on its board of directors that is not a director or executive officer of the Company or any of its Restricted Subsidiaries and has at least one executive officer that is not a director or executive officer of the Company or any of its Restricted Subsidiaries. Any such designation by the Board of Directors shall be evidenced to the Transfer Agent and the Exchange Trustee by filing with the Transfer Agent and the Exchange Trustee a certified copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing conditions and was permitted by the covenant described above under the respective captions"--Certain Covenants--Restricted Payments". If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of the Certificate of Designations and the Exchange Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the Company as of such date (and, if such Indebtedness is not permitted to be incurred as of such date under the covenants described above under the respective captions "-- Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock," the Company shall be in default of such covenant). The Board of Directors of the Company may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that 187
such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation shall only be permitted if (i) such Indebtedness is permitted under the covenant described above under the respective captions "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock," calculated on a pro forma basis as if such designation had occurred at the beginning of the four-quarter reference period, and (ii) no Default would occur or be in existence following such designation. "Voting Stock" of any Person as of any date means the Capital Stock of such Person that is at the time entitled to vote in the election of the Board of Directors of such Person. "Weighted Average Life to Maturity" means, when applied to any Indebtedness or series or class of preferred stock at any date, the number of years obtained by dividing: (1) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal or liquidation preference, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment; by (2) the then outstanding principal amount of such Indebtedness or the aggregate liquidation preference of the then outstanding preferred stock, as the case may be. "Wholly Owned Restricted Subsidiary" of any Person means a Restricted Subsidiary of such Person all of the outstanding Capital Stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person or by one or more Wholly Owned Restricted Subsidiaries of such Person and one or more Wholly Owned Restricted Subsidiaries of such Person. 188
BOOK-ENTRY, DELIVERY AND FORM The new preferred stock will be represented by one or more certificates in registered, global form without interest coupons. The global certificates will be deposited upon issuance with the Transfer Agent as custodian for DTC, in New York, New York, and registered in the name of DTC or its nominee, in each case for credit to an account of a direct or indirect participant in DTC as described below. Except as set forth below, the global certificates may be transferred, in whole and not in part, only to another nominee of DTC or to a successor of DTC or its nominee. Beneficial interests in the global certificates may not be exchanged for exchangeable preferred stock in certificated form except in the limited circumstances described below. See "--Depositary Procedures--Exchange of Book-Entry Exchangeable Preferred Stocks for Certificated Securities." Except in the limited circumstances described below, owners of beneficial interests in the global certificates will not be entitled to receive physical delivery of certificated securities (as defined below). Transfers of beneficial interest in the global certificates will be subject to the applicable rules and procedures of DTC and its direct or indirect participants, which may change from time to time. Initially, the exchange agent will act as paying agent and registrar. The exchangeable preferred stock may be presented for registration of transfer and exchange at the offices of the registrar. Depository Procedures The following description of the operations and procedures of DTC are provided solely as a matter of convenience. These operations and procedures are solely within the control of the respective settlement systems and are subject to changes by them from time to time. We take no responsibility for these operations and procedures and urges investors to contact the system or their participants directly to discuss these matters. DTC is a limited-purpose trust company created to hold securities for its participating organizations, or participants, and to facilitate the clearance and settlement of transactions in those securities between participants through electronic book-entry changes in accounts of its participants. The participants include securities brokers and dealers (including the initial purchasers), banks, trust companies, clearing corporations and certain other organizations. Access to DTC's system is also available to other entities such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly, the indirect participants. Persons who are not participants may beneficially own securities held by or on behalf of DTC only through the participants or the indirect participants. The ownership interests in, and transfers of ownership interests in, each security held by or on behalf of DTC are recorded on the records of the participants and indirect participants. Pursuant to procedures established by DTC: (1) upon deposit of the global certificates, DTC will credit the accounts of participants designated by the initial purchasers with portions of the principal amount of the global certificates; and (2) ownership of such interests in the global certificates will be shown on, and the transfer of ownership thereof will be effected only through, records maintained by DTC (with respect to the participants) or by the participants and the indirect participants (with respect to other owners of beneficial interest in the global certificates). Investors in the global certificates may hold their interests therein directly through DTC, if they are participants in such system, or indirectly through organizations (including Euroclear and Cedel Bank) which are participants in such system. Investors in the Regulation S global certificates must initially hold their interests therein through Euroclear or Cedel Bank, if they are participants in such 189
systems, or indirectly through organizations which are participants in such systems. After the expiration of the restricted period (but not earlier), investors may also hold interests in the Regulation S global certificates through organizations other than Euroclear and Cedel Bank that are participants in the DTC system. Euroclear and Cedel Bank will hold interests in the Regulation S global certificates on behalf of their participants through customers' securities accounts in their respective names on the books of their respective depositaries, which are Morgan Guaranty Trust Company of New York, Brussels office, as operator of Euroclear, and Citibank, N.A. as operator of Cedel. The depositaries, in turn, will hold such interests in the Regulation S global certificates in customers' securities accounts in the depositaries' names on the books of DTC. All interests in a global certificate, including those held through Euroclear or Cedel Bank, may be subject to the procedures and requirements of DTC. Those interests held by Euroclear or Cedel Bank may be also be subject to the procedures and requirements of such system. The laws of some states require that certain persons take physical delivery in definitive form of securities that they own. Consequently, the ability to transfer beneficial interest in a global certificate to such persons may be limited to that extent. Because DTC can act only on behalf of participants, which in turn act on behalf of indirect participants and certain banks, the ability of a person having a beneficial interest in a global certificate to pledge such interest to persons or entities that do not participate in the DTC system, or otherwise take actions in respect of such interests, may be affected by the lack of a physical certificate evidencing such interests. For certain other restrictions on the transferability of the preferred stock or the exchange debentures, as applicable, see "--Exchange of Book-Entry Securities for Certificated Securities", "--Exchange of Certificated Securities for Book- Entry Securities" and "--Exchanges between Regulation S Certificates and Rule 144A Certificates." Because DTC can act only on behalf of participants, which in turn act on behalf of indirect participants and certain banks, the ability of a person having beneficial interests in a global certificate to pledge such interests to persons or entities that do not participate in the DTC system, or otherwise take actions in respect of such interests, may be affected by the lack of a physical certificate evidencing such interests. Except as described below, owners of interest in the global certificates will not have exchangeable preferred stock or exchange debentures, as applicable, registered in their names, will not receive physical delivery of exchangeable preferred stock or exchange debentures, as applicable, in certificated form and will not be considered the registered owners or "holders" thereof under the certificate of designations or the exchange indenture, as applicable, for any purpose. Payments in respect of the principal of, and premium, if any, liquidated damages, if any, and interest on a global certificate registered in the name of DTC or its nominee will be payable to DTC in its capacity as the registered holder under the certificate of designations or the exchange indenture, as applicable. Under the terms of the certificate of designations and the exchange indenture, we and the transfer agent or exchange trustee, as applicable, will treat the persons in whose names the exchangeable preferred stock or exchange debentures, as applicable, including the global certificates, are registered as the owners thereof for the purpose of receiving such payments and for any and all other purposes whatsoever. Consequently, neither we, the transfer agent or the exchange trustee nor any of their respective agents has or will have any responsibility or liability for: (1) any aspect of DTC's records or any participant's or indirect participant's records relating to or payments made on account of beneficial ownership interest in the global certificates, or for maintaining, supervising or reviewing any of DTC's records or any participant's or indirect participant's records relating to the beneficial ownership interests in the global certificates; or (2) any other matter relating to the actions and practices of DTC or any of its participants or indirect participants. 190
DTC's current practice, upon receipt of any payment in respect of securities such as the exchangeable preferred stock (including dividends) or the exchange debentures (including principal and interest), as applicable, is to credit the accounts of the relevant participants with the payment on the payment date, in amounts proportionate to their respective holdings in the principal amount of beneficial interest in the relevant security as shown on the records of DTC unless DTC has reason to believe it will not receive payment on such payment date. Payments by the participants and the indirect participants to the beneficial owners of exchangeable preferred stock or exchange debentures, as applicable, will be governed by standing instructions and customary practices and will be the responsibility of the participants or the indirect participants and will not be the responsibility of DTC, the transfer agent, the exchange trustee or us. None of us, the transfer agent or the exchange trustee will be liable for any delay by DTC or any of its participants in identifying the beneficial owners of the exchangeable preferred stock or exchange debentures, as applicable, and we, the transfer agent and the exchange trustee may conclusively rely on and will be protected in relying on instructions from DTC or its nominee for all purposes. Except for trades involving only Euroclear and Cedel Bank participants, interests in the global certificates are expected to be eligible to trade in DTC's Same-Day Funds Settlement System and secondary market trading activity in such interests will, therefore, settle in immediately available funds, subject in all cases to the rules and procedures of DTC and its participants. See "-- Same Day Settlement and Payment". DTC will take any action permitted to be taken by a holder of exchangeable preferred stock or exchange debentures, as applicable, only at the direction of one or more participants to whose account DTC has credited the interests in the global certificates and only in respect of such portion of the aggregate principal amount of the exchangeable preferred stock or exchange debentures, as applicable, as to which such participant or participants has or have given such direction. However, if there is an event of default under the exchange debentures, DTC reserves the right to exchange the global certificates for legended securities in certificated form, and to distribute such certificates to its participants. Although DTC has agreed to the foregoing procedures to facilitate transfers of interests in the global certificates among participants in DTC, Euroclear and Cedel Bank, they are under no obligation to perform or to continue to perform such procedures, and such procedures may be discontinued at any time. None of the us, the transfer agent or the exchange trustee nor any of our or respective agents will have any responsibility for the performance by DTC, Euroclear or Cedel Bank or their respective participants or indirect participants of their respective obligations under the rules and procedures governing their operations. Exchange of Book-Entry Certificates for Certificated Securities A global certificate is exchangeable for definitive certificates in registered certificated form if: (1) DTC: (a) notifies us that it is unwilling or unable to continue as depositary for the global certificate and we fail to appoint a successor depositary; or (b) has ceased to be a clearing agency registered under the Exchange Act and we fail to appoint a successor depositary; (2) we, at our option, notify the exchange trustee in writing that it elects to cause the issuance of the exchangeable preferred stock or exchange debentures, as applicable, in certificate form; or 191
(3) there shall have occurred and be continuing (a) a voting rights triggering event with respect to the exchangeable preferred stock or (b) a default or event of default with respect to the exchange debentures. In addition, beneficial interests in a global certificate may be exchanged for certificated certificates upon request but only upon prior written notice given to the exchange trustee by or on behalf of DTC in accordance with the exchange indenture. In all cases, certificated securities delivered in exchange for any global certificate or beneficial interests therein will be registered in the names, and issued in any approved denominations, requested by or on behalf of the depositary (in accordance with its customary procedures) and will bear the applicable restrictive legend referred to in "Notice to Investors," unless we determine otherwise in compliance with applicable law. Exchange of Certificated Securities for Book-Entry Securities Certificates issued in certificated form may not be exchanged for beneficial interests in any global certificate unless the transferor first delivers to the transfer agent or the exchange trustee, as applicable, a written certificate (in the form provided in the certificate of designations or the exchange indenture) to the effect that such transfer will comply with the appropriate transfer restrictions applicable to such certificate. Same Day Settlement and Payment The certificate of designation or the exchange indenture, as applicable, require that payments in respect of the certificates represented by the global certificates (including liquidation preference, dividends, principal, premium, interest and liquidated damages) be made by wire transfer of immediately available funds to the accounts specified by the global certificate holder. With respect to certificated securities, we will make all such payments by wire transfer of immediately available funds to the accounts specified by the holders thereof or, if no such account is specified, by mailing a check to each such holder's registered address. The certificates represented by the global certificates are expected to be eligible to trade in the PORTAL market and to trade in the Depositary's Same-Day Funds Settlement System, and any permitted secondary market trading activity in such Certificates will, therefore, be required by the Depositary to be settled in immediately available funds. We expect that secondary trading in any certificated certificates will also be settled in immediately available funds. Registration Rights and Liquidated Damages Holders of the new preferred stock are not entitled to any registration rights with respect to the new preferred stock. We and the initial purchasers entered into the registration rights agreement for the benefit of the holders of transfer restricted securities on the closing date. Pursuant to the registration rights agreement, we agreed to file with the Commission the exchange offer registration statement on the appropriate form under the Securities Act with respect to the new preferred stock. The registration statement of which this prospectus is a part constitutes the exchange offer registration statement. The registration rights agreement provides that if (1) we are not required to file the exchange offer registration statement or permitted to consummate the exchange offer because the exchange offer is not permitted by applicable law or Commission policy or (2) any holder of transfer restricted securities notifies us prior to the 20th day following consummation of the exchange offer that (A) it is prohibited by law or Commission policy from participating in the exchange offer or (B) that it may not resell the new preferred stock acquired by it in the exchange offer to the public without delivering a prospectus and the prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales or (C) that it is a broker-dealer and owns preferred stock acquired directly from us or our affiliate, we will file with the Commission a shelf registration statement to cover resales of the preferred stock by the holders thereof, subject to such 192
holders satisfying certain conditions relating to the provision of information in connection with the shelf registration statement. We have agreed that we will use all commercially reasonable efforts to cause any such shelf registration statement to be declared effective as promptly as possible by the Commission. For purposes of the foregoing, "transfer restricted securities" means each old preferred stock until (1) the date on which such old preferred stock has been exchanged by a person other than a broker-dealer for a new preferred stock in the exchange offer, (2) following the exchange by a broker- dealer in the exchange offer of an old preferred stock for a new preferred stock, the date on which such new preferred stock is sold to a purchaser who receives from such broker-dealer on or prior to the date of such sale a copy of the prospectus contained in the exchange offer registration statement, (3) the date on which such old preferred stock has been effectively registered under the Securities Act and disposed of in accordance with the shelf registration statement or (4) the date on which such old preferred stock is distributed to the public pursuant to Rule 144 under the Act. The registration rights agreement provides that: (1) we will file an exchange offer registration Statement with the Commission on or prior to 60 days after the closing date, (2) we will use all commercially reasonable efforts to have the Exchange Offer Registration Statement declared effective by the Commission on or prior to 150 days after the closing date, (3) unless the exchange offer would not be permitted by applicable law or Commission policy, we will commence the exchange offer and use our best efforts to issue on or prior to 30 business days after the date on which the exchange offer registration statement was declared effective by the Commission, new preferred stock in exchange for all old preferred stock tendered prior thereto in the exchange offer, and (4) if obligated to file the shelf registration statement, we will use our best efforts to file the shelf registration statement with the Commission on or prior to 45 days after such filing obligation arises and to cause the shelf registration to be declared effective by the Commission on or prior to 90 days after such obligation arises. If (a) we fail to file any of the registration statements required by the registration rights agreement on or before the date specified for such filing, (b) any of such registration statements is not declared effective by the Commission on or prior to the date specified for such effectiveness, or (c) we fail to consummate the exchange offer within 30 business days of the effectiveness target date with respect to the exchange offer registration statement, or (d) the shelf registration statement or the exchange offer registration statement is declared effective but thereafter ceases to be effective or usable in connection with resales of transfer restricted securities during the periods specified in the registration rights agreement (each such event referred to in clauses (a) through (d) above a "Registration Default"), then we will pay liquidated damages to each Holder of exchangeable preferred stock, with respect to the first 90-day period immediately following the occurrence of the first Registration Default in an amount equal to $.05 per week per $1,000 of the liquidation preference of the exchangeable preferred stock held by such holder. The amount of the liquidated damages will increase by an additional $.05 per week per $1,000 of the liquidation preference of the exchangeable preferred stock with respect to each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum amount of liquidated damages for all Registration Defaults of $.50 per week per $1,000 of the liquidation preference of the exchangeable preferred stock. We will pay all accrued liquidated damages on each interest payment date to the Holders of record on the immediately preceding record date by wire transfer of immediately available funds, in the case of the holder of global preferred stock, and to holders of certificated securities by wire transfer to the accounts specified by them or by mailing checks to their registered addresses if no such accounts have been specified. Following the cure of all Registration Defaults, the accrual of liquidated damages will cease. 193
DESCRIPTION OF CAPITAL STOCK The following summary of the material terms and provisions of our capital stock does not purport to be complete and is subject to the detailed provisions of, and qualified in its entirety by reference to, our certificate of incorporation and by-laws, the certificate of designations, the governance agreement, the stockholders' agreement and the CTSH shareholders agreement, and to the applicable provisions of the Delaware General Corporation Law. General Our authorized capital stock consists of 600,000,000 shares of common stock, par value $.01 per share, 90,000,000 shares of Class A common stock, par value $.01 per share, and 10,000,000 shares of preferred stock, par value $.01 per share. There are 94,905,902 shares of common stock outstanding, 11,340,000 shares of Class A common stock outstanding and 201,063 shares of 12 3/4% Senior Exchangeable Preferred Stock due 2010. Common Stock Voting Rights Each share of common stock is entitled to one vote. The common stock votes together as a single class on all matters presented for a vote of the stockholders, except as provided under the Delaware General Corporation Law. All the outstanding shares of common stock are held by directors, executive officers, other employees and our affiliates. Dividends and Liquidation Rights Each share of common stock is entitled to receive dividends if, as and when declared by the Board of Directors out of funds legally available for that purpose, subject to approval of certain holders of the senior convertible preferred stock. In the event of our dissolution, after satisfaction of amounts payable to our creditors and distribution of any preferential amounts to the holders of outstanding senior convertible preferred stock, if any, holders of common stock are entitled to share ratably in the assets available for distribution to the stockholders. Other Provisions There are no preemptive rights to subscribe for any additional securities which we may issue, and there are no redemption provisions or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are legally issued, fully paid and nonassessable. Class A Common Stock Voting Rights Each share of Class A common stock is entitled to one vote for each such share on all matters presented to the stockholders, except the election of directors. The holders of the shares of Class A common stock vote, except as provided under the Delaware General Corporation Law, together with the holders of the common stock and any other class or series of our stock accorded such general voting rights, as a single class. So long as TdF is qualified, holders of shares of Class A common stock voting as a separate class have the right to elect two directors to our board of directors; provided, however, that if TdF is not qualified, so long as the ownership interest of the TdF Group is at least 5%, holders of Class A common stock voting as a separate class have the right to elect one director. 194
The holders of Class A common stock, subject to limitations described in "The Roll-Up--Governance Agreement--Governance Limitations", have a veto over certain significant actions, described in "Governance--Veto Rights", taken by us. Convertibility Each share of Class A common stock is convertible, at the option of its record holder, into one share of common stock at any time. In the event of any transfer of any share of Class A common stock to any person other than an Affiliate (as defined in Rule 12b-2 of the Exchange Act), such share of Class A common stock automatically converts, without any further action, into one share of Common Stock; provided, however, and subject to certain conditions described in our certificate of incorporation, that a holder of shares of Class A common stock may pledge its shares to a financial institution pursuant to a bona fide pledge of such shares of Class A common stock as collateral security for any indebtedness or other obligation of any person due to the pledgee or its nominee. Further, each share of Class A common stock automatically converts into one share of common stock on the first date on which the ownership interest of TdF Group is less than 5%. Dividends and Liquidation Rights Holders of shares of Class A common stock are entitled to the same dividends and liquidation rights as holders of shares of common stock. Other Provisions Pursuant to the governance agreement, so long as it remains qualified, TdF has anti-dilutive rights in connection with maintaining a certain percentage of voting power in us and, accordingly, we may not, subject to certain exceptions relating primarily to compensation of directors and employees, issue, sell or transfer additional securities (except for the IPO) unless TdF is offered the right to purchase, at the same price, an amount such that it would maintain such percentage of voting power in CCIC. All outstanding shares of Class A common stock are legally issued, fully paid and nonassessable. Preferred Stock Pursuant to the our certificate of incorporation, we may issue up to 10,000,000 shares of preferred stock in one or more series. Our Board of Directors has the authority, without any vote or action by the stockholders (other than any rights of TdF under the governance agreement), to create one or more series of preferred stock up to the limit of our authorized but unissued shares of preferred stock and to fix their designations, preferences, rights, qualifications, limitations and restrictions, including the voting rights, dividend rights, dividend rate, conversion rights, terms of redemption (including sinking fund provisions), redemption price or prices, liquidation preferences and the number of shares constituting any series. See "Risk Factors--We May Not Have Sufficient Funds to Repurchase the Exchangeable Preferred Stock or the Exchange Debentures Upon a Change of Control". Senior Preferred Warrants In connection with the offering of the senior convertible preferred stock in August 1997 and October 1997, we issued warrants to purchase an aggregate of 1,314,990 shares of common stock at a price of $7.50 per share. 195
Certificate of Incorporation and By-laws Stockholders' rights and related matters are governed by the Delaware General Corporation Law, and our certificate of incorporation and by-laws. Certain provisions of our certificate of incorporation and by-laws, which are summarized below, may have the effect, either alone or in combination with each other, of discouraging or making more difficult a tender offer or takeover attempt that is opposed by our board of directors but that a stockholder might consider to be in its best interest. Such provisions may also adversely affect prevailing market prices for the common stock. We believe that such provisions are necessary to enable us to develop its business in a manner that will foster its long-term growth without disruption caused by the threat of a takeover not deemed by our board of directors to be in our best interests and those of our stockholders. Classified Board of Directors and Related Provisions Our certificate of incorporation provides that our directors, other than those directors who may be elected by holders of any series of preferred stock or holders of the Class A common stock, initially are to be divided into three classes of directors, initially consisting of three, three and four directors. One class of directors, initially consisting of three directors, will be elected for a term expiring at the annual meeting of shareholders to be held in 1999, another class initially consisting of three directors will be elected for a term expiring at the annual meeting of stockholders to be held in 2000, and another class initially consisting of four directors shall be initially elected for a term expiring at the annual meeting of stockholders in 2001. The classified board provisions will prevent a party who acquires control of a majority of our outstanding voting stock from obtaining control of our board of directors until the second annual stockholders meeting following the date such party obtains the controlling interest. Voting stock is defined in our certificate of incorporation as the outstanding shares of our capital stock entitled to vote in a general vote of our stockholders as a single class with shares of our common stock, which shares of capital stock include the shares of Class A common stock. No Stockholder Action by Written Consent; Special Meeting The certificate of incorporation prohibits stockholders (other than holders of Class A common stock with respect to matters upon which such holders are entitled to vote as a separate class) from taking action by written consent in lieu of an annual or special meeting and, thus, stockholders may only take action at an annual or special meeting called in accordance with our by-laws. The by-laws provide that special meetings of stockholders may only be called by our Secretary at the direction of our board of directors pursuant to a resolution adopted by the board. These provisions could have the effect of delaying consideration of a stockholder proposal until the next annual meeting. The provisions would also prevent the holders of a majority of the voting power of our capital stock entitled to vote from unilaterally using the written consent procedure to take stockholder action. Advance Notice Requirements for Stockholder Proposals and Director Nominations Our by-laws establish advance notice procedures with regard to stockholder proposals and the nomination, other than by or at the direction of the board of directors, of candidates for election as directors. These procedures provide that the notice of stockholder proposals and stockholder nominations for the election of directors at an annual meeting must be in writing and received by our Secretary no less than 90 days nor more than 120 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that with respect to the annual meeting to be held in 1999, the anniversary date shall be deemed to be April 1, 1999; provided further that in the event that the date of the annual meeting is advanced by more than 30 days, or delayed by more than 90 days, from such anniversary date, notice by the stockholder to be timely must be delivered not earlier 196
than the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public disclosure of the date of the annual meeting was made. The notice of nominations for the election of directors must set forth certain information with respect to the stockholder giving the notice and with respect to each nominee. By requiring advance notice of nominations by stockholders, the foregoing procedures will afford our board of directors an opportunity to consider the qualifications of the proposed nominees and, to the extent deemed necessary or desirable by the board of directors, to inform stockholders about such qualifications. By requiring advance notice of other proposed business, such procedures will provide our board of directors with an opportunity to inform stockholders, prior to such meetings, of any business proposed to be conducted at such meetings, together with any recommendations as to the board of directors' position regarding action to be taken with respect to such business, so that stockholders can better decide whether to attend such a meeting or to grant a proxy regarding the disposition of any such business. Dilution Our certificate of incorporation provides that our board of directors is authorized to create and issue, whether or not in connection with the issuance and sale of any of its stock or other securities or property, rights entitling the holders to purchase from us shares of stock or other securities of us or any of other corporation, recognizing that, under certain circumstances, the creation and issuance of such rights could have the effect of discouraging third parties from seeking, or impairing their right to seek, to acquire a significant portion of our outstanding securities, to engage in any transaction which might result in a change of control of the corporation or to enter into any agreement, arrangement or understanding with another party to accomplish the foregoing or for the purpose of acquiring, holding, voting or disposing of any of our securities. Amendments Our certificate of incorporation and by-laws provide that we may at any time and from time to time, amend, alter, change or repeal any provision contained in our certificate of incorporation or a preferred stock designation; provided, however, the affirmative vote of the holders of at least 80% of the voting power of the then outstanding voting stock, voting together as a single class, is required to amend, repeal or adopt any provision inconsistent with certain provisions of our certificate of incorporation, including the provisions referred to above relating to the classification of our board of directors, prohibiting stockholder action by written consent, and prohibiting the calling of special meetings by stockholders. Our by-laws may be amended by either the holders of 80% of the voting power of the Voting Stock or by the majority of the board; provided that the board may alter, amend or repeal or adopt new by-laws in conflict with certain provisions thereof by a two-thirds vote of the entire board. Rights Plan Rights Our board of directors has declared a dividend of one right for each outstanding share of common stock and each outstanding share of Class A common stock. Rights have been issued in connection with each outstanding share of common stock and Class A common stock; and rights will be issued in connection with common stock and Class A common stock issued thereafter until the distribution date, and, in certain circumstances, with respect to common stock and Class A common stock issued after the distribution date referred to below. Each right, when it becomes exercisable as described below, will entitle the registered holder to purchase from us one one-thousandth (1/1000th) 197
of a share of Series A Participating Cumulative Preferred Stock (the "Preferred Shares") at a price of $110.00 per (1/1000th) of a share, subject to adjustment in certain circumstances (the "Purchase Price"). The description and terms of the rights are set forth in a rights agreement between us and the rights agent named therein. The rights will not be exercisable until the distribution date and will expire on the tenth annual anniversary of the rights agreement, unless earlier redeemed by us. Until a right is exercised, the holder thereof, as such, will have no rights as a stockholder of us, including the right to vote or to receive dividends with respect to the rights or the Preferred Shares relating thereto. Distribution Date Under the rights agreement, the "distribution date" is the earlier of (1) such time as we learn that a person or group (including any affiliate or associate of such person or group) has acquired, or has obtained the right to acquire, beneficial ownership of more than 15% of our outstanding voting securities (such person or group being an "acquiring person"), subject to the exceptions relating to the TDF Group and the Berkshire Group described in the paragraph below, unless provisions preventing accidental triggering of the distribution of the rights apply, and (2) the close of business on such date, if any, as may be designated by our board of directors following the commencement of, or first public disclosure of an intent to commence, a tender or exchange offer for more than 15% or more of the outstanding shares of voting securities. Each member of the TdF Group will not otherwise be considered an acquiring person if (a) during the first five years following the adoption of the rights agreement, the aggregate ownership interest of the TdF Group does not exceed 25% (or 30% if the board so elects) of the outstanding voting securities or (b) thereafter, the aggregate ownership interest of the TdF Group does not exceed the lesser of (1) 25% or 30%, as applicable, of the voting securities then outstanding and (2) the greater of (x) the aggregate interest of the TdF Group as of the fifth anniversary of the rights agreement and (y) 15% of the then outstanding voting securities. Each member of the Berkshire Group will not otherwise be deemed an acquiring person if the aggregate ownership interest of the Berkshire Group does not exceed the greater of (a) the aggregate ownership interest of the Berkshire Group upon the execution of the rights agreement, reduced by an amount equal to any disposition of voting securities following the date the rights agreement is executed and (b) 15% of the outstanding voting securities. Triggering Event and Effect of Triggering Event At such time as there is an acquiring person, the rights will entitle each holder (other than such acquiring person) of a right to purchase, at the Purchase Price, that number of one-thousandths (1/1000ths) of a Preferred Share equivalent to the number of shares of common stock that at the time of such event would have a market value of twice the Purchase Price. In the event we are acquired in a merger or other business combination by an acquiring person or an affiliate or associate of an acquiring person that is a publicly traded corporation or 50% or more of our assets or assets representing 50% or more of our revenues or cash flow are sold, leased, exchanged or otherwise transferred (in one or more transactions) to an acquiring person or an affiliate or associate of an acquiring person that is a publicly traded corporation, each right will entitle its holder (other than rights beneficially owned by such acquiring person or its affiliates or associates) to purchase, for the Purchase Price, that number of common shares of such corporation which at the time of the transaction would have a market value or, in certain circumstances, book value of twice the Purchase Price. In the event we are acquired in a merger or other business combination by an acquiring person or an affiliate or associate of an acquiring person that is not a publicly traded entity or 50% or more of our assets or assets representing 50% or more of our revenues or cash flow are sold, leased, exchanged or otherwise transferred (in one or more transactions) to an Acquiring 198
Person or affiliate or associate of an Acquiring Person that is not a publicly traded entity, each right will entitle its holder (subject to the next paragraph) to purchase, for the Purchase Price, at such holder's option, (1) that number of shares of the surviving corporation in the transaction with such entity (which surviving corporation could be us) which at the time of the transaction would have a book value of twice the Purchase Price, (2) that number of shares of the ultimate parent of or entity controlling such surviving corporation which at the time of the transaction would have a book value of twice the Purchase Price or (3) if such entity has an affiliate which has publicly traded common shares, that number of common shares of such affiliate which at the time of the transaction would have market value of twice the Purchase Price. Any rights that are at any time beneficially owned by an acquiring person (or any affiliate or associate of an acquiring person) will be null and void and nontransferable and any holder of any such right (including any purported transferee or subsequent holder) will be unable to exercise or transfer any such right. Redemption At any time prior to the earlier of (i) such time as a person or group becomes an acquiring person and (ii) the Expiration Date, our board of directors may redeem the rights in whole, but not in part, at a price (in cash or common stock or other securities of ours deemed by our board of directors to be at least equivalent in value) of $.01 per right (which amount shall be subject to adjustment as provided in the rights agreement). Immediately upon the action of our board of directors ordering the redemption of the rights, and without any further action and without any notice, the right to exercise the rights will terminate and the only right of the holders of rights will be to receive the redemption price. In addition, at any time after there is an acquiring person, our board of directors may elect to exchange each right for consideration per right consisting of one-half of the securities that would be issuable at such time upon exercise of one right pursuant to the terms of the rights agreement. Amendment At any time prior to the distribution date, we may, without the approval of any holder of any rights, supplement or amend any provision of the rights agreement (including the date on which the Expiration Date or distribution date shall occur, the definition of acquiring person, the time during which the rights may be redeemed or the terms of the Preferred Shares), except that no supplement or amendment shall be made which reduces the redemption price (other than pursuant to certain adjustments therein). Certain Effects of the Rights Plan The rights plan is designed to protect our stockholders in the event of unsolicited offers to acquire us and other coercive takeover tactics which, in the opinion of our board of directors, could impair its ability to represent stockholder interests. The provisions of the rights plan may render an unsolicited takeover of us more difficult or less likely to occur or might prevent such a takeover, even though such takeover may offer our stockholders the opportunity to sell their stock at a price above the prevailing market rate and may be favored by a majority of our stockholders. Section 203 of the Delaware General Corporation Law Section 203 of the Delaware General Corporation Law prohibits certain transactions between a Delaware corporation and an "interested stockholder", which is defined as a person who, together with any affiliates and/or associates of such person, beneficially owns, directly or indirectly, 15% or more of the outstanding voting shares of a Delaware corporation. This provision prohibits certain business combinations (defined broadly to include mergers, consolidations, sales or other 199
dispositions of assets having an aggregate value of 10% or more of the consolidated assets of the corporation, and certain transactions that would increase the interested stockholder's proportionate share ownership in the corporation) between an interested stockholder and a corporation for a period of three years after the date the interested stockholder acquired its stock, unless: (1) the business combination is approved by the corporation's board of directors prior to the date the interested stockholder acquired shares; (2) the interested stockholder acquired at least 85% of the voting stock of the corporation in the transaction in which it became an interested stockholder; or (3) the business combination is approved by a majority of the board of directors and by the affirmative vote of two-thirds of the outstanding voting stock owned by disinterested stockholders at an annual or special meeting. A Delaware corporation, pursuant to a provision in its certificate of incorporation or by-laws, may elect not to be governed by Section 203 of the Delaware General Corporation Law. We are subject to the restrictions imposed by Section 203. Under certain circumstances, Section 203 makes it more difficult for a person who could be an "interested stockholder" to effect various business combinations with a corporation for a three-year period, although the stockholders may elect to exclude a corporation from the restrictions imposed thereunder. Our certificate of incorporation does not exclude us from the restrictions imposed under Section 203 of the Delaware General Corporation Law. It is anticipated that the provisions of Section 203 may encourage companies interested in acquiring us to negotiate in advance with our board of directors, since the stockholder approval requirement would be avoided if a majority of the directors then in office approves, prior to the date on which a stockholder becomes an interested stockholder, either the business combination or the transaction which results in the stockholder becoming an interested stockholder. Limitations of Directors' Liability Our certificate of incorporation provides that none of our directors will be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director except for liability: (1) for any breach of the director's duty of loyalty to us or our stockholders, (2) for acts of omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) under Section 174 of the Delaware General Corporation Law, or (4) for any transaction from which the director derived an improper personal benefit. The effect of these provisions will be to eliminate our rights and our stockholders (through stockholders' derivatives suits on behalf of us) to recover monetary damages against a director for breach of fiduciary duty as a director (including breaches resulting from grossly negligent behavior), except in the situations described above. These provisions will not limit the liability of directors under federal securities laws and will not affect the availability of equitable remedies such as an injunction or rescission based upon a director's breach of his duty of care. Transfer Agent The Transfer Agent and Registrar for the Common Stock is ChaseMellon Shareholder Services, L.L.C. 200
DESCRIPTION OF CERTAIN INDEBTEDNESS Senior Credit Facility Pursuant to the amended and restated loan agreement dated as of July 10, 1998, two wholly owned subsidiaries of CCIC, CCI and Crown Castle International Corp. de Puerto Rico (collectively, the "Borrowers"), have entered into the senior credit facility with a group of banks and other financial institutions led by Key Corporate Capital Inc. and PNC Bank, National Association, as arrangers and agents. The following summary of certain provisions of the senior credit facility does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the provisions of the senior credit facility. The senior credit facility provides for revolving credit loans in an aggregate principal amount not to exceed $100.0 million, for working capital needs, acquisitions and general corporate purposes. The senior credit facility includes a $5.0 million sublimit available for the issuance of letters of credit. As of March 1, 1999, Crown Communication and its subsidiaries had unused borrowing availability under the senior credit facility of $54.0 million. The loan commitment under the senior credit facility reduces by $5.0 million commencing March 31, 2001 and by $5.0 million each calendar quarter thereafter until December 31, 2004, when the senior credit facility matures. In addition, the senior credit facility provides for mandatory reduction of the loan commitment and mandatory prepayment with the: (1) net proceeds of certain asset sales, (2) net proceeds of certain required capital contributions to Crown Communication by CCIC relating to the proceeds from the sale of equity, convertible or debt securities, subject to certain exceptions, (3) net proceeds of any unused insurance proceeds and (4) a percentage of the excess cash flow of the Borrowers, commencing with the calendar year ending December 31, 2000. The Borrowers' obligations under the senior credit facility are guaranteed by each direct and indirect majority owned subsidiary of Crown Communication and are also secured by (1) a pledge by the Borrowers of all of the outstanding capital stock of each of their respective direct subsidiaries and (2) a perfected first priority security interest in substantially all of the personal property of the Borrowers and their subsidiaries. In addition, the senior credit facility is guaranteed on a limited recourse basis by CCIC, limited in recourse to the collateral pledged by CCIC (the capital stock of Crown Communication). The loans under the senior credit facility will interest, at the Borrowers' option, at either (A) a "base rate" equal to KeyCorp's prime lending rate plus an applicable spread ranging from 0% to 1.5% (determined based on a leverage ratio) or (B) a "LIBOR rate" plus an applicable spread ranging from 1.0% to 3.25% (determined based on a leverage ratio). Following the occurrence and during the continuance of an event of default under the senior credit facility, the loans bear interest at the "base rate" plus 3.5%. The senior credit facility contains a number of covenants that, among other things, restrict the ability of the Borrowers and their respective subsidiaries to dispose of assets, incur additional indebtedness, incur guaranty obligations, repay subordinated indebtedness except in accordance with the subordination provisions, pay dividends or make capital distributions, create liens on assets, enter into leases, make investments, make acquisitions, engage in mergers or consolidations, make capital expenditures, engage in certain transactions with subsidiaries and affiliates and otherwise restrict 201
corporate activities. In addition, the senior credit facility will require compliance with certain financial covenants, including requiring the Borrowers and their respective subsidiaries to maintain a maximum ratio of indebtedness to operating cash flow, a minimum ratio of operating cash flow to fixed charges, a minimum ratio of operating cash flow to projected debt service and a minimum ratio of operating cash flow to interest expense. CCIC does not expect that such covenants will materially impact the ability of the Borrowers and their respective subsidiaries to operate their respective businesses. Pursuant to the terms of the senior credit facility, Crown Communication is entitled to pay dividends or make distributions to CCIC in order to permit CCIC to pay its out-of-pocket costs for corporate development and overhead and to pay cash interest on certain indebtedness of CCIC (including the 10 5/8% discount notes); provided that the amount of such dividends or distributions does not exceed (1) $6.0 million in any year ending on or prior to October 31, 2002 or (3) $33.0 million in any year thereafter. The senior credit facility also allows Crown Communication to pay dividends or distribute cash to CCIC to the extent required to pay taxes allocable to the Borrowers and their respective subsidiaries. All of the above-mentioned dividends or distributions, however, including dividends or distributions that are intended to pay interest on the 10 5/8% discount notes, may not be made by Crown Communication so long as any default or event of default exists under the senior credit facility. The senior credit facility contains customary events of default, including the failure to pay principal when due or any interest or other amount that becomes due within two days after the due date thereof, any representation or warranty being made by the Borrowers that is incorrect in any material respect on or as of the date made, a default in the performance of any negative covenants or a default in the performance of certain other covenants or agreements for a period of thirty days, default in certain other indebtedness, certain insolvency events and certain change of control events. In addition, a default under the 10 5/8% Notes Indenture will result in a default under the senior credit facility. CTI Credit Facility Pursuant to the loan amendment agreement dated May 21, 1997, among CTI, as borrower, CTSH, as guarantor, Credit Suisse First Boston, as arranger and agent, and J.P. Morgan Securities Ltd., as co-arranger, CTI's (Pounds)162.5 million term and revolving loan facilities were amended to a (Pounds)64.0 million revolving loan facility. The following summary of certain provisions of the CTI credit facility does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the provisions of the CTI credit facility. The CTI credit facility provides for revolving credit loans in an aggregate principal amount not to exceed (Pounds)64.0 million to finance capital expenditures in respect of digital terrestrial television with up to (Pounds)46.5 million of such amount available for working capital needs and for general corporate purposes. As of March 1, 1999, CTI and its subsidiaries had unused borrowing availability under the CTI credit facility of approximately (Pounds)24.0 million ($39.9 million). The loan commitment under the CTI credit facility will be automatically reduced to zero in three equal semi-annual installments commencing on May 31, 2001 and ending on May 31, 2002, when the CTI credit facility matures. In addition, the CTI Credit Facility provides for mandatory cancellation of all or part of the loan commitment and mandatory prepayment (1) with an amount equal to the net proceeds of certain asset sales and (2) upon the consummation of an initial public offering or the listing on any stock exchange of the shares of CTI, CTSH or CCIC. CTI's and CTSH's obligations under the CTI credit facility are secured by fixed and floating charges over all of their respective assets. The loans under the CTI credit facility will bear interest at a "LIBOR rate" plus 0.85% and a spread related to the lenders' cost of making the CTI credit facility available to CTI. 202
The CTI credit facility contains a number of covenants that, among other things, restrict the ability of CTI to dispose of assets, incur additional indebtedness, incur guaranty obligations, repay subordinated indebtedness except in accordance with the subordination provisions, pay dividends or make capital distributions, create liens on assets, make investments, make acquisitions, engage in certain transactions with subsidiaries and affiliates and otherwise restrict corporate activities. In addition, the CTI credit facility will require compliance with certain financial covenants, including requiring CTI to maintain a maximum ratio of indebtedness to EBITDA, a minimum ratio of EBITDA to interest expense, and a minimum tangible net worth. CCIC does not expect that such covenants will materially impact the ability of CTI to operate its business. The CTI credit facility contains customary events of default, including the failure to pay principal or any interest or any other amount that becomes due within three business days after the due date thereof, any representation or warranty being made by CTI that is untrue or misleading on the date made, a default in the performance of any of its covenants under the CTI credit facility (unless, if such default is capable of remedy, such default is cured within 14 days of CTI becoming aware of such default), default in certain other indebtedness, certain insolvency events and certain change of control events. On July 17, 1998, the lenders (acting through Credit Suisse First Boston, as agent) under the CTI credit facility waived a provision in the CTI credit facility that would have required the repayment of the CTI credit facility concurrently with the listing of our common stock. The 10 5/8% Discount Notes On November 20, 1997, we privately placed $251.0 million principal amount at maturity ($150,010,150 initial accreted value) of our 10 5/8% Senior Discount 10 5/8% Notes due 2007. The following is a summary of certain terms of the 10 5/8% discount notes and is qualified in its entirety by reference to the indenture governing the 10 5/8% discount notes relating to the 10 5/8% Notes. The 10 5/8% discount notes are our unsecured senior obligations, and will rank pari passu in right of payment with all our existing and future senior indebtedness and will be senior to our future subordinated indebtedness. The 10 5/8% discount notes mature on November 15, 2007. The 10 5/8% discount notes will accrete in value until November 15, 2002. Thereafter, cash interest will accrue on the 10 5/8% discount notes at the rate of 10.625% per annum and will be payable semi-annually, commencing on May 15, 2003. Except as stated below, the 10 5/8% discount notes are not redeemable prior to November 15, 2002. Thereafter, the 10 5/8% discount notes are redeemable at our option, in whole or in part, at any time or from time to time, at a premium which is at a fixed percentage that declines to par on or after November 15, 2005, in each case together with accrued and unpaid interest, if any, to the date of redemption. In the event we consummate a public equity offering or certain strategic equity investments prior to November 15, 2000, we may, at our option, use all or a portion of the proceeds from such offering to redeem up to 35% of the original aggregate principal amount at maturity of the 10 5/8% discount notes at a redemption price equal to 110.625% of the accreted value of the 10 5/8% discount notes to be redeemed, plus accrued and unpaid interest, if any, thereon to the redemption date, provided at least 65% of the original aggregate principal amount at maturity of the 10 5/8% discount notes remains outstanding after each such redemption. Upon the occurrence of a change of control (as defined in the 10 5/8% Notes Indenture), each holder of 10 5/8% discount notes has the right to require us to purchase all or a portion of such holder's 10 5/8% discount notes at a price equal to 101% of the aggregate principal amount thereof, together with accrued and unpaid interest to the date of purchase. 203
The 10 5/8% Notes Indenture contains certain covenants, including covenants that limit: (1) indebtedness, (2) restricted payments, (3) distributions from restricted subsidiaries, (4) transactions with affiliates, (5) sales of assets and subsidiary stock (including sale and leaseback transactions), (6) dividend and other payment restrictions affecting restricted subsidiaries, and (7) mergers or consolidations. The CTI Bonds On May 21, 1997, a subsidiary of CTSH, CTI, issued (Pounds)125.0 million aggregate principal amount of its 9% Guaranteed Bonds due 2007. The CTI bonds are listed on the Luxembourg Stock Exchange. The following is a summary of certain terms of the bonds and is qualified in its entirety by reference to the trust deed dated May 21, 1997 relating to the CTI bonds. The CTI bonds constitute direct, general and unconditional guaranteed obligations of the subsidiary of CTSH and rank pari passu with all other present and future unsecured and unsubordinated obligations of such subsidiary. The CTI bonds are guaranteed jointly and severally by CTI and CTSH. The CTI bonds will mature on March 30, 2007. Interest on the CTI bonds is payable annually in arrears on March 30 in each year, the first payment having been made on March 30, 1998. The CTI bonds may be redeemed at our option in whole or in part, at any time or from time to time, at the greater of their principal and such price as will provide a gross redemption yield 0.5% per annum above the gross redemption yield of the benchmark gilt plus, in either case, accrued and unpaid interest. Upon the occurrence of a put event (as defined in the trust deed), each holder of CTI bonds has the right to require such subsidiary to purchase all or a portion of such holder's CTI bonds at a price equal to 101% of the aggregate principal amount thereof, together with accrued and unpaid interest to the date of purchase. The trust deed contains certain covenants, including covenants that limit: (1) indebtedness, (2) restricted payments, (3) distributions from restricted subsidiaries, (4) transactions with affiliates, (5) sales of assets and subsidiary stock, (6) dividend and other payment restrictions affecting restricted subsidiaries, and (7) mergers or consolidations. Joint Venture Credit Facility The following summary of certain provisions of the joint venture credit facility does not purport to be complete and is subject to, and is qualified in its entirety by reference to the joint venture credit facility. The joint venture credit facility provides for revolving credit loans in an aggregate principal amount not to exceed $250.0 million, $180.0 million of which was drawn in connection with the formation of the joint venture, and the balance of which will be used for acquisition and construction of tower facilities, capital expenditures, working capital needs and general corporate purposes. The borrowing base until September 30, 2001, is based on a multiple of test operating cash flow. On September 30, 2001, the conversion date, the borrowing base test will be eliminated and the amount of the facility will be decreased to the borrowing base as of that date. The joint venture credit facility includes a $25.0 million sublimit available for the issuance of letters of credit. 204
The amount of the facility after the conversion date will be reduced on a quarterly basis until March 31, 2006, when the joint venture credit facility matures. The annual percentage reduction in this loan commitment is 3.0% in 2001 (two quarters), 7.5% in 2002, 22.5% in 2003, Pursuant to the loan agreement dated as of March 31, 1999, Crown Atlantic Holding Sub L.L.C. entered into the joint venture credit facility with Key Corporate Capital, Inc. 26.0% in 2004, 32.0% in 2005 and 9.0% in 2006 (one quarter). In addition, the joint venture credit facility provides for mandatory reduction of the loan commitment and mandatory prepayment with the: (1) net proceeds of certain asset sales, (2) 50% of capital contributions to Holdco subject to certain significant exceptions including capital expenditures pursuant to the build-to-suit agreement, (3) net proceeds of any unused insurance proceeds and (4) a percentage of the excess cash flow of the joint venture, commencing with the calendar year ending December 31, 2001. The joint venture's obligations under the joint venture credit facility are secured by (1) a pledge of the membership interest in the joint venture and (2) a perfected first priority security interest in the joint venture's interest in tenant leases including the global lease. The joint venture credit facility contractually permits the joint venture to pay maintenance, operating, ground lease and other expenses and costs relating to the tower facilities out of the tower rentals whether or not an event of default has occurred. The loans under the joint venture credit facility will bear interest, at the joint venture's option, at either (A) a "base rate" equal to KeyCorp's prime lending rate plus an applicable spread ranging from 0% to 1.25% (determined based on a leverage ratio) or (B) a "LIBOR rate" plus an applicable spread ranging from 1.0% to 2.875% (determined based on a leverage ratio). The joint venture must hedge approximately 50% of its variable interest rate obligations for a period of two years. Following the occurrence of and during the continuance of an event of default under the joint venture credit facility, the loans will bear interest at the "base rate" plus 4.875%. The joint venture credit facility will contain a number of covenants that, among other things, restrict the ability of the joint venture to: . dispose of assets, . incur additional indebtedness, . incur guaranty obligations, . repay subordinated indebtedness except in accordance with the subordination provisions, . pay dividends or make capital distributions, . create liens on assets, . enter into leases, . make investments, . make acquisitions, . engage in mergers or consolidations, . make capital expenditures, . engage in certain transactions with subsidiaries and affiliates and otherwise restrict company activities. In addition, the joint venture credit facility will require compliance with certain financial covenants, including requiring the joint venture to maintain: . a minimum ratio of operating cash flow to indebtedness, . a minimum ratio of operating cash flow to fixed charges, . a minimum ratio of operating cash flow to projected debt service and . a minimum ratio of operating cash flow to interest expense. 205
The joint venture does not expect that such covenants will materially impact its ability to operate its business. The joint venture credit facility contains customary events of default, including the failure to pay principal when due or any interest or other amount that becomes due within two days after the due date thereof, any representation or warranty being made by the joint venture that is incorrect in any material respect on or as of the date made, a default in the performance of any negative covenants or a default in the performance of certain other covenants or agreements (including the formation agreement) for a period of days, default in certain other indebtedness, certain insolvency events and certain change of control events. During the first two years of the joint venture credit facility, capital contributions can cure an operating cash flow default and certain other covenant and agreement defaults. CCIC Term Loan Facility Pursuant to a term loan agreement dated as of March 15, 1999, we entered into a term loan credit facility with a group of banks and other financial institutions led by Goldman Sachs Credit Partners L.P., Salomon Brothers Holding Company Inc. and Credit Suisse First Boston. As of April 5, 1999, we had borrowed $100.0 million under the term loan facility to fund or refinance our escrow payments made in connection with the proposed Powertel acquisition and the proposed BellSouth transaction. The following summary of the term loan facility does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the provisions of the term loan facility. The term loan facility provides for term loans in an aggregate principal amount not to exceed $100.0 million. The loans under the term loan facility mature on November 30, 2007 and bear interest at an increasing rate based on LIBOR as set forth in the term loan agreement, but in no event shall the interest on such loans exceed 16%. At any time we may, at our option, prepay the term loans without penalty or premium. Subject to limited exceptions, the term loan facility requires us to prepay the loans without penalty or premium with the proceeds of: (1) any offering of debt or equity securities, (2) the incurrence of other debt (other than debt under the senior credit facility), (3) asset sales for cash consideration, or with a fair market value, in excess of $1.0 million, and (4) any recovery of amounts deposited in escrow in connection with the proposed Powertel acquisition and the proposed BellSouth transaction. The term loan agreement contains covenants substantially identical to the covenants contained in our 10 5/8% discount notes. At any time on or after March 16, 2000, the lenders under the term loan agreement may exchange their term loans for an equal aggregate principal amount of the our Senior Exchange Notes due 2007. These exchange notes will be issued pursuant to an indenture dated as of March 15, 1999, between us and United States Trust Company of New York, as trustee. These exchange notes will have the same maturity as the term loans and will bear interest at the rate in effect with respect to the term loans on the date of exchange. The covenants contained in the exchange note indenture will be substantially identical to the covenants contained in the certificate of designations governing our exchangeable preferred stock, with additional covenants restricting the incurrence of liens and sale-leaseback transactions. 206
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS The following discussion is a summary of certain U.S. federal income tax consequences of the exchange offer to holders of old preferred stock, but does not purport to be a complete analysis of all potential tax effects. The summary set forth below is based upon the Internal Revenue Code of 1986, as amended, regulations of the Treasury Department, administrative rulings and pronouncements of the Internal Revenue Service and judicial decisions, all of which are subject to change, possibly with retroactive effect. This summary does not purport to address all the U.S. federal income tax consequences that may be applicable to particular holders, including dealers in securities, financial institutions, insurance companies and tax-exempt organizations. In addition, this summary does not consider the effect of any foreign, state, local, gift, estate or other tax laws that may be applicable to a particular holder. This summary applies only to a holder that acquired old preferred stock at original issue for cash and holds old preferred stock as a "capital asset" within the meaning of Section 1221 of the Code. Holders of old preferred stock considering the exchange offer should consult their own tax advisors concerning the U.S. federal income tax consequences in light of their particular situations as well as any consequences arising under the laws of any other taxing jurisdiction. An exchange of old preferred stock for new preferred stock pursuant to the exchange offer will not be treated as a taxable exchange or other taxable event for U.S. federal income tax purposes. Accordingly, holders of old preferred stock who exchange their old preferred stock for new preferred stock will not recognize income, gain or loss for U.S. federal income tax purposes and any such holder will have the same adjusted tax basis and holding period in the new preferred stock as it had in the old preferred stock immediately before the exchange. THE FOREGOING DISCUSSION OF CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS DOES NOT CONSIDER THE FACTS AND CIRCUMSTANCES OF ANY PARTICULAR HOLDER'S SITUATION OR STATUS. ACCORDINGLY, EACH HOLDER OF OLD PREFERRED STOCK SHOULD CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES OF THE EXCHANGE OFFER TO IT, INCLUDING THOSE UNDER STATE, FOREIGN AND OTHER TAX LAWS. PLAN OF DISTRIBUTION Each broker-dealer that receives new preferred stock for its own account pursuant to the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of such new preferred stock. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of new preferred stock received in exchange for old preferred stock where such old preferred stock were acquired as a result of market-making activities or other trading activities. We have agreed that for a period of 180 days after the expiration date, we will make available a prospectus meeting the requirements of the Preferred Stock Act to any broker-dealer for use in connection with any such resale. In addition, until , all dealers effecting transactions in the new preferred stock may be required to deliver a prospectus. We will not receive any proceeds from any sale of new preferred stock by broker-dealers. New preferred stock received by broker-dealers for their own account pursuant to the exchange offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the new preferred stock or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer or the purchasers of any such new preferred stock. Any 207
broker-dealer that resells new preferred stock that were received by it for its own account pursuant to the exchange offer and any broker or dealer that participates in a distribution of such new preferred stock may be deemed to be an "underwriter" within the meaning of the Preferred Stock Act and any profit on any such resale of new preferred stock and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Preferred Stock Act. The letter of transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker- dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Preferred Stock Act. LEGAL MATTERS Certain legal matters will be passed upon for us by Cravath, Swaine & Moore, New York, New York. INDEPENDENT AUDITORS The consolidated financial statements and schedule of the Company at December 31, 1997 and 1998, and for each of the three years in the period ended December 31, 1998, the financial statements of the Home Service Transmission business of the BBC at March 31, 1996 and for the year ended March 31, 1996 and the period from April 1, 1996 to February 27, 1997 and the consolidated financial statements of CTI at March 31, 1997 and December 31, 1997 and for the period from February 28, 1997 to March 31, 1997 and the period from April 1, 1997 to December 31, 1997 have been included herein in reliance upon the report of KPMG LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. CERTAIN CURRENCY TRANSLATIONS Our U.K. subsidiary, Castle Transmission Services (Holdings) Ltd. publishes its consolidated financial statements in pounds sterling. For the convenience of the reader, this prospectus contains translations of certain pound sterling amounts into U.S. dollars at specified rates, or, if not so specified, at the noon buying rate in New York City for cable transfers in pounds sterling as certified for customs purposes by the Federal Reserve Bank of New York on December 31, 1998, of (Pounds)1.00 = $1.6628. No representation is made that the pound sterling amounts have been, could have been or could be converted into U.S. dollars at the rates indicated or any other rates. On March 15, 1999, the noon buying rate was (Pounds)1.00 = $1.6223. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934 and in accordance therewith files reports and other information with the Commission. Such reports and other information can be inspected and copied at the public reference facilities maintained by the Commission at its offices at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of such materials can be obtained by mail from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such reports and other information concerning the Company are also available for inspection at the offices of the Nasdaq National Market, 1735 K Street, N.W., Washington, D.C. 20006. In addition, the Commission maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants, including the Company, that file electronically with the Commission. Anyone who receives this prospectus may obtain a copy of any of the agreements summarized herein without charge by writing to Crown Castle International Corp., 510 Bering Drive, Suite 500, Houston, TX 77057, Attention: Secretary. 208
INDEX TO FINANCIAL STATEMENTS CROWN CASTLE INTERNATIONAL CORP. Report of KPMG LLP, Independent Certified Public Accountants.............. F-2 Consolidated Balance Sheet as of December 31, 1997 and 1998............... F-3 Consolidated Statement of Operations and Comprehensive Loss for each of the three years in the period ended December 31, 1998.................... F-4 Consolidated Statement of Cash Flows for each of the three years in the period ended December 31, 1998........................................... F-5 Consolidated Statement of Stockholders' Equity (Deficit) for each of the three years in the period ended December 31, 1998........................ F-6 Notes to Consolidated Financial Statements for each of the three years in the period ended December 31, 1998....................................... F-7 CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND THE BBC HOME SERVICE TRANSMISSION BUSINESS Report of KPMG, Chartered Accountants..................................... F-33 Profit and Loss Accounts of the BBC Home Service Transmission business for the Year ended March 31, 1996 and the Period from April 1, 1996 to February 27, 1997 and the Consolidated Profit and Loss Accounts of Castle Transmission Services (Holdings) Ltd for the Period from February 28, 1997 to March 31, 1997 and for the Period from April 1, 1997 to December 31, 1997................................................................. F-34 Balance Sheet of the BBC Home Service Transmission business at March 31, 1996 and Consolidated Balance Sheets of Castle Transmission Services (Holdings) Ltd at March 31, 1997 and at December 31, 1997................ F-35 Cash Flow Statements of the BBC Home Service Transmission business for the Year ended March 31, 1996 and the Period from April 1, 1996 to February 27, 1997 and the Consolidated Cash Flow Statements of Castle Transmission Services (Holdings) Ltd for the Period from February 28, 1997 to March 31, 1997 and for the Period from April 1, 1997 to December 31, 1997...... F-36 Reconciliation of Movements in Corporate Funding of the BBC Home Service Transmission business for the Year ended March 31, 1996 and the Period from April 1, 1996 to February 27, 1997 and Consolidated Reconciliation of Movements in Shareholders' Funds of Castle Transmission Services (Holdings) Ltd for the Period from February 28, 1997 to March 31, 1997 and for the Period from April 1, 1997 to December 31, 1997............... F-37 Notes to the Consolidated Financial Statements............................ F-38 BELL ATLANTIC MOBILE TOWER OPERATIONS Report of KPMG LLP, Independent Certified Public Accountants.............. F-61 Statement of Net Assets as of December 31, 1998........................... F-62 Statements of Revenues and Direct Expenses for each of the two years in the period ended December 31, 1998....................................... F-63 Notes to Financial Statements for each of the two years in the period ended December 31, 1998.................................................. F-64 POWERTEL TOWER OPERATIONS Report of KPMG LLP, Independent Certified Public Accountants.............. F-66 Statement of Net Assets as of December 31, 1998........................... F-67 Statement of Revenues and Direct Expenses for the year ended December 31, 1998..................................................................... F-68 Notes to financial Statements for the year ended December 31, 1998........ F-69 F-1
INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Crown Castle International Corp.: We have audited the accompanying consolidated balance sheets of Crown Castle International Corp. and subsidiaries as of December 31, 1997 and 1998, and the related consolidated statements of operations and comprehensive loss, cash flows and stockholders' equity (deficit) for each of the years in the three- year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Crown Castle International Corp. and subsidiaries as of December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP Houston, Texas February 24, 1999 F-2
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In thousands of dollars, except share amounts) December 31, -------------------- 1997 1998 ASSETS -------- ---------- Current assets: Cash and cash equivalents............................. $ 55,078 $ 296,450 Receivables: Trade, net of allowance for doubtful accounts of $177 and $1,535 at December 31, 1997 and 1998, respectively........................................ 9,264 32,130 Other................................................ 811 4,290 Inventories........................................... 1,322 6,599 Prepaid expenses and other current assets............. 681 2,647 -------- ---------- Total current assets................................. 67,156 342,116 Property and equipment, net............................. 81,968 592,594 Investments in affiliates............................... 59,082 2,258 Goodwill and other intangible assets, net of accumulated amortization of $3,997 and $20,419 at December 31, 1997 and 1998, respectively................................. 152,541 569,740 Deferred financing costs and other assets, net of accumulated amortization of $743 and $1,722 at December 31, 1997 and 1998, respectively........................ 10,644 16,522 -------- ---------- $371,391 $1,523,230 ======== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable...................................... $ 7,760 $ 46,020 Accrued interest...................................... -- 15,677 Accrued compensation and related benefits............. 1,792 5,188 Deferred rental revenues and other accrued liabilities.......................................... 2,398 26,002 -------- ---------- Total current liabilities............................ 11,950 92,887 Long-term debt.......................................... 156,293 429,710 Other liabilities....................................... 607 22,823 -------- ---------- Total liabilities.................................... 168,850 545,420 -------- ---------- Commitments and contingencies (Note 12) Minority interests -- 39,185 Redeemable preferred stock, $.01 par value; 10,000,000 shares authorized: 12 3/4% Senior Exchangeable Preferred Stock; shares issued: December 31, 1997--none and December 31, 1998-- 200,000 (stated at mandatory redemption and aggregate liquidation value)......................... -- 201,063 Senior Convertible Preferred Stock; shares issued: December 31, 1997--657,495 and December 31, 1998-- none (stated at redemption value; aggregate liquidation value of $68,916)........................ 67,948 -- Series A Convertible Preferred Stock; shares issued: December 31, 1997--1,383,333 and December 31, 1998-- none (stated at redemption and aggregate liquidation value)............................................... 8,300 -- Series B Convertible Preferred Stock; shares issued: December 31, 1997--864,568 and December 31, 1998-- none (stated at redemption and aggregate liquidation value)............................................... 10,375 -- Series C Convertible Preferred Stock; shares issued: December 31, 1997--3,529,832 and December 31, 1998-- none (stated at redemption and aggregate liquidation value)............................................... 74,126 -- -------- ---------- Total redeemable preferred stock..................... 160,749 201,063 -------- ---------- Stockholders' equity: Common stock, $.01 par value; 690,000,000 shares authorized: Class A Common Stock; shares issued: December 31, 1997--1,041,565 and December 31, 1998--none.......... 2 -- Class B Common Stock; shares issued: December 31, 1997--9,367,165 and December 31, 1998--none.......... 19 -- Common Stock; shares issued: December 31, 1997--none and December 31, 1998--83,123,873.................... -- 831 Class A Common Stock; shares issued: December 31, 1997--none and December 31, 1998--11,340,000 -- 113 Additional paid-in capital.............................. 58,248 795,153 Cumulative foreign currency translation adjustment...... 562 1,690 Accumulated deficit..................................... (17,039) (60,225) -------- ---------- Total stockholders' equity........................... 41,792 737,562 -------- ---------- $371,391 $1,523,230 ======== ========== See notes to consolidated financial statements. F-3
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS (In thousands of dollars, except per share amounts) Years Ended December 31, -------------------------- 1996 1997 1998 ------ -------- -------- Net revenues: Site rental and broadcast transmission........... $5,615 $ 11,010 $ 75,028 Network services and other....................... 592 20,395 38,050 ------ -------- -------- 6,207 31,405 113,078 ------ -------- -------- Operating expenses: Costs of operations (exclusive of depreciation and amortization): Site rental and broadcast transmission......... 1,292 2,213 26,254 Network services and other..................... 8 13,137 21,564 General and administrative....................... 1,678 6,824 23,571 Corporate development............................ 1,324 5,731 4,625 Non-cash compensation charges.................... -- -- 12,758 Depreciation and amortization.................... 1,242 6,952 37,239 ------ -------- -------- 5,544 34,857 126,011 ------ -------- -------- Operating income (loss)............................ 663 (3,452) (12,933) Other income (expense): Equity in earnings (losses) of unconsolidated affiliate....................................... -- (1,138) 2,055 Interest and other income (expense).............. 193 1,951 4,220 Interest expense and amortization of deferred financing costs................................. (1,803) (9,254) (29,089) ------ -------- -------- Loss before income taxes and minority interests.... (947) (11,893) (35,747) Provision for income taxes......................... (10) (49) (374) Minority interests................................. -- -- (1,654) ------ -------- -------- Net loss........................................... (957) (11,942) (37,775) Dividends on preferred stock....................... -- (2,199) (5,411) ------ -------- -------- Net loss after deduction of dividends on preferred stock............................................. $ (957) $(14,141) $(43,186) ====== ======== ======== Net loss........................................... $ (957) $(11,942) $(37,775) Other comprehensive income: Foreign currency translation adjustments......... -- 562 1,128 ------ -------- -------- Comprehensive loss................................. $ (957) $(11,380) $(36,647) ====== ======== ======== Loss per common share--basic and diluted........... $(0.27) $ (2.27) $ (1.02) ====== ======== ======== Common shares outstanding--basic and diluted (in thousands)........................................ 3,503 6,238 42,518 ====== ======== ======== See notes to consolidated financial statements. F-4
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands of dollars) Years Ended December 31, --------------------------- 1996 1997 1998 ------- -------- -------- Cash flows from operating activities: Net loss................................... $ (957) $(11,942) $(37,775) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Depreciation and amortization............. 1,242 6,952 37,239 Amortization of deferred financing costs and discounts on long-term debt.......... 55 2,159 17,910 Non-cash compensation charges............. -- -- 12,758 Minority interests........................ -- -- 1,654 Equity in losses (earnings) of unconsolidated affiliate................. -- 1,138 (2,055) Changes in assets and liabilities, excluding the effects of acquisitions: Increase in accounts payable............. 323 1,824 15,373 Increase (decrease) in deferred rental revenues and other liabilities.......... 219 (240) 5,847 Increase (decrease) in accrued interest.. 306 (396) 5,835 Decrease (increase) in receivables....... (1,695) 1,353 (7,450) Increase in inventories, prepaid expenses and other assets........................ (23) (1,472) (4,360) ------- -------- -------- Net cash provided by (used for) operating activities................... (530) (624) 44,976 ------- -------- -------- Cash flows from investing activities: Capital expenditures....................... (890) (18,035) (138,759) Acquisitions of businesses, net of cash acquired.................................. (10,925) (33,962) (10,489) Investments in affiliates.................. (2,101) (59,487) -- ------- -------- -------- Net cash used for investing activities.. (13,916) (111,484) (149,248) ------- -------- -------- Cash flows from financing activities: Proceeds from issuance of capital stock.... 10,503 139,867 339,929 Net borrowings (payments) under revolving credit agreements......................... 11,000 (6,223) 9,212 Incurrence of financing costs.............. (180) (7,798) (3,010) Purchase of capital stock.................. -- (2,132) (883) Proceeds from issuance of long-term debt... -- 150,010 -- Principal payments on long-term debt....... (130) (113,881) -- ------- -------- -------- Net cash provided by financing activities............................. 21,193 159,843 345,248 ------- -------- -------- Effect of exchange rate changes on cash..... -- -- 396 ------- -------- -------- Net increase in cash and cash equivalents... 6,747 47,735 241,372 Cash and cash equivalents at beginning of year....................................... 596 7,343 55,078 ------- -------- -------- Cash and cash equivalents at end of year.... $ 7,343 $ 55,078 $296,450 ======= ======== ======== Supplementary schedule of noncash investing and financing activities: Conversion of stockholder's Convertible Secured Subordinated Notes to Series A Convertible Preferred Stock............... -- $ 3,657 -- Amounts recorded in connection with acquisitions (see Note 2): Fair value of net assets acquired, including goodwill and other intangible assets................................... 10,958 197,235 431,453 Issuance of common stock.................. -- 57,189 420,964 Issuance of long-term debt................ -- 78,102 -- Assumption of long-term debt.............. -- 27,982 -- Amounts due to seller..................... 33 -- -- Supplemental disclosure of cash flow information: Interest paid.............................. $ 1,442 $ 7,533 $ 6,276 Income taxes paid.......................... -- 26 446 See notes to consolidated financial statements. F-5
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) (In thousands of dollars, except share amounts) Class A Class B Class A Common Stock Common Stock Common Stock Common Stock ---------------------- ---------------------- ---------------------- --------------------- Additional Paid-In Shares ($.01 Par) Shares ($.01 Par) Shares ($.01 Par) Shares ($.01 Par) Capital ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance, January 1, 1996.......... 1,350,000 $ 3 1,433,330 $ 3 -- $ -- -- $ -- $ 634 Issuances of capital stock... -- -- 55,000 -- -- -- -- -- 128 Net loss........ -- -- -- -- -- -- -- -- -- ---------- ------- ---------- -------- ---------- ---- ---------- ---- -------- Balance, December 31, 1996......... 1,350,000 3 1,488,330 3 -- -- -- -- 762 Issuances of capital stock... -- -- 8,228,835 17 -- -- -- -- 57,696 Purchase of capital stock... (308,435) (1) (350,000) (1) -- -- -- -- (210) Foreign currency translation adjustments..... -- -- -- -- -- -- -- -- -- Dividends on preferred stock........... -- -- -- -- -- -- -- -- -- Net loss........ -- -- -- -- -- -- -- -- -- ---------- ------- ---------- -------- ---------- ---- ---------- ---- -------- Balance, December 31, 1997......... 1,041,565 2 9,367,165 19 -- -- -- -- 58,248 Conversion of preferred stock to Common Stock........... -- -- -- -- 38,517,865 385 -- -- 164,712 Conversion of Class A Common Stock and Class B Common Stock to Common Stock........... (1,041,565) (2) (9,367,165) (19) 10,953,625 109 -- -- (88) Issuances of capital stock... -- -- -- -- 33,793,453 338 11,340,000 113 560,779 Purchase of capital stock... -- -- -- -- (141,070) (1) -- -- (882) Non-cash compensation charges......... -- -- -- -- -- -- -- -- 12,384 Foreign currency translation adjustments..... -- -- -- -- -- -- -- -- -- Dividends on preferred stock........... -- -- -- -- -- -- -- -- -- Net loss........ -- -- -- -- -- -- -- -- -- ---------- ------- ---------- -------- ---------- ---- ---------- ---- -------- Balance, December 31, 1998......... -- $ -- -- $ -- 83,123,873 $831 11,340,000 $113 $795,153 ========== ======= ========== ======== ========== ==== ========== ==== ======== Cumulative Foreign Currency Translation Accumulated Adjustment Deficit Total ----------- ----------- --------- Balance, January 1, 1996.......... $ -- $ (21) $ 619 Issuances of capital stock... -- -- 128 Net loss........ -- (957) (957) ----------- ----------- --------- Balance, December 31, 1996......... -- (978) (210) Issuances of capital stock... -- -- 57,713 Purchase of capital stock... -- (1,920) (2,132) Foreign currency translation adjustments..... 562 -- 562 Dividends on preferred stock........... -- (2,199) (2,199) Net loss........ -- (11,942) (11,942) ----------- ----------- --------- Balance, December 31, 1997......... 562 (17,039) 41,792 Conversion of preferred stock to Common Stock........... -- -- 165,097 Conversion of Class A Common Stock and Class B Common Stock to Common Stock........... -- -- -- Issuances of capital stock... -- -- 561,230 Purchase of capital stock... -- -- (883) Non-cash compensation charges......... -- -- 12,384 Foreign currency translation adjustments..... 1,128 -- 1,128 Dividends on preferred stock........... -- (5,411) (5,411) Net loss........ -- (37,775) (37,775) ----------- ----------- --------- Balance, December 31, 1998......... $1,690 $(60,225) $737,562 =========== =========== ========= See notes to consolidated financial statements. F-6
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation and Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of Crown Castle International Corp. and its majority and wholly owned subsidiaries, collectively referred to herein as the "Company." All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to the prior year's financial statements to be consistent with the presentation in the current year. The Company owns, operates and manages wireless communications sites and broadcast transmission networks. The Company also provides complementary services to its customers, including network design, radio frequency engineering, site acquisition, site development and construction, antenna installation and network management and maintenance. The Company's communications sites are located throughout the United States, in Puerto Rico and in the United Kingdom. In the United States and Puerto Rico, the Company's primary business is the leasing of antenna space to wireless operators under long-term contracts. In the United Kingdom, the Company's primary business is the operation of television and radio broadcast transmission networks; the Company also leases antenna space to wireless operators in the United Kingdom. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Summary of Significant Accounting Policies Cash Equivalents Cash equivalents consist of highly liquid investments with original maturities of three months or less. Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Property and Equipment Property and equipment is stated at cost, net of accumulated depreciation. Depreciation is computed utilizing the straight-line method at rates based upon the estimated useful lives of the various classes of assets. Additions, renewals and improvements are capitalized, while maintenance and repairs are expensed. Upon the sale or retirement of an asset, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is recognized. In March 1995, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("SFAS 121"). SFAS 121 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS 121 was effective for fiscal years beginning after December 15, 1995. The adoption of SFAS 121 by the Company in 1996 did not have a material impact on its consolidated financial statements. F-7
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Goodwill and Other Intangible Assets Goodwill and other intangible assets represents the excess of the purchase price for an acquired business over the allocated value of the related net assets (see Note 2). Goodwill is amortized on a straight-line basis over a twenty year life. Other intangible assets (principally the value of existing site rental contracts at Crown Communications) are amortized on a straight-line basis over a ten year life. The carrying value of goodwill and other intangible assets will be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the acquired assets may not be recoverable. If the sum of the estimated future cash flows (undiscounted) expected to result from the use and eventual disposition of an asset is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of an impairment loss is based on the fair value of the asset. Deferred Financing Costs Costs incurred to obtain financing are deferred and amortized over the estimated term of the related borrowing. At December 31, 1997, other accrued liabilities includes $1,160,000 of such costs related to the issuance of the Company's 10 5/8% Senior Discount Notes. Revenue Recognition Site rental revenues are recognized on a monthly basis under lease or management agreements with terms ranging from 12 months to 25 years. Broadcast transmission revenues are recognized on a monthly basis under transmission contracts with terms ranging from 8 years to 12 years. Network services revenues from site development, construction and antennae installation activities are recognized under a method which approximates the completed contract method. This method is used because these services are typically completed in three months or less and financial position and results of operations do not vary significantly from those which would result from use of the percentage-of-completion method. These services are considered complete when the terms and conditions of the contract or agreement have been substantially completed. Costs and revenues associated with installations not complete at the end of a period are deferred and recognized when the installation becomes operational. Any losses on contracts are recognized at such time as they become known. Network services revenues from design, engineering, site acquisition, and network management and maintenance activities are recognized under service contracts with customers which provide for billings on a time and materials, cost plus profit, or fixed price basis. Such contracts typically have terms from six months to two years. Revenues are recognized as services are performed with respect to the time and materials contracts. Revenues are recognized using the percentage-of-completion method for cost plus profit and fixed price contracts, measured by the percentage of contract costs incurred to date compared to estimated total contract costs. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Corporate Development Expenses Corporate development expenses represent costs incurred in connection with acquisitions and development of new business initiatives. Income Taxes The Company accounts for income taxes using an asset and liability approach, which requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences F-8
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) of events that have been recognized in the Company's financial statements or tax returns. Deferred income tax assets and liabilities are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. 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 and convertible preferred stock for the diluted computation. A reconciliation of the numerators and denominators of the basic and diluted per share computations is as follows: Years Ended December 31, -------------------------- 1996 1997 1998 ------ -------- -------- (In thousands of dollars, except per share amounts) Net loss........................................ $ (957) $(11,942) $(37,775) Dividends on preferred stock.................... -- (2,199) (5,411) ------ -------- -------- Net loss applicable to common stock for basic and diluted computations....................... $ (957) $(14,141) $(43,186) ====== ======== ======== Weighted-average number of common shares outstanding during the period for basic and diluted computations (in thousands)............ 3,503 6,238 42,518 ====== ======== ======== Loss per common share--basic and diluted........ $(0.27) $ (2.27) $ (1.02) ====== ======== ======== The calculations of common shares outstanding for the diluted computations exclude the following potential common shares as of December 31, 1998: (i) options to purchase 16,585,197 shares of common stock at exercise prices ranging from $-0- to $17.625 per share; (ii) warrants to purchase 1,314,990 shares of common stock at an exercise price of $7.50 per share; and (iii) shares of Castle Transmission Services (Holdings) Ltd ("CTI") stock which are convertible into 17,443,500 shares of common stock. The inclusion of such potential common shares in the diluted per share computations would be antidilutive since the Company incurred net losses for each of the three years in the period ended December 31, 1998. Foreign Currency Translation CTI uses the British pound as the functional currency for its operations. The Company translates CTI's results of operations using the average exchange rate for the period, and translates CTI's assets and liabilities using the exchange rate at the end of the period. The cumulative effect of changes in the exchange rate is recorded as a translation adjustment in stockholders' equity. Financial Instruments The carrying amount of cash and cash equivalents approximates fair value for these instruments. The estimated fair value of the 10 % Senior Discount Notes and the 9% Guaranteed Bonds is based on quoted market prices, and the estimated fair value of the other long-term debt is determined based on the current rates offered for similar borrowings. The estimated fair value of the interest rate F-9
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) swap agreement is based on the amount that the Company would receive or pay to terminate the agreement at the balance sheet date. The estimated fair values of the Company's financial instruments, along with the carrying amounts of the related assets (liabilities), are as follows: December 31, 1997 December 31, 1998 ------------------ ------------------ Carrying Fair Carrying Fair Amount Value Amount Value -------- -------- -------- -------- (In thousands of dollars) Cash and cash equivalents............. $ 55,078 $ 55,078 $296,450 $296,450 Long-term debt........................ (156,293) (161,575) (429,710) (443,379) Interest rate swap agreement.......... -- (97) -- (47) The Company's interest rate swap agreement is used to manage interest rate risk. The net settlement amount resulting from this agreement is recognized as an adjustment to interest expense. The Company does not hold or issue derivative financial instruments for trading purposes. Stock Options In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). SFAS 123 establishes alternative methods of accounting and disclosure for employee stock-based compensation arrangements. The Company has elected to continue the use of the "intrinsic value based method" of accounting for its employee stock option plans (see Note 9). 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. See Note 9 for the disclosures required by SFAS 123. Recent Accounting Pronouncements In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130 establishes standards for the reporting and display of comprehensive income in a company's financial statements. Comprehensive income includes all changes in a company's equity accounts (including net income or loss) except investments by, or distributions to, the company's owners. Items which are components of comprehensive income (other than net income or loss) include foreign currency translation adjustments, minimum pension liability adjustments and unrealized gains and losses on certain investments in debt and equity securities. The components of comprehensive income must be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 is effective for fiscal years beginning after December 15, 1997. The Company has adopted the requirements of SFAS 130 in its financial statements for 1998. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 131 establishes standards for the way that public companies report, in their annual financial statements, certain information about their operating segments, their products and services, the geographic areas in which they operate and their major customers. SFAS 131 also requires that certain information about operating segments be reported in interim financial statements. SFAS 131 is effective for periods beginning after December 15, 1997. The Company has adopted the requirements of SFAS 131 in its financial statements for the year ended December 31, 1998 (see Note 13). F-10
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In April 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-5, Reporting on the Costs of Start-Up Activities ("SOP 98-5"). SOP 98-5 requires that costs of start-up activities be charged to expense as incurred and broadly defines such costs. The Company has deferred certain costs incurred in connection with potential business initiatives and new geographic markets, and SOP 98-5 will require that such deferred costs be charged to results of operations upon its adoption. SOP 98-5 is effective for fiscal years beginning after December 15, 1998. The Company will adopt the requirements of SOP 98-5 as of January 1, 1999. The cumulative effect of the change in accounting principle for the adoption of SOP 98-5 will result in a charge to results of operations in the Company's financial statements for the three months ending March 31, 1999; it is currently estimated that such charge will amount to approximately $2,300,000. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133 requires that derivative instruments be recognized as either assets or liabilities in the consolidated balance sheet based on their fair values. Changes in the fair values of such derivative instruments will be recorded either in results of operations or in other comprehensive income, depending on the intended use of the derivative instrument. The initial application of SFAS 133 will be reported as the effect of a change in accounting principle. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company will adopt the requirements of SFAS 133 in its financial statements for the three months ending March 31, 2000. The Company has not yet determined the effect that the adoption of SFAS 133 will have on its consolidated financial statements. 2. Acquisitions During the three years in the period ended December 31, 1998, the Company consummated a number of business acquisitions which were accounted for using the purchase method. Results of operations and cash flows of the acquired businesses are included in the consolidated financial statements for the periods subsequent to the respective dates of acquisition. Motorola, Inc. ("Motorola") On June 28, 1996, the Company acquired fifteen telecommunications towers and related assets, and assets related to specialized mobile radio and microwave services, from Motorola in Puerto Rico. The purchase price consisted of $9,919,000 in cash. Motorola provided certain management services related to these assets for a period of ninety days after the closing date. Management fees for such services amounted to $57,000 for the year ended December 31, 1996. Other Acquisitions During 1996, the Company acquired a number of other telecommunications towers and related equipment from various sellers. The aggregate total purchase price for these acquisitions of $1,039,000 consisted of $1,006,000 in cash and a $33,000 payable to a seller. TEA Group Incorporated and TeleStructures, Inc. (collectively, "TEA") On May 12, 1997, the Company acquired all of the common stock of TEA. TEA provides telecommunications site selection, acquisition, design and development services. The purchase price of $14,215,000 consisted of $8,120,000 in cash (of which $2,001,000 was paid in 1996 as an option payment), promissory notes payable to the former stockholders of TEA totaling $1,872,000, the assumption of $1,973,000 in outstanding debt and 535,710 shares of the Company's Class B F-11
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Common Stock valued at $2,250,000 (the estimated fair value of such common stock on that date). The Company recognized goodwill of $9,568,000 in connection with this acquisition. The Company repaid the promissory notes with a portion of the proceeds from the issuance of its 10 5/8% Senior Discount Notes (see Note 5). Crown Communications ("CCM"), Crown Network Systems, Inc. ("CNS") and Crown Mobile Systems, Inc. ("CMS") (collectively, "Crown") On July 11, 1997, the Company entered into an asset purchase and merger agreement with the owners of Crown. On August 15, 1997, such agreement was amended and restated, and the Company acquired (i) substantially all of the assets, net of outstanding liabilities, of CCM and (ii) all of the outstanding common stock of CNS and CMS. Crown provides network services, which includes site selection and acquisition, antenna installation, site development and construction, network design and site maintenance, and owns and operates telecommunications towers and related assets. The purchase price of $185,021,000 consisted of $27,843,000 in cash, a short-term promissory note payable to the former owners of Crown for $76,230,000, the assumption of $26,009,000 in outstanding debt and 7,325,000 shares of the Company's Class B Common Stock valued at $54,939,000 (the estimated fair value of such common stock on that date). The Company recognized goodwill and other intangible assets of $146,103,000 in connection with this acquisition. The Company financed the cash portion of the purchase price with proceeds from the issuance of redeemable preferred stock (see Note 8), and repaid the promissory note with proceeds from the issuance of additional redeemable preferred stock and borrowings under the Senior Credit Facility (see Note 5). In 1997, the Company organized Crown Communication Inc. ("CCI," a Delaware corporation) as a wholly owned subsidiary to own the net assets acquired from CCM and the common stock of CNS and CMS. In January 1998, the Company merged Castle Tower Corporation ("CTC," a wholly owned operating subsidiary) with and into CCI, establishing CCI as the principal domestic operating subsidiary of the Company. CTI On April 24, 1998, the Company entered into a share exchange agreement with certain shareholders of CTI pursuant to which certain of CTI's shareholders agreed to exchange their shares of CTI for shares of the Company. On August 18, 1998, the exchange was consummated and the Company's ownership of CTI increased from approximately 34.3% to 80%. The Company issued 20,867,700 shares of its Common Stock and 11,340,000 shares of its Class A Common Stock, with such shares valued at an aggregate of $418,700,000 (based on the price per share to the public in the Company's initial public offering as discussed in Note 9). The Company recognized goodwill of $344,204,000 in connection with this transaction, which was accounted for as an acquisition using the purchase method. CTI's results of operations and cash flows are included in the consolidated financial statements for the period subsequent to the date the exchange was consummated. Pro Forma Results of Operations (Unaudited) The following unaudited pro forma summary presents consolidated results of operations for the Company as if (i) the TEA and Crown acquisitions had been consummated as of January 1, 1997 and (ii) the share exchange with CTI's shareholders had been consummated as of January 1 for both 1997 and 1998. Appropriate adjustments have been reflected for depreciation and amortization, F-12
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) interest expense, amortization of deferred financing costs, income taxes and certain nonrecurring income and expenses recorded by the Company in connection with the investment in CTI in 1997 (see Note 4). The pro forma information does not necessarily reflect the actual results that would have been achieved, nor is it necessarily indicative of future consolidated results for the Company. Years Ended December 31, -------------------------- 1997 1998 ------------ ------------ (In thousands of dollars, except per share amounts) Net revenues................................. $ 180,936 $ 210,041 Net loss..................................... (34,601) (46,517) Loss per common share--basic and diluted..... (0.60) (0.72) Agreement with Nextel Communications, Inc. ("Nextel") On July 11, 1997, the Company entered into an agreement with Nextel (the "Nextel Agreement") whereby the Company has the option to purchase up to 50 of Nextel's existing towers which are located in Texas, Florida and the metropolitan areas of Denver, Colorado and Philadelphia, Pennsylvania. As of February 24, 1999, the Company had purchased 49 of such towers for an aggregate price of $11,019,000 in cash. Millennium Communications Limited ("Millennium") On October 8, 1998, the Company acquired all of the outstanding shares of Millennium. Millennium develops, owns and operates telecommunications towers and related assets in the United Kingdom. On the date of acquisition, Millennium owned 102 tower sites. Millennium is being operated as a subsidiary of CTI. The purchase price of $14,473,000 consisted of $9,813,000 in cash, the repayment of $2,396,000 in outstanding debt and 358,678 shares of the Company's common stock valued at $2,264,000 (the market value of such common stock on that date). Agreement with Bell Atlantic Mobile ("BAM") On December 8, 1998, the Company entered into an agreement with BAM to form a joint venture ("Crown Atlantic") to own and operate a significant majority of BAM's towers. Upon formation of Crown Atlantic (which is currently expected to occur in March 1999), (i) the Company will contribute to Crown Atlantic $250,000,000 in cash and 15,575,046 shares of its Common Stock in exchange for a 62.3% ownership interest in Crown Atlantic, (ii) Crown Atlantic will borrow $180,000,000 under a committed $250,000,000 revolving credit facility, and (iii) BAM will contribute to Crown Atlantic approximately 1,427 towers in exchange for a cash distribution of $380,000,000 from Crown Atlantic and a 37.7% ownership interest in Crown Atlantic. Upon dissolution of Crown Atlantic, BAM would receive (i) the shares of the Company's Common Stock contributed to Crown Atlantic and (ii) a payment (either in cash or in shares of the Company's Common Stock, at the Company's election) equal to 14.0% of the fair market value of Crown Atlantic's other net assets; the Company would then receive the remaining assets and liabilities of Crown Atlantic. The Company will account for its investment in Crown Atlantic as an acquisition using the purchase method, and will include Crown Atlantic's results of operations and cash flows in the Company's consolidated financial statements for periods subsequent to formation. F-13
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 3. Property and Equipment The major classes of property and equipment are as follows: Estimated December 31, Useful ----------------- Lives 1997 1998 ---------- ------- -------- (In thousands of dollars) Land and buildings......................... 0-50 years $ 1,930 $ 58,767 Telecommunications towers and broadcast transmission equipment.................... 5-20 years 76,847 532,907 Transportation and other equipment......... 3-10 years 4,379 11,452 Office furniture and equipment............. 5-7 years 3,664 12,248 ------- -------- 86,820 615,374 Less: accumulated depreciation............. (4,852) (22,780) ------- -------- $81,968 $592,594 ======= ======== Depreciation expense for the years ended December 31, 1997 and 1998 was $2,886,000 and $20,638,000, respectively. Accumulated depreciation on telecommunications towers and broadcast transmission equipment was $4,136,000 and $15,995,000 at December 31, 1997 and 1998, respectively. At December 31, 1998, minimum rentals receivable under existing operating leases for towers are as follows: years ending December 31, 1999--$183,244,000; 2000--$187,311,000; 2001--$185,097,000; 2002--$179,641,000; 2003--$171,329,000; thereafter-- $667,731,000. 4. Investments in Affiliates Investment in CTI On February 28, 1997, the Company used a portion of the net proceeds from the sale of the Series C Convertible Preferred Stock (see Note 8) to purchase an ownership interest of approximately 34.3% in CTI (a company incorporated under the laws of England and Wales). The Company led a consortium of investors which provided the equity financing for CTI. The funds invested by the consortium were used by CTI to purchase, through a wholly owned subsidiary, the domestic broadcast transmission division of the British Broadcasting Corporation (the "BBC"). The cost of the Company's investment in CTI amounted to approximately $57,542,000. The Company accounted for its investment in CTI utilizing the equity method of accounting prior to the consummation of the share exchange agreement with CTI's shareholders in August 1998 (see Note 2). In March 1997, as compensation for leading the investment consortium, the Company received a fee from CTI amounting to approximately $1,165,000. This fee was recorded as other income by the Company when received. In addition, the Company received approximately $1,679,000 from CTI as reimbursement for costs incurred prior to the closing of the purchase from the BBC. In June 1997, as compensation for the successful completion of the investment in CTI and certain other acquisitions and investments, the Company paid bonuses to two of its executive officers totaling $913,000. These bonuses are included in corporate development expenses on the Company's consolidated statement of operations. F-14
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Summarized financial information for CTI is as follows (for periods in which the Company accounted for CTI utilizing the equity method): December 31, 1997 ------------- (In thousands of dollars) ------------- Current assets.................................................... $ 37,510 Property and equipment, net....................................... 341,737 Goodwill, net..................................................... 76,029 --------- $ 455,276 ========= Current liabilities............................................... $ 48,103 Long-term debt.................................................... 237,299 Other liabilities................................................. 3,453 Redeemable preferred stock........................................ 174,944 Stockholders' equity (deficit).................................... (8,523) --------- $ 455,276 ========= Ten Months Ended Eight Months December 31, Ended August 1997 31, 1998 ------------ ------------ (In thousands of dollars) Net revenues........................................ $103,531 $97,228 Operating expenses.................................. 86,999 78,605 -------- ------- Operating income.................................... 16,532 18,623 Interest and other income........................... 553 725 Interest expense and amortization of deferred financing costs.................................... (20,404) (13,378) Provision for income taxes.......................... -- -- -------- ------- Net income (loss)................................... $ (3,319) $(5,970) ======== ======= 5. Long-term Debt Long-term debt consists of the following: December 31, ------------------------- 1997 1998 ------------ ------------ (In thousands of dollars) Senior Credit Facility........................... $ 4,700 $ 5,500 10 5/8% Senior Discount Notes due 2007, net of discount........................................ 151,593 168,099 CTI Credit Facility.............................. -- 55,177 9% Guaranteed Bonds due 2007..................... -- 200,934 ------------ ------------ $ 156,293 $ 429,710 ============ ============ Senior Credit Facility CTC had a credit agreement with a bank (as amended, the "Bank Credit Agreement") which consisted of secured revolving lines of credit (the "Revolving Credit Facility") and a $2,300,000 term note (the "Term Note"). On January 17, 1997, the Bank Credit Agreement was amended to: (i) increase the available borrowings under the Revolving Credit Facility to $50,000,000; (ii) repay the F-15
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Term Note, along with accrued interest thereon, with borrowings under the Revolving Credit Facility; and (iii) extend the termination date for the Bank Credit Agreement to December 31, 2003. Available borrowings under the Revolving Credit Facility were generally to be used to construct new towers and to finance a portion of the purchase price for towers and related assets. The amount of available borrowings was determined based on the current financial performance (as defined) of: (i) the assets to be acquired; and (ii) assets acquired in previous acquisitions. In addition, up to $5,000,000 of borrowing availability under the Revolving Credit Facility could be used for letters of credit. In October 1997, the Bank Credit Agreement was amended to (i) increase the available borrowings to $100,000,000; (ii) include the lending bank under Crown's bank credit agreement as a participating lender; and (iii) extend the maturity date to December 31, 2004 (as amended, the "Senior Credit Facility"). On October 31, 1997, additional borrowings under the Senior Credit Facility, along with the proceeds from the October issuance of Senior Preferred Stock (see Note 8), were used to repay (i) the promissory note payable to the former stockholders of Crown and (ii) the outstanding borrowings under Crown's bank credit agreement (see Note 2). In November 1997, the Company repaid all of the outstanding borrowings under the Senior Credit Facility with a portion of the proceeds from the issuance of its 10 5/8% Senior Discount Notes (as discussed below). Upon the merger of CTC into CCI in January 1998, CCI became the primary borrower under the Senior Credit Facility. In December 1998, the Company again repaid all of the outstanding borrowings under the Senior Credit Facility with a portion of the proceeds from the issuance of its 12 3/4% Senior Exchangeable Preferred Stock (see Note 8). As of December 31, 1998, approximately $77,570,000 of borrowings was available under the Senior Credit Facility, of which $5,000,000 was available for letters of credit. There were no letters of credit outstanding as of December 31, 1998. The amount of available borrowings under the Senior Credit Facility will decrease by $5,000,000 at the end of each calendar quarter beginning on March 31, 2001 until December 31, 2004, at which time any remaining borrowings must be repaid. Under certain circumstances, CCI may be required to make principal prepayments under the Senior Credit Facility in an amount equal to 50% of excess cash flow (as defined), the net cash proceeds from certain asset sales or the net cash proceeds from certain sales of equity or debt securities by the Company. The Senior Credit Facility is secured by substantially all of the assets of CCI and the Company's pledge of the capital stock of CCI and its subsidiaries. In addition, the Senior Credit Facility is guaranteed by the Company. Borrowings under the Senior Credit Facility bear interest at a rate per annum, at the Company's election, equal to the bank's prime rate plus 1.5% or a Eurodollar interbank offered rate (LIBOR) plus 3.25% (9.25% and 8.32%, respectively, at December 31, 1998). The interest rate margins may be reduced by up to 2.25% (non-cumulatively) based on a financial test, determined quarterly. As of December 31, 1998, the financial test permitted a reduction of 1.5% in the interest rate margin for prime rate borrowings and 2.25% in the interest rate margin for LIBOR borrowings. Interest on prime rate loans is due quarterly, while interest on LIBOR loans is due at the end of the period (from one to three months) for which such LIBOR rate is in effect. The Senior Credit Facility requires CCI to maintain certain financial covenants and places restrictions on CCI's ability to, among other things, incur debt and liens, pay dividends, make capital expenditures, dispose of assets, undertake transactions with affiliates and make investments. 10 5/8% Senior Discount Notes due 2007 (the "Notes") On November 25, 1997, the Company issued $251,000,000 aggregate principal amount of the Notes for cash proceeds of $150,010,000 (net of original issue discount). The Company used a F-16
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) portion of the net proceeds from the sale of the Notes to (i) repay all of the outstanding borrowings, including accrued interest thereon, under the Senior Credit Facility; (ii) repay the promissory notes payable, including accrued interest thereon, to the former stockholders of TEA (see Note 2); (iii) repay certain indebtedness, including accrued interest thereon, from a prior acquisition; and (iv) repay outstanding installment debt assumed in connection with the Crown acquisition (see Note 2). The Notes will not pay any interest until May 15, 2003, at which time semi- annual interest payments will commence and become due on each May 15 and November 15 thereafter. The maturity date of the Notes is November 15, 2007. The Notes are net of unamortized discount of $99,407,000 and $82,901,000 at December 31, 1997 and 1998, respectively. The Notes are redeemable at the option of the Company, in whole or in part, on or after November 15, 2002 at a price of 105.313% of the principal amount plus accrued interest. The redemption price is reduced annually until November 15, 2005, after which time the Notes are redeemable at par. Prior to November 15, 2000, the Company may redeem up to 35% of the aggregate principal amount of the Notes, at a price of 110.625% of the accreted value thereof, with the net cash proceeds from a public offering of the Company's common stock. The Notes are senior indebtedness of the Company; however, they are unsecured and effectively subordinate to the liabilities of the Company's subsidiaries, which include outstanding borrowings under the Senior Credit Facility, the CTI Credit Facility and the CTI Bonds. The indenture governing the Notes (the "Indenture") places restrictions on the Company's ability to, among other things, pay dividends and make capital distributions, make investments, incur additional debt and liens, issue additional preferred stock, dispose of assets and undertake transactions with affiliates. As of December 31, 1998, the Company was effectively precluded from paying dividends on its capital stock under the terms of the Indenture. Reporting Requirements Under the Indenture (Unaudited) The following information (as such capitalized terms are defined in the Indenture) is presented solely as a requirement of the Indenture; 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. F-17
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Upon consummation of the share exchange with CTI's shareholders (see Note 2), which increased the Company's ownership interest in CTI to 80%, the Company designated CTI as an Unrestricted Subsidiary. In addition, the net proceeds from the Company's initial public offering of common stock (see Note 9) were placed into a newly formed subsidiary that was also designated as an Unrestricted Subsidiary. Prior to these transactions, the Company did not have any Unrestricted Subsidiaries. Summarized financial information for (i) the Company and its Restricted Subsidiaries and (ii) the Company's Unrestricted Subsidiaries is as follows: December 31, 1998 ---------------------------------------------------- Company and Restricted Unrestricted Consolidation Consolidated Subsidiaries Subsidiaries Eliminations Total ------------ ------------ ------------- ------------ (In thousands of dollars) Cash and cash equivalents............ $ 41,785 $ 254,665 $ -- $ 296,450 Other current assets.... 19,585 26,081 -- 45,666 Property and equipment, net.................... 165,205 427,389 -- 592,594 Investments in Unrestricted Subsidiaries........... 744,941 -- (744,941) -- Goodwill and other intangible assets, net.................... 143,729 426,011 -- 569,740 Other assets, net....... 15,440 3,340 -- 18,780 ---------- ---------- --------- ---------- $1,130,685 $1,137,486 $(744,941) $1,523,230 ========== ========== ========= ========== Current liabilities..... $ 17,653 $ 75,234 $ -- $ 92,887 Long-term debt.......... 173,599 256,111 -- 429,710 Other liabilities....... 808 22,015 -- 22,823 Minority interests...... -- 39,185 -- 39,185 Redeemable preferred stock.................. 201,063 -- -- 201,063 Stockholders' equity.... 737,562 744,941 (744,941) 737,562 ---------- ---------- --------- ---------- $1,130,685 $1,137,486 $(744,941) $1,523,230 ========== ========== ========= ========== F-18
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Three Months Ended December 31, 1998 Year Ended December 31, 1998 -------------------------------------- -------------------------------------- Company and Company and Restricted Unrestricted Consolidated Restricted Unrestricted Consolidated Subsidiaries Subsidiaries Total Subsidiaries Subsidiaries Total ------------ ------------ ------------ ------------ ------------ ------------ (In thousands of dollars) Net revenues............ $ 17,030 $43,787 $60,817 $ 55,023 $58,055 $113,078 Costs of operations (exclusive of depreciation and amortization).......... 7,069 18,117 25,186 23,446 24,372 47,818 General and administrative......... 6,883 1,666 8,549 21,153 2,418 23,571 Corporate development... 1,787 -- 1,787 4,625 -- 4,625 Non-cash compensation charges................ 523 874 1,397 9,907 2,851 12,758 Depreciation and amortization........... 4,879 15,255 20,134 16,921 20,318 37,239 -------- ------- ------- -------- ------- -------- Operating income (loss)................. (4,111) 7,875 3,764 (21,029) 8,096 (12,933) Equity in earnings of unconsolidated affiliate.............. -- -- -- 2,055 -- 2,055 Interest and other income (expense)....... (285) 2,212 1,927 1,101 3,119 4,220 Interest expense and amortization of deferred financing costs.................. (5,823) (5,685) (11,508) (21,727) (7,362) (29,089) Provision for income taxes (156) -- (156) (374) -- (374) Minority interests...... -- (1,326) (1,326) -- (1,654) (1,654) -------- ------- ------- -------- ------- -------- Net loss................ $(10,375) $ 3,076 $(7,299) $(39,974) $ 2,199 $(37,775) ======== ======= ======= ======== ======= ======== Tower Cash Flow and Adjusted Consolidated Cash Flow for the Company and its Restricted Subsidiaries is as follows: (In thousands of dollars) --------- Tower Cash Flow, for the three months ended December 31, 1998...... $ 3,868 ======== Consolidated Cash Flow, for the twelve months ended December 31, 1998.............................................................. $ 6,001 Less: Tower Cash Flow, for the twelve months ended December 31, 1998.............................................................. (14,811) Plus: four times Tower Cash Flow, for the three months ended December 31, 1998................................................. 15,472 -------- Adjusted Consolidated Cash Flow, for the twelve months ended December 31, 1998................................................. $ 6,662 ======== F-19
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CTI Credit Facility CTI has a credit agreement with a syndicate of banks (as amended, the "CTI Credit Facility") which consists of a (Pounds)64,000,000 (approximately $106,419,000) secured revolving line of credit. Available borrowings under the CTI Credit Facility are generally to be used to finance capital expenditures and for working capital and general corporate purposes. As of December 31, 1998, approximately $51,243,000 of borrowings was available under the CTI Credit Facility. The loan commitment under the CTI Credit Facility will be automatically reduced to zero in three equal semi-annual installments beginning on May 31, 2001 until May 31, 2002, when the CTI Credit Facility matures. Under certain circumstances, CTI may be required to make principle prepayments from the proceeds of certain asset sales. The CTI Credit Facility is secured by substantially all of CTI's assets. Borrowings under the CTI Credit Facility bear interest at a rate per annum equal to a Eurodollar interbank offered rate (LIBOR) plus 0.85% (approximately 6.99% at December 31, 1998). Interest is due at the end of the period (from one to six months) for which such LIBOR rate is in effect. The CTI Credit Facility requires CTI to maintain certain financial covenants and places restrictions on CTI's ability to, among other things, incur debt and liens, pay dividends, make capital expenditures, dispose of assets, undertake transactions with affiliates and make investments. 9% Guaranteed Bonds due 2007 ("CTI Bonds") CTI has issued (Pounds)125,000,000 (approximately $207,850,000) aggregate principal amount of the CTI Bonds. Interest payments on the CTI Bonds are due annually on each March 30. The maturity date of the CTI Bonds is March 30, 2007. The CTI Bonds are stated net of unamortized discount. The CTI Bonds are redeemable, at the option of CTI, in whole or in part at any time, at the greater of their principal amount and such a price as will provide a gross redemption yield 0.5% per annum above the gross redemption yield on the benchmark gilt plus, in either case, accrued and unpaid interest. Under certain circumstances, each holder of the CTI Bonds has the right to require CTI to repurchase all or a portion of such holder's CTI Bonds at a price equal to 101% of their aggregate principal amount plus accrued and unpaid interest. The CTI Bonds are guaranteed by CTI; however, they are unsecured and effectively subordinate to the outstanding borrowings under the CTI Credit Facility. The trust deed governing the CTI Bonds places restrictions on CTI's ability to, among other things, pay dividends and make capital distributions, make investments, incur additional debt and liens, dispose of assets and undertake transactions with affiliates. Restricted Net Assets of Subsidiaries Under the terms of the Senior Credit Facility, the CTI Credit Facility and the CTI Bonds, the Company's subsidiaries are limited in the amount of dividends which can be paid to the Company. For CCI, the amount of such dividends is limited to (i) $6,000,000 per year until October 31, 2002, and $33,000,000 per year thereafter, and (ii) an amount to pay income taxes attributable to the Company's Restricted Subsidiaries. CTI is effectively precluded from paying dividends. The restricted net assets of the Company's subsidiaries totaled approximately $826,321,000 at December 31, 1998. F-20
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Interest Rate Swap Agreement The interest rate swap agreement had an outstanding notional amount of $17,925,000 at January 29, 1997 (inception) and terminated on February 24, 1999. The Company paid a fixed rate of 6.28% on the notional amount and received a floating rate based on LIBOR. This agreement effectively changed the interest rate on $17,925,000 of borrowings under the Senior Credit Facility from a floating rate to a fixed rate of 6.28% plus the applicable margin. The Company does not believe there is any significant exposure to credit risk due to the creditworthiness of the counterparty. In the event of nonperformance by the counterparty, the Company's loss would be limited to any unfavorable interest rate differential. 6. Income Taxes The provision for income taxes consists of the following: Years Ended December 31, ------------------------ 1996 1997 1998 ----- ------- -------- (In thousands of dollars) Current: State............................................ $ -- $ -- $ 365 Puerto Rico...................................... 10 49 9 ----- ------- -------- $ 10 $ 49 $ 374 ===== ======= ======== A reconciliation between the provision for income taxes and the amount computed by applying the federal statutory income tax rate to the loss before income taxes is as follows: Years Ended December 31, ------------------------ 1996 1997 1998 ----- ------- -------- (In thousands of dollars) Benefit for income taxes at statutory rate......... $(322) $(4,044) $(12,154) Stock-based compensation........................... -- -- 2,844 Amortization of intangible assets.................. -- 478 604 State and foreign taxes, net of federal tax benefit........................................... -- -- 247 Expenses for which no federal tax benefit was recognized........................................ 5 28 151 Puerto Rico taxes.................................. 10 49 9 Acquisition costs.................................. -- -- (675) Foreign earnings not subject to tax................ -- -- (584) Changes in valuation allowances.................... 315 3,650 9,944 Other.............................................. 2 (112) (12) ----- ------- -------- $ 10 $ 49 $ 374 ===== ======= ======== F-21
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The components of the net deferred income tax assets and liabilities are as follows: December 31, --------------------------- 1997 1998 ------------ ------------- (In thousands of dollars) Deferred income tax liabilities: Property and equipment........................... $ 2,487 $ 6,045 Puerto Rico earnings............................. 75 84 Intangible assets................................ 276 -- Other............................................ 38 -- ------------ ------------- Total deferred income tax liabilities.......... 2,876 6,129 ------------ ------------- Deferred income tax assets: Net operating loss carryforwards................. 6,800 19,071 Noncompete agreement............................. 37 464 Intangible assets................................ -- 351 Accrued liabilities.............................. -- 68 Other............................................ -- 45 Receivables allowance............................ 6 41 Valuation allowances............................. (3,967) (13,911) ------------ ------------- Total deferred income tax assets, net.......... 2,876 6,129 ------------ ------------- Net deferred income tax liabilities................ $ -- $ -- ============ ============= Valuation allowances of $3,967,000 and $13,911,000 were recognized to offset net deferred income tax assets as of December 31, 1997 and 1998, respectively. At December 31, 1998, the Company has net operating loss carryforwards of approximately $56,000,000 which are available to offset future federal taxable income. These loss carryforwards will expire in 2010 through 2018. The utilization of the loss carryforwards is subject to certain limitations. 7. Minority Interests Minority interests represent the minority stockholder's interest in CTI. 8. Redeemable Preferred Stock Exchangeable Preferred Stock On December 16, 1998, the Company issued 200,000 shares of its 12 3/4% Senior Exchangeable Preferred Stock due 2010 (the "Exchangeable Preferred Stock") at a price of $1,000 per share (the liquidation preference per share). The net proceeds received by the Company from the sale of such shares amounted to approximately $193,000,000 (after underwriting discounts of $7,000,000 but before other expenses of the offering, which amounted to approximately $8,059,000). A portion of the net proceeds was used to repay outstanding borrowings under the Senior Credit Facility of $73,750,000, and the remaining net proceeds are currently invested in short-term investments. The holders of the Exchangeable Preferred Stock are entitled to receive cumulative dividends at the rate of 12 3/4% per share, compounded quarterly on each March 15, June 15, September 15 and December 15 of each year, beginning on March 15, 1999. On or before December 15, 2003, the F-22
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Company has the option to pay dividends in cash or in additional shares of Exchangeable Preferred Stock. After December 15, 2003, dividends are payable only in cash. The Company is required to redeem all outstanding shares of Exchangeable Preferred Stock on December 15, 2010 at a price equal to the liquidation preference plus accumulated and unpaid dividends. On or after December 15, 2003, the shares are redeemable at the option of the Company, in whole or in part, at a price of 106.375% of the liquidation preference. The redemption price is reduced on an annual basis until December 15, 2007, at which time the shares are redeemable at the liquidation preference. Prior to December 15, 2001, the Company may redeem up to 35% of the Exchangeable Preferred Stock, at a price of 112.75% of the liquidation preference, with the net proceeds from certain public equity offerings. The shares of Exchangeable Preferred Stock are exchangeable, at the option of the Company, in whole but not in part, for 12 3/4% Senior Subordinated Exchange Debentures due 2010. The Company's obligations with respect to the Exchangeable Preferred Stock are subordinate to all indebtedness of the Company (including the Notes), and are effectively subordinate to all debt and liabilities of the Company's subsidiaries (including the Senior Credit Facility, the CTI Credit Facility and the CTI Bonds). The certificate of designations governing the Exchangeable Preferred Stock places restrictions on the Company's ability to, among other things, pay dividends and make capital distributions, make investments, incur additional debt and liens, issue additional preferred stock, dispose of assets and undertake transactions with affiliates. Senior Preferred Stock In August 1997, the Company issued 292,995 shares of its Senior Convertible Preferred Stock (the "Senior Preferred Stock") at a price of $100 per share. The net proceeds received by the Company from the sale of such shares amounted to approximately $29,266,000, most of which was used to pay the cash portion of the purchase price for Crown (see Note 2). In October 1997, the Company issued an additional 364,500 shares of its Senior Preferred Stock at a price of $100 per share. The net proceeds received by the Company from the sale of such shares amounted to $36,450,000. This amount, along with borrowings under the Senior Credit Facility, was used to repay the promissory note from the Crown acquisition (see Note 2). The holders of the Senior Preferred Stock were entitled to receive cumulative dividends at the rate of 12.5% per share, compounded annually. At the option of the holder, each share of Senior Preferred Stock (plus any accrued and unpaid dividends) was convertible, at any time, into shares of the Company's common stock at a conversion price of $7.50 (subject to adjustment in the event of an underwritten public offering of the Company's common stock). At the date of issuance of the Senior Preferred Stock, the Company believes that its conversion price represented the estimated fair value of the common stock on that date. In July 1998, all of the shares of Senior Preferred Stock were converted into shares of common stock (see Note 9). The purchasers of the Senior Preferred Stock were also issued warrants to purchase an aggregate 1,314,990 shares of the Company's common stock at an exercise price of $7.50 per share (subject to adjustment in the event of an underwritten public offering of the Company's common stock). The warrants are exercisable, in whole or in part, at any time until August and October of 2007. At the date of issuance of the warrants, the Company believes that the exercise price represented the estimated fair value of the common stock on that date. As such, the Company has not assigned any value to the warrants in its consolidated financial statements. F-23
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Series Preferred Stock The holders of the Company's Series A Convertible Preferred Stock (the "Series A Preferred Stock"), the Series B Convertible Preferred Stock (the "Series B Preferred Stock") and the Series C Convertible Preferred Stock (the "Series C Preferred Stock") (collectively, the "Series Preferred Stock") were entitled to receive dividends, if and when declared, at the same rate as dividends were declared and paid with respect to the Company's common stock. Each of the outstanding shares of Series Preferred Stock was automatically converted into five shares of common stock upon consummation of the Company's initial public offering (see Note 9). In February and April of 1997, the Company issued 3,529,832 shares of its Series C Preferred Stock at a price of $21.00 per share. The net proceeds received by the Company from the sale of the Series C Preferred Stock amounted to approximately $74,024,000. A portion of this amount was used to purchase the ownership interest in CTI (see Note 4). 9. Stockholders' Equity Common Stock On August 18, 1998, the Company consummated its initial public offering of common stock at a price to the public of $13 per share (the "IPO"). The Company sold 12,320,000 shares of its common stock and received proceeds of $151,043,000 (after underwriting discounts of $9,117,000 but before other expenses of the IPO, which amounted to approximately $4,116,000). The net proceeds from the IPO are currently invested in short-term investments. In anticipation of the IPO, the Company (i) amended and restated the 1995 Stock Option Plan to, among other things, authorize the issuance of up to 18,000,000 shares of common stock pursuant to awards made thereunder and (ii) approved an amendment to its certificate of incorporation to increase the number of authorized shares of common and preferred stock to 690,000,000 shares and 10,000,000 shares, respectively, and to effect a five-for-one stock split for the shares of common stock then outstanding. The effect of the stock split has been presented retroactively in the Company's consolidated financial statements for all periods presented. In July 1998, all of the holders of the Company's Senior Convertible Preferred Stock converted such shares into an aggregate of 9,629,200 shares of the Company's common stock. Upon consummation of the IPO, all of the holders of the Company's then-existing shares of Class A Common Stock, Class B Common Stock, Series A Convertible Preferred Stock, Series B Convertible Preferred Stock and Series C Convertible Preferred Stock converted such shares into an aggregate of 39,842,290 shares of the Company's common stock. In March 1997, the Company repurchased, and subsequently retired, 814,790 shares of its common stock from a member of the Company's Board of Directors at a cost of approximately $3,422,000. Of this amount, $1,311,000 was recorded as compensation cost and is included in corporate development expense on the Company's consolidated statement of operations. In August 1998, the Company repurchased, and subsequently retired, 141,070 shares of its common stock from a former employee at a cost of approximately $883,000. Class A Common Stock Upon consummation of the share exchange agreement with CTI's shareholders (see Note 2), an affiliate of CTI's remaining minority shareholder received all of the currently outstanding shares of the F-24
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Company's Class A Common Stock. Each share of Class A Common Stock is convertible, at the option of its holder at any time, into one share of Common Stock. The holder of the Class A Common Stock is entitled to one vote per share on all matters presented to a vote of the Company's shareholders, except with respect to the election of directors. The holder of the Class A Common Stock, voting as a separate class, has the right to elect up to two members of the Company's Board of Directors. The shares of Class A Common Stock also provide certain governance and anti-dilutive rights. Compensation Charges Related to Stock Option Grants During the period from April 24, 1998 through July 15, 1998, the Company granted options to employees and executives for the purchase of 3,236,980 shares of its common stock at an exercise price of $7.50 per share. Of such options, options for 1,810,730 shares vested upon consummation of the IPO and the remaining options for 1,426,250 shares will vest at 20% per year over five years, beginning one year from the date of grant. In addition, the Company has assigned its right to repurchase shares of its common stock from a stockholder (at a price of $6.26 per share) to two individuals (including a newly-elected director) with respect to 100,000 of such shares. Since the granting of these options and the assignment of these rights to repurchase shares occurred subsequent to the date of the share exchange agreement with CTI's shareholders and at prices substantially below the price to the public in the IPO, the Company has recorded a non-cash compensation charge related to these options and shares based upon the difference between the respective exercise and purchase prices and the price to the public in the IPO. Such compensation charge will total approximately $18.4 million, of which approximately $10.6 million was recognized upon consummation of the IPO (for such options and shares which vested upon consummation of the IPO), and the remaining $7.8 million is being recognized over five years (approximately $1.6 million per year) through the second quarter of 2003. An additional $1.6 million in non- cash compensation charges will be recognized through the third quarter of 2001 for stock options issued to certain members of CTI's management prior to the consummation of the share exchange. Stock Options In 1995, the Company adopted the Crown Castle International Corp. 1995 Stock Option Plan (as amended, the "1995 Stock Option Plan"). Up to 18,000,000 shares of the Company's common stock were reserved for awards granted to certain employees, consultants and non-employee directors of the Company and its subsidiaries or affiliates. These options generally vest over periods of up to five years from the date of grant (as determined by the Company's Board of Directors) and have a maximum term of ten years from the date of grant. Upon consummation of the share exchange agreement with CTI's shareholders (see Note 2), the Company adopted each of the various CTI stock option plans. All outstanding options to purchase shares of CTI under such plans have been converted into options to purchase shares of the Company's common stock. Up to 4,392,451 shares of the Company's common stock were reserved for awards granted under the CTI plans, and these options generally vest over periods of up to three years from the date of grant. F-25
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) A summary of awards granted under the various stock option plans is as follows for the years ended December 31, 1996, 1997 and 1998: 1996 1997 1998 ------------------- -------------------- --------------------- Weighted- Weighted- Weighted- Average Average Average Number of Exercise Number of Exercise Number of Exercise Shares Price Shares Price Shares Price --------- --------- --------- --------- ---------- --------- Options outstanding at beginning of year...... 825,000 $0.53 1,050,000 $0.89 3,694,375 $4.69 Options granted......... 225,000 2.22 3,042,500 5.46 9,024,720 10.02 Options outstanding under CTI stock option plans.................. -- -- -- -- 4,367,202 2.74 Options exercised....... -- -- (363,125) 0.53 (216,650) 4.89 Options forfeited....... -- -- (35,000) 1.20 (284,450) 5.72 --------- --------- ---------- Options outstanding at end of year............ 1,050,000 0.89 3,694,375 4.69 16,585,197 7.06 ========= ========= ========== Options exercisable at end of year............ 721,250 0.43 728,875 2.49 7,615,649 4.75 ========= ========= ========== In November 1996, options which were granted in 1995 for the purchase of 690,000 shares were modified such that those options became fully vested. In August 1998, certain outstanding options became fully or partially vested upon consummation of the IPO. A summary of options outstanding as of December 31, 1998 is as follows: Weighted- Average Number of Remaining Number of Exercise Options Contractual Options Prices Outstanding Life Exercisable -------- ----------- ----------- ----------- $ -0- to $ 0.40 677,108 7.0 years 494,709 1.20 to 1.60 123,750 7.1 years 123,750 2.37 to 3.09 3,316,600 7.8 years 2,266,600 4.01 to 6.00 2,607,621 8.2 years 1,833,960 7.50 to 7.77 5,694,692 9.3 years 2,821,630 10.04 to 12.50 450,426 9.9 years -- 13.00 3,590,000 9.6 years 75,000 17.63 125,000 10.0 years -- ---------- --------- 16,585,197 9.1 years 7,615,649 ========== ========= The weighted-average fair value of options granted during the years ended December 31, 1996, 1997 and 1998 was $0.50, $1.30 and $4.54, respectively. The fair value of each option was estimated on the date of grant using the Black- Scholes option-pricing model and the following weighted-average assumptions about the options (the minimum value method was used prior to the IPO): Years Ended December 31, ----------------------------- 1996 1997 1998 --------- --------- --------- Risk-free interest rate......................... 6.4% 6.1% 5.38% Expected life................................... 4.0 years 4.5 years 3.6 years Expected volatility............................. 0% 0% 0% to 30% Expected dividend yield......................... 0% 0% 0% F-26
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The exercise prices for options granted during the years ended December 31, 1996 and 1997 were equal to or in excess of the estimated fair value of the Company's common stock at the date of grant. As such, no compensation cost was recognized for stock options during those years (see Note 1 and "Compensation Charges Related to Stock Option Grants"). If compensation cost had been recognized for stock options based on their fair value at the date of grant, the Company's pro forma net loss for the years ended December 31, 1996, 1997 and 1998 would have been $973,000 ($0.28 per share), $12,586,000 ($2.37 per share) and $75,660,000 ($1.91 per share), respectively. The pro forma effect of stock options on the Company's net loss for those years may not be representative of the pro forma effect for future years due to the impact of vesting and potential future awards. Shares Reserved For Issuance At December 31, 1998, the Company had the following shares reserved for future issuance: Common Stock: Class A Common Stock........................................... 11,340,000 Shares of CTI stock which are convertible into common stock.... 17,443,500 Stock option plans............................................. 21,812,676 Warrants....................................................... 1,314,990 ---------- 51,911,166 ========== 10. Employee Benefit Plans The Company and its subsidiaries have various defined contribution savings plans covering substantially all employees. Depending on the plan, employees may elect to contribute up to 20% of their eligible compensation. Certain of the plans provide for partial matching of such contributions. The cost to the Company for these plans amounted to $98,000 and $197,000 for the years ended December 31, 1997 and 1998, respectively. CTI has a defined benefit plan which covers all of its employees hired on or before March 1, 1997. Employees hired after that date are not eligible to participate in this plan. The net periodic pension cost attributable to this plan for the four months ended December 31, 1998 was $1,115,000. As of December 31, 1998, (i) the accumulated benefit obligation under this plan amounted to $13,635,000 (all of which was vested); (ii) the projected benefit obligation amounted to $15,298,000; (iii) the fair value of the plan's assets amounted to $15,848,000; and (iv) the prepaid pension cost attributable to this plan amounted to $1,704,000. 11. Related Party Transactions The Company leases office space in a building formerly owned by its Chief Executive Officer. Lease payments for such office space amounted to $50,000 and $130,000 for the years ended December 31, 1996 and 1997, respectively. Included in other receivables at December 31, 1997 and 1998 are amounts due from employees of the Company totaling $499,000 and $368,000, respectively. 12. Commitments and Contingencies At December 31, 1998, minimum rental commitments under operating leases are as follows: years ending December 31, 1999--$19,721,000; 2000--$19,456,000; 2001--$19,298,000; 2002-- F-27
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) $19,293,000; 2003--$18,996,000; thereafter--$112,848,000. Rental expense for operating leases was $277,000, $1,712,000 and $9,620,000 for the years ended December 31, 1996, 1997 and 1998, respectively. The Company is involved in various claims, lawsuits and proceedings arising in the ordinary course of business. While there are uncertainties inherent in the ultimate outcome of such matters and it is impossible to presently determine the ultimate costs that may be incurred, management believes the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on the Company's consolidated financial position or results of operations. 13. Operating Segments and Concentrations of Credit Risk Operating Segments The Company's reportable operating segments for 1998 are (i) the domestic operations of CCI and (ii) the United Kingdom operations of CTI. Financial results for the Company are reported to management and the Board of Directors in this manner, and much of the Company's current debt financing is structured along these geographic lines. In addition, the Company's financial performance is evaluated by outside securities analysts based on these operating segments. See Note 1 for a description of the primary revenue sources from these two segments. As discussed in Note 2, CTI's results of operations are included in the Company's consolidated financial statements beginning in 1998. Prior to that time, the domestic operations of CCI represented the Company's only reportable segment. F-28
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 ("EBITDA"). The Company defines EBITDA as operating income (loss) plus depreciation and amortization and non- cash compensation charges. 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 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. Total assets for the Company's operating segments are determined based on the separate consolidated balance sheets for CCI and CTI. The results of operations and financial position for CTI reflect appropriate adjustments for their presentation in accordance with generally accepted accounting principles in the United States. The financial results for the Company's operating segments are as follows: Year Ended December 31, 1998 ------------------------------------------- Corporate Office Consolidated CCI CTI and Other Total -------- -------- --------- ------------ (In thousands of dollars) Net revenues: Site rental and broadcast transmission................... $ 22,541 $ 52,487 $ -- $ 75,028 Network services and other...... 31,471 5,568 1,011 38,050 -------- -------- -------- ---------- 54,012 58,055 1,011 113,078 -------- -------- -------- ---------- Costs of operations (exclusive of depreciation and amortization)... 23,076 24,372 370 47,818 General and administrative........ 17,929 2,418 3,224 23,571 Corporate development............. -- -- 4,625 4,625 -------- -------- -------- ---------- EBITDA............................ 13,007 31,265 (7,208) 37,064 Non-cash compensation charges..... 132 2,851 9,775 12,758 Depreciation and amortization..... 16,202 20,318 719 37,239 -------- -------- -------- ---------- Operating income (loss)........... (3,327) 8,096 (17,702) (12,933) Equity in earnings of unconsolidated affiliate -- -- 2,055 2,055 Interest and other income (expense)........................ (253) 294 4,179 4,220 Interest expense and amortization of deferred financing costs...... (4,476) (7,362) (17,251) (29,089) Provision for income taxes........ (374) -- -- (374) Minority interests................ -- (1,654) -- (1,654) -------- -------- -------- ---------- Net loss.......................... $ (8,430) $ (626) $(28,719) $ (37,775) ======== ======== ======== ========== Capital expenditures.............. $ 84,911 $ 50,224 $ 3,624 $ 138,759 ======== ======== ======== ========== Total assets (at year end)........ $332,555 $887,938 $302,737 $1,523,230 ======== ======== ======== ========== Investments in affiliates (at year end)............................. $ -- $ -- $ 2,258 $ 2,258 ======== ======== ======== ========== F-29
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, ----------------------------------------------------------------- 1996 1997 ------------------------------- --------------------------------- Corporate Corporate Office Consolidated Office Consolidated CCI and Other Total CCI and Other Total ------- --------- ------------ -------- --------- ------------ (In thousands of dollars) Net revenues: Site rental and broadcast transmission......... $ 5,615 $ -- $ 5,615 $ 11,010 $ -- $ 11,010 Network services and other................ 592 -- 592 20,066 329 20,395 ------- ------- ------- -------- -------- -------- 6,207 -- 6,207 31,076 329 31,405 ------- ------- ------- -------- -------- -------- Costs of operations (exclusive of depreciation and amortization).......... 1,300 -- 1,300 15,350 -- 15,350 General and administrative......... 1,678 -- 1,678 6,675 149 6,824 Corporate development... 75 1,249 1,324 1,864 3,867 5,731 ------- ------- ------- -------- -------- -------- EBITDA.................. 3,154 (1,249) 1,905 7,187 (3,687) 3,500 Depreciation and amortization 1,242 -- 1,242 6,925 27 6,952 ------- ------- ------- -------- -------- -------- Operating income (loss)................. 1,912 (1,249) 663 262 (3,714) (3,452) Equity in earnings (losses) of unconsolidated affiliate.............. -- -- -- -- (1,138) (1,138) Interest and other income (expense)....... 22 171 193 (77) 2,028 1,951 Interest expense and amortization of deferred financing costs.................. (1,803) -- (1,803) (4,660) (4,594) (9,254) Credit (provision) for income taxes........... (59) 49 (10) -- (49) (49) ------- ------- ------- -------- -------- -------- Net income (loss)....... $ 72 $(1,029) $ (957) $ (4,475) $ (7,467) $(11,942) ======= ======= ======= ======== ======== ======== Capital expenditures.... $ 890 $ -- $ 890 $ 17,200 $ 835 $ 18,035 ======= ======= ======= ======== ======== ======== Total assets (at year end)................... $250,911 $120,480 $371,391 ======== ======== ======== Investments in affiliates (at year end)................... $ -- $ 59,082 $ 59,082 ======== ======== ======== F-30
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Geographic Information A summary of net revenues by country, based on the location of the Company's subsidiary, is as follows: Years Ended December 31, ----------------------- 1996 1997 1998 ------ ------- -------- (In thousands of dollars) United States....................................... $5,050 $29,076 $ 51,807 Puerto Rico......................................... 1,157 2,329 2,470 ------ ------- -------- Total domestic operations......................... 6,207 31,405 54,277 ------ ------- -------- United Kingdom...................................... -- -- 58,055 Other foreign countries............................. -- -- 746 ------ ------- -------- Total for all foreign countries................... -- -- 58,801 ------ ------- -------- $6,207 $31,405 $113,078 ====== ======= ======== A summary of long-lived assets by country of location is as follows: December 31, ------------------- 1997 1998 -------- ---------- (In thousands of dollars) United States........................................... $237,125 $ 310,953 Puerto Rico............................................. 10,145 14,473 -------- ---------- Total domestic operations............................. 247,270 325,426 -------- ---------- United Kingdom.......................................... 56,965 855,560 Other foreign countries................................. -- 128 -------- ---------- Total for all foreign countries....................... 56,965 855,688 -------- ---------- $304,235 $1,181,114 ======== ========== Major Customers For the years ended December 31, 1996, 1997 and 1998, CCI had revenues from a single customer amounting to $2,634,000, $5,998,000 and $14,168,000, respectively. For the year ended December 31, 1998, consolidated net revenues includes $33,044,000 from a single customer of CTI. Concentrations of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash and cash equivalents and trade receivables. The Company mitigates its risk with respect to cash and cash equivalents by maintaining such deposits at high credit quality financial institutions and monitoring the credit ratings of those institutions. The Company derives the largest portion of its revenues from customers in the wireless telecommunications industry. In addition, the Company has concentrations of operations in certain geographic areas (primarily the United Kingdom, Pennsylvania, Texas, New Mexico, Arizona and Puerto Rico). The Company mitigates its concentrations of credit risk with respect to trade receivables by actively monitoring the creditworthiness of its customers. Historically, the Company has not incurred any significant credit related losses. F-31
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 14. Quarterly Financial Information (Unaudited) Summary quarterly financial information for the years ended December 31, 1997 and 1998 is as follows: Three Months Ended ------------------------------------------- March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- (In thousands of dollars, except per share amounts) 1997: Net revenues................. $ 1,994 $ 4,771 $11,481 $13,159 Operating income (loss)...... (1,293) (921) 61 (1,299) Net loss..................... (443) (1,706) (4,001) (5,792) Loss per common share--basic and diluted................. (0.13) (0.51) (0.62) (0.69) 1998: Net revenues................. $11,837 $11,530 $28,894 $60,817 Operating income (loss)...... (2,494) (2,197) (12,006) 3,764 Net loss..................... (6,606) (6,426) (17,444) (7,299) Loss per common share--basic and diluted................. (0.79) (0.78) (0.33) (0.09) 15. Subsequent Events (Unaudited) BellSouth Mobility Inc. and BellSouth Telecommunications Inc. ("BellSouth") In March 1999, the Company entered into an agreement with BellSouth to acquire the operating rights for approximately 1,850 of their towers. The transaction is structured as a lease agreement and will be treated as a sale of the towers for tax purposes. The Company will pay BellSouth consideration of $610,000,000, consisting of $430,000,000 in cash and $180,000,000 in shares of its common stock. The Company will account for this transaction as a purchase of tower assets. The transaction is expected to close over a period of up to eight months beginning in the second quarter of 1999. Upon entering into the agreement, the Company placed $50,000,000 into an escrow account. In order to fund this escrow deposit, the Company borrowed $45,000,000 under the Senior Credit Facility. Powertel, Inc. ("Powertel") In March 1999, the Company entered into an agreement with Powertel to purchase approximately 650 of their towers and related assets. The purchase price for these towers will be $275,000,000 in cash. The Company will account for this transaction as an acquisition using the purchase method. Upon entering into the agreement, the Company placed $50,000,000 into an escrow account. The Company funded this escrow deposit with borrowings under a $100,000,000 loan agreement provided by a syndicate of investment banks. The remaining $50,000,000 of borrowings under this loan agreement were used to repay the amount drawn under the Senior Credit Facility in connection with the BellSouth escrow deposit. Proposed Securities Offerings The Company intends to offer shares of its common stock and debt securities in concurrent underwritten public offerings. The proceeds from such offerings would be used to repay amounts drawn under the loan agreement in connection with the BellSouth and Powertel transactions, and to pay the remaining purchase price for such transactions. Any securities will only be offered by means of a prospectus forming a part of a registration statement filed with the Securities and Exchange Commission. There can be no assurance that such securities offerings can be successfully completed. F-32
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND THE BBC HOME SERVICE TRANSMISSION BUSINESS INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of Castle Transmission Services (Holdings) Ltd: We have audited the accompanying balance sheet of the BBC Home Service Transmission business ("Home Service") at March 31, 1996 and the consolidated balance sheets of Castle Transmission Services (Holdings) Ltd and its subsidiaries ("Castle Transmission") at March 31, 1997 and December 31, 1997 and the profit and loss accounts, cash flow statements and reconciliations of movements in corporate funding for Home Service for the year ended March 31, 1996 and the period from April 1, 1996 to February 27, 1997 and the related consolidated profit and loss accounts, cash flow statements and reconciliations of movements in shareholders' funds for Castle Transmission for the period from February 28, 1997 to March 31, 1997 and the period from April 1, 1997 to December 31, 1997. These financial statements are the responsibility of Castle Transmission's and Home Service's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United Kingdom, which do not differ in any material respect from generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Home Service at March 31, 1996 and the consolidated financial position of Castle Transmission at March 31, 1997 and December 31, 1997 and the results of operations and cash flows of Home Service for the year ended March 31, 1996 and for the period from April 1, 1996 to February 27, 1997 and of Castle Transmission for the period from February 28, 1997 to March 31, 1997 and for the period from April 1, 1997 to December 31, 1997 in conformity with generally accepted accounting principles in the United Kingdom. Generally accepted accounting principles in the United Kingdom vary in certain respects from generally accepted accounting principles in the United States. Application of generally accepted accounting principles in the United States would have affected results of operations for the year ended March 31, 1996 and the period from April 1, 1996 to February 27, 1997 for Home Service and the period from February 28, 1997 to March 31, 1997 and from April 1, 1997 to December 31, 1997 for Castle Transmission and shareholders' equity at March 31, 1996 for Home Service and at March 31, 1997 and December 31, 1997 for Castle Transmission to the extent summarised in Note 27 to these financial statements. KPMG Chartered Accountants Registered Auditor London, England March 31, 1998 F-33
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND THE BBC HOME SERVICE TRANSMISSION BUSINESS CONSOLIDATED PROFIT AND LOSS ACCOUNTS Castle Transmission Services BBC Home Service Transmission (Holdings) Ltd -------------------------------------- -------------------------------------- Period Period Period from April 1, Two from from April 1, Eight 1996 Months February 28, 1997 Months Year Ended to Ended 1997 to Ended March 31, February 27, February 27, to March 31, December 31, August 31, Note 1996 1997 1997 1997 1997 1998 ------ ----------- ------------- ------------ ------------ ------------- ----------- (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 (Unaudited) (Unaudited) Turnover................ 3 70,367 70,614 12,805 6,433 56,752 59,033 Changes in stocks and work in progress....... (635) (554) (150) 340 747 (1,279) Own work capitalised.... 4,653 3,249 308 170 1,127 2,440 Raw materials and consumables............ 14 (1,155) (387) (446) (2,410) (281) Other external charges.. (34,750) (26,191) (4,130) (1,668) (13,811) (14,900) Staff costs............. 4 (17,197) (16,131) (3,104) (1,421) (14,345) (16,032) Depreciation and other amounts written off tangible and intangible assets................. 5 (12,835) (13,038) (2,464) (1,819) (16,854) (15,594) Other operating charges................ (1,832) (2,792) (181) (344) (2,430) (2,175) ------- ------- ------- ------ ------- ------- (62,582) (56,612) (10,108) (5,188) (47,976) (47,821) Operating profit........ 7,785 14,002 2,697 1,245 8,776 11,212 Other interest receivable and similar income................. -- -- -- 49 288 440 Interest payable and similar charges........ 7 -- -- -- (969) (12,419) (9,507) ------- ------- ------- ------ ------- ------- Profit/(loss) on ordinary activities before and after taxation............... 3-6, 8 7,785 14,002 2,697 325 (3,355) 2,145 Additional finance cost of non-equity shares... -- -- -- (318) (2,862) -- ------- ------- ------- ------ ------- ------- Retained profit/(loss) for the period......... 7,785 14,002 2,697 7 (6,217) 2,145 ======= ======= ======= ====== ======= ======= Neither BBC Home Service nor Castle Transmission have any recognised gains or losses other than those reflected in the profit and loss accounts. The accompanying notes are an integral part of these consolidated financial statements. F-34
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND THE BBC HOME SERVICE TRANSMISSION BUSINESS CONSOLIDATED BALANCE SHEETS BBC Home Service Castle Transmission Services Transmission (Holdings) Ltd ---------------- ------------------------------------------ At March 31, At March 31, At December 31, At August 31, 1996 1997 1997 1998 Note ---------------- ------------ --------------- ------------- (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 (Unaudited) Fixed assets Intangible............ 9 -- 46,573 46,056 44,404 Tangible.............. 10 202,592 206,162 206,134 229,124 ------- -------- -------- -------- 202,592 252,735 252,190 273,528 Current assets Stocks................ 11 1,750 807 1,340 2,620 Debtors............... 12 4,714 10,344 13,230 11,639 Amounts owed by group undertakings......... -- -- -- 1,273 Cash at bank and in hand................. -- 9,688 8,152 9,198 ------- -------- -------- -------- 6,464 20,839 22,722 24,730 Creditors: amounts fall- ing due within one year................... 13 (6,627) (14,820) (29,139) (36,514) ------- -------- -------- -------- Net current assets/(liabilities)... (163) 6,019 (6,417) (11,784) ------- -------- -------- -------- Total assets less current liabilities.... 202,429 258,754 245,773 261,744 Creditors: amounts falling due after more than one year.......... 14 -- (154,358) (143,748) (149,535) Provisions for liabili- ties and charges....... 15 -- (1,723) (2,157) (2,461) ------- -------- -------- -------- Net assets.............. 202,429 102,673 99,868 109,748 ======= ======== ======== ======== Capital and reserves Corporate funding..... 202,429 -- -- -- Called up share capi- tal.................. 16 -- 102,348 102,898 108,303 Profit and loss ac- count................ 17 -- 325 (3,030) 1,445 ------- -------- -------- -------- 202,429 102,673 99,868 109,748 ======= -------- -------- -------- Shareholders' funds/(deficit) Equity................ 109 (6,107) 109,748 Non-equity............ 102,564 105,975 -- -------- -------- -------- 102,673 99,868 109,748 ======== ======== ======== The accompanying notes are an integral part of these consolidated financial statements. F-35
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND THE BBC HOME SERVICE TRANSMISSION BUSINESS CONSOLIDATED CASH FLOW STATEMENTS Castle Transmission Services BBC Home Service Transmission (Holdings) Ltd ---------------------------------------- ---------------------------------------- Period from Period from Eight Year Period from Two Months February 28, April 1, Months Ended April 1, 1996 Ended 1997 1997 Ended March 31, to February 27, February 27, to March 31, to December 31, August 31, 1996 1997 1997 1997 1997 1998 Note ----------- --------------- ------------ ------------ --------------- ----------- (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 (Unaudited) (Unaudited) Cash inflow from operating activities... 21 24,311 26,427 5,161 5,756 27,983 37,302 Returns on investment and servicing of finance................ 22 -- -- -- (885) (2,428) (10,076) Capital expenditure and financial investments.. 22 (17,190) (20,092) (711) (748) (14,361) (36,135) Acquisitions and disposals.............. 22 -- -- -- (251,141) (307) -- ------- ------- ------ -------- -------- -------- Cash inflow/(outflow)... 7,121 6,335 4,450 (247,018) 10,887 (8,909) Financing............... 22 Net (decrease) in corporate funding...... (7,121) (6,335) (4,450) -- -- -- Issuance of shares...... -- -- -- 102,348 550 5,405 Increase/(decrease) in debt................... -- -- -- 154,358 (12,973) 5,000 Capital element of finance lease rentals.......... -- -- -- -- -- (450) ------- ------- ------ -------- -------- -------- (7,121) (6,335) (4,450) 256,706 (12,423) 9,955 ------- ------- ------ -------- -------- -------- Increase/(decrease) in cash................... -- -- -- 9,688 (1,536) 1,046 ======= ======= ====== ======== ======== ======== Reconciliation of net cash flow to movement in net debt............ 23 Increase/(decrease) in cash in the period..... -- -- -- 9,688 (1,536) 1,046 Cash (inflow)/outflow from (increase)/decrease in debt................... -- -- -- (154,358) 12,973 (4,550) ------- ------- ------ -------- -------- -------- Change in net debt resulting from cash flow................... -- -- -- (144,670) 11,437 (3,504) New finance leases...... -- -- -- -- (711) (797) Amortisation of bank loan issue costs....... -- -- -- -- (2,087) (159) Amortisation of Guaranteed Bonds....... -- -- -- -- (55) (179) ------- ------- ------ -------- -------- -------- Movement in net debt in the period............. -- -- -- (144,670) 8,584 (4,639) Net debt at beginning of the period............. -- -- -- -- (144,670) (136,086) ------- ------- ------ -------- -------- -------- Net debt at end of the period................. -- -- -- (144,670) (136,086) (140,725) ======= ======= ====== ======== ======== ======== The accompanying notes are an integral part of these consolidated financial statements. F-36
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND THE BBC HOME SERVICE TRANSMISSION BUSINESS CONSOLIDATED RECONCILIATION OF MOVEMENTS IN CORPORATE FUNDING/SHAREHOLDERS' FUNDS Castle Transmission Services BBC Home Service Transmission (Holdings) Ltd ---------------------------------------- ---------------------------------------- Two Period from Eight Year Period from Months February 28, Period from Months Ended April 1, 1996 Ended 1997 April 1, 1997 Ended March 31, to February 27, February 27, to March 31, to December 31, August 31, 1996 1997 1997 1997 1997 1998 ----------- --------------- ------------ ------------ --------------- ----------- (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 (Unaudited) (Unaudited) Profit/(loss) for the period................. 7,785 14,002 2,697 325 (3,355) 2,145 Net (decrease) in corporate funding...... (7,121) (6,335) (4,450) -- -- -- New share capital subscribed............. -- -- -- 102,348 550 5,405 Charge on share option arrangements........... -- -- -- -- -- 2,330 ------- ------- ------- ------- ------- ------- Net additions/(deductions) to corporate funding/shareholders' funds.................. 664 7,667 (1,753) 102,673 (2,805) 9,880 Opening corporate funding/shareholders' funds.................. 201,765 202,429 211,849 -- 102,673 99,868 ------- ------- ------- ------- ------- ------- Closing corporate funding/shareholders' funds.................. 202,429 210,096 210,096 102,673 99,868 109,748 ======= ======= ======= ======= ======= ======= The accompanying notes are an integral part of these consolidated financial statements. F-37
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND THE BBC HOME SERVICE TRANSMISSION BUSINESS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1 Basis of preparation As used in the financial statements and related notes, the terms "Castle Transmission" or "the Group" refers to the operations of Castle Transmission Services (Holdings) Ltd and its subsidiaries, Castle Transmission International Ltd ("CTI") which is the successor business and Castle Transmission (Finance) plc ("CTF"). The term "Home Service" refers to the operations of the Home Service Transmission business of the British Broadcasting Corporation ("BBC") which was the predecessor business. These consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") applicable in the United Kingdom (UK) and comply with the financial reporting standards of the Institute of Chartered Accountants in England and Wales. A summary of the differences between UK GAAP and United States (US) GAAP as applicable to Castle Transmission is set out in Note 27. Castle Transmission Services (Holdings) Ltd (the "Company") was incorporated on August 27, 1996 and did not trade in the period to February 27, 1997. CTI was incorporated by the BBC on May 9, 1996 and did not trade in the period to February 27, 1997. On February 27, 1997, the assets and liabilities of Home Service were transferred to CTI. On February 28, 1997 CTI was acquired by the Company. During the period between August 27, 1996 and February 27, 1997 Castle Transmission did not trade and received no income and incurred no expenditure. Accordingly the first consolidated profit and loss account for Castle Transmission represents the trading of Castle Transmission for the period from February 28, 1997 to March 31, 1997. CTF was incorporated April 9, 1997. The financial statements for the year ended March 31, 1996 and the period from April 1, 1996 to February 27, 1997 represent the profit and loss accounts, balance sheet, cash flow statements and reconciliations of movements in corporate funding of Home Service. They have been prepared from the separate financial records and management accounts of Home Service. Home Service was charged a management fee by the BBC representing an allocation of certain costs including pension, information technology, occupancy and other administration costs which were incurred centrally by the BBC but which were directly attributable to Home Service. Management believes such allocation is reasonable. Such costs are based on the pension arrangement and the cost structure of the BBC and are not necessarily representative of such costs of Castle Transmission under separate ownership. Home Service did not incur any costs in relation to financing as necessary funding was provided from the BBC through the corporate funding account. No interest is charged by the BBC on such funds because there is no debt at BBC which is attributable to Home Service. Home Service was not a separate legal entity and therefore was not directly subject to taxation on its results. The BBC is a not-for-profit organisation and is not subject to taxation except to the extent of activities undertaken with the objective of making a profit, including all external activities (principally site sharing and commercial projects). The tax charge attributable to Home Service has been calculated as if Home Service were under separate ownership since April 1, 1994 and as if all of its results of operations were subject to normal taxation. Redundancy costs were incurred by the BBC which related to Home Service staff. The redundancy costs amounted to (Pounds)1.1m in 1996 and (Pounds)0.6m in the period from April 1, 1996 to February 27, 1997. The redundancy programmes were controlled by the BBC and the costs were not recharged to Home Service. No adjustment has been made in the Home Service financial statements F-38
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND THE BBC HOME SERVICE TRANSMISSION BUSINESS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) for these costs because any costs incurred would have been reflected in the cost base of Home Service, and as described in note 25 would have been off-set by an increase in turnover from the BBC. The consolidated financial statements for the two months ended February 27, 1997 and as of and for the eight months ended August 31, 1998 are unaudited; however, in the opinion of all the directors, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation have been made. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end. Operating results for the eight month period ended August 31, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. 2 Accounting policies The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the financial statements of Home Service and the consolidated financial statements of Castle Transmission. Basis of consolidation The consolidated financial statements include the financial statements of the Company and its subsidiaries made up to March 31, 1997 and December 31, 1997 after elimination of all significant inter-company accounts and transactions. The acquisition method of accounting has been adopted. Under this method, the results of subsidiaries acquired or disposed of in the period are included in the consolidated profit and loss account from the date of acquisition or up to the date of disposal. Goodwill Purchased goodwill on acquisitions (representing the excess of the fair value of the consideration given over the fair value of the separable net assets acquired) is capitalised and amortised over 20 years, the period over which the Directors consider that the Group will derive economic benefits. Tangible fixed assets and depreciation Depreciation is provided to write off the cost or valuation less the estimated residual value of tangible fixed assets by equal instalments over their estimated useful economic lives as follows: Land and buildings Home Service Castle Transmission -------------- ------------------- Freehold and long leasehold buildings... 50 years 50 years Freehold and long leasehold improve- ments.................................. 20 years 20 years Short leasehold land and buildings...... Unexpired term Unexpired term No depreciation is provided on freehold land................................... Plant and equipment Home Service Castle Transmission ------------ ------------------- Transmitters and power plant............... 25 years 20 years Electric and mechanical infrastructure..... 10-20 years 10-20 years Other plant and machinery.................. 3-10 years 3-10 years Computer equipment......................... 5 years 5 years Motor vehicles............................. -- 3 years F-39
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND THE BBC HOME SERVICE TRANSMISSION BUSINESS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Strategic spares, which comprise those spares that are vital to the operation of the transmission system, are included in the capitalised value of the asset to which they relate and are depreciated over the life of the asset. Assets under construction are included within fixed assets. The associated labour costs are capitalised using a predetermined labour rate, and any over or under recoveries are recognised in the profit and loss account in the period in which they arise. Foreign currencies Transactions in foreign currencies are translated at the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities, to the extent that they are denominated in foreign currency, are retranslated at the rate of exchange ruling at the balance sheet date and gains or losses are included in the profit and loss account. Leases Where the Company enters into a lease which entails taking substantially all the risks and rewards of ownership of an asset, the lease is treated as a "finance lease'. The asset is recorded in the balance sheet as a tangible fixed asset and is depreciated over its useful life or term of the lease, whichever is shorter. Future instalments under such leases, net of finance charges, are included within creditors. Rentals payable are apportioned between the finance element, which is charged to the profit and loss account, and the capital element which reduces the outstanding obligation for future instalments. Operating lease rentals are charged to the profit and loss account on a straight line basis over the period of the lease. Pensions The pension costs charged in the period include costs incurred, at the agreed employer's contribution rate. See note 20 for further details. Stocks Stocks held are general maintenance spares and manufacturing stocks. Stocks are stated at the lower of weighted average cost and net realisable value. Work in progress For individual projects, the fees on account and project costs are recorded in work in progress. When a project is complete, the project balances are transferred to turnover and cost of sales as appropriate, and the net profit is recognised. Where the payments on account are in excess of project costs, these are recorded as payments on account. Provision is made for any losses as soon as they are foreseen. Taxation The charge for taxation is based on the result for the period and takes into account taxation deferred because of timing differences between the treatment of certain items for taxation and accounting purposes. Provision is made for deferred tax only to the extent that it is probable that an actual liability will crystallise. F-40
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND THE BBC HOME SERVICE TRANSMISSION BUSINESS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Turnover Turnover represents the amounts (excluding value added tax) derived from the provision of transmission and maintenance contracts, site sharing arrangements and commercial projects. Revenue is recognised on the basis of contracts or as services are provided to customers. Issue costs Costs incurred in raising funds are deducted from the amount raised and amortised over the life of the debt facility on a constant yield basis. 3 Analysis of turnover Home Service Castle Transmission ------------------------ ------------------------------ Period from Period from April 1, Period from April 1, Year Ended 1996 to February 28, 1997 1997 to March 31, February 27, to March 31, December 31, 1996 1997 1997 1997 ----------- ------------ ----------------- ------------ (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 By activity BBC..................... 45,704 49,903 3,982 35,640 Other--non BBC.......... 24,663 20,711 2,451 21,112 ------ ------ ----- ------ 70,367 70,614 6,433 56,752 ====== ====== ===== ====== 4 Staff numbers and costs The average number of persons employed by the Group (including directors) during the period, analysed by category was as follows: Home Service Castle Transmission ------------------------ ------------------------------ Period from Period from April 1, Period from April 1, Year Ended 1996 to February 28, 1997 1997 to March 31, February 27, to March 31, December 31, 1996 1997 1997 1997 ----------- ------------ ----------------- ------------ Operational staff....... 381 357 313 289 Project staff........... 154 125 108 97 Management, finance, personnel and other support services....... 53 70 69 89 ------ ------ ----- ------ 588 552 490 475 ====== ====== ===== ====== The aggregate payroll costs of these persons were as follows: Home Service Castle Transmission ------------------------ ------------------------------ Period from Period from April 1, Period from April 1, Year Ended 1996 to February 28, 1997 1997 to March 31, February 27, to March 31, December 31, 1996 1997 1997 1997 ----------- ------------ ----------------- ------------ (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 Wages and salaries...... 15,517 14,579 1,189 12,087 Social security costs... 1,159 1,061 76 768 Other pension costs..... 521 491 156 1,490 ------ ------ ----- ------ 17,197 16,131 1,421 14,345 ====== ====== ===== ====== F-41
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND THE BBC HOME SERVICE TRANSMISSION BUSINESS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 5 Profit/(loss) on ordinary activities before taxation Home Service Castle Transmission ------------------------- ------------------------------ Period from Period from April 1, Period from April 1, Years Ended 1996 to February 28, 1997 1997 to March 31, February 27, to March 31, December 31, 1996 1997 1997 1997 ----------- ------------- ----------------- ------------ (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 Profit (loss) on ordinary activities before taxation is stated after charging: Depreciation and other amounts written off tangible fixed assets: Owned................... 12,835 13,038 1,624 14,953 Leased.................. -- -- -- 147 Goodwill amortisation... -- -- 195 1,754 Hire of plant and machinery--rentals payable under operating leases................. 112 53 79 Hire of other assets-- under operating leases................. 396 36 530 ====== ====== ===== ====== The information in respect of hire of plant and machinery and other assets under operating leases is not available for the year ended March 31, 1996. 6 Remuneration of directors There were no directors of Home Service. The directors of Castle Transmission received no emoluments for the period February 28, 1997 to March 31, 1997 and (Pounds)277,000 for the period April 1, 1997 to December 31, 1997. The amounts paid to third parties in respect of directors' services were (Pounds)2,000 for the period from February 28, 1997 to March 31, 1997 and (Pounds)23,000 for the period from April 1, 1997 to December 31, 1997. The aggregate emoluments of the highest paid director were (Pounds)170,000. The highest paid director is not a member of any Group pension scheme. Pension entitlements On retirement the directors participating in the Group defined benefit scheme are entitled to 1/60th of their final pensionable salary for each year of service. F-42
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND THE BBC HOME SERVICE TRANSMISSION BUSINESS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 7 Interest payable and similar charges Home Service Castle Transmission ---------------------------- ------------------------------ Period from Period from Period from April 1, Year Ended April 1, 1996 to February 28, 1997 1997 to March 31, February 27, to March 31, December 31, 1996 1997 1997 1997 ----------- ---------------- ----------------- ------------ (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 On bank loans and overdrafts............. -- -- 934 3,315 On all other loans...... -- -- -- 6,934 Finance charges payable in respect of finance leases and hire purchase contracts..... -- -- -- 28 Finance charges amortised in respect of bank loans (see note 14).................... -- -- 35 2,087 Finance charges amortised in respect of the Bonds.............. -- -- -- 55 --- --- --- ------ -- -- 969 12,419 === === === ====== 8 Taxation Home Service There is no tax charge in respect of the results of Home Service for the year ended March 31, 1996 or for the period from April 1, 1996 to February 27, 1997. As a separate legal entity subject to normal taxation, Home Service would have capital allowances available as discussed below which would result in taxable losses for all periods. Deferred tax assets have not been recognised on such tax losses as management has concluded that it is not likely that the deferred tax asset would be realised. Castle Transmission There is no tax charge in respect of the period from February 28, 1997 to March 31, 1997 and April 1, 1997 to December 31, 1997. Based on an agreement with the Inland Revenue Service, Castle Transmission will have capital allowances available on capital expenditure incurred by Home Service and the BBC prior to the acquisition of approximately (Pounds)179 million. The accelerated tax deductions associated with such capital allowances result in a taxable loss for both periods. Deferred tax assets have not been recognised on such tax losses as management has concluded that it is not likely that the deferred tax asset would be realised based on the limited operating history of Castle Transmission. F-43
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND THE BBC HOME SERVICE TRANSMISSION BUSINESS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 9 Intangible assets Castle Transmission As at As at March 31, December 31, 1997 1997 ----------- ------------ (Pounds)000 (Pounds)000 Goodwill Cost At beginning of period............................. -- 46,768 Arising on acquisition of Home Service............. 46,768 -- Adjustment to the allocation of fair value arising on acquisition of Home Service (see notes 18 and 24)............................................... -- 1,237 ------ ------ At end of the period............................... 46,768 48,005 ====== ====== Amortisation At beginning of period............................. -- 195 Charged in period.................................. 195 1,754 ------ ------ At end of the period............................... 195 1,949 ====== ====== Net book value At end of the period............................... 46,573 46,056 ====== ====== 10 Tangible fixed assets Home Service Land and Plant and Computer Assets under buildings machinery equipment construction Total ----------- ----------- ----------- ------------ ----------- (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 (i) Year ended March 31, 1996 Cost or valuation At April 1, 1995........ 26,789 178,205 1,337 22,309 228,640 Additions............... -- 111 40 17,928 18,079 Disposals............... -- -- (1,325) -- (1,325) Transfers............... 474 13,354 -- (13,828) -- ------ ------- ------ ------- ------- At March 31, 1996....... 27,263 191,670 52 26,409 245,394 ------ ------- ------ ------- ------- Depreciation At April 1, 1995........ 7,291 22,671 441 -- 30,403 Charge for period....... 819 12,008 8 -- 12,835 On disposal............. -- -- (436) -- (436) ------ ------- ------ ------- ------- At March 31, 1996....... 8,110 34,679 13 -- 42,802 ------ ------- ------ ------- ------- Net book value At March 31, 1996....... 19,153 156,991 39 26,409 202,592 ====== ======= ====== ======= ======= F-44
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND THE BBC HOME SERVICE TRANSMISSION BUSINESS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Land and Plant and Computer Assets under buildings machinery equipment construction Total ----------- ----------- ----------- ------------ ----------- (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 (ii) Period ended February 27, 1997 Cost or valuation At April 1, 1996........ 27,263 191,670 52 26,409 245,394 Additions............... -- 24 179 14,283 14,486 Disposals............... -- (1,816) -- (1,718) (3,534) Transfers............... 2,585 23,972 252 (26,809) -- Transfer between business units......... 10,824 (2,061) (4) 612 9,371 ------ ------- --- ------- ------- At February 27, 1997.... 40,672 211,789 479 12,777 265,717 ------ ------- --- ------- ------- Depreciation At April 1, 1996........ 8,110 34,679 13 -- 42,802 Charge for period....... 807 12,158 73 -- 13,038 On disposal............. -- (1,816) -- -- (1,816) Transfers............... 46 (108) 62 -- -- Transfers between business units......... 2,185 (137) (1) -- 2,047 ------ ------- --- ------- ------- At February 27, 1997.... 11,148 44,776 147 -- 56,071 ------ ------- --- ------- ------- Net book value At February 27, 1997.... 29,524 167,013 332 12,777 209,646 ====== ======= === ======= ======= The transfers between business units reflect transactions made between the predecessor business and other business units of the BBC, in preparation for the sale of Home Service. These include the transfer of the head office at Warwick into the books of Home Service prior to the sale. Castle Transmission Land and Plant and Computer Assets under buildings machinery equipment construction Total ----------- ----------- ----------- ------------ ----------- (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 (i) Period ended March 31, 1997 Cost On acquisition.......... 30,373 163,556 332 12,777 207,038 Additions............... -- 56 -- 692 748 Transfers............... 17 59 -- (76) -- ------ ------- --- ------- ------- At March 31, 1997....... 30,390 163,671 332 13,393 207,786 ------ ------- --- ------- ------- Depreciation On acquisition.......... -- -- -- -- -- Charge for period....... 86 1,529 9 -- 1,624 ------ ------- --- ------- ------- At March 31, 1997....... 86 1,529 9 -- 1,624 ------ ------- --- ------- ------- Net book value At March 31, 1997....... 30,304 162,142 323 13,393 206,162 ====== ======= === ======= ======= (ii) Period ended December 31, 1997 Cost At April 1, 1997........ 30,390 163,671 332 13,393 207,786 Addition................ 10 3,602 582 10,878 15,072 Transfers............... 651 12,772 -- (13,423) -- ------ ------- --- ------- ------- At December 31, 1997.... 31,051 180,045 914 10,848 222,858 ------ ------- --- ------- ------- Depreciation At April 1, 1997........ 86 1,529 9 -- 1,624 Charge for period....... 847 13,975 278 -- 15,100 ------ ------- --- ------- ------- At December 31, 1997.... 933 15,504 287 -- 16,724 ------ ------- --- ------- ------- Net book value At December 31, 1997.... 30,118 164,541 627 10,848 206,134 ====== ======= === ======= ======= F-45
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND THE BBC HOME SERVICE TRANSMISSION BUSINESS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The net book value of land and buildings comprises: Home Service Castle Transmission ------------ ---------------------------- At March 31, At March 31, At December 31, 1996 1997 1997 ------------ ------------ --------------- (Pounds)000 (Pounds)000 (Pounds)000 Freehold........................... 16,268 21,558 21,375 Long leasehold..................... 1,540 7,468 7,472 Short leasehold.................... 1,345 1,278 1,271 ------ ------ ------ 19,153 30,304 30,118 ====== ====== ====== Included within fixed assets are the following assets held under finance leases: Home Service Castle Transmission ------------ ---------------------------- At March 31, At March 31, At December 31, 1996 1997 1997 ------------ ------------ --------------- (Pounds)000 (Pounds)000 (Pounds)000 Motor vehicles..................... -- -- 270 Computer equipment................. -- -- 441 --- --- --- -- -- 711 === === === 11 Stocks Home Service Castle Transmission ------------ ------------------------------------------ At March 31, At March 31, At December 31, At August 31, 1996 1997 1997 1998 ------------ ------------ --------------- ------------- (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 (Unaudited) Work in progress (see note 13)............... -- -- 274 1,421 Spares and manufacturing stocks................. 1,750 807 1,066 1,199 ----- --- ----- ----- 1,750 807 1,340 2,620 ===== === ===== ===== 12 Debtors Home Service Castle Transmission ------------ ---------------------------- At March 31, At March 31, At December 31, 1996 1997 1997 ------------ ------------ --------------- (Pounds)000 (Pounds)000 (Pounds)000 Trade debtors..................... 3,780 7,503 10,250 Other debtors..................... 212 2,259 2,200 Prepayments and accrued income.... 722 582 780 ----- ------ ------ 4,714 10,344 13,230 ===== ====== ====== 13 Creditors: amounts falling due within one year Home Service Castle Transmission ------------ ---------------------------- At March 31, At March 31, At December 31, 1996 1997 1997 ------------ ------------ --------------- (Pounds)000 (Pounds)000 (Pounds)000 Payments on account.............. 426 347 -- Obligations under finance leases and hire purchase contracts..... -- -- 490 Trade creditors.................. 872 4,123 1,916 Other creditors.................. -- 1,519 2,153 Accruals and deferred income..... 5,329 8,831 24,580 ----- ------ ------ 6,627 14,820 29,139 ===== ====== ====== F-46
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND THE BBC HOME SERVICE TRANSMISSION BUSINESS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Payments on account (and work in progress) relate to commercial projects and are shown net in the financial statements. The gross billings amount to (Pounds)3,222,000 in 1996, (Pounds)3,836,000 in March 1997 and (Pounds)2,458,000 in December 1997. The related gross costs amounted to (Pounds)2,796,000 in 1996, (Pounds)3,489,000 in March 1997 and (Pounds)2,732,000 in December 1997. 14 Creditors: amounts falling due after more than one year Castle Transmission ------------------------------------------ At March 31, At December 31, At August 31, 1997 1997 1998 ------------ --------------- ------------- (Pounds)000 (Pounds)000 (Pounds)000 (Unaudited) Guaranteed Bonds................ -- 120,582 120,761 Bank loans and overdrafts....... 154,358 22,945 28,104 Obligations under finance leases and hire purchase contracts.... -- 221 670 ------- ------- ------- 154,358 143,748 149,535 ======= ======= ======= Debts can be analysed as falling due: in one year or less, or on de- mand........................... -- -- between one and two years....... 7,244 59 between two and five years...... 29,160 162 in five years or more........... 117,954 143,527 ------- ------- 154,358 143,748 ======= ======= On May 21, 1997, CTF issued and Castle Transmission guaranteed, (Pounds)125,000,000 9 percent Guaranteed Bonds due 2007 (the "Guaranteed Bonds"). The Guaranteed Bonds are redeemable at their principal amount, unless previously redeemed or purchased and cancelled, on March 30, 2007. The Guaranteed Bonds may be redeemed in whole but not in part, at the option of CTF, at their principal amount plus accrued interest if, as a result of certain changes in the laws and regulations of the United Kingdom, CTF or Castle Transmission becomes obliged to pay additional amounts. The Guaranteed Bonds may be redeemed in whole or in part, at the option of CTF, at any time at the higher of their principal amount and such a price as will provide a gross redemption yield 0.50 percent per annum above the gross redemption yield on the benchmark gilt plus (in either case) accrued interest. Bondholders may, in certain circumstances including but not limited to a change in control of CTF, or the early termination of the agreement between CTI and the BBC relating to the domestic analogue transmission of radio and television programmes by CTI, require the Guaranteed Bonds to be redeemed at 101 percent of their principal amount plus accrued interest. The Guaranteed Bonds were issued at an issue price of 99.161 percent. The Guaranteed Bonds are shown net of unamortised discount and issue costs. Interest accrues from the date of issue and is payable in arrears on March 30 each year commencing March 30, 1998. On February 28, 1997 the Group entered into term and revolving loan facilities with a syndicate of banks. There are three facilities. Facility A and Facility B are (Pounds)122,500,000 and (Pounds)35,000,000 term loan facilities. Facility A is repayable in instalments, the last of which is due in June 2004, and Facility B is repayable in two instalments in December 2004 and June 2005. These facilities were made available to finance the amount owed to the BBC on the acquisition of the Home Service transmission business and were drawn down in full on February 28, 1997. F-47
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND THE BBC HOME SERVICE TRANSMISSION BUSINESS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The third facility, Facility C, is a (Pounds)5,000,000 revolving loan facility maturing in June 2005 under which advances are to be made to the Group to finance its working capital requirements and for general corporate purposes. This facility was undrawn at March 31, 1997. Borrowings under the facilities are secured by fixed and floating charges over substantially all of the assets and undertakings of the Group and bear interest at 2.25 percent above LIBOR for Facility B and between 0.875 percent and 1.75 percent above LIBOR (depending on the annualised debt coverage and the outstanding percentage of the facilities) for Facilities A and C. The net proceeds of the Guaranteed Bonds were used to repay substantially all of the amounts outstanding under Facilities A, B and C. The remaining balance of Facilities A, B and C was replaced by a (Pounds)64,000,000 revolving loan facility maturing in May 2002 (the "New Facility"), under which advances will be made to CTI to finance its working capital requirements and finance capital expenditures in respect of Digital Terrestrial Television. Borrowings under the New Facility are secured by fixed and floating charges over substantially all of the assets and undertakings of Castle Transmission and bear interest at LIBOR plus the applicable margin plus cost rate. Included within bank loans and overdrafts is an amount of (Pounds)3,142,000 at March 31, 1997 and (Pounds)1,055,000 at December 31, 1997 representing finance costs deferred to future accounting periods in accordance with FRS4. As a result of the issuance of the Guaranteed Bonds and the New Facility, the remaining deferred financing costs of (Pounds)1,930,000, relating to Facilities A, B and C were charged to the profit and loss account during the period from April 1, 1997 to December 31, 1997. 15 Provision for liabilities and charges Castle Transmission ---------------------------- At March 31, At December 31, 1997 1997 ------------ --------------- (Pounds)000 (Pounds)000 On acquisition/at the start of the period.......... 1,723 1,723 Fair value adjustments (see note 24)............... -- 1,016 Established in the period (see below).............. -- 417 Utilised in the period............................. -- (999) ----- ----- At the end of the period........................... 1,723 2,157 ===== ===== Home Service did not make any provisions for liabilities and charges. On the acquisition by Castle Transmission, a provision was established for costs associated with the split of the BBC transmission business between Home Service and World Service comprising redundancy costs and costs relating to the relocation and reorganisation of shared sites. No payments or additional provisions were made in the one month period and the balance on acquisition and at March 31, 1997 was (Pounds)1,723,000. As a result of the completion of the fair value exercise this provision was reduced by (Pounds)234,000 and a further provision was made of (Pounds)1,250,000 in respect of a contingent liability for wind loading fees that existed at February 27, 1997. See notes 18 and 24 for further details. A further provision of (Pounds)417,000, in respect of these wind loading fees, was charged to the profit and loss account during the period from April 1, 1997 to December 31, 1997. F-48
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND THE BBC HOME SERVICE TRANSMISSION BUSINESS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 16 Share capital At March 31, At December 31, 1997 1997 At March 31, At December 31, Number of Number of 1997 1997 shares shares (Pounds)000 (Pounds)000 -------------- --------------- ------------ --------------- Authorised Equity: Ordinary Shares of 1 pence each........ 11,477,290 11,477,290 115 115 Non-equity: Redeemable Preference Shares of 1 pence each............. 11,465,812,710 11,465,812,710 114,658 114,658 -------------- -------------- ------- ------- 11,477,290,000 11,477,290,000 114,773 114,773 ============== ============== ======= ======= Allotted, called up and fully paid Equity: Ordinary Shares of 1 pence each........ 10,234,790 10,289,790 102 103 Non-equity: Redeemable Preference Shares of 1 pence each............. 10,224,555,210 10,279,500,210 102,246 102,795 -------------- -------------- ------- ------- 10,234,790,000 10,289,790,000 102,348 102,898 ============== ============== ======= ======= On incorporation the Company had an authorised share capital of 100 Ordinary Shares of (Pounds)1 each of which 1 share was allotted, called up and fully paid. On January 23, 1997, the 100 issued and unissued Ordinary Shares of (Pounds)1 each were subdivided into Ordinary Shares of 1 pence each and the authorised share capital of the Company was increased to (Pounds)114,772,900 by the creation of 11,467,290 additional Ordinary Shares of 1 pence each and by the creation of 11,465,812,710 Redeemable Preference Shares of 1 pence each. On February 28, 1997 the Company issued for cash 10,234,690 Ordinary Shares of 1 pence each at par and 10,224,555,210 Redeemable Preference Shares of 1 pence each at par. On September 19, 1997 a further 55,000 Ordinary Shares of 1 pence each and 54,945,000 Redeemable Preference Shares of 1 pence each were issued at par for cash. These shares were issued to certain members of the management team. Management believes that this sale price reflects the fair value of the shares at that date. The Redeemable Preference Shares are redeemable on December 31, 2050. The Company may also redeem any number of Redeemable Preference Shares at any time by giving at least two business days' notice in writing to the holders. In addition, the Company shall redeem in full all the Redeemable Preference Shares on or before the earlier or any listing or sale of 87.5 percent or more of the issued share capital. No premium is payable on redemption. The holders of the Redeemable Preference Shares are entitled to receive a dividend in respect of periods from January 1, 2004 at a rate of 5 percent per annum. Dividends shall accrue on a daily basis and shall, unless the Company is prohibited from paying dividends by the Companies Act 1985 or is not permitted by any financing agreement to which it is a party to pay such dividend, become a debt due from and payable to the holders of the Redeemable Preference Shares on January 1 of each year beginning January 1, 2005. In accordance with FRS4: Capital Instruments, a finance cost has been calculated to result in a constant rate of return over the period and carrying amount for these Redeemable Preference Shares and has been included in the profit and loss account as an appropriation. F-49
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND THE BBC HOME SERVICE TRANSMISSION BUSINESS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) On a winding up of the Company, the holders of the Redeemable Preference Shares would be entitled, in priority to any payment to the holders of the Ordinary Shares, to receive an amount equal to the nominal amount paid up on each Redeemable Preference Share together with all arrears and accruals of the preferential dividend payable thereon, whether or not such dividend has become due and payable. The holders of the Redeemable Preference Shares have no right to vote at any general meeting of the Company. At December 31, 1997 two of the shareholders held share warrants which entitled them to a maximum of 772,500 Ordinary Shares and 771,727,500 Redeemable Preference Shares issued at par. These are subject to adjustment in accordance with the conditions set out in the warrant instrument which relate to any reorganisation of the Company's share capital. The rights under the share warrants can be exercised by giving 7 days' notice to the Company. The rights lapse on the earliest of the following dates: the date of a listing of any part of the share capital on the Official List of the London Stock Exchange or any other stock exchange; the date of any sale of 85 percent or more of the issued share capital of the Company; the date on which the Company goes into liquidation; and February 28, 2007. 17 Reserves Castle Transmission ----------------------------------- Period from Period from February 28, 1997 April 1, 1997 to to March 31, 1997 December 31, 1997 ----------------- ----------------- (Pounds)000 (Pounds)000 Profit and loss account At the start of the period............. -- 325 Retained profit/(loss) for the period.. 7 (6,217) Additional finance cost of non-equity shares................................ 318 2,862 --- ------ At the end of the period............... 325 (3,030) === ====== 18 Acquisition On February 28, 1997 the Company acquired the entire share capital of CTI. CTI had itself acquired the assets and liabilities of Home Service on February 27, 1997, with the intention of CTI's ensuing disposal to the Company. As the two transactions were enacted for the purpose of the sale and purchase of Home Service, a provisional fair value exercise was performed by CTI on the acquisition of the trade and net assets of Home Service on 27 February 1997, giving rise to acquisition goodwill of (Pounds)39.6 million. The fair value exercise was only provisional at March 31, 1997 as the elapsed time had not been sufficient to form a final judgement on the fair value adjustments. The fair value exercise has now been finalised and as a result goodwill has been increased by (Pounds)1.2 million. See note 24. The consideration paid for the acquisition of the shares of CTI by the Company amounted to (Pounds)45 million plus fees of (Pounds)7.5 million. (Pounds)7.2 million had been paid or accrued at March 31, 1997, which gave rise to additional goodwill of (Pounds)7.5 million. F-50
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND THE BBC HOME SERVICE TRANSMISSION BUSINESS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In addition, the BBC was paid (Pounds)199 million by CTI as a repayment of the loan made by the BBC on the transfer of the assets and liabilities of Home Service. The total consideration paid by the Group amounted to (Pounds)244 million (excluding fees), which resulted in total goodwill in the Consolidated Financial Statements of (Pounds)48 million. This goodwill has been capitalised and will be written off over 20 years, the period over which the Directors consider that the Group will derive economic benefits. 19 Commitments (a) Capital commitments at the end of the financial period for which no provision has been made, were as follows: Home Service Castle Transmission ------------ ---------------------------- At March 31, At March 31, At December 31, 1996 1997 1997 ------------ ------------ --------------- (Pounds)000 (Pounds)000 (Pounds)000 Contracted........................ 4,192 4,785 11,431 Authorised but not contracted..... 7,969 6,490 89,729 ===== ===== ====== (b) Annual commitments under non-cancellable operating leases were as follows: Castle Transmission ----------------------- At December 31, 1997 ----------------------- Land and buildings Other ----------- ----------- (Pounds)000 (Pounds)000 Operating leases which expire: Within one year...................................... 90 159 In the second to fifth years inclusive............... 343 385 Over five years...................................... 235 -- --- --- 668 544 === === 20 Pension scheme Home Service Home Service participated in a multi-employer pension scheme operated by the BBC. The scheme is a defined benefit scheme whereby retirement benefits are based on the employees' final remuneration and length of service and is funded through a separate trustee administered scheme. Contributions to the scheme are based on pension costs for all members of the scheme across the BBC and are made in accordance with the recommendations of independent actuaries who value the scheme at regular intervals, usually triennially. Pension scheme assets are not apportioned between different parts of the BBC. The pension rate charged to Home Service was 4.5 percent for the year ended March 31, 1996 and for the period from April 1, 1996 to February 27, 1997. This charge took into account the surplus shown by the last actuarial valuation of the BBC scheme. Amounts charged were as follows: (Pounds)521,000 in 1996 and (Pounds)491,000 in the period from April 1, 1996 to February 27, 1997. F-51
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND THE BBC HOME SERVICE TRANSMISSION BUSINESS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Castle Transmission The pension charge is not comparable between Home Service and Castle Transmission due to the former having a reduced charge as a result of the surplus in the BBC Pension scheme. Under the terms of the sale agreement Castle Transmission was temporarily participating in the BBC Pension scheme until July 31, 1997. From August 1, 1997 the Group was committed under the sale agreement to establish its own pension scheme. In respect of past service benefits, members were able to choose between transferring past service benefits to the Group scheme or leaving them in the BBC Pension scheme. To the extent that past service benefits were transferred, the BBC Pension scheme made a full transfer payment to the Group scheme calculated in accordance with the actuarial basis as set out in the sale agreement. The pension charge for the period from February 28, 1997 to March 31, 1997 included in the accounts represented contributions payable to the BBC Pension scheme and amounted to (Pounds)156,000. Contributions are calculated at the employers' contribution rate of 17.7 per cent of pensionable salary. The contribution rate has been determined by a qualified actuary and is specified in the sale agreement. At August 1, 1997 Castle Transmission established its own pension scheme. This is a defined benefit scheme and assets were transferred from the BBC Pension scheme to the extent that members chose to transfer past benefits. From August 1, the Castle Transmission Pension Scheme will be liable in respect of future pension benefits. The pension charge for the period from April 1, 1997 to December 31, 1997 was (Pounds)1,490,000. There were no outstanding or prepaid contributions at either the beginning or end of the financial periods. The Group also established a defined contribution scheme which will have a backdated start date of August 1, 1997. This scheme will be open to employees joining the Group after March 1, 1997. The defined benefit scheme will not be open to these employees. The pensionable charge for the period from April 1, 1997 to December 31, 1997 represents contributions under this scheme amounting to (Pounds)nil. 21 Reconciliation of operating profit to operating cash flows Home Service Castle Transmission --------------------------- --------------------------------- Period from Period from Period from Year Ended April 1, 1996 February 28, 1997 April 1, 1997 March 31, to February 27, to March 31, to December 31, 1996 1997 1997 1997 ----------- --------------- ----------------- --------------- (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 Operating profit........ 7,785 14,002 1,245 8,776 Depreciation and amortisation charge.... 12,835 13,038 1,819 16,854 (Increase)/Decrease in stocks................. (678) 294 (2) (746) Decrease/(Increase) in debtors................ 2,571 (258) (5,372) (2,937) Increase/(Decrease) in creditors.............. 1,798 (649) 8,066 6,036 ------ ------ ------ ------ Cash inflow from operating activities... 24,311 26,427 5,756 27,983 ====== ====== ====== ====== F-52
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND THE BBC HOME SERVICE TRANSMISSION BUSINESS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 22 Analysis of cash flows for headings noted in the cash flow statement Home Service Castle Transmission ---------------------------- --------------------------------- Period from Period from Period from Year Ended April 1, 1996 to February 28, 1997 April 1, 1997 March 31, February 27, to March 31, to December 31, 1996 1997 1997 1997 ----------- ---------------- ----------------- --------------- (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 Returns on investment and servicing of finance Interest received....... -- -- 49 242 Interest paid........... -- -- (934) (2,670) ------- ------- -------- -------- Net cash outflow for returns on investment and servicing of finance................ -- -- (885) (2,428) ======= ======= ======== ======== Capital expenditure and financial investments Purchase of tangible fixed assets........... (18,079) (21,810) (748) (14,361) Proceeds on disposal of tangible fixed assets.. 889 1,718 -- -- ------- ------- -------- -------- Net cash outflow for capital expenditure and financial investments.. (17,190) (20,092) (748) (14,361) ======= ======= ======== ======== Acquisitions and disposals Purchase of subsidiary undertaking (see note 24).................... -- -- (52,141) (307) Amount paid to BBC on acquisition............ -- -- (199,000) -- ------- ------- -------- -------- Net cash outflow for acquisition and disposals.............. -- -- (251,141) (307) ======= ======= ======== ======== Financing Issue of shares......... -- -- 102,348 550 Increase/(decrease) in corporate funding...... (7,121) (6,335) -- -- Debt due beyond a year: Facility A (net of issue costs)................. -- -- 120,056 -- Facility B (net of issue costs)................. -- -- 34,302 -- Repayment of Facility A and B.................. -- -- -- (157,500) New Facility............ -- -- -- 24,000 Guaranteed Bonds........ -- -- -- 120,527 ------- ------- -------- -------- Net cash inflow/(outflow) from financing.............. (7,121) (6,335) 256,706 (12,423) ======= ======= ======== ======== F-53
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND THE BBC HOME SERVICE TRANSMISSION BUSINESS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 23 Analysis of net debt due after one year Other At February 27, non-cash At March 31, 1997 Cashflow changes 1997 --------------- ----------- ----------- --------------- (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 Cash at bank and in hand................... -- 9,688 -- 9,688 Debt due after 1 year... -- (154,358) -- (154,358) -------- -------- ------ -------- -- (144,670) -- (144,670) ======== ======== ====== ======== Other At March 31, non-cash At December 31, 1997 Cashflow changes 1997 --------------- ----------- ----------- --------------- (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 Cash at bank and in hand................... 9,688 (1,536) -- 8,152 Finance leases.......... -- -- (711) (711) Debt due after 1 year... (154,358) 12,973 (2,142) (143,527) -------- -------- ------ -------- (144,670) 11,437 (2,853) (136,086) ======== ======== ====== ======== 24 Purchase of subsidiary undertaking At March 31, Fair value At December 31, 1997 adjustments 1997 ------------ ----------- --------------- (Pounds)000 (Pounds)000 (Pounds)000 Net assets acquired: Tangible fixed assets........... 207,038 -- 207,038 Stocks.......................... 119 134 253 Debtors......................... 4,972 (97) 4,875 Creditors--trade................ (6,033) 49 (5,984) --owed to BBC on acquisition.............. (199,000) -- (199,000) Provisions (see note 15)........ (1,723) (1,016) (2,739) -------- ------ -------- Adjusted net assets acquired.... 5,373 (930) 4,443 Goodwill........................ 46,768 1,237 48,005 -------- ------ -------- Cost of acquisition including related fees................... 52,141 307 52,448 ======== ====== ======== Satisfied by: Cash............................ 52,141 307 52,448 ======== ====== ======== The total consideration paid by Castle Transmission included the assumption and subsequent repayment of (Pounds)199 million paid to the BBC, see note 18. Fair value adjustments The fair value adjustments result from the completion of the fair value exercise performed by CTI on the acquisition of Home Service and the under accrual of fees by the Company, in relation to the acquisition of CTI, at March 31, 1997. The (Pounds)1,237,000 increase in goodwill relates predominantly to the provision of (Pounds)1,250,000 in respect of a dispute over wind loading fees. This dispute was an F-54
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND THE BBC HOME SERVICE TRANSMISSION BUSINESS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) existing contingent liability at the date of acquisition and consequently provision has been made against the fair value of the assets and liabilities of Home Service at February 27, 1998. 25 Related party disclosures Home Service Throughout the year ended March, 31 1996 and the period from April 1, 1996 to February 27, 1997, Home Service entered into a number of transactions with other parts of the BBC. Substantially all of these transactions are exempt from the disclosure provisions of FRS 8 "Related Party Disclosures" as they have been undertaken between different parts of the BBC, and are eliminated in the consolidated accounts of the BBC. However, brief details of the nature of these transactions are set out below. The majority of Home Service's income arises from trading with other parts of the BBC. Prices are set at BBC group level on the basis of cost budgets prepared by Home Service. The aggregate value of such sales in each of the years covered by the combined financial statements is given in Note 3. Administrative costs include expenses re-charged to Home Service by the BBC. These re-charges related to costs incurred centrally in respect of pension, information technology, occupancy and other administration costs. These charges amounted to (Pounds)5.8 million in 1996 and (Pounds)1.2 million in the period between April 1, 1996 and February 27, 1997. The reduced charge for the period to February 27, 1997 is a result of more functions being carried out by employees of Home Service in preparation for the change to a stand alone entity. In addition, re-charges were also made for distribution costs relating to telecommunication links between the BBC and the transmitting stations and these were then internally re-charged to other parts of the BBC. The charges amounted to (Pounds)5.6 million in 1996 and (Pounds)6.4 million in the period between April 1, 1996 and February 27, 1997. Castle Transmission The Shareholders of Castle Transmission are: Crown Castle International Corp. ("CCIC", formerly Castle Tower Holding Corp.), Candover Investments plc and funds managed by it ("Candover"), TeleDiffusion de France International S.A ("TdF") and Berkshire Partners LLC and funds managed by it ("Berkshire"). They are considered to be related parties as they are the consortium who own 99 percent of the shares of the Company. F-55
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND THF BBC HOME SERVICE TRANSMISSION BUSINESS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Castle Transmission paid fees to shareholders in respect of expenses incurred during the acquisition and success fees. Castle Transmission also has management agreements with CCIC (for commercial and financial advice and training and consultancy) and TdF (for technical advice and consulting), these agreements run for five years from February 28, 1997. Fees are payable on the basis of an annual fee for agreed services provided to Castle Transmission, together with fees on a commercial arm's length basis for any additional services provided. In addition Castle Transmission has agreed to reimburse shareholders' expenses in relation to attendance at board meetings. The amounts paid and accrued by the Company during the period were as follows: Total amounts payable at Amounts Amounts Amounts March 31, Related party expensed capitalised paid 1997 ------------- ----------- ----------- ----------- ------------- (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 CCIC....................... 20 1,763 1,763 20 Candover................... 1 244 244 1 TdF........................ -- 129 -- 129 Berkshire.................. 1 315 316 -- --- ----- ----- --- 22 2,451 2,323 150 === ===== ===== === Total amounts Total amounts payable at payable at March 31, Amounts Amounts Amounts December 31, Related party 1997 expensed capitalised paid 1997 ------------- ------------- ----------- ----------- ----------- ------------- (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 CCIC.................... 20 253 -- 246 27 Candover................ 1 16 -- 13 4 TdF..................... 129 -- -- 129 -- Berkshire............... -- 55 -- 43 12 --- --- --- --- --- 150 324 -- 431 43 === === === === === Ongoing BBC relationship At the time of the acquisition of Home Service, Castle Transmission entered into a ten year transmission contract with the BBC for the provision of domestic terrestrial analogue television and radio transmission services expiring on March 31, 2007. Thereafter, the contract continues until terminated by twelve months notice by either party on March 31 in any contract year from and including March 31, 2007. It may also be terminated early if certain conditions are met. The contract provides for charges of approximately (Pounds)46 million to be payable by the BBC to Castle Transmission for the year to March 31, 1998. Castle Transmission's charges for subsequent years of the contract are largely determined by a formula which escalates the majority of the charges by a factor which is 1% below the rate of increase in the Retail Price Index over the previous calendar year. Those elements of the charges which are subject to the escalation formula for the contract year commencing April 1, 1998 amount to approximately (Pounds)46 million. 26 Post balance sheet events On January 23, 1998, the Board of Directors adopted: (i) the All Employee Share Option Scheme; (ii) the Management Share Option Scheme; and (iii) individual share option arrangements for certain directors of the Company. F-56
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND THE BBC HOME SERVICE TRANSMISSION BUSINESS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The All Employee Share Option Scheme provides for an unlimited number of shares to be granted to all employees of the Company. The Board may select any number of individuals to apply for the grant of an option. Not later than thirty days following the date by which an application must be made, the Board may grant to each applicant the number of options specified in his application. These options may be exercised at the earliest of the third anniversary of the date of grant, in the event of a flotation or in the event of a take-over, reconstruction, liquidation or option exchange as set out in the Scheme rules. For options granted under this scheme the option price and the number of shares will not change during the life of the option. Under the terms of the Management Share Option Scheme and the individual share option arrangements, share options may be granted to employees or directors of the Company as determined by the Board of Directors up to a maximum of 460,000 Ordinary Shares and 459,540,000 Redeemable Preference Shares. Options will vest over periods of up to four years and have a maximum term of up to nine years. For options over 223,333 Ordinary Shares and 223,110,000 Redeemable Preference Shares, the option price and the number of shares will not change during the life of the option. The remaining options are subject to certain performance criteria. On January 23, 1998 and January 30, 1998 the Company granted options to purchase an aggregate of 460,000 Ordinary Shares and 459,540,000 Redeemable Preference Shares under the terms of the individual share option arrangements and the Management Share Option Scheme, respectively. The weighted average price for such options is 1.16 pence for Ordinary Shares and 1.16 pence for Redeemable Preference Shares. The weighted average vesting period for such options is 1.13 years. Any accounting charge resulting from a difference between the fair value of the rights to the shares at the date of grant and the amount of consideration to be paid for the shares will be charged to the profit and loss account in the year to December 31, 1998 and subsequent years according to the vesting provisions of the arrangements. Where the options are subject to performance criteria, the amount initially recognised will be based on a reasonable expectation of the extent to which these criteria will be met and will be subject to subsequent adjustments as necessary to deal with changes in the probability of performance criteria being met. Update of post balance sheet events (Unaudited) On March 23, 1998, the Company granted options to purchase an aggregate of 40,750 Ordinary Shares and 40,709,250 Redeemable Preference Shares under the terms of the All Employee Share Option Scheme. The price for such options is 1.00 pence for both Ordinary Shares and Redeemable Preference Shares. The vesting period for such options is three years. The accounting charge related to all share options included within the unaudited consolidated financial statements for the eight months ended August 31, 1998 is (Pounds)2,330,000. On April 23, 1998, the Board of Directors adopted share option arrangements for certain individuals. On that same date, the Company granted options to purchase 60,000 Ordinary Shares and 59,940,000 Redeemable Preference Shares under the terms of such share option arrangements. These options will vest over a period of four years and have a maximum term of six years. The weighted average price of such options is 1.75 pence for both Ordinary Shares and Redeemable Preference Shares. The weighted average vesting period for such options is two years. On July 1, 1998 and July 15, 1998, CCIC granted options to purchase 59,932 ordinary shares in CCIC to employees of CTI under terms of individual share option arrangements. The weighted F-57
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND THE BBC HOME SERVICE TRANSMISSION BUSINESS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) average price for such options is $37.54. These options vested on August 18, 1998. The accounting charge related to these options included in the unaudited consolidated financial statements for the eight months ended August 31, 1998 is (Pounds)978,000. On July 15, 1998, the Board of Directors of the Company resolved that the Management Share Option Scheme would not be subject to any performance criteria and would vest on a time basis only. An August 11, 1998, the Company granted options to purchase 15,690 Ordinary Shares and 15,674,310 Redeemable Preference Shares under the terms of the Management Share Option Scheme. The weighted average price for such options is 2.5 pence for both Ordinary Shares and Redeemable Preference Shares. The weighted average vesting period for such options is 2.7 years. On August 21, 1998, the Company issued 515,000 Ordinary Shares and 514,485,000 Redeemable Preference Shares to CCIC for cash at par under the terms of the warrant. In addition, CCIC subscribed for 10,210 Ordinary Shares and 10,199,790 Redeemable Preference Shares for cash at a premium of 1.5 pence per share. On August 21, 1998, the Company became an 80% owned subsidiary of CCIC. On that same date, (i) all issued and unissued Redeemable Preference Shares were redesignated as Ordinary Shares; and (ii) all existing options to purchase shares in the Company were converted into options to purchase shares in CCIC at the rate of 7 shares in CCIC for every 1000 shares in the Company. 27 Summary of differences between United Kingdom and United States generally accepted accounting principles These consolidated financial statements have been prepared in accordance with UK GAAP, which differ in certain respects from US GAAP. The differences that affect Home Service and Castle Transmission are set out below: (a) Tangible fixed assets During 1993 Home Service revalued upwards its investments in certain identifiable tangible fixed assets. Such upward revaluation is not permissible under US GAAP. Rather, depreciated historical cost must be used in financial statements prepared in accordance with US GAAP. In the period between April 1, 1996 and February 27, 1997 there were a number of transfers of fixed assets to and from other parts of the BBC as explained in note 10. For US GAAP purposes these transfers have been accounted for under the as-if-pooling-of-interests method for transactions between entities under common control. (b) Deferred taxation Under UK GAAP, deferred taxes are accounted for to the extent that it is considered probable that a liability or asset will crystallise in the foreseeable future. Under US GAAP, deferred taxes are accounted for on all timing differences and a valuation allowance is established in respect of those deferred tax assets where it is more likely than not that some portion will remain unrealised. Deferred tax also arises in relation to the tax effect of other US GAAP adjustments. F-58
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND THF BBC HOME SERVICE TRANSMISSION BUSINESS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (c) Pensions The Group accounts for costs of pensions under the rules set out in the UK accounting standards. US GAAP is more prescriptive in respect of actuarial assumptions and the allocation of costs to accounting periods. (d) Capitalised interest Under US GAAP, interest incurred during the construction periods of tangible fixed assets is capitalised and depreciated over the life of the assets. (e) Redeemable preference shares Under UK GAAP, preference shares with mandatory redemption features or redeemable at the option of the security holder are classified as a component of total shareholders' funds. US GAAP requires such redeemable preference shares to be classified outside of shareholders' funds. (f) Cash flow statement Under US GAAP various items would be reclassified within the consolidated cash flow statement. In particular, interest received, interest paid and taxation would be part of net cash flows from operating activities, and dividends paid would be included within net cash flow from financing. In addition, under US GAAP, acquisitions and disposals would be included as investing activities. Movements in those current investments which are included under the heading of cash under US GAAP form part of the movements entitled "Management of liquid resources" in the consolidated cash flow statements. Summary combined statements of cash flows for Castle Transmission prepared in accordance with US GAAP are set out below: Home Service Castle Transmission ---------------------------------------- ---------------------------------------- Two Period from Eight Year Period from Months February 28, Period from Months Ended April 1, 1996 Ended 1997 April 1, 1997 Ended March 31, to February 27, February 27, to March 31, to December 31, August 31, 1996 1997 1997 1997 1997 1998 ----------- --------------- ------------ ------------ --------------- ----------- (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 (Unaudited) (Unaudited) Net cash provided by operating activities... 24,311 28,146 5,161 4,871 25,555 27,226 Net cash used by investing activities... (17,190) (21,811) (711) (52,889) (14,668) (36,135) Net cash (used)/provided by financing activities............. (7,121) (6,335) (4,450) 57,706 (12,423) 9,955 ------- ------- ------ ------- ------- ------- Net increase/(decrease) in cash and cash equivalents............ -- -- -- 9,688 (1,536) 1,046 Cash and cash equivalents at beginning of period.... -- -- -- -- 9,688 8,152 ------- ------- ------ ------- ------- ------- Cash and cash equivalents at end of period................. -- -- -- 9,688 8,152 9,198 ======= ======= ====== ======= ======= ======= F-59
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND THE BBC HOME SERVICE TRANSMISSION BUSINESS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following is a summary of the approximate effect on Home Service's and Castle Transmission's net profit and corporate funding/shareholders' funds of the application of US GAAP. Home Service Castle Transmission ---------------------------------------- --------------------------------------------- Two Eight Year Period from Months Period from Period from Months Ended April 1, 1996 Ended February 28, 1997 April 1, 1997 Ended March 31, to February 27, February 27, to March 31, to December 31, August 31, 1996 1997 1997 1997 1997 1998 ----------- --------------- ------------ ----------------- --------------- ----------- (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 (Unaudited) (Unaudited) Net profit/(loss) as reported in the profit and loss accounts...... 7,785 14,002 2,697 325 (3,355) 2,145 US GAAP adjustments: Depreciation adjustment on tangible fixed assets............... 3,707 3,993 726 -- -- -- Pensions.............. -- -- -- -- 65 108 Capitalised interest.. -- -- -- 78 801 1,385 ------ ------ ----- ---- ------ ----- Net income/(loss) under US GAAP................ 11,492 17,995 3,423 403 (2,489) 3,638 Additional finance cost of non-equity shares...... -- -- -- (318) (2,862) -- ------ ------ ----- ---- ------ ----- Net income/(loss) attributable to ordinary shareholders under US GAAP.......... 11,492 17,995 3,423 85 (5,351) 3,638 ====== ====== ===== ==== ====== ===== Home Service Castle Transmission ------------ ----------------------------------------- At March 31, ------------------------ At December 31, At August 31, 1996 1997 1997 1998 ------------ ----------- --------------- ------------- (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 (Unaudited) Corporate funding/shareholders' funds as reported in the balance sheets..... 202,429 102,673 99,868 109,748 US GAAP adjustments: Depreciation adjustment on tangible fixed assets............... (35,945) -- -- -- Pensions.............. -- -- 65 173 Capitalised interest.. -- 78 879 2,264 Redeemable preference shares (including ad- ditional finance cost of non-equity shares).............. -- (102,564) (105,975) -- ------- -------- -------- ------- Corporate funding/shareholders' funds/(deficit) under US GAAP................ 166,484 187 (5,163) 112,185 ======= ======== ======== ======= F-60
INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Crown Castle International Corp.: We have audited the accompanying statement of net assets of Bell Atlantic Mobile Tower Operations as of December 31, 1998, and the related statements of revenues and direct expenses for each of the years in the two-year period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statement of net assets and the related statements of revenues and direct expenses are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statement of net assets and the related statements of revenues and direct expenses. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the statement of net assets and the related statements of revenues and direct expenses. We believe that our audit provides a reasonable basis for our opinion. The statements of net assets and revenues and direct expenses were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission. As discussed in note 1, such statements do not reflect certain corporate overhead expenses incurred by Bell Atlantic Mobile, the contributor of the net assets, on behalf of the tower operations. In our opinion, the statements referred to above present fairly, in all material respects, the net assets of Bell Atlantic Mobile Tower Operations as of December 31, 1998, and the related revenues and direct expenses for each of the years in the two-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP March 4, 1998 F-61
BELL ATLANTIC MOBILE TOWER OPERATIONS STATEMENT OF NET ASSETS (In thousands of dollars) December 31, 1998 Property and equipment, net............................................ $83,557 ------- Net Assets......................................................... $83,557 ======= See notes to financial statements. F-62
BELL ATLANTIC MOBILE TOWER OPERATIONS STATEMENTS OF REVENUES AND DIRECT EXPENSES (In thousands of dollars) Years ended December 31, -------------------------- 1997 1998 ------------ ------------ Site rental revenues............................... $ 6,480 $ 11,183 Costs of operations................................ 15,131 14,941 Depreciation and amortization...................... 7,221 6,278 ------------ ------------ Loss from Tower Operations....................... $ (15,872) $ (10,036) ============ ============ See notes to financial statements. F-63
BELL ATLANTIC MOBILE TOWER OPERATIONS NOTES TO FINANCIAL STATEMENTS (In thousands of dollars) 1. Basis of Presentation and Summary of Significant Accounting Policies Basis of Presentation On December 8, 1998 Crown Castle International Corp. ("CCIC") and Bell Atlantic Mobile and certain entities controlled by Bell Atlantic Mobile ("BAM") entered into a formation agreement in order to create Crown Atlantic Company LLC ("Crown Atlantic"). Under the terms of the agreement, BAM will contribute tower structures and certain related assets while CCIC will contribute cash and shares of its common stock to Crown Atlantic and its parent company, respectively. The tower structures and related assets consist of the tower facilities that were previously part of BAM's cellular operations. Their locations span New York, New England, Philadelphia, Pittsburgh, Washington- Baltimore and certain areas in the Southeast and Southwest. Under the formation agreement, Crown Atlantic will assume all obligations of BAM as landlord, licensor or tenant relating to the tower space leases with respect to the period after the closing date. Crown Atlantic will also assume all obligations of BAM subsequent to the closing date relating to the operation of the towers and any contracts entered into by BAM during the ordinary course of business of BAM relating to the towers but only to the extent that such contracts were chosen to be included in the obligations assumed by Crown Atlantic. Under the terms of the formation agreement, Crown Atlantic did not assume certain liabilities as defined in the actual terms of the formation agreement. The accompanying statement of net assets reflects the assets to be contributed by BAM to Crown Atlantic pursuant to the formation agreement. The statement of net assets reflects BAM's historical carrying values of the contributed assets, adjusted to exclude certain assets which will not be contributed as part of the formation agreement. The accompanying statements of revenue and direct expenses reflect operations related to the tower assets to be contributed by BAM to Crown Atlantic per the formation agreement. Certain direct and indirect operating costs of BAM have been allocated and included in the costs of operations. The allocated amounts totaled $3,501 and $3,694 for the years ended December 31, 1997 and 1998, respectively. Such allocations are based on determinations that management believes are reasonable, but may not be necessarily indicative of such costs incurred by Crown Atlantic in the future. The statements of revenues and direct expenses do not include allocated costs related to general corporate overhead, interest expense and income taxes and therefore may not be indicative of future operations. The accompanying statement of net assets and the related statements of revenues and direct expenses were prepared for the purpose of complying with the requirements of the Securities and Exchange Commission and are not intended to be a complete presentation of Bell Atlantic Mobile's assets and liabilities or revenues and expenses. Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-64
BELL ATLANTIC MOBILE TOWER OPERATIONS NOTES TO FINANCIAL STATEMENTS--(Continued) (In thousands of dollars) Revenue Recognition Site rental revenues are recognized on a monthly basis under lease or management agreements. Site rental revenues represent charges for tower usage billed to third party customers under lease arrangements. 2. Property and Equipment Property and equipment are stated at historical costs. Depreciation of property and equipment is provided on the straight-line method over the estimated useful lives of the assets. Property and equipment at December 31, 1998 consisted of the following: Estimated Useful Lives ------------ Land..................................................... $ 21,798 Telecommunication towers and related equipment........... 12 years 97,035 -------- 118,833 Less: accumulated depreciation........................... (35,276) -------- $ 83,557 ======== 3. Commitments At December 31, 1998, minimum rental commitments under operating leases are as follows: Years ending December 31, 1999................................................................... 12,235 2000................................................................... 10,200 2001................................................................... 8,118 2002................................................................... 5,512 2003................................................................... 2,762 4. Site Rental Revenues At December 31, 1998, minimum amounts receivable under third party lease agreements are as follows: Years ending December 31, 1999................................................................... 12,214 2000................................................................... 11,948 2001................................................................... 10,952 2002................................................................... 6,997 2003................................................................... 2,207 F-65
INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders of Crown Castle International Corp. We have audited the accompanying statement of net assets of Powertel Tower Operations as of December 31, 1998, and the related statement of revenues and direct expenses for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statement of net assets and the related statement of revenues and direct expenses are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statement of net assets and the related statement of revenues and direct expenses. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the statement of net assets and the related statement of revenues and direct expenses. We believe that our audits provide a reasonable basis for our opinion. The statements of net assets and revenues and direct expenses were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission. As discussed in note 1, such statements do not reflect certain corporate overhead expenses incurred by Powertel, Inc., the owner of the net assets, on behalf of the tower operations. In our opinion, the statements referred to above present fairly, in all material respects, the net assets of Powertel Tower Operations as of December 31, 1998, and the related revenues and direct expenses for the year then ended in conformity with generally accepted accounting principles. KPMG LLP February 5, 1999 F-66
POWERTEL TOWER OPERATIONS STATEMENT OF NET ASSETS (In thousands of dollars) DECEMBER 31, 1998 Prepaid expenses and other current assets............................. $ 2,031 Property and equipment, net........................................... 121,490 -------- Total assets........................................................ 123,521 Deferred revenues..................................................... 309 -------- Net assets.......................................................... $123,212 ======== See notes to financial statements. F-67
POWERTEL TOWER OPERATIONS STATEMENT OF REVENUES AND DIRECT EXPENSES (In thousands of dollars) YEAR ENDED DECEMBER 31, 1998 Site rental revenues................................................. $ 1,865 Cost of operations................................................... 6,167 Depreciation......................................................... 7,534 -------- Loss from tower operations......................................... $(11,836) ======== See notes to financial statements. F-68
POWERTEL TOWER OPERATIONS NOTES TO FINANCIAL STATEMENTS (In thousands of dollars) 1. Basis of Presentation and Summary of Significant Accounting Policies Basis of Presentation On March 15, 1999, Crown Castle International Corp. ("CCIC") and Powertel, Inc. ("Powertel") entered into an asset purchase agreement, whereby Powertel will sell tower structures and certain related assets to CCIC. The tower structures and related assets consist of the tower facilities that were previously part of Powertel's PCS and cellular operations. Their locations span Atlanta, Georgia; Jacksonville, Florida; Memphis, Tennessee; Jackson, Mississippi; and Birmingham, Alabama and certain areas in Kentucky and Tennessee. The accompanying statement of net assets reflects the assets to be sold by Powertel to CCIC pursuant to the asset purchase agreement. The statement of net assets reflects Powertel's historical carrying values of the tower assets, adjusted to exclude certain assets which will not be contributed as part of the asset purchase agreement. The accompanying statement of revenues and direct expenses reflects operations related to the tower assets to be sold by Powertel to CCIC per the asset purchase agreement. The statement of revenues and direct expenses does not include allocated costs related to general corporate overhead, interest expense and income taxes and therefore may not be indicative of future operations. The accompanying statement of net assets and the related statement of revenues and direct expenses were prepared for the purpose of complying with the requirements of the Securities and Exchange Commission and are not intended to be a complete presentation of Powertel's assets and liabilities or revenues and expenses. Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition Site rental revenues are recognized on a monthly basis under lease agreements. Site rental revenues represent charges for tower usage billed to third party customers under lease arrangements. Revenue amounts received in advance are deferred and recognized over the term of the lease agreement. F-69
POWERTEL TOWER OPERATIONS NOTES TO FINANCIAL STATEMENTS--(Continued) (In thousands of dollars) 2. Property and Equipment Property and equipment are stated at historical costs. Depreciation of property and equipment is provided on the straight-line method over the estimated useful lives of the assets. Property and equipment at December 31, 1998 consisted of the following: Estimated Useful Lives ------------ Land $ 859 Telecommunication towers and related equipment........... 15 years 134,757 -------- 135,616 Less: accumulated depreciation .......................... (14,126) -------- $121,490 ======== 3. Commitments At December 31, 1998, minimum rental commitments under operating leases are as follows: Year ending December 31, 1999................................................................... $4,120 2000................................................................... 4,093 2001................................................................... 3,276 2002................................................................... 1,929 2003................................................................... 626 Thereafter............................................................. 185 4. Site Rental Revenues At December 31, 1998, minimum amounts receivable under third party lease agreements are as follows: Year ending December 31, 1999................................................................... $2,690 2000................................................................... 2,677 2001................................................................... 2,610 2002................................................................... 2,131 2003................................................................... 948 Thereafter............................................................. 485 F-70
$200,000,000 [LOGO] CROWN CASTLE INTERNATIONAL CROWN CASTLE INTERNATIONAL CORP. Offer to Exchange all Outstanding 12 3/4% Senior Exchangeable Preferred Stock due 2010 for 12 3/4% Senior Exchangeable Preferred Stock due 2010, which have been Registered under the Securities Act of 1933 ---------------- Prospectus , 1999 ----------------
PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS Item 20. Indemnification of Directors and Officers Section 145 of the General Corporation Law of the State of Delaware ("DGCL") provides that a corporation has the power to indemnify any director or officer, or former director or officer, who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) against the expenses (including attorney's fees), judgments, fines or amounts paid in settlement actually and reasonably incurred by them in connection with the defense of any action by reason of being or having been directors or officers, if such person shall have acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding; provided that such person had no reasonable cause to believe his conduct was unlawful, except that, if such action shall be in the right of the corporation, no such indemnification shall be provided as to any claim, issue or matter as to which such person shall have been judged to have been liable to the corporation unless and to the extent that the Court of Chancery of the State of Delaware (the "Court of Chancery"), or any court in such suit or action was brought, shall determine upon application that, in view of all of the circumstances of the case, such person is fairly and reasonably entitled to indemnify for such expenses as such court shall deem proper. Accordingly, the Restated Certificate of Incorporation of the Company (filed herewith as Exhibit 3.1) provide that the Company shall, to the maximum extent permitted under the DGCL indemnify each person who is or was a director or officer of the Company. The Company may, by action of the Board of Directors, indemnify other employees and agents of the Corporation, directors, officers, employees or agents of a subsidiary, and each person serving as a director, officer, partner, member, employee or agent or another corporation, partnership, limited liability company, joint venture, trust or other enterprise, at the request of the Company, with the same scope and effect as the indemnification of directors and officers of the Company. Notwithstanding the foregoing, the Company shall be required to indemnify any person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors or is a proceeding to enforce such person's claim to indemnification pursuant to the rights granted by the Restated Certificate of Incorporation or otherwise by the Company. The Company may also enter into one or more agreements with any person which provide for indemnification greater or different than that provided in the Restated Certificate of Incorporation. Furthermore, a director of the Company shall not be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (1) for any breach of the director's duty of loyalty to the Company or its stockholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) under Section 174 of the DGCL, or (4) for any transaction from which the director derived an improper personal benefit. The Company's By-laws provide that each person who was or is made a party or is threatened to be made a party to or is involved in any manner in any threatened, pending or completed action, suit, or proceeding, whether civil, criminal, administrative or investigative ("Proceeding"), by reason of the fact that he or she or a person of whom he or she is the legal representative is or was a director or officer of the Company or, while a director or officer of the Company, a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise shall be indemnified and held harmless by the Company to the fullest extent permitted by the DGCL. Such indemnification shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that the II-1
Company shall indemnify any such person seeking indemnification in connection with a Proceeding (or part thereof) initiated by such person only if such Proceeding (or part thereof) was authorized by the Board of Directors or is a Proceeding to enforce such person's claim to indemnification pursuant to the rights granted by the Company's By-laws. The Company shall pay the expenses incurred by any person described in the first two sentences of this paragraph in defending any such Proceeding in advance of its final disposition upon, to the extent such an undertaking is required by applicable law, receipt of an undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Company as authorized in the Company's By-laws or otherwise. The Company's By-laws further provide that the indemnification and the advancement of expenses incurred in defending a Proceeding prior to its final disposition provided by, or granted pursuant to, the Company's By-laws shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Restated Certificate of Incorporation, other provision of the Company's By-laws or otherwise. The Company may also maintain insurance, at its expense, to protect itself and any person who is or was a director, officer, partner, member, employee or agent of the Company or a subsidiary or of another corporation, partnership, limited liability company, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Company would have the power to indemnify such person against such expense, liability or loss under the DGCL. The Company's By-laws further provide that the Company may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification, and rights to be paid by the Company the expenses incurred in defending any Proceeding in advance of its final disposition, to any person who is or was an employee or agent (other than a director or officer) of the Company or a subsidiary thereof and to any person who is or was serving at the request of the Company or a subsidiary thereof as a director, officer, partner, member, employee or agent of another corporation, partnership, limited liability company, joint venture, trust or other enterprise, including service with respect to employee benefit plans maintained or sponsored by the Company or a subsidiary thereof, to the fullest extent of the provisions of the Company's By-laws with respect to the indemnification and advancement of expenses of directors and officers of the Company. Item 21. Exhibits and Financial Statement Schedules (a) Exhibits Exhibit No. Description of Exhibit ------- ---------------------- **2.1 Asset Purchase and Merger Agreement among Crown Network Systems, Inc., Crown Mobile Systems, Inc., Robert A. Crown, Barbara Crown and Castle Acquisition Corp. I, Castle Acquisition Corp. II, Castle Tower Holding Corp. dated July 11, 1997 **2.2 First Amended and Restated Asset Purchase and Merger Agreement among Crown Network Systems, Inc., Crown Mobile Systems, Inc., Robert A. Crown, Barbara Crown and Castle Acquisition Corp. I, Castle Acquisition Corp. II, Castle Tower Holding Corp. dated July 11, 1997, as amended and restated on August 14, 1997 **2.3 Stock Purchase Agreement by and between Castle Tower Holding Corp., Bruce W. Neurohr, Charles H. Jones, Ronald J. Minnich, Ferdinand G. Neurohr and Terrel W. Pugh dated May 12, 1997 ("TEA Stock Purchase Agreement") ***2.4 Share Exchange Agreement among Castle Transmission Services (Holdings) Ltd., Crown Castle International Corp., T 1 Diffusion de France International S.A., Digital Future Investments B.V. and certain shareholders of Castle Transmission Services (Holdings) Ltd. dated as of April 24, 1998 II-2
Exhibit No. Description of Exhibit -------- ---------------------- +3.1 Restated Certificate of Incorporation of Crown Castle International Corp. dated August 21, 1998 +3.2 Amended and Restated By-laws of Crown Castle International Corp. dated August 21, 1998 +3.3 Certificate of Designations, Preferences and Relative, Participating, Optional and other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions thereof of 12 3/4% Senior Exchangeable Preferred Stock due 2010 and 12 3/4% Series B Senior Exchangeable Preferred Stock due 2010 of Crown Castle International Corp. **4.1 Indenture dated as of November 25, 1997 between Crown Castle International Corp. and United States Trust Company of New York, as Trustee (including exhibits). **4.2 Amended and Restated Stockholders Agreement among Castle Tower Holding Corp., Edward C. Hutcheson, Jr., Ted B. Miller, Jr., Robert A. Crown and Barbara Crown and the persons listed on Schedule I thereto dated August 15, 1997 **4.3 Article Fourth of Certificate of Incorporation of Castle Tower Holding Corp. (included in Exhibits 3.1 and 3.3) **4.4 Trust Deed related to (Pounds)125,000,000 9 percent. Guaranteed Bonds due 2007 among Castle Transmission (Finance) PLC, as Issuer, Castle Transmission International Ltd. and Castle Transmission Services (Holdings) Ltd., as Guarantors, and The Law Debenture Trust Corporation p.l.c., as Trustee, dated May 21, 1997 **4.5 First Supplemental Trust Deed related to (Pounds)125,000,000 9 percent Guaranteed Bonds due 2007 among Castle Transmission (Finance) PLC, as Issuer, Castle Transmission International Ltd. and Castle Transmission Services (Holdings) Ltd., as Guarantors, and The Law Debenture Trust Corporation p.l.c., as Trustee, dated October 17, 1997 ***4.6 Specimen Certificate of Common Stock +4.7 Indenture dated as of December 21, 1998 between Crown Castle International Corp. and the United States Trust Company, as Trustee (including exhibits) *5 Opinion of Cravath, Swaine & Moore. **10.1 Registration Rights Agreement by and among Crown Castle International Corp. and Lehman Brothers Inc. and Credit Suisse First Boston Corporation dated as of November 25, 1997 ***10.2 Amended and Restated Loan Agreement by and among Crown Communication Inc., Crown Castle International Corp. de Puerto Rico, Key Corporate Capital Inc. and certain lenders dated July 10, 1998 **10.8 Amended and Restated Limited Holdco Guaranty by Crown Castle International Corp., in favor of KeyBank National Association, as Agent, dated November 25, 1997 **10.9 Memorandum of Understanding regarding Management and Governance of Castle Tower Holding Corp. and Crown Communications, Inc. dated August 15, 1997 **10.10 Site Commitment Agreement between Nextel Communications, Inc. and Castle Tower Corporation dated July 11, 1997 **10.11 Independent Contractor Agreement by and between Crown Network Systems, Inc. and Sprint Spectrum L.P. dated July 8, 1996, including addendum dated November 12, 1997 **10.12 Independent Contractor Agreement between Crown Network Systems, Inc. and Powerfone, Inc. d/b/a Nextel Communications dated September 30, 1996 **10.13 Independent Contractor Agreement by and between APT Pittsburgh Limited Partnership and Crown Network Systems, Inc. dated December 3, 1996 II-3
Exhibit No. Description of Exhibit -------- ---------------------- **10.14 Master Lease Agreement between Sprint Spectrum, L.P. and Robert Crown d/b/a Crown Communications dated June 11, 1996 ("Sprint Master Lease Agreement") **10.15 First Amendment to Sprint Master Lease Agreement, dated July 5, 1996 (included in Exhibit 10.14) **10.16 Second Amendment to Sprint Master Lease Agreement, dated January 27, 1997 (included in Exhibit 10.14) **10.17 Master Lease Agreement between Powerfone, Inc. d/b/a Nextel Communications and Robert A. Crown d/b/a Crown Communications dated October 3, 1996 **10.18 Master Lease Agreement between APT Pittsburgh Limited Partnership and Robert Crown d/b/a Crown Communications dated December 3, 1996 **10.19 Master Tower Lease Agreement between Cellco Partnership d/b/a Bell Atlantic NYNEX Mobile, Pittsburgh SMSA, L.P. and Pennsylvania RSN No. 6(II) and Robert A. Crown d/b/a Crown Communications dated December 29, 1995, as amended by a letter agreement dated as of October 28, 1997 **10.20 Master Tower Lease Agreement between Cellco Partnership d/b/a Bell Atlantic NYNEX Mobile, Pittsburgh SMSA, L.P. and Pennsylvania RSN No. 6(II) and Robert A. Crown d/b/a Crown Communications dated December 29, 1995, as amended by a letter agreement dated as of October 28, 1997 **10.21 Castle Tower Holding Corp. 1995 Stock Option Plan (Third Restatement) **10.22 Services Agreement between Castle Transmission International Ltd. (formerly known as Castle Transmission Services Ltd.) and Castle Tower Holding Corp. dated February 28, 1997 **10.23 Shareholders Agreement among Berkshire Fund IV Investment Corp., Berkshire Investors LLC, Berkshire Partners LLC, Candover Investments PLC, Candover (Trustees) Limited, Candover Partners Limited (as general partner for four limited partnerships), Castle Tower Holding Corp., T 1 Diffusion de France International S.A., and Diohold Limited (now known as Castle Transmission Services (Holdings) Ltd.) dated January 23, 1997 **10.24 First Amendment to Amended and Restated Stockholders Agreement by and among Crown Castle International Corp., Edward C. Hutcheson, Jr., Ted B. Miller, Jr., Robert A. Crown and Barbara Crown and the persons listed as Investors dated January 28, 1998 **10.25 Third Amendment to Sprint Master Lease Agreement, dated February 12, 1998 +10.26 Stockholders Agreement between Crown Castle International Corp. and certain stockholders listed on Schedule 1 thereto, dated as of August 21, 1998 as amended by Amendment No. 1, dated as of the 12th day of November, 1998 ***10.27 Agreement among Castle Transmission Services (Holdings) Ltd., Digital Future Investments B.V., Berkshire Partners LLC and certain shareholders of Castle Transmission Services (Holdings) Ltd. for the sale and purchase of certain shares of Castle Transmission Services (Holdings) Ltd., for the amendment of the Shareholders Agreement in respect of Castle Transmission Services (Holdings) Ltd. and for the granting of certain options dated April 24, 1998 +10.28 Governance Agreement among Crown Castle International Corp., TeleDiffusion de France International S.A. and Digital Future Investments B.V., dated as of August 21, 1998 II-4
Exhibit No. Description of Exhibit -------- ---------------------- +10.29 Form of Severance Agreement entered into between Crown Castle International Corp. and Ted Miller, George Reese, John Gwyn, Charles Green, Alan Rees, Blake Hawk and David Ivy +10.30 Shareholders Agreement among Crown Castle International Corp., T 1 Diffusion de France International S.A. and Castle Transmission Services (Holdings) Limited dated August 1998 ***10.31 Site Sharing Agreement between National Transcommunications Limited and The British Broadcasting Corporation dated September 10, 1991 ***10.32 Transmission Agreement between The British Broadcasting Corporation and Castle Transmission Services Limited dated February 27, 1997 ***10.33 Digital Terrestrial Television Transmission Agreement between The British Broadcasting Corporation and Castle Transmission International Ltd. dated February 10, 1998 ***10.34 Agreement for the Provision of Digital Terrestrial Television Distribution and Transmission Services between British Digital Broadcasting plc and Castle Transmission International Ltd. dated December 18, 1997 ***10.35 Loan Amendment Agreement among Castle Transmission International, Castle Transmission Services (Holdings) Ltd. and certain lenders dated May 21, 1997 ***10.36 Crown Castle International Corp. 1995 Stock Option Plan (Fourth Restatement) ***10.37 Contract between British Telecommunications PLC and Castle Transmission International Inc. for the Provision of Digital Terrestrial Television Network Distribution Service dated May 13, 1998 ***10.38 Site Marketing Agreement dated June 25, 1998 between BellSouth Mobility Inc. and Crown Communication Inc. ***10.39 Commitment Agreement between the British Broadcasting Corporation, Castle Tower Holding Corp., T 1 Diffusion de France International S.A. and T 1 Diffusion de France S.A. +10.40 Amended and Restated Services Agreement between Castle Transmission International Limited and T 1 Diffusion de France S.A. dated August 1998 ***10.41 Castle Transmission Services (Holdings) Ltd. All Employee Share Option Scheme dated as of January 23, 1998 ***10.42 Rules of the Castle Transmission Services (Holdings) Ltd. Bonus Share Plan +10.43 Employee Benefit Trust between Castle Transmission Services (Holdings) Ltd. and Castle Transmission (Trustees) Limited ***10.44 Castle Transmission Services (Holdings) Ltd. Unapproved Share Option Scheme dated as of January 23, 1998 ***10.45 Amending Agreement between the British Broadcasting Corporation and Castle Transmission International Limited dated July 16, 1998 +10.46 Rights Agreement dated as of August 21, 1998, between Crown Castle International Corp. and Chasemellon Shareholder Services, L.L.C. ***10.47 Deed of Grant of Option between Castle Transmission Series (Holdings) Ltd. and George Reese dated January 23, 1998 ***10.48 Deed of Grant of Option between Castle Transmission Services (Holdings) Ltd. and David Ivy dated January 23, 1998 II-5
Exhibit No. Description of Exhibit ----------- ---------------------- ***10.49 Deed of Grant of Option between Castle Transmission Services (Holdings) Ltd. and David Ivy dated April 23, 1998 ***10.50 Deed of Grant of Option between Castle Transmission Services (Holdings) Ltd. and Ted B. Miller, Jr., dated April 23, 1998 ***10.51 Deed of Grant of Option between Castle Transmission Services (Holdings) Ltd. and Ted B. Miller, Jr., dated January 23, 1998 ***10.52 Memorandum Regarding Proposed Initial Public Offering and Certain Transitional Changes Affecting Management dated July 2, 1998, between Crown Castle International Corp. and Robert A. and Barbara A. Crown ***10.53 Services Agreement dated July 2, 1998, by and between Crown Castle International Corp. and Robert A. and Barbara A. Crown +10.56 Registration Rights Agreement dated as of December 21, 1998 by and among Crown Castle International Corp. and Lehman Brothers, Salomon Smith Barney and Goldman, Sachs & Co. ****10.57 Formation Agreement relating to the formation of Crown Atlantic Company LLC, Crown Atlantic Holding Sub LLC, and Crown Atlantic Holding Company LLC dated December 1998 (including exhibits) *****10.58 Letter of Agreement between Crown Castle International Corp. and BellSouth Mobility Inc. dated March 5, 1999 (including the Form of Sublease) ******10.59 Asset Purchase Agreement among Crown Castle International Corp., CCP Inc., Powertel Atlanta Towers, LLC, Powertel Birmingham Towers, LLC, Powertel Jacksonville Towers, LLC, Powertel Kentucky Towers, LLC, Powertel Memphis Towers, LLC and Powertel, Inc. dated March 15, 1999 +10.60 Framework Agreement between One2One and Castle Transmission International Ltd. dated March 5, 1999 +10.61 Indenture between Crown Castle International Corp. and United States Trust Company of New York dated March 15, 1999 +10.62 Registration Rights Agreement among Crown Castle International Corp. and Goldman Sachs Credit Partners LP, Salomon Brothers Holding Company Inc. and Credit Suisse First Boston dated March 15, 1999 +10.63 Escrow Agreement among Crown Castle International Corp., Goldman Sachs Credit Partners LP, Salomon Brothers Holding Company Inc., Credit Suisse First Boston and United States Trust Company of New York dated March 15, 1999 +10.64 Term Loan Agreement among Crown Castle International Corp. and Goldman Sachs Credit Partners LP, Salomon Brothers Holding Company Inc. and Credit Suisse First Boston dated March 15, 1999 +11 Computation of Net Loss per Common Share +12 Computation of Ratio of Earnings to Fixed Charges +21 Subsidiaries of Crown Castle International Corp. 23.1 Consent of KPMG LLP *23.2 Consent of Cravath, Swaine & Moore (included in Exhibit 5) +27.1 Financial Data Schedule II-6
- -------- + Previously filed. * To be filed by amendment. ** Incorporated by reference to the exhibits with the corresponding exhibit numbers in the Registration Statement on Form S-4 previously filed by the Registrant (Registration No. 333-43873). *** Incorporated by reference to the exhibits with the corresponding exhibit numbers in the Registration Statement on Form S-1 previously filed by the Registrant (Registration No. 333-57283). **** Incorporated by reference to the exhibit previously filed by the Registrant on Form 8-K (Registration No. 0-24737) dated December 9, 1998. ***** Incorporated by reference to the exhibit previously filed by the Registrant on Form 8-K (Registration No. 0-24737) dated March 8, 1999. ****** Incorporated by reference to the exhibit previously filed by the Registrant on Form 8-K (Registration No. 0-24737) dated March 15, 1999. Schedule I--Condensed Financial Information of Registrant All other schedules are omitted because they are not applicable or because the required information is contained in the financial statements or notes thereto included in this Registration Statement. Item 22. Undertakings The undersigned Registrant hereby undertakes that insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions described under Item 20 above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted against the Registrant by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes (i) to respond to requests for information that are incorporated by reference into the Prospectus pursuant to Item 4, 10(b), 11, or 13 of Form S-4, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This undertaking also includes documents filed subsequent to the effective date of the Registration Statement through the date of responding to the request. The undersigned Registrant hereby undertakes to supply by means of a post- effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective. The undersigned Registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this Registration Statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the undersigned undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other Items of the applicable form. II-7
The undersigned Registrant hereby undertakes that every prospectus: (i) that is filed pursuant to the immediately preceding paragraph or (ii) that purports to meet the requirements of Section 10(a)(3) of the Securities Act of 1933 and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post- effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-8
SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Houston, State of Texas, on this 6th day of April, 1999 Crown Castle International Corp., /s/ Charles C. Green, III by: _________________________________ Name: Charles C. Green, III Title: Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated on this 6th day of April, 1999. Signature Title --------- ----- * Chief Executive Officer and Vice Chairman of the ______________________________________ Board (Principal Executive Officer) Ted B. Miller, Jr. * President and Director ______________________________________ David L. Ivy /s/ Charles C. Green, III Executive Vice President and Chief Financial ______________________________________ Officer (Principal Financial Officer) Charles C. Green, III * Vice President, Chief Accounting Officer and ______________________________________ Corporate Controller (Principal Accounting Wesley D. Cunningham Officer) * Chairman of the Board ______________________________________ Carl Ferenbach * Director ______________________________________ Michel Azibert * Director ______________________________________ Bruno Chetaille * Director ______________________________________ Robert A. Crown II-9
Signature Title --------- ----- * Director ______________________________________ Bruno Chetaille * Director ______________________________________ Robert A. Crown * Director ______________________________________ Randall A. Hack * Director ______________________________________ Robert F. McKenzie * Director ______________________________________ William A. Murphy * Director ______________________________________ Jeffrey H. Schutz /s/ Charles C. Green, III ______________________________________ Charles C. Green, III Attorney-in-Fact II-10
CROWN CASTLE INTERNATIONAL CORP. SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEET (Unconsolidated) (In thousands of dollars, except share amounts) December 31, -------------------- 1997 1998 -------- ---------- ASSETS Current assets: Cash and cash equivalents............................... $ 53,092 $ 37,907 Receivables and other current assets.................... 424 957 Advances to subsidiaries, net........................... 2,611 13,711 -------- ---------- Total current assets.................................. 56,127 52,575 Property and equipment, net of accumulated depreciation of $27 and $875 at December 31, 1997 and 1998, respectively............................................ 808 4,255 Investment in subsidiaries............................... 232,229 1,041,788 Investments in affiliates................................ 59,082 2,258 Deferred financing costs and other assets, net of accumulated amortization of $69 and $814 at December 31, 1997 and 1998, respectively............................. 7,075 7,227 -------- ---------- $355,321 $1,108,103 -------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and other accrued liabilities.......... $ 1,187 $ 1,379 -------- ---------- Total current liabilities............................. 1,187 1,379 Long-term debt........................................... 151,593 168,099 -------- ---------- Total liabilities..................................... 152,780 169,478 -------- ---------- Redeemable preferred stock, $.01 par value; 10,000,000 shares authorized: 12 3/4% Senior Exchangeable Preferred Stock; shares issued: December 31, 1997--none and December 31, 1998--200,000 (stated at mandatory redemption and aggregate liquidation value)..................................... -- 201,063 Senior Convertible Preferred Stock; shares issued: December 31, 1997--657,495 and December 31, 1998--none (stated at redemption value; aggregate liquidation value of $68,916)................ 67,948 -- Series A Convertible Preferred Stock; shares issued: December 31, 1997--1,383,333 and December 31, 1998-- none (stated at redemption and aggregate liquidation value)................................................. 8,300 -- Series B Convertible Preferred Stock; shares issued: December 31, 1997--864,568 and December 31, 1998--none (stated at redemption and aggregate liquidation value)................................................. 10,375 -- Series C Convertible Preferred Stock; shares issued: December 31, 1997--3,529,832 and December 31, 1998-- none (stated at redemption and aggregate liquidation value)................................................. 74,126 -- -------- ---------- Total redeemable preferred stock.................... 160,749 201,063 -------- ---------- Stockholders' equity: Common stock, $.01 par value; 690,000,000 shares authorized: Class A Common Stock; shares issued: December 31, 1997--1,041,565 and December 31, 1998--none.............................. 2 -- Class B Common Stock; shares issued: December 31, 1997--9,367,165 and December 31, 1998--none.............................. 19 -- Common Stock; shares issued: December 31, 1997--none and December 31, 1998--83,123,873........................ -- 831 Class A Common Stock; shares issued: December 31, 1997--none and December 31, 1998--11,340,000........................ -- 113 Additional paid-in capital.............................. 58,248 795,153 Cumulative foreign currency translation adjustment...... 562 1,690 Accumulated deficit..................................... (17,039) (60,225) -------- ---------- Total stockholders' equity............................ 41,792 737,562 -------- ---------- $355,321 $1,108,103 -------- ---------- See notes to consolidated financial statements and accompanying notes. S-1
CROWN CASTLE INTERNATIONAL CORP. SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(Continued) STATEMENT OF OPERATIONS (Unconsolidated) (In thousands of dollars) Years Ended December 31, --------------------------- 1996 1997 1998 ------- -------- -------- Other revenues.................................... $ -- $ 329 $ 399 Interest and other income......................... 171 2,028 1,354 General and administrative expenses............... -- (149) (2,975) Corporate development expenses.................... (1,249) (3,867) (4,404) Non-cash compensation charges..................... -- -- (9,775) Depreciation and amortization..................... -- (27) (720) Interest expense and amortization of deferred financing costs.................................. -- (4,594) (17,251) ------- -------- -------- Loss before income taxes and equity in earnings (losses) of subsidiaries and unconsolidated affiliate........................................ (1,078) (6,280) (33,372) Credit (provision) for income taxes............... 49 (49) -- Equity in earnings (losses) of subsidiaries....... 72 (4,475) (6,458) Equity in earnings (losses) of unconsolidated affiliate........................................ -- (1,138) 2,055 ------- -------- -------- Net loss.......................................... (957) (11,942) (37,775) Dividends on preferred stock...................... -- (2,199) (5,411) ------- -------- -------- Net loss after deduction of dividends on preferred stock............................................ $ (957) $(14,141) $(43,186) ======= ======== ======== See notes to consolidated financial statements and accompanying notes. S-2
CROWN CASTLE INTERNATIONAL CORP. SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(Continued) STATEMENT OF CASH FLOWS (Unconsolidated) (In thousands of dollars) Years Ended December 31, ----------------------------- 1996 1997 1998 ------- --------- --------- Cash flows from operating activities: Net loss...................................... $ (957) $ (11,942) $ (37,775) Adjustments to reconcile net loss to net cash used for operating activities: Amortization of deferred financing costs and discount on long-term debt................. -- 1,652 17,251 Non-cash compensation charges............... -- -- 9,775 Equity in losses (earnings) of subsidiaries............................... (72) 4,475 6,458 Depreciation and amortization............... -- 27 720 Equity in losses (earnings) of unconsolidated affiliate................... -- 1,138 (2,055) Increase (decrease) in accounts payable and other accrued liabilities.................. 130 (103) 1,352 Decrease (increase) in receivables and other assets..................................... (1,122) 551 (1,413) ------- --------- --------- Net cash used for operating activities.... (2,021) (4,202) (5,687) ------- --------- --------- Cash flows from investing activities: Investment in subsidiaries.................... -- (89,989) (332,065) Net advances to subsidiaries.................. (288) (2,223) (11,100) Capital expenditures.......................... -- (835) (3,624) Investments in affiliates..................... (2,101) (59,487) -- ------- --------- --------- Net cash used for investing activities.... (2,389) (152,534) (346,789) ------- --------- --------- Cash flows from financing activities: Proceeds from issuance of capital stock....... 10,503 139,867 339,929 Incurrence of financing costs................. -- (5,908) (1,755) Purchase of capital stock..................... -- (2,132) (883) Proceeds from issuance of long-term debt...... -- 150,010 -- Principal payments on long-term debt.......... -- (78,102) -- ------- --------- --------- Net cash provided by financing activities............................... 10,503 203,735 337,291 ------- --------- --------- Net increase (decrease) in cash and cash equivalents.................................... 6,093 46,999 (15,185) Cash and cash equivalents at beginning of year.. -- 6,093 53,092 ------- --------- --------- Cash and cash equivalents at end of year........ $ 6,093 $ 53,092 $ 37,907 ======= ========= ========= Supplementary schedule of noncash investing and financing activities: Issuance of long-term debt in connection with acquisitions................................. $ -- $ 78,102 $ -- Issuance of common stock in connection with acquisitions................................. -- 57,189 420,964 Conversion of subsidiary's Convertible Secured Subordinated Notes to Series A Convertible Preferred Stock.............................. -- 3,657 -- Supplemental disclosure of cash flow information: Interest paid................................. $ -- $ 2,943 $ -- Income taxes paid............................. -- -- -- See notes to consolidated financial statements and accompanying notes. S-3
CROWN CASTLE INTERNATIONAL CORP. SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(Continued) NOTES TO FINANCIAL STATEMENTS (Unconsolidated) 1. Investment in Subsidiaries The Company's investment in subsidiaries is presented in the accompanying unconsolidated financial statements using the equity method of accounting. Under the terms of the Senior Credit Facility, the CTI Credit Facility and the CTI Bonds, the Company's subsidiaries are limited in the amount of dividends which can be paid to the Company. For CCI, the amount of such dividends is limited to (i) $6,000,000 per year until October 31, 2002, and $33,000,000 per year thereafter, and (ii) an amount to pay income taxes attributable to the Company's Restricted Subsidiaries. CTI is effectively precluded from paying dividends. The restricted net assets of the Company's subsidiaries totaled approximately $826,321,000 at December 31, 1998. 2. Long-term Debt Long-term debt consists of the Company's 10 5/8% Senior Discount Notes due 2007. 3. Income Taxes Income taxes reported in the accompanying unconsolidated financial statements are determined by computing income tax assets and liabilities on a consolidated basis, for the Company and members of its consolidated federal income tax return group, and then reducing such consolidated amounts for the amounts recorded by the Company's subsidiaries on a separate tax return basis. S-4
EXHIBIT INDEX Exhibit No. Description of Exhibit -------- ---------------------- **2.1 Asset Purchase and Merger Agreement among Crown Network Systems, Inc., Crown Mobile Systems, Inc., Robert A. Crown, Barbara Crown and Castle Acquisition Corp. I, Castle Acquisition Corp. II, Castle Tower Holding Corp. dated July 11, 1997 **2.2 First Amended and Restated Asset Purchase and Merger Agreement among Crown Network Systems, Inc., Crown Mobile Systems, Inc., Robert A. Crown, Barbara Crown and Castle Acquisition Corp. I, Castle Acquisition Corp. II, Castle Tower Holding Corp. dated July 11, 1997, as amended and restated on August 14, 1997 **2.3 Stock Purchase Agreement by and between Castle Tower Holding Corp., Bruce W. Neurohr, Charles H. Jones, Ronald J. Minnich, Ferdinand G. Neurohr and Terrel W. Pugh dated May 12, 1997 ("TEA Stock Purchase Agreement") ***2.4 Share Exchange Agreement among Castle Transmission Services (Holdings) Ltd., Crown Castle International Corp., T 1 Diffusion de France International S.A., Digital Future Investments B.V. and certain shareholders of Castle Transmission Services (Holdings) Ltd. dated as of April 24, 1998 +3.1 Restated Certificate of Incorporation of Crown Castle International Corp. dated August 21, 1998 +3.2 Amended and Restated By-laws of Crown Castle International Corp. dated August 21, 1998 +3.3 Certificate of Designations, Preferences and Relative, Participating, Optional and other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions thereof of 12 3/4% Senior Exchangeable Preferred Stock due 2010 and 12 3/4% Series B Senior Exchangeable Preferred Stock due 2010 of Crown Castle International Corp. **4.1 Indenture dated as of November 25, 1997 between Crown Castle International Corp. and United States Trust Company of New York, as Trustee (including exhibits). **4.2 Amended and Restated Stockholders Agreement among Castle Tower Holding Corp., Edward C. Hutcheson, Jr., Ted B. Miller, Jr., Robert A. Crown and Barbara Crown and the persons listed on Schedule I thereto dated August 15, 1997 **4.3 Article Fourth of Certificate of Incorporation of Castle Tower Holding Corp. (included in Exhibits 3.1 and 3.3) **4.4 Trust Deed related to (Pounds)125,000,000 9 percent. Guaranteed Bonds due 2007 among Castle Transmission (Finance) PLC, as Issuer, Castle Transmission International Ltd. and Castle Transmission Services (Holdings) Ltd., as Guarantors, and The Law Debenture Trust Corporation p.l.c., as Trustee, dated May 21, 1997 **4.5 First Supplemental Trust Deed related to (Pounds)125,000,000 9 percent Guaranteed Bonds due 2007 among Castle Transmission (Finance) PLC, as Issuer, Castle Transmission International Ltd. and Castle Transmission Services (Holdings) Ltd., as Guarantors, and The Law Debenture Trust Corporation p.l.c., as Trustee, dated October 17, 1997 ***4.6 Specimen Certificate of Common Stock +4.7 Indenture dated as of December 21, 1998 between Crown Castle International Corp. and the United States Trust Company, as Trustee (including exhibits) *5 Opinion of Cravath, Swaine & Moore. **10.1 Registration Rights Agreement by and among Crown Castle International Corp. and Lehman Brothers Inc. and Credit Suisse First Boston Corporation dated as of November 25, 1997 ***10.2 Amended and Restated Loan Agreement by and among Crown Communication Inc., Crown Castle International Corp. de Puerto Rico, Key Corporate Capital Inc. and certain lenders dated July 10, 1998
Exhibit No. Description of Exhibit ----------------------------- **10.8 Amended and Restated Limited Holdco Guaranty by Crown Castle International Corp., in favor of KeyBank National Association, as Agent, dated November 25, 1997 **10.9 Memorandum of Understanding regarding Management and Governance of Castle Tower Holding Corp. and Crown Communications, Inc. dated August 15, 1997 **10.10 Site Commitment Agreement between Nextel Communications, Inc. and Castle Tower Corporation dated July 11, 1997 **10.11 Independent Contractor Agreement by and between Crown Network Systems, Inc. and Sprint Spectrum L.P. dated July 8, 1996, including addendum dated November 12, 1997 **10.12 Independent Contractor Agreement between Crown Network Systems, Inc. and Powerfone, Inc. d/b/a Nextel Communications dated September 30, 1996 **10.13 Independent Contractor Agreement by and between APT Pittsburgh Limited Partnership and Crown Network Systems, Inc. dated December 3, 1996 **10.14 Master Lease Agreement between Sprint Spectrum, L.P. and Robert Crown d/b/a Crown Communications dated June 11, 1996 ("Sprint Master Lease Agreement") **10.15 First Amendment to Sprint Master Lease Agreement, dated July 5, 1996 (included in Exhibit 10.14) **10.16 Second Amendment to Sprint Master Lease Agreement, dated January 27, 1997 (included in Exhibit 10.14) **10.17 Master Lease Agreement between Powerfone, Inc. d/b/a Nextel Communications and Robert A. Crown d/b/a Crown Communications dated October 3, 1996 **10.18 Master Lease Agreement between APT Pittsburgh Limited Partnership and Robert Crown d/b/a Crown Communications dated December 3, 1996 **10.19 Master Tower Lease Agreement between Cellco Partnership d/b/a Bell Atlantic NYNEX Mobile, Pittsburgh SMSA, L.P. and Pennsylvania RSN No. 6(II) and Robert A. Crown d/b/a Crown Communications dated December 29, 1995, as amended by a letter agreement dated as of October 28, 1997 **10.20 Master Tower Lease Agreement between Cellco Partnership d/b/a Bell Atlantic NYNEX Mobile, Pittsburgh SMSA, L.P. and Pennsylvania RSN No. 6(II) and Robert A. Crown d/b/a Crown Communications dated December 29, 1995, as amended by a letter agreement dated as of October 28, 1997 **10.21 Castle Tower Holding Corp. 1995 Stock Option Plan (Third Restatement) **10.22 Services Agreement between Castle Transmission International Ltd. (formerly known as Castle Transmission Services Ltd.) and Castle Tower Holding Corp. dated February 28, 1997 **10.23 Shareholders Agreement among Berkshire Fund IV Investment Corp., Berkshire Investors LLC, Berkshire Partners LLC, Candover Investments PLC, Candover (Trustees) Limited, Candover Partners Limited (as general partner for four limited partnerships), Castle Tower Holding Corp., T 1 Diffusion de France International S.A., and Diohold Limited (now known as Castle Transmission Services (Holdings) Ltd.) dated January 23, 1997 **10.24 First Amendment to Amended and Restated Stockholders Agreement by and among Crown Castle International Corp., Edward C. Hutcheson, Jr., Ted B. Miller, Jr., Robert A. Crown and Barbara Crown and the persons listed as Investors dated January 28, 1998 **10.25 Third Amendment to Sprint Master Lease Agreement, dated February 12, 1998
Exhibit No. Description of Exhibit -------- ---------------------- +10.26 Stockholders Agreement between Crown Castle International Corp. and certain stockholders listed on Schedule 1 thereto, dated as of August 21, 1998 as amended by Amendment No. 1, dated as of the 12th day of November, 1998 ***10.27 Agreement among Castle Transmission Services (Holdings) Ltd., Digital Future Investments B.V., Berkshire Partners LLC and certain shareholders of Castle Transmission Services (Holdings) Ltd. for the sale and purchase of certain shares of Castle Transmission Services (Holdings) Ltd., for the amendment of the Shareholders Agreement in respect of Castle Transmission Services (Holdings) Ltd. and for the granting of certain options dated April 24, 1998 +10.28 Governance Agreement among Crown Castle International Corp., TeleDiffusion de France International S.A. and Digital Future Investments B.V., dated as of August 21, 1998 +10.29 Form of Severance Agreement entered into between Crown Castle International Corp. and Ted Miller, George Reese, John Gwyn, Charles Green, Alan Rees, Blake Hawk and David Ivy +10.30 Shareholders Agreement among Crown Castle International Corp., T 1 Diffusion de France International S.A. and Castle Transmission Services (Holdings) Limited dated August 1998 ***10.31 Site Sharing Agreement between National Transcommunications Limited and The British Broadcasting Corporation dated September 10, 1991 ***10.32 Transmission Agreement between The British Broadcasting Corporation and Castle Transmission Services Limited dated February 27, 1997 ***10.33 Digital Terrestrial Television Transmission Agreement between The British Broadcasting Corporation and Castle Transmission International Ltd. dated February 10, 1998 ***10.34 Agreement for the Provision of Digital Terrestrial Television Distribution and Transmission Services between British Digital Broadcasting plc and Castle Transmission International Ltd. dated December 18, 1997 ***10.35 Loan Amendment Agreement among Castle Transmission International, Castle Transmission Services (Holdings) Ltd. and certain lenders dated May 21, 1997 ***10.36 Crown Castle International Corp. 1995 Stock Option Plan (Fourth Restatement) ***10.37 Contract between British Telecommunications PLC and Castle Transmission International Inc. for the Provision of Digital Terrestrial Television Network Distribution Service dated May 13, 1998 ***10.38 Site Marketing Agreement dated June 25, 1998 between BellSouth Mobility Inc. and Crown Communication Inc. ***10.39 Commitment Agreement between the British Broadcasting Corporation, Castle Tower Holding Corp., T 1 Diffusion de France International S.A. and T 1 Diffusion de France S.A. +10.40 Amended and Restated Services Agreement between Castle Transmission International Limited and T 1 Diffusion de France S.A. dated August 1998 ***10.41 Castle Transmission Services (Holdings) Ltd. All Employee Share Option Scheme dated as of January 23, 1998 ***10.42 Rules of the Castle Transmission Services (Holdings) Ltd. Bonus Share Plan +10.43 Employee Benefit Trust between Castle Transmission Services (Holdings) Ltd. and Castle Transmission (Trustees) Limited ***10.44 Castle Transmission Services (Holdings) Ltd. Unapproved Share Option Scheme dated as of January 23, 1998
Exhibit No. Description of Exhibit ----------- ---------------------- ***10.45 Amending Agreement between the British Broadcasting Corporation and Castle Transmission International Limited dated July 16, 1998 +10.46 Rights Agreement dated as of August 21, 1998, between Crown Castle International Corp. and Chasemellon Shareholder Services, L.L.C. ***10.47 Deed of Grant of Option between Castle Transmission Series (Holdings) Ltd. and George Reese dated January 23, 1998 ***10.48 Deed of Grant of Option between Castle Transmission Services (Holdings) Ltd. and David Ivy dated January 23, 1998 ***10.49 Deed of Grant of Option between Castle Transmission Services (Holdings) Ltd. and David Ivy dated April 23, 1998 ***10.50 Deed of Grant of Option between Castle Transmission Services (Holdings) Ltd. and Ted B. Miller, Jr., dated April 23, 1998 ***10.51 Deed of Grant of Option between Castle Transmission Services (Holdings) Ltd. and Ted B. Miller, Jr., dated January 23, 1998 ***10.52 Memorandum Regarding Proposed Initial Public Offering and Certain Transitional Changes Affecting Management dated July 2, 1998, between Crown Castle International Corp. and Robert A. and Barbara A. Crown ***10.53 Services Agreement dated July 2, 1998, by and between Crown Castle International Corp. and Robert A. and Barbara A. Crown +10.56 Registration Rights Agreement dated as of December 21, 1998 by and among Crown Castle International Corp. and Lehman Brothers, Salomon Smith Barney and Goldman, Sachs & Co. ****10.57 Formation Agreement relating to the formation of Crown Atlantic Company LLC, Crown Atlantic Holding Sub LLC, and Crown Atlantic Holding Company LLC dated December 1998 (including exhibits) *****10.58 Letter of Agreement between Crown Castle International Corp. and BellSouth Mobility Inc. dated March 5, 1999 (including the Form of Sublease) ******10.59 Asset Purchase Agreement among Crown Castle International Corp., CCP Inc., Powertel Atlanta Towers, LLC, Powertel Birmingham Towers, LLC, Powertel Jacksonville Towers, LLC, Powertel Kentucky Towers, LLC, Powertel Memphis Towers, LLC and Powertel, Inc. dated March 15, 1999 +10.60 Framework Agreement between One2One and Castle Transmission International Ltd. dated March 5, 1999 +10.61 Indenture between Crown Castle International Corp. and United States Trust Company of New York dated March 15, 1999 +10.62 Registration Rights Agreement among Crown Castle International Corp. and Goldman Sachs Credit Partners LP, Salomon Brothers Holding Company Inc. and Credit Suisse First Boston dated March 15, 1999 +10.63 Escrow Agreement among Crown Castle International Corp., Goldman Sachs Credit Partners LP, Salomon Brothers Holding Company Inc., Credit Suisse First Boston and United States Trust Company of New York dated March 15, 1999 +10.64 Term Loan Agreement among Crown Castle International Corp. and Goldman Sachs Credit Partners LP, Salomon Brothers Holding Company Inc. and Credit Suisse First Boston dated March 15, 1999
Exhibit No. Description of Exhibit ------- ---------------------- +11 Computation of Net Loss per Common Share +12 Computation of Ratio of Earnings to Fixed Charges +21 Subsidiaries of Crown Castle International Corp. 23.1 Consent of KPMG LLP *23.2 Consent of Cravath, Swaine & Moore (included in Exhibit 5) +27.1 Financial Data Schedule - -------- + Previously filed. * To be filed by amendment. ** Incorporated by reference to the exhibits with the corresponding exhibit numbers in the Registration Statement on Form S-4 previously filed by the Registrant (Registration No. 333-43873). *** Incorporated by reference to the exhibits with the corresponding exhibit numbers in the Registration Statement on Form S-1 previously filed by the Registrant (Registration No. 333-57283). **** Incorporated by reference to the exhibit previously filed by the Registrant on Form 8-K (Registration No. 0-24737) dated December 9, 1998. ***** Incorporated by reference to the exhibit previously filed by the Registrant on Form 8-K (Registration No. 0-24737) dated March 8, 1999. ****** Incorporated by reference to the exhibit previously filed by the Registrant on Form 8-K (Registration No. 0-24737) dated March 15, 1999.
EXHIBIT 23.1 The Board of Directors Crown Castle International Corp.: The audits referred to in our report dated February 24, 1999, included the related financial statement schedule as of December 31, 1997 and 1998, and for each of the years in the three-year period ended December 31, 1998, included in the Registration Statement. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We consent to the use of our reports incorporated by reference herein and to the reference to our firm under the headings "Experts" in the Prospectus. /s/ KPMG LLP KPMG LLP Houston, Texas April 6, 1999