PROSPECTUS
$251,000,000
CROWN CASTLE INTERNATIONAL CORP.
OFFER TO EXCHANGE ITS 10 5/8% SENIOR DISCOUNT NOTES DUE 2007, WHICH HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR UP TO
$251,000,000 PRINCIPAL AMOUNT AT MATURITY OF ITS OUTSTANDING 10 5/8% SENIOR
DISCOUNT NOTES DUE 2007
-----------------
The Exchange Offer will expire at 5:00 P.M., New York City time, on May 14,
1998, unless extended.
Crown Castle International Corp., a company incorporated under the laws of
Delaware ("CCIC" or the "Company"), hereby offers, upon the terms and subject
to the conditions set forth in this Prospectus and the accompanying Letter of
Transmittal (which together constitute the "Exchange Offer"), to exchange its
10 5/8% Senior Discount Notes due 2007 (the "New Notes") which have been
registered under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to a Registration Statement (as defined herein) of which this
Prospectus constitutes a part, for up to $251,000,000 aggregate principal
amount at maturity of its outstanding 10 5/8% Senior Discount Notes due 2007
(the "Old Notes"), of which $251,000,000 aggregate principal amount at
maturity is outstanding as of the date hereof.
The New Notes will evidence the same debt as the Old Notes and will be
issued under and be entitled to the same benefits under the Indenture (as
defined herein) as the Old Notes. In addition, the New Notes and the Old Notes
will be treated as one series of securities under the Indenture. The terms of
the New Notes are identical in all material respects to the terms of the Old
Notes, except for certain transfer restrictions, registration rights and terms
providing for an increase in the interest rate on the Old Notes under certain
circumstances relating to the registration of the New Notes. The New Notes and
the Old Notes are collectively referred to herein as the "Notes." See
"Description of the Notes."
The New Notes will mature on November 15, 2007. The Old Notes were issued at
a substantial discount to their principal amount at maturity, and were sold at
a price to investors that yielded gross proceeds to the Company of
approximately $150.0 million. The Accreted Value (as defined) of the New Notes
will be calculated from the date of issuance of the Old Notes. The New Notes
will accrete in value until November 15, 2002. Thereafter, cash interest will
accrue on the New Notes and will be payable semiannually in arrears on May 15
and November 15, commencing May 15, 2003, at a rate of 10.625% per annum. The
New Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after November 15, 2002, at the redemption prices set
forth herein, plus accrued and unpaid interest and Liquidated Damages (as
defined), if any, thereon to the date of redemption. In addition, prior to
November 15, 2000, the Company may redeem up to 35% of the original aggregate
principal amount at maturity of the New Notes at 110.625% of the Accreted
Value (as defined) thereof, plus Liquidated Damages, if any, to the redemption
date with the net cash proceeds of one or more Public Equity Offerings or
Strategic Equity Investments (each as defined); provided that at least 65% of
the original aggregate principal amount at maturity of the New Notes remains
outstanding immediately after the occurrence of each such redemption.
Upon the occurrence of a Change of Control (as defined), each holder of New
Notes will have the right to require the Company to purchase all or any part
of such holder's New Notes at a purchase price equal to 101% of the Accreted
Value thereof, plus Liquidated Damages, if any, to the date of purchase prior
to November 15, 2002 or 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest and Liquidated Damages, if any, to the date of
purchase on or after November 15, 2002. See "Description of the Notes."
The Notes represent general unsecured obligations of the Company and rank
pari passu in right of payment with all current and future unsecured senior
Indebtedness (as defined) of the Company. The operations of the Company are
conducted through its subsidiaries, and the Company's subsidiaries will not be
guarantors of the Notes. Accordingly, the Notes are effectively subordinated
to indebtedness and other liabilities of such subsidiaries, including
borrowings under the Senior Credit Facility (as defined). As of November 25,
1997, the Company's subsidiaries had no indebtedness outstanding, and
approximately $8.9 million of other outstanding liabilities. As of January 5,
1998, the Company's principal operating subsidiary had indebtedness amounting
to approximately $4.7 million, representing borrowings under the Senior Credit
Facility, and unused borrowing availability under the Senior Credit Facility
of approximately $93.6 million. The Company has provided a limited recourse
guaranty of the Senior Credit Facility, limited in recourse only to the
capital stock of certain of the Company's subsidiaries. The Company currently
has no secured indebtedness.
(continued on next page)
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See "Risk Factors" beginning on page 19 for a discussion of certain factors
that holders of the Old Notes should consider in connection with the Exchange
Offer and that prospective investors in the New Notes should consider in
connection with such investment.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is April 16, 1998.
(Continued from front cover)
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company under the Registration Rights Agreement dated as of
November 25, 1997 (the "Registration Rights Agreement") between the Company
and Lehman Brothers Inc. and Credit Suisse First Boston Corporation, as the
initial purchasers of the Old Notes (the "Initial Purchasers").
The Company is making the Exchange Offer in reliance on the position of the
staff of the Securities and Exchange Commission (the "Commission") as set
forth in certain no-action letters addressed to other parties in other
transactions. However, the Company has not sought their own no-action letter,
and there can be no assurance that the staff of the Commission will make a
similar determination with respect to the Exchange Offer as in such other
circumstances. Based upon these interpretations by the staff of the
Commission, the Company believes that New Notes issued pursuant to this
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by a holder thereof other than (i) a broker-dealer who
purchased such Old Notes directly from the Company to resell pursuant to Rule
144A or any other available exemption under the Securities Act or (ii) a
person that is an "affiliate" (as defined in Rule 405 of the Securities Act)
of the Company without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such New Notes are
acquired in the ordinary course of such holder's business and that such holder
is not participating, and has no arrangement or understanding with any person
to participate, in the distribution of such New Notes. Holders of Old Notes
accepting the Exchange Offer will represent to the Company in the Letter of
Transmittal that such conditions have been met. Any holder who participates in
the Exchange Offer for the purpose of participating in a distribution of the
New Notes may not rely on the position of the staff of the Commission as set
forth in these no-action letters and would have to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any secondary resale transaction. A secondary resale
transaction in the United States by a holder who is using the Exchange Offer
to participate in the distribution of New Notes must be covered by a
registration statement containing the selling securityholder information
required by Item 507 of Regulation S-K of the Securities Act.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it acquired the Old Notes as a result
of market-making activities or other trading activities and will deliver a
prospectus in connection with any resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. 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 Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of 180 days after the Expiration Date (as defined herein), it will make
this Prospectus available to any broker-dealer for use in connection with any
such resale. See "Plan of Distribution." All broker-dealers must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any secondary resale transaction. See "The Exchange Offer."
The New Notes are new securities for which there is currently no market.
Although the Notes are eligible for trading in the Private Offerings, Resale
and Trading through Automated Linkages (PORTAL) Market of the Nasdaq Stock
Market, Inc., the Company presently does not intend to apply for listing of
the New Notes on any securities exchange or for quotation through the National
Association of Securities Dealers Automated Quotation System ("NASDAQ"). The
Company has been advised by the Initial Purchasers that, following completion
of the Exchange Offer, they presently intend to make a market in the New
Notes; however, the Initial Purchasers are not obligated to do so, and any
market-making activities with respect to the New Notes may be discontinued at
any time without notice. There can be no assurance that an active public
market for the New Notes will develop.
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF OLD NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER
THEIR OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
i
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding and will be entitled to all the rights and preferences and will be
subject to the limitations applicable thereto under the Indenture. Following
consummation of the Exchange Offer, the holders of Old Notes will continue to
be subject to the existing restrictions upon transfer thereof, and the Company
will have no further obligation to such holders (other than the Initial
Purchasers) to provide for the registration under the Securities Act of the
Old Notes held by them. To the extent that Old Notes are tendered and accepted
in the Exchange Offer, a holder's ability to sell untendered Old Notes could
be adversely affected. It is not expected that an active market for the Old
Notes will develop while they are subject to restrictions on transfer. The
Company will accept for exchange any and all Old Notes that are validly
tendered and not withdrawn on or prior to 5:00 p.m., New York City time, on
the date the Exchange Offer expires, which will be May 14, 1998 (the
"Expiration Date"), unless the Exchange Offer is extended by the Company in
its sole discretion (but in no event to a date later than May 29, 1998), in
which case the term "Expiration Date" shall mean the latest date and time to
which the Exchange Offer is extended. Tenders of Old Notes may be withdrawn at
any time prior to 5:00 p.m., New York City time, on the Expiration Date,
unless previously accepted for payment by the Company. The Exchange Offer is
not conditioned upon any minimum principal amount of Old Notes being tendered
for exchange. However, the Exchange Offer is subject to certain conditions
which may be waived by the Company and to the terms and provisions of the
Registration Rights Agreement. Old Notes may be tendered only in denominations
of $1,000 and integral multiples thereof. The Company has agreed to pay the
expenses of the Exchange Offer. See "The Exchange Offer--Fees and Expenses."
The Company will not receive any proceeds from this Exchange Offer. No
dealer-manager is being used in connection with this Exchange Offer. See "Use
of Proceeds" and "Plan of Distribution."
UNTIL JULY 15, 1998, ALL BROKER-DEALERS EFFECTING TRANSACTIONS IN THE NEW
NOTES, WHETHER OR NOT PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF BROKER-DEALERS
TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
No broker-dealer, salesperson or other individual has been authorized to
give any information or to make any representation in connection with the
Exchange Offer other than those contained in this Prospectus and Letter of
Transmittal and, if given or made, such information or representation must not
be relied upon as having been authorized by the Company. The delivery of this
Prospectus shall not, under any circumstances, create any implication that the
information herein is correct at any time subsequent to its date.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT TENDERS
FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH THE
EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
This Prospectus includes forward-looking statements. All statements other
than statements of historical facts included in this Prospectus, 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 herein regarding
industry prospects, the Company's prospects and the Company's financial
position are forward-looking statements. Although the Company believes that
the expectations reflected in such forward-looking statements are reasonable,
it can give no assurance that such expectations will prove to have been
correct. Important factors that could cause actual results to differ
materially from the Company's expectations ("Cautionary Statements") are
disclosed in this Prospectus, including, without limitation, in conjunction
with the forward-looking statements included in this Prospectus under "Risk
Factors." All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the Cautionary Statements.
ii
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 under the Securities Act with respect to the New Notes offered hereby (the
"Registration Statement"). This Prospectus, which constitutes a part of the
Registration Statement, does not contain all the information set forth in the
Registration Statement, certain parts of which have been omitted from this
Prospectus in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the New Notes offered
hereby, reference is made to the Registration Statement, including the
exhibits and schedules filed therewith. Statements made in this Prospectus
concerning the contents of any document referred to herein are not necessarily
complete. With respect to each such document filed with the Commission as an
exhibit to the Registration Statement, reference is made to the exhibit for a
more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference.
As a result of the filing of the Registration Statement with the Commission,
the Company will become subject to the informational reporting requirements of
the Exchange Act and, in accordance therewith, will be required to file
reports and other information with the Commission.
The Registration Statement, including the exhibits and scheduled thereto,
such reports and other information can be inspected and copied at the Public
Reference Section of the Commission at Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549 and at the regional offices of the
Commission located at 7 World Trade Center, 13th Floor, Suite 1300, New York,
New York 10048 and Suite 1400, Northwestern Atrium Center, 14th Floor, 500
West Madison Street, Chicago, Illinois 60661. Copies of such material can also
be obtained at prescribed rates by writing to the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549 and its public reference facilities in New York, New York and Chicago,
Illinois. The Commission also maintains a Web site that contains reports,
proxy and information statements and other information regarding registrants,
such as the Company, that file electronically with the Commission. The address
of such site is http://www.sec.gov.
In the event the Company is not required to be subject to the reporting
requirements of the Exchange Act in the future, the Company will be required
under the Indenture, dated as of November 25, 1997 (the "Indenture"), between
the Company and United States Trust Company of New York, as trustee (the
"Trustee"), pursuant to which the Old Notes have been, and the New Notes will
be, issued, to furnish to holders of the Notes the quarterly and annual
financial information, documents and other reports that would be required to
be contained in a filing with the Commission on Forms 10-K, 10-Q and 8-K, and,
with respect to the annual information only, a report thereon by the Company's
certified public accounts, for so long as any Notes are outstanding.
iii
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements
included elsewhere in this Prospectus. Holders of the Old Notes and prospective
investors in the New Notes are urged to read this Prospectus in its entirety.
Unless the context otherwise indicates, the term "Company" refers to the
business conducted by Crown Castle International Corp. and its subsidiaries
(including the Crown Business), and the "Crown Business" or "Crown" refers to
the business conducted by Crown Communications, Crown Network Systems, Inc.,
Crown Mobile Systems, Inc. and their affiliates prior to their acquisition by
CCIC. In addition, the term "CTI" refers to the business conducted by Castle
Transmission Services (Holdings) Ltd and its wholly owned subsidiary, Castle
Transmission International Ltd.
THE COMPANY
The Company is a leading provider of communication sites and wireless network
services. The Company owns, operates and manages wireless transmission towers
and rooftop sites, and also provides an array of related infrastructure and
network support services to the wireless communications and radio and
television broadcasting industries. The Company's primary business focus is the
leasing of antennae space on multiple tenant towers and rooftops to a variety
of wireless communications carriers under long-term lease contracts. Supporting
its competitive position in the site rental business, the Company maintains in-
house expertise in, and offers to its customers, infrastructure and network
support services that include communication site selection and acquisition,
antennae installation, site development and construction and network design.
The Company leases antennae space to its customers on its owned and managed
towers. The Company generally receives fees for installing customers' equipment
and antennae on a tower and also receives monthly rental payments from
customers payable under site rental leases that generally range in length from
three to five years. The Company's U.S. customers include such companies as
Aerial Communications, American Paging, AT&T Wireless, Bell Atlantic Mobile,
BellSouth Mobility, Motorola, Nextel, PageNet and Sprint PCS, as well as
private network operators and various federal and local government agencies,
such as the Federal Bureau of Investigation, the Internal Revenue Service and
the U.S. Postal Service.
At December 31, 1997, the Company owned or managed 373 towers and 80 revenue
producing rooftop sites in the United States and Puerto Rico. The Company's
tower footprints consist of 178 owned and managed towers located in western
Pennsylvania (primarily in and around the greater Pittsburgh area), 138 owned
and managed towers located in the southwestern United States (primarily in
western Texas), 21 owned towers located in Mississippi, 14 owned towers located
on mountaintops across Puerto Rico, 14 managed towers in West Virginia and
eight other owned towers located in other states across the United States. The
Company plans to enhance and expand its tower footprints by building and
acquiring multiple tenant towers in locations attractive to site rental
customers. To that end, the Company has developed, maintains and deploys for
its own use extensive network design and radio frequency engineering expertise,
as well as site selection, site acquisition and tower construction
capabilities. The Company plans to leverage such expertise and experience in
building and acquiring new towers by entering into build-out or purchase
contracts with various carriers. For example, pursuant to an agreement with
Nextel Communications, Inc. ("Nextel"), the Company has options to construct up
to 250 multiple tenant towers with Nextel as an anchor tenant along certain
interstate corridors. In addition, pursuant to this agreement, the Company has
exercised an option to purchase 50 of Nextel's existing towers clustered in
various markets, including Philadelphia, Houston, Dallas and San Antonio.
The Company's 34.3%-owned affiliate, CTI, owns or has access to approximately
1,300 towers in the United Kingdom, primarily serving the U.K. broadcasting
industry. CTI's customers include such companies as the British Broadcasting
Corporation ("BBC"), Cellnet, National Transcommunications Limited ("NTL"),
Mercury One2One, Orange Personal Communications and Vodaphone Limited.
1
INDUSTRY BACKGROUND
The Company's site rental and network services businesses serve the wireless
communications and broadcasting industries, each of which is currently
experiencing a period of significant change. The wireless communications
industry is growing rapidly as consumers become more aware of the benefits of
wireless services, current wireless technologies are used in more applications,
the cost of wireless services to consumers declines and new wireless
technologies are developed. Changes in U.S. federal regulatory policy,
including the implementation of the Telecommunications Act of 1996 (the "1996
Telecom Act"), have led to a significant number of new competitors in the
wireless communications industry through the auction of frequency spectrum for
a wide range of uses, most notably "Personal Communications Services" ("PCS").
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 communication sites as new carriers build out
their networks and existing carriers upgrade and expand their networks to
maintain their competitiveness. The Cellular Telecommunications Industry
Association ("CTIA") estimates that, as of June 30, 1997, there were 38,650
antennae sites in the United States. The Personal Communications Industry
Association ("PCIA") estimates that the wireless communications industry will
construct at least 100,000 new antennae sites over the next 10 years. The
Company believes that, as the wireless industry has become more competitive,
many carriers are dedicating their capital and operations primarily to
activities that directly contribute to subscriber growth, such as marketing and
distribution. Management believes that these carriers, therefore, may seek to
reduce costs and increase efficiency by outsourcing infrastructure network
functions such as communication site ownership, construction, management and
maintenance. Further, in order to speed new network deployment or expansion and
to generate efficiencies, carriers are increasingly co-locating transmission
equipment with that of other network operators. The need for co-location has
also been driven by regulatory restrictions and the growing trend by
municipalities to slow the proliferation of towers by requiring that towers
accommodate multiple tenants. While the wireless communications industry is
experiencing rapid growth, the broadcasting industry has been characterized by
consolidation and rationalization. This industry is currently assessing the
benefits of, and planning its strategy for, the transition from analog to
digital transmission systems, which will require enhanced broadcast
infrastructure.
All of these factors have provided an opportunity for the Company to
specialize in the provision, ownership and management of communication sites,
the leasing of antennae space on such sites and the provision of related
network infrastructure and support services, such as the design of wireless and
broadcast sites and networks, the selection and acquisition of tower and
rooftop sites (including the resolution of zoning and permitting issues), the
construction of towers and the installation of antennae.
Management believes that, in addition to the favorable growth and outsourcing
trends in the wireless communications industry, tower operators benefit from
several additional favorable characteristics, such as: (i) a customer base
diversified across industry segments (such as PCS, cellular, paging,
specialized mobile radio ("SMR"), enhanced specialized mobile radio ("ESMR")
and broadcasting) and across individual customers within these segments; (ii)
stable, recurring revenues as a result of the contract nature of the site
rental business; (iii) low customer churn due to the costs to a carrier
associated with reconfiguring its network; and (iv) barriers to entry as a
result of local opposition to the proliferation of towers.
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BUSINESS STRATEGY
The Company's objective is to become the leading global provider of
communication sites and network services to the wireless communications and
broadcasting industries. Management believes that the Company's experience in
establishing and expanding its existing tower footprints, its significant
relationships with wireless communications companies and its ability to offer
customers its in-house technical and operational expertise, uniquely position
it to take advantage of available opportunities, to increase cash flow and to
achieve its strategic goals. Key elements of the Company's strategy are to:
. INCREASE UTILIZATION OF TOWER CAPACITY. The Company seeks to take
advantage of the operating leverage of its site rental business by
increasing the amount of antennae space leased on its owned or managed
communication sites. The Company believes that many of its towers have
significant capacity available for antennae space rental and that
increased utilization of its tower capacity can be achieved at low
incremental cost, thereby yielding significant contribution margin. In
addition, the Company will continue to build towers with the capacity to
accommodate multiple tenants and both existing and emerging
technologies.
. EXPAND TOWER FOOTPRINTS. The Company intends to enhance its existing
tower footprints and to establish new clusters of towers in targeted
markets, particularly those that have not yet been significantly built
out by carriers. As the Company has demonstrated in western
Pennsylvania, it believes that once a strategic critical mass of towers
is established in a particular region, the Company can attract wireless
operators by offering the advantages of well-positioned communication
sites from a single source. The Company is pursuing this strategy
through both the construction of new towers and the acquisition of
existing towers. The Company's tower construction strategy is not based
on speculative tower development but rather on the construction of
multiple tenant towers with long-term "anchor" tenants. For example,
pursuant to its site commitment agreement with Nextel (the "Nextel
Agreement"), the Company has options to construct up to 250 multiple
tenant towers with Nextel as an anchor tenant along certain interstate
corridors. The Company may also pursue acquisitions involving towers or
other tower companies, particularly those with the potential to create
or augment a critical mass of clustered towers in new or existing
markets. Pursuant to the Nextel Agreement, the Company has exercised an
option to purchase 50 of Nextel's existing towers clustered in various
markets, including Philadelphia, Houston, Dallas and San Antonio. See
"Business--Significant Contracts."
. PROVIDE A FULL RANGE OF SERVICES. The Company maintains in-house
technical and operational expertise to support the development of its
tower footprints and to offer wireless communications carriers and
broadcasters a portfolio of technical and operational network services.
Management believes that the ability to offer end-to-end services (site
selection and acquisition, antennae installation, site development and
construction and network design) is a key competitive advantage as
wireless communications carriers and broadcasters prefer to work with
independent tower operators that can credibly offer the convenience and
efficiency of complete network design and operational solutions.
Management also believes that the Company's experience in building its
own tower footprints, as well as its in-house expertise, differentiates
it from many of its competitors and strengthens the Company's ability to
attract anchor tenants to its towers.
. CAPITALIZE ON RELATIONSHIPS WITH KEY CUSTOMERS. The Company intends to
leverage its existing strategic relationships, contracts and reputation
for quality service to secure additional site rental, tower build-out
and network services contracts. For example, the Company has developed
contractual relationships with a number of regional and national
carriers, including Aerial Communications, Bell Atlantic Mobile, Nextel
and Sprint PCS, that provide the Company with a platform from which to
expand into multiple markets and increase antennae space rented on its
existing towers. In addition, the Company's customer-oriented approach,
technical expertise and focus on quality service has
3
enabled it to secure contracts such as the Bell Atlantic Agreement (as
defined) which, as of December 31, 1997, provided the Company with
exclusive rights to lease antennae space on 117 existing Bell Atlantic
towers located primarily in western Pennsylvania and West Virginia. See
"Business--Significant Contracts."
. CAPITALIZE ON CTI'S EXPERTISE AND OPPORTUNITIES. CTI, the Company's
34.3%-owned affiliate, employs a corps of engineers and technical
personnel who designed and built the broadcast transmission network for
the BBC. CTI owns and operates one of the world's most established radio
and television broadcasting networks, including both the infrastructure
and transmission equipment located on 780 owned and 558 licensed towers.
CTI provides analog television and radio transmission services to the
BBC under a 10-year contract and has recently won bids to enter into
transmission contracts to design, build and operate Digital Terrestrial
Television ("DTT") networks for four of the six national licenses
recently awarded in the United Kingdom. The Company intends to leverage
its relationship with CTI to capitalize on opportunities to design,
build, own and manage towers, networks and other infrastructure for the
broadcasting industry in the United States and international markets. In
addition, the Company intends to leverage its wireless expertise in the
United States by providing wireless network services to CTI to
capitalize on the growth of wireless communications in the United
Kingdom. Finally, the Company is in discussions with certain of the
other holders of equity interests in CTI with respect to potential
transactions pursuant to which CTI would become a subsidiary of the
Company. There can be no assurance that any such transaction will be
consummated.
. PURSUE GROWTH THROUGH ACQUISITIONS. The Company continually evaluates
potential acquisitions, investments and strategic alliances. The Company
views such transactions as a means to expand its operations within its
existing markets and to enter new markets, including international
opportunities. The Company's acquisition and investment criteria include
the existence of high quality assets, capacity to add tenants,
attractive location for wireless build-out and return on capital.
BACKGROUND
Founded in 1994, the Company acquired 127 towers located in Texas, Colorado,
New Mexico, Arizona, Oklahoma and Nevada from Pittencrieff Communications,
Inc. ("PCI") in 1995. The Company subsequently continued to build its business
through a variety of transactions, including (i) the acquisition in 1996 of
Motorola's SMR and microwave system (the "Puerto Rico System") in Puerto Rico,
which included 15 communication sites (the "Puerto Rico Acquisition"), (ii)
the purchase through a series of transactions in 1996 and 1997 of TEA Group
Incorporated ("TEA"), a leading domestic and international site acquisition
firm (the "TEA Acquisition") and (iii) the purchase in February 1997 of a
34.3% ownership interest in CTI (the "CTI Investment"). In August 1997, CCIC
enhanced its tower footprints and domestic network services offerings by
consummating the Crown Merger (as defined).
THE CROWN MERGER
The Crown Merger was consummated on August 15, 1997 and was structured as an
acquisition by a subsidiary of CCIC of the assets of Crown Communications (a
proprietorship owned by Robert A. and Barbara Crown), and a merger of
subsidiaries of CCIC with and into Crown Network Systems, Inc. ("CNSI") and
Crown Mobile Systems, Inc. ("CMSI"). The acquisition of the assets of Crown
Communications and the merger of subsidiaries of CCIC with and into CNSI and
CMSI are collectively referred to herein as the "Crown Merger." The
consideration paid by CCIC for the Crown Merger consisted of $25.0 million of
cash, the issuance of a $76.2 million promissory note to Robert and Barbara
Crown (the "Seller Note"), the assumption of approximately $26.0 million of
indebtedness and the issuance of 1,465,000 shares of Class B Common Stock,
4
par value $.01 per share, of CCIC ("Class B Common Stock") (representing
approximately 13.2% of the fully diluted ownership of CCIC). The cash portion
of the consideration was initially funded through the private placement by CCIC
of $29.3 million of senior convertible preferred stock (the "Senior Convertible
Preferred Stock") and warrants to purchase Class B Common Stock. On October 31,
1997, the Company repaid the Seller Note. See "--The Refinancing."
The assets acquired through the Crown Merger included 61 owned towers and
exclusive rights to lease antennae space on 147 other towers and rooftop sites,
most of which are located in and around the greater Pittsburgh area, giving the
Company a significant presence in that market. The remaining Crown
communication sites are located in other areas of Pennsylvania, West Virginia,
Kentucky, Ohio and Delaware. For the seven months ended July 31, 1997, Crown
had revenues of $17.7 million. As a result of the Crown Merger, the Company
believes it is one of the largest independent owners and providers of towers
and wireless network services in the United States.
THE REFINANCING
On October 31, 1997, Castle Tower Corporation ("CTC"), a wholly owned
subsidiary of CCIC, borrowed approximately $94.7 million (the "October Bank
Financing") under a Loan Agreement dated April 26, 1995, as amended on June 26,
1996, January 17, 1997, April 3, 1997 and October 31, 1997 (the "Senior Credit
Facility"). In addition, concurrently with the October Bank Financing, CCIC
privately placed an additional $36.5 million of Senior Convertible Preferred
Stock and warrants to purchase Class B Common Stock. The proceeds of the
October Bank Financing and the private placement of Senior Convertible
Preferred Stock were used to repay the Seller Note, to repay loans outstanding
under a credit agreement at Crown Communication and to pay related fees and
expenses. The October Bank Financing, the private placement of the Senior
Convertible Preferred Stock and the application of the proceeds therefrom are
collectively referred to herein as the "October Refinancing."
On November 20, 1997, the Company privately placed $251.0 million principal
amount at maturity ($150,010,150 initial accreted value) of its 10 5/8% Senior
Discount Notes due 2007, yielding net proceeds to the Company of approximately
$143.7 million after deducting discounts and estimated fees and expenses (the
"Offering of the Old Notes"). The net proceeds to the Company from the Offering
of the Old Notes were used to repay substantially all outstanding indebtedness
of the Company, including the approximately $94.7 million of indebtedness
incurred under the Senior Credit Facility in connection with the October
Refinancing, and to pay related fees and expenses and are being used for
general corporate purposes. The October Refinancing, the Offering of the Old
Notes and the application of the net proceeds from the Offering of the Old
Notes, are collectively referred to herein as the "Refinancing." As of January
5, 1998, there was approximately $93.6 million of unused borrowing availability
under the Senior Credit Facility.
------------------
The Company's principal executive offices are located at 510 Bering Drive,
Suite 500, Houston, Texas 77057, telephone (713) 570-3000.
5
CORPORATE STRUCTURE
The following chart illustrates (i) the organizational structure of the
Company, its two subsidiaries and its U.K. affiliate and (ii) their respective
debt obligations. See "Capitalization."
[FLOW CHART DEPICTING CORPORATE STRUCTURE]
- --------
(a) All the capital stock of Crown Communication and its direct and indirect
subsidiaries has been pledged to secure amounts under the Senior Credit
Facility. In connection with such pledge, CCIC has provided a limited
recourse guaranty of the Senior Credit Facility, limited in recourse only
to the pledged capital stock (which does not include CTI).
(b) Following the Refinancing and the receipt of certain approvals from the
Federal Communications Commission ("FCC"), (i) TeleStructures, Inc.
("TeleStructures"), formerly a wholly owned subsidiary of CCIC, became a
wholly owned subsidiary of TEA, (ii) CTC, formerly a wholly owned
subsidiary of CCIC, was merged with and into Crown Communication and (iii)
TEA, CNSI and CMSI, formerly wholly owned subsidiaries of CCIC, and
Spectrum Site Management Corporation ("Spectrum") and Castle Tower
Corporation (PR) (as of November 21, 1997, the name of this entity was
changed to Crown Castle International Corp. de Puerto Rico, and is referred
to herein as "CTC (PR)"), formerly wholly owned subsidiaries of CTC, became
wholly owned subsidiaries of Crown Communication.
(c) CTC borrowed approximately $94.7 million under the Senior Credit Facility
on October 31, 1997. In connection with the Offering of the Old Notes, the
Company repaid all amounts outstanding thereunder. As of January 5, 1998,
there was approximately $93.6 million of unused borrowing availability
under the Senior Credit Facility. See "Description of the Senior Credit
Facility."
6
THE EXCHANGE OFFER
THE EXCHANGE OFFER.......... The Company is offering to exchange pursuant to
the Exchange Offer an aggregate principal amount
of up to $251,000,000 principal amount at
maturity of the Company's New Notes for a like
principal amount at maturity of the Company's Old
Notes. The Company will issue the New Notes on or
promptly after the Exchange Date. As of the date
of this Prospectus, $251,000,000 aggregate
principal amount at maturity of the Old Notes is
outstanding. The terms of the New Notes are
identical in all material respects to the terms
of the Old Notes for which they may be exchanged
pursuant to this offer, except that the New Notes
have been registered under the Securities Act and
are issued free from any covenant regarding
registration, including terms providing for an
increase in the interest rate on the Old Notes
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 Notes will evidence the same debt as the
Old Notes and will be issued under and be
entitled to the same benefits under the Indenture
as the Old Notes. The issuance of the New Notes
and the Exchange Offer are intended to satisfy
certain obligations of the Company under the
Registration Rights Agreement. See "The Exchange
Offer" and "Description of the Notes."
YIELD AND INTEREST.......... The Accreted Value of the New Notes will be
calculated from the original date of issuance of
the Old Notes. The New Notes will accrete daily
at a rate of 10.625% per annum, compounded
semiannually, to an aggregate principal amount of
$251.0 million by November 15, 2002. Cash
interest will not accrue on the New Notes prior
to November 15, 2002. Thereafter, cash interest
on the New Notes will accrue and be payable
semiannually in arrears on each May 15 and
November 15, commencing May 15, 2003, at a rate
of 10.625% per annum. See "The Exchange Offer--
Interest on the New Notes."
EXPIRATION DATE............. The Exchange Offer will expire at 5:00 p.m., New
York City time on May 14, 1998, unless extended
by the Company in its sole discretion (but in no
event to a date later than May 29, 1998). See
"The Exchange Offer--Expiration Date; Extensions;
Amendments."
EXCHANGE DATE............... The date of acceptance for exchange of the Old
Notes and the consummation of the Exchange Offer
will be the first business day following the
Expiration Date unless extended. See "The
Exchange Offer--Terms of the Exchange."
CONDITIONS OF THE EXCHANGE The Company's obligation to consummate the
OFFER....................... Exchange Offer will be subject to certain
conditions. See "The Exchange Offer--Conditions
to the Exchange Offer." The Company reserves the
right to terminate or amend the Exchange Offer at
any time prior to the Expiration Date.
7
WITHDRAWAL RIGHTS........... Tenders may be withdrawn at any time prior to
5:00 p.m., New York City time, on the Expiration
Date; otherwise, all tenders will be irrevocable.
See "The Exchange Offer--Withdrawal of Tenders."
PROCEDURES FOR TENDERING See "The Exchange Offer--Procedures for
NOTES....................... Tendering."
FEDERAL INCOME TAX The exchange of Old Notes for New Notes pursuant
CONSEQUENCES............... to the Exchange Offer will not result in any
income, gain or loss to holders who participate
in the Exchange Offer or to the Company for
federal income tax purposes. See "Certain United
States Federal Income Tax Considerations."
RESALE...................... The Company is making the Exchange Offer in
reliance on the position of the staff of the
Commission as set forth in certain no-action
letters addressed to other parties in other
transactions. However, the Company has not sought
their own no-action letter, and there can be no
assurance that the staff of the Commission would
make a similar determination with respect to the
Exchange Offer as in such other circumstances.
Based on these interpretations by the staff of
the Commission, the Company believes that New
Notes issued pursuant to this Exchange Offer in
exchange for Old Notes may be offered for resale,
resold and otherwise transferred by a holder
thereof other than (i) a broker-dealer who
purchased such Old Notes directly from the
Company to resell pursuant to Rule 144A or any
other available exemption under the Securities
Act or (ii) a person that is an "affiliate" (as
defined in Rule 405 of the Securities Act) of the
Company without compliance with the registration
and prospectus delivery provisions of the
Securities Act, provided that such New Notes are
acquired in the ordinary course of such holder's
business and that such holder is not
participating, and has no arrangement or
understanding with any persons to participate, in
the distribution of such New Notes. Holders of
Old Notes accepting the Exchange Offer will
represent to the Company in the Letter of
Transmittal that such conditions have been met.
Any holder who participates in the Exchange Offer
for the purpose of participating in a
distribution of the New Notes may not rely on the
position of the staff of the Commission as set
forth in these no-action letters and would have
to comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with any secondary resale transaction.
A secondary resale transaction in the United
States by a holder who is using the Exchange
Offer to participate in the distribution of New
Notes must be covered by a registration statement
containing the selling securityholder information
required by Item 507 of Regulation S-K of the
Securities Act. Each broker-dealer (other than an
"affiliate" of the Company) that receives New
Notes for its own account pursuant to the
Exchange Offer must acknowledge that it acquired
the Old Notes as the result of market-making
activities or other trading activities and will
deliver a prospectus in connection with any
resale of such New Notes. The Letter of
Transmittal states that
8
by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the
meaning of the Securities Act. 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 Notes received in
exchange for Old Notes where such Old Notes were
acquired by such broker-dealer as a result of
market-making activities or other trading
activities. In addition, pursuant to Section 4(3)
under the Securities Act, until July 15, 1998,
all dealers effecting transactions in the New
Notes, whether or not participating in the
Exchange Offer, may be required to deliver a
Prospectus. The Company has agreed that, for a
period of 180 days after the date of this
Prospectus, it will make this Prospectus
available to any broker-dealer for use in
connection with any such resale. See "Plan of
Distribution." Any broker-dealer who is an
affiliate of the Company may not rely on such no-
action letters and must comply with the
registration and prospectus delivery requirements
of the Securities Act in connection with any
secondary resale transaction. See "The Exchange
Offer--Purpose of the Exchange Offer."
REMAINING OLD NOTES......... Holders of Old Notes who do not tender their Old
Notes in the Exchange Offer or whose Old Notes
are not accepted for exchange will continue to
hold such Old Notes and will be entitled to all
the rights and preferences, and will be subject
to the limitations, applicable thereto under the
Indenture. All untendered and tendered but
unaccepted Old Notes (collectively, the
"Remaining Old Notes") will continue to bear
legends restricting their transfer. In general,
the Old Notes may not be offered or sold, unless
registered under the Securities Act, except
pursuant to an exemption from, or in a
transaction not subject to, the Securities Act
and applicable state securities laws. To the
extent that the Exchange Offer is effected, the
trading market, if any, for Remaining Old Notes
could be adversely affected. See "Risk Factors--
Consequences of Failure to Properly Tender Old
Notes Pursuant to the Exchange Offer" and "The
Exchange Offer--Terms of the Exchange."
EXCHANGE AGENT.............. The exchange agent with respect to the Exchange
Offer is United States Trust Company of New York
(the "Exchange Agent"). The address and telephone
number of the Exchange Agent are set forth in
"The Exchange Offer--Exchange Agent."
USE OF PROCEEDS............. There will be no proceeds to the Company from the
exchange pursuant to the Exchange Offer. See "Use
of Proceeds."
9
THE NEW NOTES
Securities Offered.......... $251,000,000 in aggregate principal amount at
maturity of 10 5/8% Senior Discount Notes due
2007 (the "New Notes").
Maturity Date............... November 15, 2007.
Yield and Interest.......... The Accreted Value of the New Notes will be
calculated from the original date of issuance of
the Old Notes. The New Notes will accrete daily
at a rate of 10.625% per annum, compounded
semiannually, to an aggregate principal amount of
$251.0 million by November 15, 2002. Cash
interest will not accrue on the New Notes prior
to November 15, 2002. Thereafter, cash interest
on the New Notes will accrue and be payable
semiannually in arrears on each May 15 and
November 15, commencing May 15, 2003, at a rate
of 10.625% per annum.
Original Issue Discount..... The Old Notes were issued at a substantial
discount to their principal amount, and were sold
to investors at a price that yielded gross
proceeds to the Company of approximately $150.0
million. The Old Notes were offered at an
original issue discount for U.S. federal income
tax purposes. Thus, although cash interest will
not be payable on the New Notes prior to May 15,
2003, original issue discount will accrue from
the issue date of the New Notes and will be
included as interest income periodically
(including for periods ending prior to May 15,
2003) in a holder's gross income for U.S. federal
income tax purposes in advance of receipt of the
cash payments to which the income is
attributable.
Optional Redemption......... Except as described below, the New Notes will not
be redeemable at CCIC's option prior to November
15, 2002. Thereafter, the New Notes will be
subject to redemption at any time at the option
of CCIC, in whole or in part, at the redemption
prices set forth herein plus accrued and unpaid
interest and Liquidated Damages thereon, if any,
to the applicable redemption date. In addition,
at any time prior to November 15, 2000, CCIC may
on any one or more occasions redeem up to 35% of
the original aggregate principal amount at
maturity of the New Notes at a redemption price
of 110.625% of the Accreted Value thereof, plus
Liquidated Damages thereon, if any, to the
redemption date, with the net cash proceeds from
one or more Public Equity Offerings or Strategic
Equity Investments; provided that at least 65% of
the original aggregate principal amount at
maturity of the New Notes remains outstanding
immediately after the occurrence of such
redemption (excluding New Notes held by the
Company or any of its subsidiaries). See
"Description of the Notes--Optional Redemption."
Ranking..................... The New Notes will be general unsecured
obligations of CCIC, ranking pari passu in right
of payment with all future senior indebtedness of
CCIC, and senior in right of payment to all
future subordinated indebtedness of CCIC.
However, the New Notes will
10
be effectively junior to all future secured
indebtedness of CCIC to the extent of the assets
securing such indebtedness. CCIC is a holding
company whose only significant asset is the
capital stock of its subsidiaries and its
investment in CTI. The New Notes will not be
guaranteed by such subsidiaries or by CTI.
Accordingly, the New Notes will be structurally
subordinated to all indebtedness and other
liabilities (including trade payables) of CCIC's
subsidiaries, including all borrowings under the
Senior Credit Facility. As of December 31, 1997,
CCIC had approximately $151.6 million of
outstanding indebtedness. As of January 5, 1998,
CCIC's principal operating subsidiary, Crown
Communication, had indebtedness amounting to
approximately $4.7 million, representing
borrowings under the Senior Credit Facility,
unused borrowing availability under the Senior
Credit Facility of approximately $93.6 million
and approximately $10.7 million of other
outstanding liabilities. CCIC has provided a
limited recourse guaranty of the Senior Credit
Facility, limited in recourse only to the capital
stock of CCIC's subsidiaries (but not including
CTI). CCIC currently has no secured indebtedness.
Change of Control........... Upon the occurrence of a Change of Control, the
holders of the New Notes will have the right to
require CCIC to repurchase such holders' New
Notes, in whole or in part, at a price equal to
101% of the Accreted Value thereof, plus
Liquidated Damages thereon, if any, to the date
of purchase prior to November 15, 2002 or 101% of
the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages thereon,
if any, to the date of purchase on or after
November 15, 2002. The occurrence of a Change in
Control would result in a default under the
Senior Credit Facility, and any amounts owed
thereunder must be paid prior to CCIC's
obligations to the holder of the New Notes. There
can be no assurance that sufficient funds will be
available under circumstances that would require
CCIC to repurchase the New Notes. See
"Description of the Notes--Repurchase at the
Option of Holders--Change of Control."
Certain Covenants........... The Indenture pursuant to which the New Notes
will be issued contains certain covenants that,
among other things, limit the ability of CCIC and
its Restricted Subsidiaries (as defined) to (i)
incur additional indebtedness and issue preferred
stock, (ii) pay dividends or make certain other
restricted payments, (iii) enter into
transactions with affiliates, (iv) make certain
asset dispositions, (v) merge or consolidate
with, or transfer substantially all its assets
to, another Person (as defined), (vi) create
Liens (as defined), (vii) issue or sell Equity
Interests (as defined) of CCIC's Restricted
Subsidiaries, (viii) engage in sale and leaseback
transactions or (ix) engage in certain business
activities. See "Description of the Notes--
Certain Covenants." In addition, under certain
circumstances, CCIC will be required to offer to
purchase the New Notes at a price equal to 100%
of the Accreted Value thereof, plus Liquidated
11
Damages thereon, if any, if such circumstances
occur prior to November 15, 2002, or equal to
100% of the principal amount thereof, plus
accrued and unpaid interest and Liquidated
Damages thereon, if any, to the date of purchase
if such circumstances occur on or after November
15, 2002, with the proceeds of certain Asset
Sales (as defined). See "Description of the
Notes--Repurchase at the Option of Holders--Asset
Sales." CTI is not a subsidiary of the Company
and is not, therefore, subject to the provisions
of the Indenture.
RISK FACTORS
For a discussion of certain factors that should be considered in connection
with an investment in the Notes, see "Risk Factors."
12
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 Statement (as defined) included elsewhere
in this Prospectus. The pro forma statement of operations data and other data
for the year ended December 31, 1997, give effect to the Transactions (as
defined under "Unaudited Pro Forma Condensed Consolidated Statement of
Operations") as if they had occurred on January 1, 1997. The information set
forth below should be read in conjunction with "Unaudited Pro Forma Condensed
Consolidated Statement of Operations," "Selected Financial and Other Data of
CCIC," "Selected Financial and Other Data of Crown," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements of CCIC and Crown included elsewhere in this
Prospectus.
YEAR ENDED
DECEMBER 31,
1997
------------
(DOLLARS IN
THOUSANDS)
STATEMENT OF OPERATIONS DATA:(A)
Net revenues:
Site rental...................................................... $ 15,560
Network services and other....................................... 41,291
---------
Total net revenues............................................. 56,851
---------
Costs of operations:
Site rental...................................................... 3,634
Network services and other....................................... 25,306
---------
Total costs of operations...................................... 28,940
---------
General and administrative........................................ 11,254
Corporate development(b).......................................... 3,507
Depreciation and amortization..................................... 13,189
---------
Operating income (loss)........................................... (39)
Equity in losses of unconsolidated affiliate...................... (1,274)
Interest and other income......................................... 769
Interest expense and amortization of deferred financing costs..... (17,835)
---------
Income (loss) before income taxes................................. (18,379)
Provision for income taxes........................................ (50)
---------
Net income (loss)................................................. $ (18,429)
=========
OTHER DATA:
Site data (at period end):(c)
Towers owned..................................................... 240
Towers managed................................................... 133
Rooftop sites managed (revenue producing)(d)..................... 80
---------
Total sites owned and managed.................................. 453
=========
EBITDA(e)......................................................... $ 13,150
Capital expenditures.............................................. 30,496
Summary cash flow information:
Net cash provided by operating activities........................ 11,213
Net cash used for investing activities........................... (123,945)
Net cash provided by financing activities........................ 168,425
13
YEAR ENDED
DECEMBER 31, 1997
-----------------------
(DOLLARS IN THOUSANDS)
Adjusted EBITDA(e)...................................... $ 14,997
Ratio of EBITDA to total interest expense(f)............ 0.74x
Ratio of total debt to Adjusted EBITDA ................. 10.42x
Ratio of total debt to EBITDA .......................... 11.89x
Ratio of earnings to fixed charges(g)................... --
AS OF DECEMBER 31, 1997
-----------------------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 55,078
Property and equipment, net............................. 81,968
Total assets............................................ 371,391
Total debt.............................................. 156,293
Redeemable preferred stock(h)........................... 160,749
Total stockholders' equity.............................. 41,792
- --------
(a) The Company has provided a "combined results of operations" discussion of
CCIC, Crown and certain other acquired businesses under "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Unaudited Supplemental Combined Adjusted Results 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 the aggregate number of sites of CCIC and its acquired
businesses (including Crown) as of the end of each period.
(d) As of December 31, 1997, the Company had contracts with 1,436 buildings to
manage on behalf of such buildings the leasing of space for antennae on the
rooftops of such buildings. A revenue producing rooftop represents a
rooftop where the Company has arranged a lease of space on such rooftop
and, as such, is receiving payments in respect of its management contract.
The Company generally does not receive any payment for rooftops under
management unless the Company actually leases space on such rooftops to
third parties. As of December 31, 1997, the Company had 1,356 rooftop sites
under management throughout the United States that were not revenue
producing rooftops but were available for leasing to customers.
(e) EBITDA is defined as operating income (loss) plus depreciation and
amortization. EBITDA and Adjusted EBITDA are presented as additional
information because management believes them to be a useful indicator of
the Company's ability to meet debt service and capital expenditure
requirements and because certain debt covenants of the Company utilize
Adjusted EBITDA to measure compliance with such covenants. 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, the Company's measure of EBITDA may
not be comparable to similarly titled measures of other companies. Adjusted
EBITDA is defined as the sum of (i) annualized site rental EBITDA before
corporate development for the most recent calendar quarter and (ii) EBITDA,
less site rental EBITDA before corporate development, for the most recent
four calendar quarters.
(f) Total interest expense includes amortization of deferred financing costs of
$1,338.
(g) For purposes of computing the ratio of earnings to fixed charges, earnings
represent net income (loss) before income taxes, fixed charges and equity
in losses of unconsolidated affiliate. Fixed charges consist of interest
expense, the interest component of operating leases and amortization of
deferred financing costs. For the year ended December 31, 1997, earnings
were insufficient to cover fixed charges by $17,105.
(h) Represents (i) the Senior Convertible Preferred Stock privately placed by
CCIC in August 1997 and October 1997, which is mandatorily redeemable upon
the earlier of (A) 91 days after the tenth anniversary date of the issuance
of the Notes or (B) May 15, 2008 and (ii) the Series A Convertible
Preferred Stock, the Series B Convertible Preferred Stock, and the Series C
Convertible Preferred Stock (each as defined) privately placed by CCIC in
April 1995, July 1996 and February 1997, respectively, all of which are
redeemable at the option of the holder beginning on the same date upon
which the Senior Convertible Preferred Stock is mandatorily redeemable.
14
SUMMARY FINANCIAL AND OTHER DATA OF CCIC
The summary historical consolidated financial data for CCIC presented below
for each of the three years in the period ended December 31, 1997, and as of
December 31, 1995, 1996 and 1997, have been derived from the consolidated
financial statements of CCIC, which have been audited by KPMG Peat Marwick LLP,
independent certified public accountants. 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--The
Company" and the consolidated financial statements of CCIC included elsewhere
in this Prospectus.
YEARS ENDED
DECEMBER 31,
------------------------
1995 1996 1997
------ ------ --------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net revenues:
Site rental........................................ $4,052 $5,615 $ 11,010
Network services and other......................... 6 592 20,395
------ ------ --------
Total net revenues............................... 4,058 6,207 31,405
------ ------ --------
Costs of operations:
Site rental........................................ 1,226 1,292 2,213
Network services and other......................... -- 8 13,137
------ ------ --------
Total costs of operations........................ 1,226 1,300 15,350
------ ------ --------
General and administrative.......................... 729 1,678 6,824
Corporate development(a)............................ 204 1,324 5,731
Depreciation and amortization....................... 836 1,242 6,952
------ ------ --------
Operating income (loss)............................. 1,063 663 (3,452)
Equity in losses of unconsolidated affiliate........ -- -- (1,138)
Interest and other income(b)........................ 53 193 1,951
Interest expense and amortization of deferred
financing costs.................................... (1,137) (1,803) (9,254)
------ ------ --------
Income (loss) before income taxes................... (21) (947) (11,893)
Provision for income taxes.......................... -- (10) (49)
------ ------ --------
Net income (loss)................................... $ (21) $ (957) $(11,942)
====== ====== ========
OTHER DATA:
Site data (at period end):(c)
Towers owned....................................... 126 155 240
Towers managed..................................... 7 7 133
Rooftop sites managed (revenue producing)(d)....... 41 52 80
------ ------ --------
Total sites owned and managed.................... 174 214 453
====== ====== ========
15
YEARS ENDED
DECEMBER 31,
---------------------------
1995 1996 1997
------- ------- ---------
(DOLLARS IN THOUSANDS)
EBITDA(e)......................................... $ 1,899 $ 1,905 $ 3,500
Capital expenditures.............................. 161 890 18,035
Summary cash flow information:
Net cash provided by (used for) operating 1,672 (530) (624)
activities......................................
Net cash used for investing activities........... (16,673) (13,916) (111,484)
Net cash provided by financing activities........ 15,597 21,193 159,843
Ratio of earnings to fixed charges(f) ............ -- -- --
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents......................... $ 596 $ 7,343 $ 55,078
Property and equipment, net....................... 16,003 26,753 81,968
Total assets...................................... 19,875 41,226 371,391
Total debt........................................ 11,182 22,052 156,293
Redeemable preferred stock(g)..................... 5,175 15,550 160,749
Total stockholders' equity (deficit).............. 619 (210) 41,792
- --------
(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, includes (i)
nonrecurring cash bonuses of $913 paid to certain executive officers in
connection with the CTI Investment and (ii) a nonrecurring cash charge of
$1,311 related to the purchase by CCIC of shares of Class B Common Stock
from CCIC's former chief executive officer in connection with the CTI
Investment. See "Certain Relationships and Related Transactions."
(b) Includes a $1.2 million fee received in March 1997 as compensation for
leading the investment consortium which provided the equity financing for
CTI in connection with the CTI Investment.
(c) Represents the aggregate number of sites of CCIC as of the end of each
period.
(d) As of December 31, 1997, the Company had contracts with 1,436 buildings to
manage on behalf of such buildings the leasing of space for antennae on the
rooftops of such buildings. A revenue producing rooftop represents a
rooftop where the Company has arranged a lease of space on such rooftop
and, as such, is receiving payments in respect of its management contract.
The Company generally does not receive any payment for rooftops under
management unless the Company actually leases space on such rooftops to
third parties. As of December 31, 1997, the Company had 1,356 rooftop sites
under management throughout the United States that were not revenue
producing rooftops but were available for leasing to customers.
(e) EBITDA is defined as operating income (loss) plus depreciation and
amortization. EBITDA is presented as additional information because
management believes it to be a useful indicator of the Company'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, the Company's 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 net income (loss) before income taxes, fixed charges and equity
in 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 and
1997, earnings were insufficient to cover fixed charges by $21, $947 and
$10,755, respectively.
(g) Represents (i) the Senior Convertible Preferred Stock privately placed by
CCIC in August 1997 and October 1997, which is mandatorily redeemable upon
the earlier of (A) 91 days after the tenth anniversary date of the issuance
of the Notes or (B) May 15, 2008 and (ii) the Series A Convertible
Preferred Stock, the Series B Convertible Preferred Stock, and the Series C
Convertible Preferred Stock privately placed by CCIC in April 1995, July
1996 and February 1997, respectively, all of which are redeemable at the
option of the holder beginning on the same date upon which the Senior
Convertible Preferred Stock is mandatorily redeemable.
16
SUMMARY FINANCIAL AND OTHER DATA OF CROWN
The summary historical combined financial data for Crown presented below for
each of the two years in the period ended December 31, 1996 and the seven
months ended July 31, 1997, have been derived from the combined financial
statements of Crown, which have been audited by KPMG Peat Marwick LLP,
independent certified public accountants. Crown was acquired by CCIC in the
Crown Merger in August 1997 and, as a result, twelve-month historical financial
data for Crown is not presented. 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--Crown" and the
combined financial statements of Crown included elsewhere in this Prospectus.
SEVEN MONTHS
YEARS ENDED ENDED
DECEMBER 31, JULY 31,
---------------- ------------
1995 1996 1997
------- ------- ------------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net revenues:
Site rental..................................... $ 3,632 $ 5,120 $ 4,550
Network services and other...................... 7,384 14,260 13,137
------- ------- -------
Total net revenues............................ 11,016 19,380 17,687
------- ------- -------
Costs of operations:
Site rental..................................... 763 1,691 1,421
Network services and other...................... 3,944 8,632 5,841
------- ------- -------
Total costs of operations..................... 4,707 10,323 7,262
------- ------- -------
General and administrative....................... 2,625 3,150 3,761
Depreciation and amortization.................... 568 1,168 1,006
------- ------- -------
Operating income................................. 3,116 4,739 5,658
Interest and other income (expense).............. 19 (53) (26)
Interest expense................................. (785) (1,175) (925)
------- ------- -------
Income before income taxes....................... 2,350 3,511 4,707
Provision for income taxes....................... -- -- --
------- ------- -------
Net income....................................... $ 2,350 $ 3,511 $ 4,707
======= ======= =======
OTHER DATA:
Site data (at period end):(a)
Towers owned.................................... 45 53
Towers managed.................................. 122 127
Rooftop sites managed (revenue producing)....... 9 16
------- -------
Total sites owned and managed................. 176 196
======= =======
EBITDA:(b)
Site rental..................................... $ 2,589 $ 3,098 $ 2,943
Network services and other...................... 1,095 2,809 3,721
------- ------- -------
Total......................................... $ 3,684 $ 5,907 $ 6,664
======= ======= =======
EBITDA as a percentage of net revenues:(b)
Site rental..................................... 71.3% 60.5% 64.7%
Network services and other...................... 14.8% 19.7% 28.3%
Total......................................... 33.4% 30.5% 37.7%
Capital expenditures............................. $ 5,670 $ 8,658 $12,425
Summary cash flow information:
Net cash provided by operating activities....... 2,974 4,162 5,199
Net cash used for investing activities.......... (5,670) (8,652) (12,425)
Net cash provided by financing activities....... 2,367 4,100 7,018
Ratio of earnings to fixed charges(c)............ 5.04x
- -------
(a) Represents the aggregate number of sites of Crown as of the end of each
period.
(b) EBITDA is defined as operating income plus depreciation and amortization.
EBITDA is presented as additional information because management believes
it to be a useful indicator of a company'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, Crown's measure of EBITDA may not be comparable to similarly
titled measures of other companies.
(c) For purposes of computing the ratio of earnings to fixed charges, earnings
represent net income before income taxes and fixed charges. Fixed charges
consist of interest expense, the interest component of operating leases and
amortization of deferred financing costs.
17
SUMMARY FINANCIAL AND OTHER DATA OF CTI
The summary historical financial data for CTI, which is 34.3% owned by CCIC,
presents (i) summary historical financial data of the Home Service Transmission
business of the BBC prior to its acquisition by CTI (the "Predecessor") for the
year ended March 31, 1996 and the eleven months ended February 27, 1997, (ii)
summary historical consolidated financial data of CTI after such acquisition
for the one month ended March 31, 1997 and (iii) summary historical
consolidated financial data of CTI as of and for the nine months ended December
31, 1997. The historical financial data for the year ended March 31, 1996 and
the eleven months ended February 27, 1997 have been derived from the audited
financial statements of the Predecessor. The summary financial data for the one
month ended March 31, 1997 and the nine months ended December 31, 1997 have
been derived from the audited consolidated financial statements of CTI, which
have been audited by KPMG, Chartered Accountants. The results of operations for
the one month ended March 31, 1997 and the nine months ended December 31, 1997
are not necessarily indicative of the results of operations of CTI for the full
year. 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 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 distribution to CCIC. See "Risk Factors--
Relationship with Minority Owned Affiliate; Potential Conflicts of Interests."
The information set forth below should be read in conjunction with the
consolidated financial statements of CTI included elsewhere in this Prospectus.
PREDECESSOR COMPANY CTI CTI
--------------------------------- ------------------------------ ----------------------
ELEVEN MONTHS ONE NINE MONTHS ONE MONTH NINE MONTHS
YEAR ENDED ENDED MONTH ENDED ENDED ENDED ENDED
MARCH 31, FEBRUARY 27, MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31,
1996 1997 1997 1997 1997(A) 1997(A)
--------------- ---------------- -------------- -------------- --------- ------------
(U.S. DOLLARS IN
(POUNDS STERLING IN THOUSANDS) THOUSANDS)
STATEMENT OF OPERATIONS
DATA:
Net revenues............ (Pounds) 70,367 (Pounds) 70,614 (Pounds) 6,433 (Pounds)56,752 $10,620 $ 93,686
Operating expenses...... 62,582 56,612 5,188 47,976 8,564 79,199
--------------- ---------------- -------------- -------------- ------- --------
Operating income........ 7,785 14,002 1,245 8,776 2,055 14,487
Interest and other
income................. -- -- 49 288 81 475
Interest expense and
amortization of
deferred financing
costs.................. -- -- (969) (12,419) (1,600) (20,501)
--------------- ---------------- -------------- -------------- ------- --------
Income (loss) before
income taxes........... 7,785 14,002 325 (3,355) 537 (5,538)
Provision for income
taxes.................. -- -- -- -- -- --
--------------- ---------------- -------------- -------------- ------- --------
Net income (loss) under
U.K. GAAP.............. 7,785 14,002 325 (3,355) 537 (5,538)
Adjustments to convert
to U.S. GAAP........... 3,707 3,993 78 866 129 1,430
--------------- ---------------- -------------- -------------- ------- --------
Net income (loss) under
U.S. GAAP.............. (Pounds)11,492 (Pounds)17,995 (Pounds)403 (Pounds)(2,489) $ 665 $ (4,109)
=============== ================ ============== ============== ======= ========
OTHER DATA:
EBITDA (under U.S.
GAAP)(b)............... (Pounds) 20,620 (Pounds) 27,040 (Pounds) 3,064 (Pounds)25,695 $ 5,058 $ 42,417
Capital expenditures
(under U.S. GAAP)...... 18,079 21,810 748 14,361 1,235 23,707
Summary cash flow information (under
U.S. GAAP):
Net cash provided by
operating activities... 24,311 28,146 4,871 25,555 8,041 42,186
Net cash used for
investing activities... (17,190) (21,811) (52,889) (14,668) (87,309) (24,214)
Net cash provided by
(used for) financing
activities............. (7,121) (6,335) 57,706 (12,423) 95,261 (20,508)
AS OF DECEMBER 31, 1997 AS OF DECEMBER 31, 1997
------------------------------ ---------------------------
(POUNDS STERLING IN THOUSANDS) (U.S. DOLLARS IN THOUSANDS)
BALANCE SHEET DATA
(under U.S. GAAP):
Cash and cash
equivalents............ (Pounds)8,152 $ 13,457
Property and equipment,
net.................... 207,013 341,737
Total assets............ 275,791 455,276
Total debt.............. 143,748 237,299
Redeemable preference
shares................. 105,975 174,944
Ordinary shareholders'
equity (deficit)....... (5,163) (8,523)
- -------
(a) CTI publishes its consolidated financial statements in pounds sterling. In
this Prospectus, references to "pounds sterling" or "(Pounds)" are to U.K.
currency and references to "U.S. dollars," "U.S.$" or "$" are to U.S.
currency. For the convenience of the reader, the information set forth
above, as well as certain other information with respect to CTI included in
this Prospectus, contains translations of pound sterling amounts into U.S.
dollars at the rate quoted at 4 p.m. Eastern time by Dow Jones and other
sources as published in The Wall Street Journal for pounds sterling (the
"Exchange Rate") on December 31, 1997, of (Pounds)1.00 = $1.6508. 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 February 27, 1997, the Exchange Rate was (Pounds)1.00 =
$1.6443.
(b) EBITDA is defined as operating income (loss) plus depreciation and
amortization. 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.
18
RISK FACTORS
Prospective investors should consider carefully the risk factors set forth
below, as well as the other information appearing in this Prospectus, before
making any investment in the New Notes.
CONSEQUENCES OF FAILURE TO PROPERLY TENDER OLD NOTES PURSUANT TO THE EXCHANGE
OFFER
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the following
restrictions on transfer with respect to their Old Notes: (i) the Remaining
Old Notes 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 (ii) the Remaining Old
Notes will bear a legend restricting transfer in the absence of registration
or an exemption therefrom. The Company does not currently anticipate that they
will register the Old Notes under the Securities Act. To the extent that Old
Notes are tendered and accepted in connection with the Exchange Offer, any
trading market for remaining Old Notes could be adversely affected.
Issuance of the New Notes in exchange for the Old Notes pursuant to the
Exchange Offer will be made only after timely receipt by the Exchange Agent of
such Old Notes, a properly completed and duly executed Letter of Transmittal
and all other required documents. Therefore, holders of the Old Notes desiring
to tender such Old Notes in exchange for New Notes should allow sufficient
time to ensure timely delivery. The Company is under no duty to give
notification of defects or irregularities with respect to tenders of Old Notes
for exchange. Old Notes that are not tendered or that are tendered but not
accepted by the Company for exchange, 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.
SUBSTANTIAL LEVERAGE; RESTRICTIONS IMPOSED BY THE TERMS OF THE COMPANY'S
INDEBTEDNESS
The Company is highly leveraged. As of December 31, 1997, the Company had
total consolidated indebtedness of approximately $156.3 million, total
redeemable preferred stock of $160.7 million and total stockholders' equity of
approximately $41.8 million. Also, after giving pro forma effect to the
Transactions, the Company's earnings would have been insufficient to cover
fixed charges by $17.1 million for fiscal 1997. CCIC and its subsidiaries will
be permitted to incur additional indebtedness in the future. See
"Capitalization," "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources," "Description of
the Senior Credit Facility" and "Description of the Notes."
The degree to which the Company is leveraged has important consequences to
holders of the New Notes, including, but not limited to: (i) making it more
difficult for the Company to satisfy its obligations with respect to the
Notes, (ii) increasing the Company's vulnerability to general adverse economic
and industry conditions, (iii) limiting the Company's ability to obtain
additional financing to fund future working capital, capital expenditures and
other general corporate requirements, (iv) requiring the dedication of a
substantial portion of the Company's cash flow from operations to the payment
of principal of, and interest on, its indebtedness, thereby reducing the
availability of such cash flow to fund working capital, capital expenditures
or other general corporate purposes, (v) limiting the Company's flexibility in
planning for, or reacting to, changes in its business and the industry, and
(vi) placing the Company at a competitive disadvantage vis-a-vis less
leveraged competitors. In addition, the degree to which the Company is
leveraged could prevent it from repurchasing all of the New Notes tendered to
it upon the occurrence of a Change of Control. See "--Repurchase of the Notes
Upon a Change of Control," "Description of the Senior Credit Facility" and
"Description of the Notes--Repurchase at the Option of Holders--Change of
Control."
19
The Company's ability to make scheduled payments of principal of, or to pay
interest on, its debt obligations, and its ability to refinance any such debt
obligations (including the Notes), or to fund planned capital expenditures,
will depend on its future performance, which, to a certain extent, is subject
to general economic, financial, competitive, legislative, regulatory and other
factors that are beyond its control. The Company's business strategy
contemplates substantial capital expenditures in connection with the expansion
of its tower footprints. Based on the Company's current operations and
anticipated revenue growth, management believes that cash flow from operations
and available cash, together with available borrowings under the Senior Credit
Facility, will be sufficient to fund the Company's anticipated capital
expenditures through at least 1998, including in connection with the Nextel
Agreement. Thereafter, however, or in the event the Company exceeds its
currently anticipated capital expenditures for 1998, the Company anticipates
that it will need to seek additional equity or debt financing to fund its
business plan. Failure to obtain any such financing could require the Company
to significantly reduce its planned capital expenditures and could have a
material adverse effect on the Company's ability to achieve its business
strategy. In addition, the Company may need to refinance all or a portion of
its indebtedness (including the Notes) on or prior to its scheduled maturity.
There can be no assurance that the Company will generate sufficient cash flow
from operations in the future, that anticipated revenue growth will be
realized or that future borrowings, equity contributions or loans from
affiliates will be available in an amount sufficient to service its
indebtedness and make anticipated capital expenditures. In addition, there can
be no assurance that the Company will be able to effect any required
refinancings of its indebtedness (including the Notes) on commercially
reasonable terms or at all. See "--Holding Company Structure; Restrictions on
Access to Cash Flow of Subsidiaries" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
The Senior Credit Facility and the Indenture contain numerous restrictive
covenants, including but not limited to covenants that restrict the Company's
ability to incur indebtedness, pay dividends, create liens, sell assets and
engage in certain mergers and acquisitions. In addition, the Senior Credit
Facility requires subsidiaries of the Company to maintain certain financial
ratios. The ability of the Company to comply with the covenants and other
terms of the Senior Credit Facility and the Indenture and to satisfy its
respective debt obligations (including, without limitation, borrowings and
other obligations under the Senior Credit Facility) will depend on the future
operating performance of the Company. In the event the Company fails to comply
with the various covenants contained in the Senior Credit Facility or the
Indenture, as applicable, it would be in default thereunder, and in any such
case, the maturity of substantially all of its long-term indebtedness could be
accelerated. A default under the Indenture would also constitute an event of
default under the Senior Credit Facility. See "Description of the Senior
Credit Facility" and "Description of the Notes."
HOLDING COMPANY STRUCTURE; RESTRICTIONS ON ACCESS TO CASH FLOW OF SUBSIDIARIES
CCIC is a holding company with no business operations of its own. CCIC's
only significant asset is the outstanding capital stock of its subsidiaries
and its 34.3%-owned affiliate, CTI. CCIC conducts all its business operations
through its subsidiaries. Accordingly, CCIC's only source of cash to pay
interest on and principal of the Notes is distributions with respect to its
ownership interest in its subsidiaries from the net earnings and cash flow
generated by such subsidiaries. Although the Notes do not require cash
interest payments until May 15, 2003, at such time the Notes will have
accreted to $251.0 million and will require annual cash interest payments of
approximately $26.7 million. In addition, the Notes mature on November 15,
2007. CCIC currently expects that the earnings and cash flow of its
subsidiaries will be retained and used by such subsidiaries in their
operations, including to service their respective debt obligations. Even if
CCIC determined to pay a dividend on or make a distribution in respect of the
capital stock of its 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, will permit such dividends or distributions.
Furthermore, the terms of the Senior Credit Facility place restrictions on
Crown Communication's 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 Senior Credit Facility. In addition, CCIC's
subsidiaries will be permitted under the terms of the Indenture to incur
certain additional indebtedness that may restrict or prohibit the making of
distributions, the payment of dividends or the
20
making of loans by such subsidiaries to CCIC. Accordingly, CCIC does not
anticipate that it will receive any material distributions from its
subsidiaries prior to 2003, and there can be no assurance that sufficient
amounts will be available to service interest on the Notes that becomes
payable on a semiannual basis commencing in 2003. See "--Substantial Leverage;
Restrictions Imposed by the Terms of the Company's Indebtedness" and
"Description of the Senior Credit Facility."
CCIC currently anticipates that, in order to pay the principal of the Notes
or to redeem or repurchase the Notes upon a Change of Control, CCIC will be
required to adopt one or more alternatives, such as refinancing its
indebtedness, selling its equity securities or the equity securities or assets
of its subsidiaries, or seeking capital contributions or loans from its
affiliates. None of the affiliates of CCIC are required to make any capital
contributions, loans or other payments to CCIC with respect to CCIC's
obligations on the Notes. There can be no assurance that any of the foregoing
actions could be effected on satisfactory terms, that any of the foregoing
actions would enable CCIC to pay the principal amount of the Notes or that any
of such actions would be permitted by the terms of the Indenture or any other
debt instruments of CCIC or CCIC's subsidiaries then in effect. See "--
Substantial Leverage; Restrictions Imposed by the Terms of the Company's
Indebtedness."
RANKING OF THE NOTES; STRUCTURAL SUBORDINATION
The Notes represent general unsecured obligations of CCIC and rank pari
passu in right of payment with all existing and future senior indebtedness of
CCIC, if any, and senior in right of payment to all future subordinated
indebtedness of CCIC, if any. As of December 31, 1997, CCIC had no
indebtedness other than the Notes (and its limited recourse guaranty of any
amounts thereafter outstanding under the Senior Credit Facility). The Notes
will not be guaranteed by CCIC's subsidiaries. As a result, all indebtedness,
including trade payables, of such subsidiaries, including borrowings under the
Senior Credit Facility, will be structurally senior to the Notes. In addition,
CCIC has provided a limited recourse guaranty of the Senior Credit Facility
(limited to the capital stock of its subsidiaries) and has pledged the stock
of its subsidiaries to secure the borrowings under the Senior Credit Facility,
and such subsidiaries have granted liens on substantially all of their assets
as security for the obligations under the Senior Credit Facility. As of
January 5, 1998, Crown Communication, CCIC's principal operating subsidiary,
had indebtedness amounting to approximately $4.7 million, representing
borrowings under the Senior Credit Facility, unused borrowing availability
under the Senior Credit Facility of approximately $93.6 million and $10.7
million of other liabilities outstanding, all of which will be structurally
senior in right of payment to the Notes. CCIC currently has no secured
indebtedness. See "Capitalization," "Unaudited Pro Forma Condensed
Consolidated Financial Statements" and "Description of the Senior Credit
Facility."
RISKS ASSOCIATED WITH CONSTRUCTION AND ACQUISITIONS OF TOWERS
The Company's growth strategy depends on its ability to construct, acquire
and operate towers in conjunction with the expansion of wireless
communications carriers. As of December 31, 1997, the Company had 14 towers
under construction and had plans to commence construction on an additional 16
towers by the end of 1997. The Company's ability to construct new towers can
be affected by a number of factors beyond its control, including zoning and
local permitting requirements and Federal Aviation Administration ("FAA")
considerations, availability of construction equipment and skilled
construction personnel and bad weather conditions. 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. There can be no assurance that: (i) the Company
will be able to overcome the barriers to new construction; (ii) the number of
towers planned for construction will be completed in accordance with the
requirements of the Company's customers; or (iii) there will be a significant
need for the construction of new towers once the wireless communications
carriers complete their tower network infrastructure build-out. With respect
to the acquisition of towers, the Company competes with certain wireless
communications carriers, broadcasters, site developers and other independent
tower owners and operators for acquisitions of towers, and expects such
competition to increase. Increased competition for acquisitions may result in
fewer acquisition opportunities for the Company, as well as higher acquisition
prices. The Company regularly explores acquisition opportunities;
21
however, with the exception of the Nextel Agreement, the Company has no
agreements or understandings regarding such possible future acquisitions.
There can be no assurance that the Company will be able to identify towers or
companies to acquire in the future. In addition, the Company may need to seek
additional debt or equity financing in order to fund properties it seeks to
acquire. The availability of additional financing cannot be assured and
depending on the terms of proposed acquisitions and financing, could be
restricted by the terms of the Senior Credit Facility and the Indenture. No
assurance can be given that the Company will be able to identify, finance and
complete future acquisitions on acceptable terms or that the Company will be
able to manage profitably and market under-utilized capacity on additional
towers. The extent to which the Company is unable to construct or acquire
additional towers, or manage profitably such tower expansion, may have a
material adverse effect on the Company's financial condition and results of
operation.
In addition, the timeframe for the current wireless build-out cycle may be
limited to the next few years, and many PCS networks have already been built
out in large markets. A failure by the Company to move quickly and
aggressively to obtain growth capital and capture this infrastructure
opportunity could have a material adverse effect on the Company's financial
condition and results of operations.
MANAGING INTEGRATION AND GROWTH
The Company's ability to implement its growth strategy depends, in part, on
its successes in integrating its acquisitions, investments, joint ventures and
strategic alliances into the Company's operations. The Company has grown
significantly over the past year through acquisitions. The Crown Merger in
August 1997 was significantly larger than the Company's previous acquisitions
and represents a substantial increase in the scope of the Company's business.
Crown's revenues for fiscal 1996 were $19.4 million. In contrast, CCIC's
revenues for fiscal 1996 were $6.2 million. Successful integration of Crown's
operations will depend primarily on the Company's ability to manage Crown's
operations (which, as of December 31, 1997, added over 210 additional owned or
managed towers to the Company's 161 existing owned or managed towers) and to
integrate Crown's management with CCIC's management. There can be no assurance
that the Company can successfully integrate Crown into its business or
implement its plans without delay and any failure or any inability to do so
may have a material adverse effect on the Company's financial condition and
results of operations.
Implementation of the Company's acquisition strategy may impose significant
strains on the Company's management, operating systems and financial
resources. Failure by the Company to manage its growth or unexpected
difficulties encountered during expansion could have a material adverse effect
on the Company's financial condition and results of operations. The pursuit
and integration of acquisitions, investments, joint ventures and strategic
alliances will require substantial attention from the Company's senior
management, which will limit the amount of time available to devote to the
Company's existing operations. Future acquisitions by the Company could result
in the incurrence of debt and contingent liabilities and an increase in
amortization expenses related to goodwill and other intangible assets, which
could have a material adverse effect upon the Company's financial condition
and results of operations.
DEPENDENCE ON DEMAND FOR WIRELESS COMMUNICATIONS; RISK ASSOCIATED WITH NEW
TECHNOLOGIES
Demand for the Company's site rentals is dependent on demand for
communication sites from wireless communications carriers, which, in turn, is
dependent on the demand for wireless services. Most types of wireless services
currently require ground-based network facilities, including communication
sites for transmission and reception. The extent to which wireless
communications carriers lease such communication sites depends on a number of
factors beyond the Company's control, including the level of demand for such
wireless services, the financial condition and access to capital of such
carriers, the strategy of carriers with respect to owning or leasing
communication sites, government licensing of broadcast rights, changes in
telecommunications regulations and general economic conditions.
The wireless communications industry has undergone significant growth in
recent years. A slowdown in the growth of, or reduction in, demand in a
particular wireless segment could adversely affect the demand for
communication sites. For example, the Company anticipates that a significant
amount of its revenues over the
22
next several years will be generated from carriers in the PCS market and, as
such, the Company will be subject to downturns in PCS demand. Moreover,
wireless communications carriers often operate with substantial leverage, and
financial problems for the Company's 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. While the Company generally has a diverse customer base, Nextel
(including PCI) and Sprint PCS accounted for approximately 19.6% and 13.7%,
respectively, of the Company's pro forma revenues for the year ended December
31, 1997, and the Company expects Nextel to represent an even larger portion
of its business in the future.
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 the Company's financial condition and results of operations.
VARIABILITY IN QUARTERLY AND ANNUAL PERFORMANCE
Demand for the Company's 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 communications
carriers' tower build-outs, timing of existing customer contracts and general
economic conditions. While such demand fluctuates, the Company 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 the Company's network services
businesses for any particular period may vary significantly, and should not be
considered as necessarily being indicative of longer-term results. For
example, the Company experienced a decline, as compared to the two previous
quarters, in demand for its network services business in the third and fourth
quarters of 1997. There can be no assurance that the demand for such business
will return to the level of the two previous quarters. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Unaudited Supplemental Combined Adjusted Results of Operations--Discussion of
Six Months Ended December 31, 1997." Furthermore, as wireless communications
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 the Company's operating performance.
COMPETITION
The Company competes for customers with (i) wireless communications carriers
that own and operate their own tower footprints and lease, or may in the
future decide to lease, antennae space to other carriers, (ii) site
development companies which acquire antennae space on existing towers for
wireless communications carriers and manage new tower construction, (iii)
other independent tower companies and (iv) traditional local independent tower
operators. Wireless communications carriers that own and operate their own
tower footprints generally are substantially larger and have greater financial
resources than the Company. The Company believes 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.
The Company competes for acquisition and new tower construction
opportunities with wireless communications carriers, site developers and other
independent tower operators. The Company believes that competition for tower
acquisitions will increase and that additional competitors will enter the
tower market. These additional competitors may have greater financial
resources than the Company.
RELATIONSHIP WITH MINORITY OWNED AFFILIATE; POTENTIAL CONFLICTS OF INTERESTS
The Company currently owns a 34.3% interest in CTI. Part of the Company's
growth strategy includes capitalizing on certain managerial, technical and
engineering expertise within CTI and developing synergies that exist between
them in order to operate the Company's current business more efficiently and
to pursue future business opportunities. There can be no assurance that CTI
will cooperate with the Company or that the Company will be able to
successfully capitalize on these synergies. In addition, the Company's
investment in CTI represents a substantial portion of its asset base. The
Company does not have voting control of CTI and does not have the sole power
to determine the outcome of corporate transactions such as mergers,
consolidations
23
and the sale of assets of CTI. The Company also has no access to the cash flow
of CTI. The Company is in discussions with certain of the other holders of
equity interests in CTI with respect to potential transactions pursuant to
which CTI would become a subsidiary of the Company; however, there can be no
assurance that any such transaction will be consummated.
Ted B. Miller, Jr., CCIC's Chief Executive Officer, is also the Chief
Executive Officer of CTI. Carl Ferenbach, CCIC's Chairman of the Board, is
also the Chairman of the Board of CTI. Berkshire Partners LLC ("Berkshire")
and Berkshire Fund IV Group (as defined), each of which Mr. Ferenbach is a
Managing Director, hold approximately 17.6% of the stock of Castle
Transmission Services (Holdings) Ltd ("CTSH"), the parent company of the CTI
entities. Berkshire, Berkshire Fund IV Group and CCIC together hold over 51.9%
of CTSH's stock. The Company currently engages and intends to continue to
engage in transactions with CTI. The Company currently has no agreements with
CTI with respect to future corporate opportunities and there can be no
assurance that significant conflicts of interest between the Company and CTI
will not develop. In addition, CTI may engage in activities which compete
directly or indirectly with the activities or business interests of the
Company. There can be no assurance that CTI will not benefit from its general
knowledge of the Company's plans and strategies, which could provide CTI with
a competitive advantage over the Company. Finally, as Chief Executive Officer
of both CCIC and CTI, Mr. Miller may have conflicting demands on his time.
Currently, the Company has not adopted any procedures for managing conflicts
with CTI and does not foresee the need to adopt any such procedures in the
future. See "Certain Relationships and Related Transactions."
RISKS ASSOCIATED WITH DAMAGE TO TOWERS
The Company's towers are subject to risks associated with natural disasters
such as tornadoes, hurricanes and earthquakes. The Company maintains insurance
to cover the estimated cost of replacing damaged towers (subject to certain
caps). The Company also maintains business interruption insurance, but only
with respect to the towers acquired in the Crown Merger, the Company's Puerto
Rico towers and certain of its other revenue producing towers. The Company's
10 highest revenue producing towers, six of which are in western Pennsylvania
and two of which are in Puerto Rico, accounted for 6.8% of the Company's
revenues for December 1997. The Company also maintains third party liability
insurance to protect the Company in the event of an accident involving a
tower. A tower accident for which the Company is uninsured or underinsured, or
damage to a tower or group of towers, could have a material adverse effect on
the Company's financial condition and results of operations.
RELIANCE ON NEXTEL AGREEMENT
Pursuant to the Nextel Agreement, the Company has the right to construct up
to 250 new towers for Nextel and has exercised an option to acquire 50 of
Nextel's existing towers. See "Business--Significant Contracts." Nextel may
terminate the Nextel Agreement if the Company fails to complete the
construction of towers within an agreed period or if Nextel exercises its
purchase option (following certain construction delays by the Company) for the
greater of five towers or 5% of the aggregate number of total sites committed
to within a rolling eight-month period. Furthermore, the Nextel Agreement may
be terminated by Nextel upon either the insolvency or liquidation of the
Company. The Nextel Agreement represents a significant part of the Company's
business strategy, and termination of the Nextel Agreement would have a
material adverse effect on the Company's ability to achieve its business
strategy.
REGULATORY COMPLIANCE AND APPROVAL
The Company is subject to a variety of regulation, including at the federal,
state and local level. Both the FCC and the FAA regulate towers and other
sites used for wireless communications transmitters and receivers. Such
regulations control siting and marking of towers and may, depending on the
characteristics of the tower, require registration of tower facilities.
Wireless communications devices operating on towers are separately regulated
and independently licensed based upon the regulation of the particular
frequency used. Most proposals to construct new antennae structures or to
modify existing antennae structures are reviewed by both the FCC and the FAA
to ensure that a structure will not present a hazard to aviation. Owners of
towers may have an obligation to paint them or install lighting to conform to
FCC standards and to maintain such painting or lighting. Tower owners may also
bear the responsibility for notifying the FAA of any tower lighting failures.
The Company
24
generally indemnifies its customers against any failure to comply with
applicable standards. Failure to comply with applicable requirements may lead
to civil penalties.
Local regulations include city or 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 regulations can delay or prevent new tower
construction or site upgrade projects, thereby limiting the Company's ability
to respond to customers' demands. In addition, such regulations increase the
costs associated with new tower construction. There can be no assurance 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 such delays or result in additional costs to the Company. Such
factors could have a material adverse effect on the Company's financial
condition and results of operations.
The Company's customers may also become subject to new regulations or
regulatory policies which adversely affect the demand for communication sites.
In addition, as the Company pursues international opportunities, it will be
subject to regulation in foreign jurisdictions.
TITLE TO REAL PROPERTY
The Company's real property interests relating to its towers consist of fee
interests, leasehold interests, private easements and licenses and easements
and rights-of-way granted by governmental entities. With respect to acquired
towers, the Company generally obtains title insurance on only the most
valuable fee properties and relies on title warranties from sellers with
respect to other acquired properties. The Company's ability to protect its
rights against persons claiming superior rights in towers depends on the
Company's ability to (i) recover under title policies, the policy limits of
which may be less than the purchase price of a particular tower; (ii) in the
absence of title insurance coverage, realize on title warranties given by
tower sellers, which warranties often terminate after the expiration of a
specific period (typically one to three years); and (iii) realize on title
covenants from landlords contained in lease agreements.
ENVIRONMENTAL MATTERS
The Company's operations are subject to foreign, federal, state and local
environmental laws and regulations regarding the use, storage, disposal,
emission, release and remediation of hazardous and nonhazardous substances,
materials or wastes ("Environmental Laws"). Under certain Environmental Laws,
the Company could be held strictly, jointly and severally liable for the
remediation of hazardous substance contamination at its facilities or at
third-party waste disposal sites, and could also be held liable for any
personal or property damage related to such contamination. Although the
Company believes that it is in substantial compliance with all applicable
Environmental Laws, there can be no assurance that the costs of compliance
with existing or future Environmental Laws will not have a material adverse
effect on the Company's financial condition and results of operations. See
"Business--Regulatory and Environmental Matters."
PERCEIVED HEALTH RISKS ASSOCIATED WITH RADIO FREQUENCY EMISSIONS
The Company and the wireless communications carriers that utilize the
Company's towers are subject to government requirements and other guidelines
relating to radio frequency ("RF") emissions. The potential connection between
RF 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 the Company has not been subject to any claims relating to RF
emissions, there can be no assurance that it will not be subject to such
claims. See "--Environmental Matters" and "Business--Regulatory and
Environmental Matters."
CONCENTRATION OF OWNERSHIP; ANTI-TAKEOVER PROVISIONS; BOARD RIGHTS
The Company's current executive officers, directors and their affiliates
beneficially own approximately 7,881,661 shares, or approximately 63.8%, of
the Class B Common Stock on a fully diluted basis as of the date hereof.
Robert A. Crown, president of Crown Communication and a director of the
Company, beneficially owns 1,482,500 shares, or approximately 12.0%, of the
Class B Common Stock on a fully diluted basis as of the date
25
hereof. Berkshire Partners Group (as defined), with which Carl Ferenbach, the
Chairman of the Board, and Garth H. Greimann, a director of the Company, are
affiliated, beneficially owns approximately 2,369,481 shares, or approximately
19.2%, of the Class B Common Stock on a fully diluted basis as of the date
hereof. Centennial Group (as defined), with which Jeffrey H. Schutz and David
C. Hull, Jr., both directors of the Company, are affiliated, beneficially owns
approximately 1,960,946 shares, or approximately 15.9%, of the Class B Common
Stock on a fully diluted basis as of the date hereof. Nassau Group (as
defined), with which Randall A. Hack, a director of the Company, is
affiliated, beneficially owns approximately 1,007,316 shares, or approximately
8.1%, of the Class B Common Stock on a fully diluted basis as of the date
hereof. Together, Mr. Crown, Berkshire Partners Group, Centennial Group and
Nassau Group beneficially own approximately 55.2% of the Class B Common Stock
on a fully diluted basis as of the date hereof. See "Ownership of Common
Stock."
The Company's certificate of incorporation, as amended (the "Amended
Certificate"), and by-laws, as amended (the "By-laws"), contain certain
provisions that may have the effect of discouraging, delaying or preventing a
change in control of the Company or unsolicited acquisition proposals that a
stockholder might consider favorable, including provisions requiring
supermajority voting to effect certain amendments to the By-laws. Furthermore,
pursuant to the amended and restated stockholders agreement dated August 15,
1997, among the Company, Edward C. Hutcheson, Jr., Ted B. Miller, Jr., Robert
A. Crown, Barbara Crown and certain other investors (the "Stockholders
Agreement"), Mr. Crown is entitled to nominate one director for election to
the Board and the investor parties have agreed to vote their shares in favor
of Mr. Crown's nominee. The Stockholders Agreement also contains provisions
specifying the number of directors to be elected by stockholders of certain
series or classes, limiting the persons who may call special meetings of
stockholders and requiring super-majority voting to effect certain amendments
to the Amended Certificate.
As a result of the provisions of the Amended Certificate, the By-laws and
the Stockholders Agreement and the substantial stock ownership of the parties
thereto, the persons described above have the ability to exercise substantial
influence over the Company's direction and to determine the outcome of
corporate actions requiring stockholder approval. This concentration of
ownership may have the effect of delaying or preventing a change in control of
the Company. See "Description of Capital Stock--Stockholders Agreement" and
"Ownership of Capital Stock."
DEPENDENCE ON PRINCIPAL EXECUTIVE OFFICERS
The Company's existing operations and continued future development following
the Crown Merger are dependent to a significant extent upon the performance
and the active participation of certain key individuals, including Ted B.
Miller, Jr., David L. Ivy and Robert A. Crown. There can be no assurance that
the Company will be successful in retaining the services of these, or its
other, key personnel. The loss of the services of one or more of the Company's
key personnel could adversely affect the Company's financial condition and
results of operations. See "Management."
RISK OF FRAUDULENT CONVEYANCE LIABILITY
Various laws enacted for the protection of creditors may apply to the
Company's incurrence of indebtedness and other obligations in connection with
the Transactions, including the issuance of the Notes. If a court were to find
in a lawsuit by an unpaid creditor or representative of creditors of the
Company that the Company did not receive fair consideration or reasonably
equivalent value for incurring such indebtedness or obligation and, at the
time of such incurrence, the Company (i) was insolvent; (ii) was rendered
insolvent by reason of such incurrence; (iii) was engaged in a business or
transaction for which the assets remaining in the Company constituted
unreasonably small capital; or (iv) intended to incur or believed it would
incur obligations beyond its ability to pay such obligations as they mature,
such court, subject to applicable statutes of limitation, could determine to
invalidate, in whole or in part, such indebtedness and obligations as
fraudulent conveyances or subordinate such indebtedness and obligations to
existing or future creditors of the Company.
The measure of insolvency for purposes of the foregoing will vary depending
on the law of the jurisdiction which is being applied. Generally, however, the
Company would be considered insolvent at a particular time if the sum of its
debts was then greater than all of its property at a fair valuation or if the
present fair saleable
26
value of its assets was then less than the amount that would be required to
pay its probable liabilities on its existing debts as they became absolute and
matured. On the basis of its historical financial information, its recent
operating history as discussed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and other factors, the
Company's management believes that, after giving effect to indebtedness
incurred in connection with the Crown Merger and the Refinancing, the Company
will not be rendered insolvent, it will have sufficient capital for the
businesses in which it will be engaged and it will be able to pay its debts as
they mature. However, management has not obtained any independent opinion
regarding such issues. There can be no assurance as to what standard a court
would apply in making such determinations.
ORIGINAL ISSUE DISCOUNT
The Old Notes were issued at a substantial discount from their stated
principal amount at maturity. Consequently, although cash interest on the New
Notes generally will not be payable prior to May 15, 2003, original issue
discount ("OID") will be includable in the gross income of a holder of the New
Notes for U.S. federal income tax purposes in advance of the receipt of such
cash payments on the New Notes.
If a bankruptcy case is commenced by or against CCIC under the U.S.
Bankruptcy Code after the issuance of the New Notes, the claim of a holder of
New Notes with respect to the principal amount thereof may be limited to an
amount equal to the sum of (i) the initial offering price and (ii) that
portion of the OID that is not deemed to constitute "unmatured interest" for
purposes of the U.S. Bankruptcy Code. Any OID that was not accrued as of any
such bankruptcy filing would constitute "unmatured interest."
REPURCHASE OF THE NOTES UPON A CHANGE OF CONTROL
Upon a Change of Control, the holders of the Notes will have the right to
require CCIC to repurchase such holders' Notes, in whole or in part, at a
price equal to 101% of the Accreted Value thereof, plus Liquidated Damages
thereon, if any, to the date of purchase prior to November 15, 2002 or 101% of
the principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages thereon, if any, to the date of purchase on or after November 15,
2002. If a Change of Control were to occur, there can be no assurance that
CCIC would have sufficient financial resources to repurchase all of the Notes
and repay any other indebtedness that would become payable upon the occurrence
of such Change of Control. For example, the occurrence of a Change in Control
would result in a default under the Senior Credit Facility, and any amounts
owed thereunder must be paid prior to CCIC's obligations to the holder of the
New Notes. The Change of Control purchase feature of the Notes may in certain
circumstances discourage or make more difficult a sale or takeover of the
Company. See "Description of the Notes--Repurchase at the Option of Holders--
Change of Control."
ABSENCE OF PUBLIC MARKET FOR THE NEW NOTES
The New Notes are a new issue of securities, have no established trading
market and may not be widely distributed. Although the Notes are eligible for
trading in PORTAL by "qualified institutional buyers" ("QIBs"), as defined in
Rule 144A under the Securities Act, there can be no assurance as to the
liquidity of any markets that may develop for the New Notes, the ability of
holders of the New Notes to sell their New Notes or the price at which holders
would be able to sell their New Notes. Future trading prices of the New Notes
will depend on many factors, including, among other things, prevailing
interest rates, the Company's operating results and the market for similar
securities. The Initial Purchasers have advised the Company that they
currently intend to make a market in the New Notes. However, the Initial
Purchasers are not obligated to do so and any market making may be
discontinued at any time without notice. The Company does not intend to apply
for listing of the New Notes offered hereby on any securities exchange. If a
market for the New Notes does develop, the price of the New Notes may
fluctuate and liquidity may be limited. If a market for the New Notes does not
develop, holders may be unable to resell such securities for an extended
period of time, if at all. If the market were to exist, the New Notes could
trade at prices lower than the initial offering price of the Old Notes
depending on many factors, including those described above.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that the market for the New Notes will
not be subject to similar disruptions. Any such disruption may have an adverse
effect on holders of the New Notes.
27
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the New
Notes offered hereby. In consideration for issuing the New Notes as described
in this Prospectus, the Company will receive in exchange Old Notes in like
principal amount, the terms of which are identical in all material respects to
those of the New Notes, except that the New Notes have been registered under
the Securities Act and are issued free of 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 Old Notes surrendered in exchange for
the New Notes will be retired and canceled and cannot be reissued.
Accordingly, the issuance of the New Notes will not result in any change in
the indebtedness of the Company.
The net proceeds received by the Company from the Offering of the Old Notes,
after deducting discounts and estimated fees and expenses, were approximately
$143.7 million. Such net proceeds were used to repay substantially all
outstanding indebtedness of the Company, including the indebtedness incurred
under the Senior Credit Facility in connection with the October Refinancing
and to pay related fees and expenses and are being used for general corporate
purposes. In addition to the Senior Credit Facility, the indebtedness that was
repaid included (i) a promissory note from CTC in favor of PCI (the "PCI
Note") in an aggregate principal amount of approximately $0.5 million, (ii)
four promissory notes from CCIC in favor of certain stockholders of TEA (the
"TEA Notes") in an aggregate principal amount of approximately $1.9 million,
and (iii) installment notes of Crown Communication (the "Crown Installment
Notes"), along with accrued interest, in an aggregate amount of approximately
$1.2 million.
28
CAPITALIZATION
The following table sets forth the capitalization of CCIC as of December 31,
1997. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements included elsewhere in
this Prospectus.
DECEMBER 31, 1997
----------------------
(DOLLARS IN THOUSANDS)
Cash and cash equivalents....... $ 55,078
========
Notes payable and current
maturities of long-term debt... $ --
========
Long-term debt (less current
maturities):
Senior Credit Facility (a) ... $ 4,700
10 5/8% Senior Discount Notes
due 2007..................... 151,593
--------
Total long-term debt...... 156,293
--------
Redeemable preferred stock: (b)
Senior Convertible Preferred
Stock........................ 67,948
Series A Convertible Preferred
Stock........................ 8,300
Series B Convertible Preferred
Stock........................ 10,375
Series C Convertible Preferred
Stock........................ 74,126
--------
Total redeemable preferred
stock...................... 160,749
--------
Stockholders' equity:
Common stock:
Class A Common Stock........ 2
Class B Common Stock........ 19
Additional paid-in capital.... 58,248
Cumulative foreign currency
translation adjustment....... 562
Accumulated deficit........... (17,039)
--------
Total stockholders'
equity................... 41,792
--------
Total capitalization.... $358,834
========
- --------
(a) As of January 5, 1998, the Company's principal operating subsidiary, Crown
Communication, has approximately $93.6 million of unused borrowing
availability under the Senior Credit Facility. See "Description of the
Senior Credit Facility."
(b) The holders of the redeemable preferred stock have the right to require
redemption on the earlier of 91 days after the tenth anniversary date of
issuance of the Notes or May 15, 2008. See "Description of Capital Stock."
29
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
The following Unaudited Pro Forma Condensed Consolidated Statement of
Operations (the "Pro Forma Financial Statement") is based on the historical
financial statements of CCIC and the historical financial statements of the
entities acquired by CCIC (including TEA and Crown) during the periods
presented, adjusted to give effect to the following transactions
(collectively, the "Transactions"); (i) the CTI Investment, (ii) the TEA
Acquisition, (iii) the acquisition of TeleStructures (the "TeleStructures
Acquisition"), (iv) the Crown Merger (together with the acquisitions described
in clauses (i), (ii) and (iii), the "Acquisitions") and (v) the Refinancing.
The Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the year ended December 31, 1997 gives effect to the Transactions as if they
had occurred as of January 1, 1997. The pro forma adjustments are described in
the accompanying notes and are based upon available information and certain
assumptions that management believes are reasonable.
The Pro Forma Financial Statement does not purport to represent what CCIC's
results of operations would actually have been had the Transactions in fact
occurred on such date or to project CCIC's results of operations for any
future period. The Pro Forma Financial Statement should be read in conjunction
with the consolidated financial statements included elsewhere in this
Prospectus and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
The Acquisitions are accounted for under the purchase method of accounting.
The total purchase price for each Acquisition has 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,
the Company does not expect that any such revisions will have a material
effect on its consolidated financial position or results of operations.
30
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
HISTORICAL PRO
---------------------------------------- ADJUSTMENTS FORMA ADJUSTMENTS
TELE- FOR FOR FOR PRO
CCIC(A) TEA(A) STRUCTURES(A) CROWN(A) ACQUISITIONS ACQUISITIONS REFINANCING FORMA
-------- ------ ------------- -------- ------------ ------------ ----------- --------
Net revenues:
Site rental ........... $ 11,010 $ -- $ -- $ 4,550 $ -- $ 15,560 $ -- $ 15,560
Network services and
other................. 20,395 7,615 1,212 13,137 (1,068)(b) 41,291 -- 41,291
-------- ------ ------ ------- ------- -------- ------- --------
Total net revenues.... 31,405 7,615 1,212 17,687 (1,068) 56,851 -- 56,851
-------- ------ ------ ------- ------- -------- ------- --------
Operating expenses:
Costs of operations:
Site rental............ 2,213 -- -- 1,421 -- 3,634 -- 3,634
Network services and
other................. 13,137 6,454 1,008 5,841 (1,134)(c) 25,306 -- 25,306
General and
administrative........ 6,824 644 25 3,761 -- 11,254 -- 11,254
Corporate development.. 5,731 -- -- -- (2,224)(d) 3,507 -- 3,507
Depreciation and
amortization.......... 6,952 52 -- 1,006 5,179 (e) 13,189 -- 13,189
-------- ------ ------ ------- ------- -------- ------- --------
34,857 7,150 1,033 12,029 1,821 56,890 -- 56,890
-------- ------ ------ ------- ------- -------- ------- --------
Operating income
(loss)................. (3,452) 465 179 5,658 (2,889) (39) -- (39)
Other income (expense):
Equity in losses of
unconsolidated
affiliate............. (1,138) -- -- -- (136)(f) (1,274) -- (1,274)
Interest and other
income (expense)...... 1,951 9 -- (26) (1,165)(g) 769 -- 769
Interest expense and
amortization of
deferred financing
costs................. (9,254) (18) -- (925) (5,291)(h) (15,488) (2,347)(i) (17,835)
-------- ------ ------ ------- ------- -------- ------- --------
Income (loss) before
income taxes........... (11,893) 456 179 4,707 (9,481) (16,032) (2,347) (18,379)
Provision for income
taxes.................. (49) (1) -- -- -- (50) -- (50)
-------- ------ ------ ------- ------- -------- ------- --------
Net income (loss)....... (11,942) 455 179 4,707 (9,481) (16,082) (2,347) (18,429)
Dividends on Senior
Convertible Preferred
Stock.................. (2,199) -- -- -- -- (2,199) (6,134) (8,333)
-------- ------ ------ ------- ------- -------- ------- --------
Net income (loss) after
deduction of dividends
on Senior Convertible
Preferred Stock........ $(14,141) $ 455 $ 179 $ 4,707 $(9,481) $(18,281) $(8,481) $(26,762)
======== ====== ====== ======= ======= ======== ======= ========
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 each of the entities acquired by
CCIC in the Acquisitions are included in CCIC's historical results of
operations for the period from their respective dates of acquisition
through the end of the period presented. The historical results of
operations presented for each of the acquired entities are their pre-
acquisition results of operations. Set forth below are the respective
dates of each Acquisition:
COMPANY DATE
------- ----
TEA........................................................ May 12, 1997
TeleStructures............................................. May 12, 1997
Crown...................................................... August 15, 1997
(b) Reflects the following adjustments to net revenues:
YEAR ENDED
DECEMBER 31, 1997
-----------------
Elimination of intercompany sales between TEA and
TeleStructures......................................... $(1,134)
Addition of management fee payable to CCIC from CTI for
the portion of the period preceding the CTI
Investment(i).......................................... 66
-------
Total adjustments to net revenues.................... $(1,068)
=======
--------
(i) The CTI Investment was consummated on February 28, 1997. Management
fees received by CCIC during the period subsequent to the CTI
Investment are reflected in CCIC's historical results of
operations.
(c) Reflects the elimination of intercompany transactions between TEA and
TeleStructures.
(d) Reflects the elimination of (i) nonrecurring cash bonus awards of $913
paid to certain executive officers in connection with the CTI Investment
and (ii) a nonrecurring cash charge of $1,311 related to the purchase by
CCIC of shares of Class B Common Stock from CCIC's former chief executive
officer in connection with the CTI Investment. See "Certain Relationships
and Related Transactions."
(e) Reflects the incremental amortization of goodwill and other intangible
assets and the incremental depreciation of property and equipment as a
result of the Acquisitions. Goodwill is being amortized over twenty years
and other intangible assets (primarily existing contracts) are being
amortized over ten years.
(f) Reflects equity accounting adjustments to include CCIC's percentage in
CTI's losses for the preinvestment period.
(g) Reflects the elimination of a nonrecurring success fee received by CCIC in
connection with the CTI Investment.
(h) Reflects additional interest expense attributable to the Seller Note, the
TEA Notes and borrowings under the Senior Credit Facility prior to October
31, 1997 at interest rates ranging from 8.0% to 11.0%.
(i) Reflects net increase or decrease in interest expense as a result of the
issuance of the Old Notes in connection with the Refinancing at an
interest rate on the Old Notes of 10.625% per annum. The adjustment also
includes the elimination of $1,920 of nonrecurring financing fees charged
to interest expense in September and October of 1997. Such fees related to
an unfunded interim loan facility related to the Crown Merger and an
unfunded revolving credit facility.
32
SELECTED FINANCIAL AND OTHER DATA OF CCIC
The selected historical consolidated financial data for CCIC presented below
for each of the three years in the period ended December 31, 1997, and as of
December 31, 1995, 1996 and 1997, have been derived from the consolidated
financial statements of CCIC, which have been audited by KPMG Peat Marwick
LLP, independent certified public accountants. 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--The
Company" and the consolidated financial statements of CCIC included elsewhere
in this Prospectus.
YEARS ENDED
DECEMBER 31,
---------------------------
1995 1996 1997
------- ------- ---------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net revenues:
Site rental.................................... $ 4,052 $ 5,615 $ 11,010
Network services and other..................... 6 592 20,395
------- ------- ---------
Total net revenues........................... 4,058 6,207 31,405
------- ------- ---------
Costs of operations:
Site rental.................................... 1,226 1,292 2,213
Network services and other..................... -- 8 13,137
------- ------- ---------
Total costs of operations.................... 1,226 1,300 15,350
------- ------- ---------
General and administrative....................... 729 1,678 6,824
Corporate development(a)......................... 204 1,324 5,731
Depreciation and amortization.................... 836 1,242 6,952
------- ------- ---------
Operating income (loss).......................... 1,063 663 (3,452)
Equity in losses of unconsolidated affiliate..... -- -- (1,138)
Interest and other income(b)..................... 53 193 1,951
Interest expense and amortization of deferred
financing costs................................. (1,137) (1,803) (9,254)
------- ------- ---------
Income (loss) before income taxes................ (21) (947) (11,893)
Provision for income taxes....................... -- (10) (49)
------- ------- ---------
Net income (loss)................................ (21) (957) (11,942)
Dividends on Senior Convertible Preferred Stock.. -- -- (2,199)
------- ------- ---------
Net income (loss) after deduction of dividends on
Senior Convertible Preferred Stock.............. $ (21) $ (957) $ (14,141)
======= ======= =========
OTHER DATA:
Site data (at period end):(c)
Towers owned................................... 126 155 240
Towers managed................................. 7 7 133
Rooftop sites managed (revenue producing)(d)... 41 52 80
------- ------- ---------
Total sites owned and managed................ 174 214 453
======= ======= =========
EBITDA(e)........................................ $ 1,899 $ 1,905 $ 3,500
Capital expenditures............................. 161 890 18,035
Summary cash flow information:
Net cash provided by (used for) operating ac-
tivities...................................... 1,672 (530) (624)
Net cash used for investing activities ........ (16,673) (13,916) (111,484)
Net cash provided by financing activities...... 15,597 21,193 159,843
Ratio of earnings to fixed charges(f)............ -- -- --
33
YEARS ENDED
DECEMBER 31,
------------------------
1995 1996 1997
------- ------- --------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents............................. $ 596 $ 7,343 $ 55,078
Property and equipment, net........................... 16,003 26,753 81,968
Total assets.......................................... 19,875 41,226 371,391
Total debt............................................ 11,182 22,052 156,293
Redeemable preferred stock(g)......................... 5,175 15,550 160,749
Total stockholders' equity (deficit).................. 619 (210) 41,792
- --------
(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, includes (i)
nonrecurring cash bonuses of $913 paid to certain executive officers in
connection with the CTI Investment and (ii) a nonrecurring cash charge of
$1,311 related to the purchase by CCIC of shares of Class B Common Stock
from CCIC's former chief executive officer in connection with the CTI
Investment. See "Certain Relationships and Related Transactions."
(b) Includes a $1.2 million fee received in March 1997 as compensation for
leading the investment consortium which provided the equity financing for
CTI in connection with the CTI Investment.
(c) Represents the aggregate number of sites of CCIC as of the end of each
period.
(d) As of December 31, 1997, the Company had contracts with 1,436 buildings to
manage on behalf of such buildings the leasing of space for antennae on
the rooftops of such buildings. A revenue producing rooftop represents a
rooftop where the Company has arranged a lease of space on such rooftop
and, as such, is receiving payments in respect of its management contract.
The Company generally does not receive any payment for rooftops under
management unless the Company actually leases space on such rooftops to
third parties. As of December 31, 1997, the Company had 1,356 rooftop
sites under management throughout the United States that were not revenue
producing rooftops but were available for leasing to customers.
(e) EBITDA is defined as operating income (loss) plus depreciation and
amortization. EBITDA is presented as additional information because
management believes it to be a useful indicator of the Company'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, the Company's 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 net income (loss) before income taxes, fixed charges and equity
in 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 and
1997, earnings were insufficient to cover fixed charges by $21, $947 and
$10,755, respectively.
(g) Represents (i) the Senior Convertible Preferred Stock privately placed by
CCIC in August 1997 and October 1997, which is mandatorily redeemable upon
the earlier of (A) 91 days after the tenth anniversary date of the
issuance of the Notes or (B) May 15, 2008 and (ii) the Series A
Convertible Preferred Stock, the Series B Convertible Preferred Stock, and
the Series C Convertible Preferred Stock privately placed by CCIC in April
1995, July 1996 and February 1997, respectively, all of which are
redeemable at the option of the holder beginning on the same date upon
which the Senior Convertible Preferred Stock is mandatorily redeemable.
34
SELECTED FINANCIAL AND OTHER DATA OF CROWN
The selected historical combined financial data for Crown presented below for
each of the two years in the period ended December 31, 1996 and the seven
months ended July 31, 1997, have been derived from the combined financial
statements of Crown, which have been audited by KPMG Peat Marwick LLP,
independent certified public accountants. Crown was acquired by CCIC in the
Crown Merger in August 1997 and, as a result, twelve-month historical financial
data for Crown is not presented. 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--Crown" and the
combined financial statements of Crown included elsewhere in this Prospectus.
YEARS ENDED SEVEN MONTHS
DECEMBER 31, ENDED JULY 31,
---------------- --------------
1995 1996 1997
------- ------- --------------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net revenues:
Site rental.................................. $ 3,632 $ 5,120 $ 4,550
Network services and other................... 7,384 14,260 13,137
------- ------- -------
Total net revenues......................... 11,016 19,380 17,687
------- ------- -------
Costs of operations:
Site rental.................................. 763 1,691 1,421
Network services and other................... 3,944 8,632 5,841
------- ------- -------
Total costs of operations.................. 4,707 10,323 7,262
------- ------- -------
General and administrative..................... 2,625 3,150 3,761
Depreciation and amortization.................. 568 1,168 1,006
------- ------- -------
Operating income............................... 3,116 4,739 5,658
Interest and other income (expense)............ 19 (53) (26)
Interest expense............................... (785) (1,175) (925)
------- ------- -------
Income before income taxes..................... 2,350 3,511 4,707
Provision for income taxes..................... -- -- --
------- ------- -------
Net income..................................... $ 2,350 $ 3,511 $ 4,707
======= ======= =======
OTHER DATA:
Site data (at period end):(a)
Towers owned................................. 45 53
Towers managed............................... 122 127
Rooftop sites managed (revenue producing).... 9 16
------- -------
Total sites owned and managed.............. 176 196
======= =======
EBITDA:(b)
Site rental.................................. $ 2,589 $ 3,098 $ 2,943
Network services and other................... 1,095 2,809 3,721
------- ------- -------
Total...................................... $ 3,684 $ 5,907 $ 6,664
======= ======= =======
35
YEARS ENDED SEVEN MONTHS
DECEMBER 31, ENDED JULY 31,
-------------- --------------
1995 1996 1997
------ ------ --------------
(DOLLARS IN THOUSANDS)
EBITDA as a percentage of net revenues:(b)
Site rental.................................... 71.3% 60.5% 64.7%
Network services and other..................... 14.8% 19.7% 28.3%
Total........................................ 33.4% 30.5% 37.7%
Capital expenditures............................. $5,670 $8,658 $12,425
Summary cash flow information:
Net cash provided by operating activities...... 2,974 4,162 5,199
Net cash used for investing activities......... (5,670) (8,652) (12,425)
Net cash provided by financing activities...... 2,367 4,100 7,018
Ratio of earnings to fixed charges(c)............ 5.04x
- --------
(a) Represents the aggregate number of sites of Crown as of the end of each
period.
(b) EBITDA is defined as operating income plus depreciation and amortization.
EBITDA is presented as additional information because management believes
it to be a useful indicator of a company'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, Crown's measure of EBITDA may not be comparable to similarly
titled measures of other companies.
(c) For purposes of computing the ratio of earnings to fixed charges, earnings
represent net income before income taxes and fixed charges. Fixed charges
consist of interest expense, the interest component of operating leases
and amortization of deferred financing costs.
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in understanding (i) the
Company's consolidated financial condition and results of operations as of
December 31, 1997 and for each year in the three-year period ended December
31, 1997; and (ii) Crown's combined results of operations for each year in the
two-year period ended December 31, 1996. 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 capital expenditures decisions to be
made in the future by wireless communications carriers 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
Data and Other Data of Crown" and the consolidated financial statements
included elsewhere in this Prospectus.
In addition to the discussion of historical results of operations set forth
below, the Company has provided a "combined results of operations" discussion
of CCIC, Crown and certain other acquired businesses for each year in the
three-year period ended December 31, 1997 and for the six-month period ended
December 31, 1997. See "--Unaudited Supplemental Combined Adjusted Results of
Operations." Management believes that the historical financial statements
included elsewhere herein do not, by themselves, provide investors with
sufficient information to adequately assess the trends in the combined
businesses. The Company is providing this additional information, therefore,
to supplement the historical financial information discussed below.
OVERVIEW
The Company's business depends substantially on the condition of the
wireless communications industry and the willingness of wireless
communications carriers to utilize the Company's assets and services to build
out their wireless networks. The wireless communications industry's
willingness to outsource its network build-out is affected, in turn, 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 on the same towers with other
wireless communications carriers (including direct competitors), local
restrictions on the proliferation of towers, cost of building towers and
technological changes affecting the number of communication sites needed to
provide wireless services to a given geographic area.
The Company believes that the demand for wireless networks will continue to
grow and expects that wireless communications carriers will increasingly turn
to network services providers such as the Company to build out and manage
those networks. Moreover, the Company believes that wireless carriers will be
increasingly receptive to co-location out of economic necessity and regulatory
pressures, as capital constraints and increasing restrictions on the
proliferation of towers conflict with a growing need for such sites.
CTC, a Delaware corporation, was organized on December 21, 1994 and began
operations on January 1, 1995. CCIC, a Delaware corporation, was organized on
April 20, 1995. On April 27, 1995, the stockholders of CTC contributed all the
outstanding shares of CTC's stock to the Company in exchange for shares of the
Company's stock. See "Certain Relationships and Related Transactions."
The Company acquired a total of 127 towers from PCI from January through
November 1995. A number of other business acquisitions and investments were
consummated following the PCI acquisition. In October 1995, the Company
acquired substantially all the property and equipment and operations of
Spectrum (the "Spectrum Acquisition"), which provides management services for
rooftop sites. In June 1996, the Company consummated the Puerto Rico
Acquisition. During 1995 and 1996, the Company acquired 22 additional towers
from three
37
separate sellers. In February 1997, the Company purchased its ownership
interest of approximately 34.3% in CTI. In May 1997, the Company consummated
the TEA Acquisition and the TeleStructures Acquisition. In June 1997, the
Company made an investment in Visual Intelligence Systems, Inc. ("VISI"), a
provider of computerized geographic information for a variety of business
applications (including the acquisition and design of telecommunications
sites). Finally, in August 1997, the Company consummated the Crown Merger.
Results of operations of the acquired businesses which are wholly owned are
included in the Company's consolidated financial statements for the periods
subsequent to the respective dates of acquisition.
As an important part of its business strategy, the Company will continue to
enhance its tower footprints and take advantage of the operating leverage of
its site rental business by increasing the amount of antennae space leased on
its owned or managed communication sites, expanding its tower footprints
through the build-out of towers and the acquisition of towers and maintaining
its in-house technical and operational expertise.
RESULTS OF OPERATIONS
The Company
The Company's primary sources of revenues are from (i) the rental of
antennae space on towers and rooftop sites and (ii) the provision of network
services, which includes site selection and acquisition, antennae
installation, site development and construction and network design.
Site rental revenues are received primarily from wireless communications
companies, including cellular, Personal Communications Services ("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 monthly site rental revenues per owned site as of
December 31, 1997 were approximately $3,000 for the towers located in the
southwestern United States, $7,000 for the towers in Puerto Rico, $12,500 for
the towers in and around the greater Pittsburgh area, and $2,000 for the
Company's other revenue producing towers. Average revenues for the Company'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 (i) site selection and
acquisition, (ii) site development, construction and antennae installation and
(iii) 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. Larger network services contracts are
generally billed on a fixed price basis. Service contracts for site
development, construction and antennae installation typically have terms not
exceeding one year. Service contracts for site selection and acquisition
typically have terms ranging from 6 months to 2 years. Demand for the
Company's 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 communications carriers' tower
build-outs, timing of existing customer contracts and general economic
conditions. While such demand fluctuates, the Company 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 the Company's network services
businesses for any particular period may vary significantly, and should not be
considered as necessarily being indicative of longer-term results. The Company
also derives revenues from SMR and microwave radio services in Puerto Rico.
These revenues are generally recognized under monthly management or service
agreements. Average monthly revenues as of December 31, 1997 from SMR and
microwave services were approximately $77,000 and $12,000, respectively. Other
revenues also include a monthly service fee of approximately $33,000 from CTI
as compensation for certain management services.
Costs of operations for site rental primarily consist of land leases,
repairs and maintenance, utilities, insurance, property taxes and monitoring
costs and, 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
38
towers do not generally increase significantly as additional customers are
added. However, rental expenses at certain managed towers increase as
additional customer antennae 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.
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 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 the Company'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.
The following information is derived from the Company's Consolidated
Statements of Operations for the periods indicated.
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997
-------------------- -------------------- ------------------
PERCENT PERCENT PERCENT
OF NET OF NET OF NET
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
--------- --------- --------- --------- -------- --------
(DOLLARS IN THOUSANDS)
Net revenues:
Site rental............ $ 4,052 99.9% $ 5,615 90.5% $ 11,010 35.1%
Network services and
other................. 6 0.1 592 9.5 20,395 64.9
--------- ------- --------- -------- -------- -----
Total net revenues.... 4,058 100.0 6,207 100.0 31,405 100.0
--------- ------- --------- -------- -------- -----
Operating expenses:
Costs of operations:
Site rental............ 1,226 30.3 1,292 23.0 2,213 20.1
Network services and
other................. -- -- 8 1.4 13,137 64.4
--------- --------- --------
Total costs of
operations........... 1,226 30.2 1,300 21.0 15,350 48.9
General and
administrative........ 729 18.0 1,678 27.0 6,824 21.7
Corporate development.. 204 5.0 1,324 21.3 5,731 18.3
Depreciation and
amortization.......... 836 20.6 1,242 20.0 6,952 22.1
--------- ------- --------- -------- -------- -----
Operating income
(loss)................. 1,063 26.2 663 10.7 (3,452) (11.0)
Other income (expense):
Equity in losses of
unconsolidated
affiliate............. -- -- -- -- (1,138) (3.6)
Interest and other
income................ 53 1.3 193 3.1 1,951 6.2
Interest expense and
amortization of
deferred financing
costs................. (1,137) (28.0) (1,803) (29.0) (9,254) (29.5)
--------- ------- --------- -------- -------- -----
Income (loss) before
income taxes........... (21) (0.5) (947) (15.2) (11,893) (37.9)
Provision for income
taxes.................. -- -- (10) (0.2) (49) (0.1)
--------- ------- --------- -------- -------- -----
Net income (loss)....... $ (21) (0.5)% $ (957) (15.4)% $(11,942) (38.0)%
========= ======= ========= ======== ======== =====
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 (i) 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; (ii) $10.4 million in network services revenues from
TEA; and (iii) $7.2 million in network services revenues from the
39
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 (i) $8.5
million of network services costs related to the TEA operations; (ii) $3.9
million of network services costs related to the Crown operations; and (iii)
$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 the Company'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 (i) $0.9 million for certain executive bonuses and (ii) the
repurchase of shares of the Company'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 (i) $4.7
million of depreciation and amortization related to the property and
equipment, goodwill and other intangible assets acquired in the Crown Merger;
(ii) $0.5 million of depreciation and amortization related to the property and
equipment and goodwill acquired in the TEA and TeleStructures Acquisitions;
and (iii) $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
the Company'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 the
Company'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 (i) commitment fees related to an unfunded
interim loan facility related to the Crown Merger and an unfunded revolving
credit facility; (ii) interest on notes payable to the former stockholders of
Crown for a portion of the purchase price of the Crown Business; (iii)
amortization of the original issue discount on the Company's 10 5/8% Senior
Discount Notes due 2007 (the "Notes"); (iv) interest and fees associated with
borrowings under the Company's bank credit facility which were used to finance
the Crown Merger on an interim basis; (v) interest on outstanding borrowings
assumed in
40
connection with the Crown Merger; and (vi) interest on borrowings under the
Company's bank credit facility which were used to finance the acquisition of
the Puerto Rico System.
Comparison of Years Ended December 31, 1996 and 1995
Consolidated revenues for 1996 were $6.2 million, an increase of $2.1
million, or 53.0%, from 1995. This increase was primarily attributable to (i)
$0.6 million in site rental revenues attributable to the Puerto Rico
operations; (ii) $0.6 million in site rental revenues resulting from the
effect of a full year's activity for the operations of Spectrum (which was
acquired in October 1995); (iii) an increase in site rental revenues of $0.3
million, or 6.9%, from the towers acquired from PCI; and (iv) $0.5 million in
SMR and microwave radio services revenues attributable to the Puerto Rico
operations.
Costs of operations for 1996 were $1.3 million, an increase of $0.1 million,
or 6.0%, from 1995. Additional costs in 1996 of $0.3 million attributable to
the Puerto Rico operations were largely offset by decreased costs of $0.2
million associated with the towers acquired from PCI. Such towers were managed
by PCI during 1995 under an agreement with the Company, and the management
fees charged to the Company amounted to $0.6 million. The Company began
managing the towers on January 1, 1996. As a result of these factors, costs of
operations as a percentage of revenues decreased to 21.0% in 1996 from 30.2%
in 1995.
General and administrative expenses for 1996 were $1.7 million, an increase
of $0.9 million from 1995. This increase was primarily attributable to costs
of $0.5 million and $0.1 million associated with the Spectrum and Puerto Rico
Acquisitions, respectively, along with an increase in costs of $0.3 million,
or 41.7%, at the Company's corporate office. General and administrative
expenses at the Company's corporate office increased because of additional
personnel costs and higher overhead resulting from the Company's internal
management of the PCI towers beginning in 1996. As a result of these factors,
general and administrative expenses as a percentage of revenues increased to
27.0% in 1996 from 18.0% in 1995.
Corporate development expenses for 1996 were $1.3 million, an increase of
$1.1 million from 1995. This increase was primarily 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
during the last half of 1996.
Depreciation and amortization for 1996 was $1.2 million, an increase of $0.4
million from 1995. This increase was primarily associated with depreciation
associated with towers purchased in the Puerto Rico Acquisition and goodwill
created in the Spectrum Acquisition.
Interest and other income for 1996 was $0.2 million, an increase of $0.1
million from 1995, primarily resulting from the investment of excess proceeds
from the sale of the Company's Series B Convertible Preferred Stock in July
1996. Interest expense and amortization of deferred financing costs for 1996
were $1.8 million, an increase of $0.7 million, or 58.6%, from 1995, primarily
resulting from borrowings under the Company's bank credit agreement which were
used to finance the Puerto Rico Acquisition.
Crown
Crown's primary sources of revenues are from (i) the rental of antennae
space on towers and rooftop sites and (ii) the provision of network services,
which includes site selection and acquisition, antennae installation, site
development and construction and network design. Site rental revenues are
received primarily from wireless communications companies, including cellular,
PCS, paging, 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). Such lease agreements generally include
term extension and rental rate escalation provisions. Average monthly site
rental revenues per owned site have increased from approximately $7,400 in
1995 to approximately $12,500 as of December 31, 1997.
Network services revenues consist of revenues from (i) site selection and
acquisition, (ii) site development, construction and antennae installation and
(iii) other services. Network services revenues are received primarily
41
from wireless communications companies. Such revenues are recognized under
service contracts which provide for billings on either a fixed price basis or
a time and materials basis. Larger network services contracts are generally
billed on a fixed price basis. Demand for Crown's 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
communications carriers' tower build-outs, timing of existing customer
contracts and general economic conditions. While such demand fluctuates, Crown
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 Crown's network
services businesses for any particular period may vary significantly, and
should not be considered as necessarily being indicative of longer-term
results.
Costs of operations for site rental primarily consist of rental payments on
managed sites, land leases, repairs and maintenance, utilities, insurance,
property taxes and monitoring costs. 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 antennae 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.
General and administrative expenses consist primarily of employee
compensation and related benefits costs, advertising, professional and
consulting fees, office rent and related expenses, travel costs and business
development costs.
Depreciation and amortization charges relate to Crown's property and
equipment (primarily towers, construction equipment and vehicles).
Depreciation of towers, construction equipment and vehicles are generally
computed with useful lives of 20 years, 10 years and 5 years, respectively.
Prior to their acquisition by the Company, the Crown Business was organized
as a sole proprietorship and two Subchapter S corporations under the Internal
Revenue Code. As such, no provision for income taxes has been made in Crown's
Combined Statements of Income.
The following information is derived from Crown's Combined Statements of
Income for the periods indicated.
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
-------------------- --------------------
PERCENT PERCENT
OF NET OF NET
AMOUNT REVENUES AMOUNT REVENUES
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Net revenues:
Site rental.............. $ 3,632 33.0% $ 5,120 26.4%
Network services and
other................... 7,384 67.0 14,260 73.6
--------- ------- --------- -------
Total net revenues...... 11,016 100.0 19,380 100.0
--------- ------- --------- -------
Operating expenses:
Costs of operations:
Site rental.............. 763 21.0 1,691 33.0
Network services and
other................... 3,944 53.4 8,632 60.5
--------- ---------
Total costs of
operations............. 4,707 42.7 10,323 53.3
General and
administrative.......... 2,625 23.8 3,150 16.2
Depreciation and
amortization............ 568 5.2 1,168 6.0
--------- ------- --------- -------
Operating income.......... 3,116 28.3 4,739 24.5
Other income (expense):
Interest and other income
(expense)............... 19 0.1 (53) (0.3)
Interest expense......... (785) (7.1) (1,175) (6.1)
--------- ------- --------- -------
Income before income
taxes.................... 2,350 21.3 3,511 18.1
Provision for income
taxes.................... -- -- -- --
--------- ------- --------- -------
Net income................ $ 2,350 21.3% $ 3,511 18.1%
========= ======= ========= =======
42
Comparison of Years Ended December 31, 1996 and 1995
Revenues for 1996 were $19.4 million, an increase of $8.4 million, or 75.9%,
from 1995. This increase was primarily attributable to (i) an increase of $1.5
million, or 41.0%, in site rental revenues and (ii) an increase of $6.9
million, or 93.1%, in network services revenues. The increase in site rental
revenues resulted from the addition of 8 owned towers and 5 managed towers
between December 31, 1995 and 1996, along with an increase in the average
number of tenants per site and increases in monthly site rental rates. The
total number of lease contracts at owned towers increased from 416 to 641, or
54.1%, between December 31, 1995 and 1996, while the total number of lease
contracts at managed towers increased from 31 to 72, or 132.3%, for the same
period. The average number of tenants per both owned and managed towers
increased 10% for such period, while monthly customer rental rates generally
increased by 3%. The increase in network services revenues was primarily
attributable to two major contracts with wireless communications carriers in
1996. The first contract was for deployment of wireless infrastructure through
the Metropolitan Atlanta Rail Transit Authority ("MARTA") system for the 1996
Summer Olympics in Atlanta. Revenues from this contract amounted to
approximately $2.6 million in 1996. The second contract was to build out a
carrier's network in the greater Pittsburgh area. Revenues from this contract
amounted to approximately $3.4 million in 1996.
Costs of operations for 1996 were $10.3 million, an increase of $5.6
million, or 119.3%, from 1995. This increase was primarily attributable to (i)
an increase of $0.9 million, or 121.6%, in site rental costs and (ii) an
increase of $4.7 million, or 118.9%, in network services costs. The increase
in site rental costs resulted from (i) the additional owned and managed towers
discussed above; (ii) nonrecurring charges for repairs and maintenance of $0.6
million; and (iii) an increase in rental expenses for space leased by Crown
for sublease on managed towers resulting from the increase in tenants at such
sites. Site rental operating costs as a percentage of site rental revenues
increased to 33.0% in 1996 from 21.0% in 1995, primarily due to the
nonrecurring repairs and maintenance charges. The increase in network services
costs was primarily related to the two major contracts discussed above. Costs
of network services as a percentage of network services revenues increased to
60.5% for 1996 from 53.4% for 1995, primarily due to lower realized margins on
contracts other than the two mentioned above.
General and administrative expenses for 1996 were $3.2 million, an increase
of $0.5 million, or 20.0%, from 1995. This increase was primarily attributable
to higher personnel and overhead costs associated with the hiring of new
employees.
Depreciation and amortization for 1996 was $1.2 million, an increase of $0.6
million from 1995. This increase was primarily associated with the additional
towers discussed above.
Interest expense for 1996 was $1.2 million, an increase of $0.4 million from
1995. This increase was primarily attributable to borrowings under Crown's
bank credit facility which were used to finance the construction of new
towers.
UNAUDITED SUPPLEMENTAL COMBINED ADJUSTED RESULTS OF OPERATIONS
The historical financial statements included elsewhere herein do not reflect
the results of operations of the businesses of CCIC and Crown (the
"Businesses") on an aggregate basis for all the periods presented. As a
result, management believes that the historical financial statements included
elsewhere herein do not, by themselves, provide investors with sufficient
information to adequately assess the trends of the Businesses over the periods
indicated. The Company is providing additional information, therefore, to
supplement the historical financial information included elsewhere herein to
assist prospective investors in evaluating the Businesses' historical results
of operations.
The unaudited supplemental combined adjusted financial data set forth below
have been derived from the historical results of operations of CCIC which
include the results of operations for each acquired business (including Crown)
from the respective date of its acquisition by CCIC, and are adjusted to
include the pre-acquisition results of operations for each of the acquired
businesses from the beginning of the period presented to its respective
43
acquisition date. See "Unaudited Pro Forma Condensed Consolidated Statement of
Operations." The unaudited supplemental combined adjusted financial data do
not purport to present the combined results of operations that the Businesses
would have achieved had they been under common ownership and control during
such periods, nor are they indicative of the results of operations that may be
achieved in the future. The acquisitions of the acquired businesses (including
Crown) by CCIC resulted in new bases of accounting whereby the assets and
liabilities of the acquired businesses were adjusted to their fair values on
their respective dates of acquisition pursuant to Accounting Principles Board
Opinion No. 16. To the extent such adjustments resulted in charges to
depreciation and amortization expense, such charges do not enter into the
determination of costs of operations or gross margin.
YEARS ENDED
DECEMBER 31,
-------------------------
ADJUSTED(A)
-------------------------
1995 1996 1997
------- ------- -------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net revenues:
Site rental........................................ $ 9,425 $11,356 $15,560
Network services and other......................... 32,365 34,124 41,291
------- ------- -------
Total net revenues................................. $41,790 $45,480 $56,851
======= ======= =======
Costs of operations:
Site rental........................................ $ 2,372 $ 3,206 $ 3,634
Network services and other......................... 22,807 23,276 25,306
------- ------- -------
Total costs of operations.......................... $25,179 $26,482 $28,940
======= ======= =======
Gross margin:
Site rental........................................ $ 7,053 $ 8,150 $11,926
Network services and other......................... 9,558 10,848 15,985
------- ------- -------
Total gross margin................................. $16,611 $18,998 $27,911
======= ======= =======
Gross margin as a percentage of net revenues:
Site rental........................................ 74.8% 71.8% 76.6%
Network services and other......................... 29.5% 31.8% 38.7%
Total gross margin................................. 39.7% 41.8% 49.1%
- --------
(a) Excludes the effects of certain nonrecurring transactions associated with
the CTI Investments. See "Unaudited Pro Forma Condensed Consolidated
Statement of Operations."
Comparison of Years Ended December 31, 1997 and 1996
Revenues for 1997 were $56.9 million, an increase of $11.4 million, or
25.0%, from 1996. This increase was primarily attributable to (i) an increase
of $4.2 million, or 37.0%, in site rental revenues and (ii) an increase of
$7.2 million, or 21.0%, in network services and other revenues. The increase
in site rental revenues resulted primarily from the addition of 32 owned sites
between December 31, 1996 and 1997, along with an increase in the average
number of tenants per site and increases in site rental rates. The increase in
network services revenues was primarily attributable to major contracts for
site development, construction and antennae installation in connection with a
partial build-out of two carriers' networks in the greater Pittsburgh area.
Revenues from these two contracts amounted to approximately $7.9 million for
1997.
Costs of operations for 1997 were $28.9 million, an increase of $2.5
million, or 9.3%, from 1996. This increase was primarily attributable to (i)
an increase of $0.4 million, or 13.3%, in site rental costs and (ii) an
increase of $2.0 million, or 8.7%, in network services costs. The increase in
site rental costs resulted primarily from the additional owned and managed
towers discussed above. Site rental operating costs as a percentage of site
rental revenues decreased to 23.4% for 1997 from 28.2% for 1996. The increase
in network services costs was primarily related to (i) the two major contracts
mentioned above and (ii) an increase in site selection and acquisition costs
of $0.2 million. As a result of the higher margins associated with these two
contracts and increased site selection and acquisition costs, costs of network
services as a percentage of network services revenues decreased to 61.3% for
1997 from 68.2% for 1996.
44
Discussion of Six Months Ended December 31, 1997
The Company's results of operations for the six months ended December 31,
1997 were below the level of the prior two quarters. The following discussion
compares the results of operations for the six months ended December 31, 1997
with the six months ended June 30, 1997.
Revenues for the six months ended December 31, 1997 were $26.5 million, as
compared to revenues of $30.4 million for the six months ended June 30, 1997.
Site rental revenues for the six months ended December 31, 1997 were $8.4
million, as compared to site rental revenues for the six months ended June 30,
1997 of $7.2 million. Network services and other revenues for the six months
ended December 31, 1997 were $18.1 million, as compared to $23.2 million for
the six months ended June 30, 1997. The decline in network services and other
revenues was primarily due to lower revenues from the projects related to the
two major network services contracts discussed above. See "Risk Factors--
Variability in Quarterly and Annual Performance." Exclusive of revenues from
these projects, network services and other revenues amounted to $16.7 million
for the six months ended December 31, 1997, as compared to $16.7 million for
the six months ended June 30, 1997. Revenues from additional network services
contracts in the fourth quarter of 1997 were offest by lower revenues at TEA
for the six months ended December 31, 1997 relative to the six months ended
June 30, 1997.
Costs of operations for the six months ended December 31, 1997 were $13.5
million, as compared to costs of operations of $15.4 million for the six
months ended June 30, 1997. Costs of operations for site rentals for the six
months ended December 31, 1997 were $1.9 million, as compared to costs of
operations for site rentals for the six months ended June 30, 1997 of $1.8
million. Costs of operations for network services and other for the six months
ended December 31, 1997 were $11.6 million as compared to costs of operations
for network services and other for the six months ended June 30, 1997 of $13.6
million. Due to the higher margins associated with the two major network
services contracts discussed above, costs of network services as a percentage
of network services revenues increased to 64.5% for the six months ended
December 31, 1997 as compared to 58.8% for the six months ended June 30, 1997.
Comparison of Years Ended December 31, 1996 and 1995
Revenues for 1996 were $45.5 million, an increase of $3.7 million, or 8.8%,
from the prior year. This increase was primarily attributable to (i) an
increase of $1.9 million, or 20.5%, in site rental revenues and (ii) an
increase of $1.8 million, or 5.4%, in network services revenues. The increase
in site rental revenues resulted primarily from the addition of 8 owned sites
and 5 managed sites between December 31, 1995 and 1996, along with an increase
in the average number of tenants per site and increases in site rental rates.
The increase in network services revenues was primarily attributable to two
major contracts with wireless carriers in 1996. The first contract was for
deployment of wireless infrastructure through the MARTA system for the 1996
Summer Olympics in Atlanta. Revenues from this contract amounted to
approximately $2.6 million in 1996. The second contract was to build out a
carrier's network in the Pittsburgh area. Revenues from this contract amounted
to approximately $3.4 million in 1996. Revenues from network services at TEA
decreased by $5.3 million for 1996 due to decreased effectiveness of sales and
marketing initiatives by senior management.
Costs of operations for 1996 were $26.5 million, an increase of $1.3
million, or 5.2%, from 1995. This increase was primarily attributable to (i)
an increase of $0.8 million, or 35.2%, in site rental costs; (ii) an increase
of $0.5 million, or 2.1%, in network services costs. The increase in site
rental costs resulted from (i) the additional owned and managed towers
discussed above; (ii) nonrecurring charges for repairs and maintenance of $0.6
million; and (iii) an increase in rental expenses for space leased by the
Company for sublease on managed towers resulting from the increase in tenants
at such sites. Site rental operating costs as a percentage of site rental
revenues increased to 28.2% for 1996 from 25.2% in 1995, primarily due to the
nonrecurring repairs and maintenance charges. The increase in network services
costs was primarily related to the two major contracts mentioned above, offset
in part by a decrease in site selection and acquisition costs of $4.2 million.
Costs of network services as a percentage of network services revenues
decreased to 68.2% for 1996 from 70.5% for 1995.
45
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had consolidated cash and cash
equivalents of $55.1 million, consolidated long-term debt of $156.3 million,
invested capital from the issuance of its redeemable preferred stock of $160.7
million and consolidated stockholders' equity of $41.8 million.
For the years ended December 31, 1995, 1996 and 1997, the Company's net cash
provided by (used for) operating activities was $1.7 million, ($0.5 million)
and ($0.6 million), respectively. Since its inception, the Company has
generally funded its activities (other than its acquisitions and investments)
through excess proceeds from contributions of equity capital. The Company has
financed its acquisitions and investments with the proceeds from equity
contributions, borrowings under its bank credit facility and the issuance of
promissory notes to sellers.
On a pro forma basis, capital expenditures (excluding acquisitions) were
$9.7 million for the year ended December 31, 1996 (of which $1.0 million was
for CCIC and TEA and $8.7 million was for Crown) and $30.5 million for the
year ended December 31, 1997 (of which $3.4 million was for CCIC and TEA and
$27.1 million was for Crown).
In August and October of 1997, the Company issued shares of its Senior
Convertible Preferred Stock for aggregate net proceeds of $29.3 million and
$36.5 million, respectively. The proceeds from the August issuance were used
to make a $25.0 million payment as part of the cash purchase price for the
Crown Merger. On October 31, 1997, the Company entered into an amendment to
the Senior Credit Facility. As amended, the Senior Credit Facility provides
for available borrowings of $100.0 million and expires on December 31, 2004.
On October 31, 1997, in connection with the October Refinancing, new
borrowings under the Senior Credit Facility of $94.7 million, along with the
proceeds from the October issuance of the Senior Convertible Preferred Stock,
were used to repay the Seller Note, to repay loans outstanding under a credit
agreement at Crown Communication and to pay related fees and expenses. The
Senior Credit Facility requires the Company to maintain certain financial
covenants and places restrictions on the ability of the Company and its
subsidiaries to, among other things, incur debt and liens, pay dividends, make
capital expenditures, undertake transactions with affiliates and make
investments.
The Company used the net proceeds from the Offering of the Old Notes to
repay substantially all of its outstanding indebtedness, including borrowings
under the Senior Credit Facility, and to pay related fees and expenses. The
balance of the net proceeds from the Offering of the Old Notes is being used
for general corporate purposes. As of January 5, 1998, the Company and its
subsidiaries had unused borrowing availability under the Senior Credit
Facility of approximately $93.6 million. See "Use of Proceeds."
The Company and its subsidiaries expect to use the borrowing availability
under the Senior Credit Facility, together with a portion of the net proceeds
from the Offering of the Old Notes, to fund the execution of the Company's
business plan. The Company's business strategy contemplates substantial
capital expenditures in connection with the expansion of its tower footprints.
The exact amount of the Company's future capital expenditures, however, will
depend upon a number of factors. Pursuant to the Nextel Agreement, the Company
has exercised an option to acquire 50 towers from Nextel in the first quarter
of 1998 for an aggregate purchase price of approximately $14.4 million. In
addition, pursuant to the Nextel Agreement, the Company has the exclusive
right and option to construct up to 250 new towers within selected markets
(and along parts of certain interstate highway corridors) with Nextel as the
anchor tenant. The Company currently anticipates that it will build
approximately 100 of the 250 towers in 1998 for an aggregate amount of
approximately $20.0 million, and the Company currently expects to expend
similar amounts in 1999. The Company also intends to continue to explore other
opportunities to build and acquire additional towers. Whether the Company
utilizes the Senior Credit Facility to finance the Nextel build-out and/or to
finance such other opportunities will depend upon a number of factors,
including (i) the attractiveness of the opportunities, (ii) the time frame in
which they are identified, (iii) the number of pre-existing projects to which
the Company is committed and (iv) the Company's liquidity at the time of any
potential opportunity. In the event borrowings under the Senior Credit
Facility have
46
otherwise been utilized when an opportunity arises (including additional
Nextel build-out opportunities), and the Company does not otherwise have cash
available (from the net proceeds of the Offering of the Old Notes or
otherwise), the Company would be forced to seek additional debt or equity
financing or to forego the opportunity. In the event the Company determines to
seek additional debt or equity financing, there can be no assurance that any
such financing will be commercially available or permitted by the terms of the
Company's existing indebtedness. To the extent the Company is unable to
finance future capital expenditures, it will be unable to achieve its
currently contemplated business strategy.
Prior to May 15, 2003, the Company's interest expense on the Notes will be
comprised solely of the accretion of original issue discount. Thereafter, the
Notes will require annual cash interest payments of approximately $26.7
million. In addition, the Senior Credit Facility will require periodic
interest payments on amounts borrowed thereunder. The Company's ability to
make scheduled payments of principal of, or to pay interest on, its debt
obligations, and its ability to refinance any such debt obligations (including
the Notes), will depend on its future performance, which, to a certain extent,
is subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond its control. As discussed above,
the Company's business strategy contemplates substantial capital expenditures
in connection with the expansion of its tower footprints. There can be no
assurance that the Company will generate sufficient cash flow from operations
in the future, that anticipated revenue growth will be realized or that future
borrowings, equity contributions or loans from affiliates will be available in
an amount sufficient to service its indebtedness and make anticipated capital
expenditures. The Company anticipates that it may need to refinance all or a
portion of its indebtedness (including the Notes) on or prior to its scheduled
maturity. There can be no assurance that the Company will be able to effect
any required refinancings of its indebtedness (including the Notes) on
commercially reasonable terms or at all. See "Risk Factors."
Because of the relatively low levels of inflation experienced in 1995, 1996
and 1997, inflation did not have a significant effect on the Company's or
Crown's results in such years.
REPORTING REQUIREMENTS UNDER THE INDENTURE GOVERNING THE NOTES (THE
"INDENTURE")
As of December 31, 1997, the Company does not have any Unrestricted
Subsidiaries (as defined in the Indenture). The following information (as such
capitalized terms are defined in the Indenture) is presented solely for the
purpose of measuring compliance with respect to the terms of the Indenture;
such information is not intended as an alternative measure of 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.
(IN
THOUSANDS
OF
DOLLARS)
---------
Tower Cash Flow, for the three months ended December 31, 1997.... $ 3,118
========
Consolidated Cash Flow, for the twelve months ended December 31,
1997............................................................ $ 13,150
Less: Tower Cash Flow, for the twelve months ended December 31,
1997............................................................ (10,625)
Plus: four times Tower Cash Flow, for the three months ended
December 31, 1997............................................... 12,472
--------
Adjusted Consolidated Cash Flow, for the twelve months ended
December 31, 1997............................................... $ 14,997
========
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 128, Earnings per Share
("SFAS 128"). SFAS 128 establishes new standards for computing and presenting
earnings per share ("EPS") amounts for companies with publicly held common
stock or potential common stock. The new standards require the presentation of
both basic and diluted EPS amounts for companies with complex capital
structures. Basic EPS is computed by dividing income available to common
47
stockholders by the weighted-average number of common shares outstanding for
the period, and excludes the effect of potentially dilutive securities (such
as options, warrants and convertible securities) which are convertible into
common stock. Dilutive EPS reflects the potential dilution from such
convertible securities. SFAS 128 is effective for periods ending after
December 15, 1997. The Company will adopt the requirements of SFAS 128 at such
time as it has publicly held common stock.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, Disclosure of Information about Capital Structure ("SFAS
129"). SFAS 129 establishes standards for disclosing information about a
company's outstanding debt and equity securities and eliminates exemptions
from such reporting requirements for nonpublic companies. SFAS 129 is
effective for periods ending after December 15, 1997. The Company has adopted
the requirements of SFAS 129 in its financial statements for the year ended
December 31, 1996.
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 will adopt the requirements of SFAS 130 in 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 will adopt the requirements of SFAS 131 in 1998.
48
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
In connection with the sale of the Old Notes, the Company entered into the
Registration Rights Agreement with the Initial Purchasers, pursuant to which
the Company agreed to use their best efforts to file with the Commission a
registration statement with respect to the exchange of the Old Notes for a
series of registered debt securities with terms identical in all material
respects to the terms of the Old Notes, except that the New Notes have been
registered under the Securities Act and are issued free of any covenant
regarding registration, including the payment of additional interest upon a
failure to file or have declared effective and exchange offer registration
statement or to consummate the Exchange Offer by certain dates.
The Company is making the Exchange Offer in reliance on the position of the
staff of the Commission as set forth in Exxon Capital Holdings Corp., SEC No-
Action Letter (April 13, 1989), Morgan Stanley & Co. Inc., SEC No-Action
Letter (June 5, 1991) and Shearman & Sterling, SEC No-Action Letter (July 2,
1993). However, the Company has not sought its own no-action letter, and there
can be no assurance that the staff of the Commission would make a similar
determination with respect to the Exchange Offer as in such other
circumstances. Based upon these interpretations by the staff of the
Commission, the Company believes that New Notes issued pursuant to this
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by a holder thereof other than (i) a broker-dealer who
purchased such Old Notes directly from the Company to resell pursuant to Rule
144A or any other available exemption under the Securities Act or (ii) a
person that is an "affiliate" (as defined in Rule 405 of the Securities Act)
of the Company without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such New Notes are
acquired in the ordinary course of such holder's business and that such holder
is not participating, and has no arrangement or understanding with any person
to participate, in the distribution of such New Notes. Holders of Old Notes
accepting the Exchange Offer will represent to the Company in the Letter of
Transmittal that such conditions have been met. Any holder who participates in
the Exchange Offer for the purpose of participating in a distribution of the
New Notes may not rely on the position of the staff of the Commission as set
forth in these no-action letters and would have to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any secondary resale transaction. A secondary resale
transaction in the United States by a holder who is using the Exchange Offer
to participate in the distribution of New Notes must be covered by a
registration statement containing the selling securityholder information
required by Item 507 of Regulation S-K of the Securities Act.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it acquired the Old Notes as a result
of market-making activities or other trading activities and will deliver a
prospectus in connection with any resale of such New Notes. 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 Notes received in exchange for
Old Notes where such Old Notes 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 deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. The Company has agreed that for a period of
180 days after the Expiration Date, they will make this Prospectus available
to broker-dealers for use in connection with any such resale. See "Plan of
Distribution."
Except as aforesaid, this Prospectus may not be used for an offer to resell,
resale or other retransfer of New Notes.
The Exchange Offer is not being made to, nor will the Company accept tenders
for exchange from, holders of Old Notes in any jurisdiction in which the
Exchange Offer or the acceptance thereof 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, the
Company will, unless such Old Notes are withdrawn in accordance with the
withdrawal rights specified in "Withdrawal of Tenders" below,
49
accept any and all Old Notes 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 Notes, and consummation of the Exchange Offer, is the Exchange Date, which
will be the first business day following the Expiration Date (unless extended
as described herein). The Company will issue, on or promptly after the
Exchange Date, an aggregate principal amount at maturity of up to $251,000,000
of New Notes in exchange for a like principal amount at maturity of
outstanding Old Notes tendered and accepted in connection with the Exchange
Offer. The New Notes 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 Notes in connection with the
Exchange Offer. However, Old Notes may be tendered only in integral multiples
of $1,000.
The terms of the New Notes are identical in all material respects to the
terms of the Old Notes, except that the New Notes 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 Notes will evidence
the same debt as the Old Notes and will be issued under and be entitled to the
same benefits under the Indenture as the Old Notes. As of the date of this
Prospectus, $251,000,000 aggregate principal amount at maturity of the Old
Notes is outstanding.
In connection with the issuance of the Old Notes, the Company arranged for
the Old Notes originally purchased by qualified institutional buyers to be
issued and transferable in book-entry form through the facilities of The
Depository Trust Company ("DTC"), acting as depositary. Except as described
under "Book-Entry, Delivery and Form," the New Notes will be issued in the
form of a global note registered in the name of DTC or its nominee and each
holder's interest therein will be transferable in book-entry form through DTC.
See "Book-Entry, Delivery and Form."
Holders of Old Notes do not have any appraisal or dissenters' rights in
connection with the Exchange Offer. Old Notes 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
Indenture, but will not be entitled to any registration rights under the
Registration Rights Agreement.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purposes of receiving the New Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Holders who tender Old Notes in connection with the Exchange Offer 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 Notes in connection with the Exchange Offer. The Company 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 May
14, 1998, unless extended by the Company in its sole discretion (but in no
event to a date later than May 29, 1998), in which case the term "Expiration
Date" shall mean the latest date and time to which the Exchange Offer is
extended.
The Company reserves the right, in its sole discretion (i) to delay
accepting any Old Notes, to extend the Exchange Offer or to terminate the
Exchange Offer and to refuse to accept Old Notes not previously accepted, if
50
any of the conditions set forth below under "Conditions to the Exchange Offer"
shall not have been satisfied and shall not have been waived by the Company
(if permitted to be waived by the Company) and (ii) to amend the terms of the
Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral
or written notice thereof to the registered holders. If the Exchange Offer is
amended in a manner determined by the Company to constitute a material change,
the Company will promptly disclose such amendment by means of a prospectus
supplement that will be distributed to the registered holders of the Old
Notes, and the Company will extend the Exchange Offer for a period of five to
ten business days, depending upon the significance of the amendment and the
manner of disclosure to the registered holders, if the Exchange Offer would
otherwise expire during such five to ten business day period. In no event,
however, shall the Expiration Date be later than May 29, 1998.
If the Company determines to make a public announcement of any delay,
extension, amendment or termination of the Exchange Offer, the Company shall
have no obligation to publish, advertise or otherwise communicate any such
public announcement, other than by making a timely release to an appropriate
news agency.
INTEREST ON THE NEW NOTES
The Accreted Value of the New Notes will be calculated from the original
date of issuance of the Old Notes. The New Notes will accrete daily at a rate
of 10.625% per annum, compounded semiannually, to an aggregate principal
amount of $251,000,000 by November 15, 2002. Cash interest will not accrue on
the New Notes prior to November 15, 2002. Thereafter, cash interest on the New
Notes will accrue and be payable semiannually in arrears on each May 15 and
November 15, commencing May 15, 2003, at a rate of 10.625% per annum.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or to exchange, any Old Notes for any New
Notes, and may terminate or amend the Exchange Offer before the acceptance of
any Old Notes for exchange, if:
(a) 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 the Company's reasonable good faith judgment, would be expected
to impair the ability of the Company to proceed with the Exchange Offer, or
(b) any law, statute, rule or regulation is adopted or enacted, or any
existing law, statute, rule or regulation is interpreted by the Commission
or its staff, which, in the Company's reasonable good faith judgment, would
be expected to impair the ability of the Company to proceed with the
Exchange Offer.
If the Company determines in its reasonable good faith judgment that any of
the foregoing conditions exist, the Company may (i) refuse to accept any Old
Notes and return all tendered Old Notes to the tendering holders, (ii) extend
the Exchange Offer and retain all Old Notes tendered prior to the expiration
of the Exchange Offer, subject, however, to the rights of holders who tendered
such Old Notes to withdraw their tendered Old Notes which have not been
withdrawn. If such waiver constitutes a material change to the Exchange Offer,
the Company will promptly disclose such waiver by means of a prospectus
supplement that will be distributed to the registered holders, and the Company
will extend the Exchange Offer for a period of five to ten business days,
depending upon the significance of the waiver and the manner of disclosure to
the registered holders, if the Exchange Offer would otherwise expire during
such five to ten business days. In no event, however, shall the Expiration
Date be a date later than May 29, 1998.
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 thereon guaranteed if required by the Letter of Transmittal
51
and mail or otherwise deliver such Letter of Transmittal or such facsimile,
together with the Old Notes (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 Notes by causing DTC
to transfer such Old Notes into the Exchange Agent's account in accordance
with DTC's procedure for such transfer. Although delivery of Old Notes 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 Notes will constitute an agreement between
such holder and the Company 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 Notes 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, it is recommended that holders use
an overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure delivery to the Exchange Agent before the Expiration Date.
No Letter of Transmittal or Old Notes should be sent to the Company. 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 Notes 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 Notes, either make appropriate arrangements to register
ownership of the Old Notes 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 Institution (as defined below)
unless the Old Notes tendered pursuant thereto are tendered (i) by a
registered holder who has not completed the box entitled "Special Payment
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal,
or (ii) for the account of an Eligible 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"
within the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible
Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, such Old Notes 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 as such
registered holder's name appears on such Old Notes.
If the Letter of Transmittal or any Old Notes 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
the Company, evidence satisfactory to the Company of their authority to so act
must be submitted with the Letter of Transmittal.
52
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance and withdrawal of tendered Old Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and
all Old Notes not properly tendered or any Old Notes whose acceptance by the
Company would, in the opinion of U.S. counsel to the Company, be unlawful. The
Company also reserves the right to waive any defects, irregularities or
conditions of tender as to any particular Old Notes either before or after the
Expiration Date. The Company's 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 Notes must be cured within
such time as the Company shall determine. Although the Company intends to
request the Exchange Agent to notify holders of defects or irregularities with
respect to tenders of Old Notes, neither the Company, the Exchange Agent nor
any other person shall have any duty or incur any liability for failure to
give such notification. Tenders of Old Notes will not be deemed to have been
made until such defects or irregularities have been cured or waived. Any Old
Notes 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, the Company reserves 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 the Company that, among other
things, the New Notes acquired in connection with the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such New
Notes, 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 Notes and that neither the holder
nor any such other person is an "affiliate" (as defined in Rule 405 under the
Securities Act) of the Company. If the holder is a broker-dealer which will
receive New Notes for its own account in exchange of Old Notes, it will
acknowledge that it acquired such Old Notes 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 Notes. See "Plan of Distribution."
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, or (ii) who cannot deliver their Old Notes, the Letter
of Transmittal or any other required documents to the Exchange Agent, or
cannot complete the procedure for book-entry transfer, prior to the Expiration
Date, may effect a tender of their Old Notes if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent received from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number or
numbers of such Old Notes and the principal amount of Old Notes tendered,
stating that the tender is being made thereby and guaranteeing that, within
five business days after the Expiration Date, the Letter of Transmittal (or
facsimile thereof) together with the certificate or certificates
representing the Old Notes to be tendered in proper form for transfer (or
confirmation of a book-entry transfer into the Exchange Agent's account at
DTC of Old Notes delivered electronically) and any other documents required
by the Letter of Transmittal will be deposited by the Eligible Institution
with the Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof) as well as the certificate or certificates representing
all tendered Old Notes in proper form for transfer (or confirmation of a
book-entry transfer into the Exchange Agent's account at DTC of Old Notes
delivered electronically) and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within five business days
after the Expiration Date.
53
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes 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 Notes 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 (i)
specify the name of the person who deposited the Old Notes to be withdrawn
(the "Depositor"), (ii) identify the Old Notes to be withdrawn (including the
certificate number or numbers and principal amount of such Old Notes), (iii)
be signed by the Depositor in the same manner as the original signature on the
Letter of Transmittal by which such Old Notes 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 Notes into
the name of the person withdrawing the tender, and (iv) specify the name in
which any such Old Notes 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 the Company,
whose determination shall be final and binding on all parties. Any Old Notes
so withdrawn will be deemed not to have been validly tendered for purposes of
the Exchange Offer and no New Notes will be issued with respect thereto unless
Old Notes so withdrawn are validly re-tendered. Any Old Notes 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 Notes 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
United States Trust Company of New York 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 770
Broadway, 13th Floor, New York, NY 10003. The Exchange Agent's telephone
number is (800) 548-6565 and facsimile number is (212) 420-6152.
FEES AND EXPENSES
The Company will not make any payment to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company will pay certain
other expenses to be incurred in connection with the Exchange Offer, including
the fees and expenses of the Trustee, accounting and certain legal fees.
Holders who tender their Old Notes for exchange will not be obligated to pay
any transfer taxes in connection therewith. If, however, New Notes are to be
delivered to, or are to be issued in the name of, any person other than the
registered holder of the Old Notes tendered, or if tendered Old Notes 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 Notes 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 Notes will be recorded at the same carrying value as the Old Notes
as reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized by the
Company upon the consummation of the Exchange Offer. Any expenses of the
Exchange Offer that are paid by the Company will be amortized by the Company,
as the case may be, over the term of the New Notes in accordance with
generally accepted accounting principles.
54
CONSEQUENCES OF FAILURES TO PROPERLY TENDER OLD NOTES IN THE EXCHANGE
Issuance of the New Notes in exchange for the Old Notes pursuant to the
Exchange Offer will be made only after timely receipt by the Exchange Agent of
such Old Notes, a properly completed and duly executed Letter of Transmittal
and all other required documents. Therefore, holders of the Old Notes desiring
to tender such Old Notes in exchange for New Notes should allow sufficient
time to ensure timely delivery. The Company is under no duty to give
notification of defects or irregularities with respect to tenders of Old Notes
for exchange. Old Notes that are not tendered or that are tendered but not
accepted by the Company, 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, the Company will not be
required to register the remaining Old Notes. Remaining Old Notes will
continue to be subject to the following restrictions on transfer: (i) the
Remaining Old Notes 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 (ii)
the Remaining Old Notes will bear a legend restricting transfer in the absence
of registration or an exemption therefrom. The Company does not currently
anticipate that it will register the Remaining Old Notes under the Securities
Act. To the extent that Old Notes are tendered and accepted in connection with
the Exchange Offer, any trading market for Remaining Old Notes could be
adversely affected.
55
INDUSTRY BACKGROUND
GENERAL
The Company is a leading provider of communication sites and wireless
network services. The Company owns, operates and manages wireless transmission
towers and other communications sites, and also provides an array of related
infrastructure and network support services to the wireless communications and
radio and television broadcasting industries. Each of these industries is
currently experiencing a period of significant change. The wireless
communications industry is growing rapidly as consumers become more aware of
the benefits of wireless services, current wireless technologies are used in
more applications, the cost of wireless services to consumers declines and new
wireless technologies are developed. Changes in U.S. federal regulatory
policy, including the implementation of the 1996 Telecom Act, have led to a
significant number of new competitors in the wireless communications industry
through the auction of frequency spectrum for a wide range of uses, most
notably Personal Communications Services ("PCS"). 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
communication sites as new carriers build out their networks and existing
carriers upgrade and expand their networks to maintain their competitiveness.
The Company believes that, as the wireless communications industry has become
more competitive, wireless communication carriers have sought operating and
capital efficiencies by outsourcing certain network services and build-out
activities and by co-locating transmission equipment with 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 by
requiring that towers accommodate multiple tenants. While the wireless
communications industry is experiencing rapid growth, the broadcasting
industry has been characterized by rapid consolidation and rationalization.
This industry is currently assessing the benefits of, and planning its
strategy for, the transition from analog to digital transmission systems,
which will require enhanced broadcast infrastructure.
All of these factors have provided an opportunity for the Company to
specialize in the provision, ownership and management of communication sites,
the leasing of antennae space on such sites and the provision of related
network infrastructure and support services.
TRANSMISSION NETWORKS AND TOWERS
Wireless communications and broadcasting companies each require wireless
transmission "networks" in order to provide service to their customers. Each
of these networks is configured specifically to meet the coverage requirements
of the particular carrier and includes transmission equipment such as antennae
placed at various locations throughout the service area. These locations, or
"communication sites," are critical to the operation of a wireless network and
consist of towers, rooftops and other structures upon which antennae are
placed. A network's design and the selection of available communication sites
endeavor to make optimal use of the frequency spectrum available to the
wireless communications carrier based upon projected usage patterns,
topography and design criteria.
56
[GRAPHIC DEPICTING WIRELESS COMMUNICATIONS NETWORK (a)]
- --------
(a) The two towers in the diagram above represent only a small part of the
interconnecting communication sites that may form a wireless
communications network. Each tower typically supports both transmitting
and receiving antennae, as well as microwave equipment to backhaul traffic
between towers and a carrier switching office.
The value of a tower depends on its location and the number of antennae that
it can support. While most towers have not been built with the capacity to
support multiple tenants, in many instances they can be upgraded to support
additional antennae. Several users may share one tower through "vertical
separation" or "sectorization," with each type of user on a different level.
AM broadcast towers are, however, an exception to this rule because the entire
tower is designed (electrified) to act as an antenna, and the resulting radio
interference problems make such towers undesirable for other wireless
applications.
A typical tower consists of a compound enclosing the tower and an equipment
shelter (which houses a variety of transmitting, receiving and switching
equipment). The tower can be either a self-supported or guyed model. There are
two types of self-supported models: the lattice and the monopole. A lattice
model is usually tapered from the bottom up and can have three or four legs. A
monopole is a tubular structure that is typically used as a single purpose
tower or in places where there are space constraints or a need to address
aesthetic concerns. Guyed towers gain their support capacity from a series of
guy cables attaching separate levels of the tower to anchor foundations in the
ground. Self-supported towers typically range in height from 50-200 feet for
monopoles and up to 1000 feet for lattices, while guyed towers can reach 2000
feet or more.
Rooftop sites are more common in urban downtowns where tall buildings are
generally available and multiple communication sites are required because of
high wireless traffic density. One advantage of a rooftop site is that zoning
regulations typically permit installation of antennae. In cases of such high
population density, neither height nor extended radius of coverage are as
important; and the installation of a tower structure may prove to be
impossible because of zoning restrictions, land cost and land availability.
57
[GRAPHIC DEPICTING TYPES OF TOWERS AND ANTENNAE (A)]
- --------
(a) Another type of tower not shown here is a guyed tower.
DEVELOPMENT OF THE TOWER INDUSTRY
The 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,
particularly cellular and paging. Nevertheless, as additional towers were
built by the wireless communications 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 owners 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. The Company believes 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 PCS, narrowband paging and wireless local loop),
each requiring networks with extensive tower infrastructure. These
58
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
antennae sites from a tower company with a strategically located cluster of
towers and other communication sites in that area in order to efficiently and
effectively establish service coverage in a given market.
Today, towers are owned by a variety of companies, including wireless
communications 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 communications 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.
TRENDS IN THE WIRELESS COMMUNICATIONS AND BROADCASTING INDUSTRIES
The Company's existing business and future opportunities are affected by the
ongoing trends within the two major industries it serves, 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 the Company believes 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, PCS, paging, specialized mobile radio ("SMR") and enhanced
specialized mobile radio ("ESMR"). The industry has benefitted in recent years
from increasing demand for its services, and industry experts expect this
demand to continue to increase. The following table sets forth industry
estimates regarding projected subscriber growth for certain types of wireless
communications services:
1996-2001 2001-2006
ESTIMATED PROJECTED PROJECTED COMPOUNDED COMPOUNDED
SUBSCRIBERS SUBSCRIBERS SUBSCRIBERS ANNUAL ANNUAL
1996 2001 2006 GROWTH RATE GROWTH RATE
----------- ----------- ----------- ----------- -----------
(IN MILLIONS EXCEPT PERCENTAGES)
Cellular........... 43.7 79.5 90.7 12.7% 2.7%
PCS................ 0.3 19.5 49.3 128.8 20.4
Paging............. 41.1 61.9 66.6 8.5 1.5
ESMR............... 0.3 6.6 12.0 85.1 12.9
Fixed Wireless..... 0.0 0.8 20.5 nm 93.8
- --------
nm = not meaningful
Source: Paul Kagan Associates, Inc. There can be no assurance that these
projections will prove to be accurate.
The Company believes that more communication sites will be required in the
future to accommodate the expected increase in demand for wireless
communications services. Further, the Company sees additional opportunities
with the development of higher frequency technologies (such as PCS) 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.
59
Current emerging wireless communications systems, such as PCS and ESMR,
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 PCS and ESMR carriers have already built limited
networks in certain markets, these carriers still need to fill in "dead zones"
and expand geographic coverage. The CTIA estimates that, as of June 30, 1997,
there were 38,650 antennae sites in the United States. The PCIA estimates that
the wireless communications industry will construct at least 100,000 new
antennae sites over the next 10 years. As a result of advances in digital
technology, ESMR 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, the Company
anticipates 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. These future potential applications include the auction of licenses
scheduled for December 1997 for local multi-point distribution services,
including wireless local loop, wireless cable television, data and Internet
access. 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.
In addition to the increased demand for wireless services and the need to
develop and expand wireless communications networks, the Company believes that
other trends influencing the wireless communication industry have important
implications for independent tower operators. In this increasingly competitive
environment, the Company believes that many carriers are dedicating their
capital and operations primarily to those activities that directly contribute
to subscriber growth, such as marketing and distribution. Management believes
these carriers, therefore, may seek to reduce costs and increase efficiency
through the outsourcing of infrastructure network functions such as
communication site ownership, construction, operation and maintenance.
Further, 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" ("NIMBY") arguments generated by local
zoning/planning authorities in opposition to the proliferation of towers.
Radio and Television Broadcasting
The U.S. broadcasting industry is generally a mature one in terms of demand
for transmission tower capacity. Opportunities exist, however, 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 communications carriers. The conversion of broadcast systems from
analog to digital technology will require a substantial number of new towers
to be constructed to accommodate the new systems. For example, the Company
believes that additional demand for tower capacity will occur when digital
spectrum is used to deliver high definition television ("HDTV") or digital
multi-casting, i.e., multiple "normal" definition television channels.
Television station owners will likely broadcast both the existing National
Television Standards Committee ("NTSC") television broadcasting technology and
HDTV for a number of years.
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
60
restrictions associated with new tower sites, tower operators benefit from
several favorable characteristics. The ability of tower operators to provide
antennae 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. Additionally, tower operators face
increased NIMBY sentiment by municipalities, which is reducing the
opportunities for new towers to be built and driving the trend toward co-
location on multiple tenant towers.
The Company believes that independent tower operators also benefit from the
contract nature of the site rental business and the predictability and
stability of these monthly, recurring revenues. In addition, the site rental
business has low variable costs and significant operating leverage. Towers
generally are fixed 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 communications 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. In addition, regulatory problems associated
with registering the location of the new antenna with the FCC may arise if the
new location is at the edge of the wireless communication 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 municipal approval and the time required to complete
these activities may not be justified by any potential saving in reduced site
rental expense.
61
BUSINESS
The Company is a leading provider of communication sites and wireless
network services. The Company owns, operates and manages wireless transmission
towers and rooftop sites, and also provides an array of related infrastructure
and network support services to the wireless communications and radio and
television broadcasting industries. The Company's primary business focus is
the leasing of antennae space on multiple tenant towers and rooftops to a
variety of wireless communications carriers under long-term lease contracts.
Supporting its competitive position in the site rental business, the Company
maintains in-house expertise in, and offers its customers, infrastructure and
network support services that include communication site selection and
acquisition, antennae installation, site development and construction and
network design.
The Company leases antennae space to its customers on its owned and managed
towers. The Company generally receives fees for installing customers'
equipment and antennae on a tower and also receives monthly rental payments
from customers payable under site rental leases that generally range in length
from three to five years. The Company's U.S. customers include such companies
as Aerial Communications, American Paging, AT&T Wireless, Bell Atlantic
Mobile, BellSouth Mobility, Motorola, Nextel, PageNet and Sprint PCS, as well
as private network operators and various federal and local government
agencies, such as the Federal Bureau of Investigation, the Internal Revenue
Service and the U.S. Postal Service.
At December 31, 1997, the Company owned or managed 373 towers and 80 revenue
producing rooftop sites in the United States and Puerto Rico. The Company's
tower footprints consist of 178 owned and managed towers located in western
Pennsylvania (primarily in and around the greater Pittsburgh area), 138 owned
and managed towers in the southwestern United States (primarily in western
Texas), 21 owned towers located in Mississippi, 14 owned towers on
mountaintops across Puerto Rico, 14 managed towers in West Virginia and 8
other owned towers located in other states across the United States. The
Company plans to enhance and expand its tower footprints by building and
acquiring multiple tenant towers in locations attractive to site rental
customers. To that end, the Company has developed, maintains and deploys for
its own use extensive network design and radio frequency engineering
expertise, as well as site selection, site acquisition and tower construction
capabilities. The Company plans to leverage such expertise and experience in
building and acquiring new towers by entering into build-out or purchase
contracts with various carriers. For example, pursuant to an agreement with
Nextel, the Company has options to construct up to 250 multiple tenant towers
with Nextel as an anchor tenant along certain interstate corridors. In
addition, pursuant to this agreement, the Company has exercised an option to
purchase 50 of Nextel's existing towers clustered in various markets,
including Philadelphia, Houston, Dallas and San Antonio.
The Company's 34.3%-owned affiliate, CTI, owns or has access to
approximately 1,300 towers in the United Kingdom, primarily serving the U.K.
broadcasting industry. CTI's customers include such companies as the BBC,
Cellnet, NTL, Mercury One2One, Orange Personal Communications and Vodaphone
Limited.
BACKGROUND
Founded in 1994, the Company acquired 127 towers located in Texas, Colorado,
New Mexico, Arizona, Oklahoma and Nevada from PCI in 1995. Also in 1995, in
order to expand its geographic coverage, scope of services and client base,
the Company consummated the Spectrum Acquisition for a leading rooftop
management and engineering firm that manages rooftop sites. The Spectrum
Acquisition provided the Company with management revenues for 44 rooftop
sites, as well as important relationships with carriers, and gave the Company
an entry into the market for wireless network services.
In 1996, the Company acquired from Motorola a strategic cluster of 14 towers
located on mountaintops across Puerto Rico, as well as one rooftop site and an
island-wide microwave and specialized mobile radio ("SMR") system. The Puerto
Rico Acquisition gave the Company a strategic tower footprint, and positioned
the Company to be a leading independent tower operator in the Puerto Rican
market. In addition, in July 1996, CCIC purchased an option to acquire 36% of
TEA, which represented a significant step for the Company towards
62
becoming a full service provider of wireless network services. TEA is a
leading site acquisition firm offering carriers specialized expertise in site
selection, site acquisition, zoning, permit procurement and project
management. In May 1997, CCIC acquired all the outstanding shares of TEA. In
June 1997, the Company purchased a minority interest in VISI, which intends to
provide computerized geographic information for a variety of business
applications (including site acquisition and telecommunication network
design).
In February 1997, CCIC, along with Candover Investments plc, TeleDiffusion
de France International S.A. (a subsidiary of France Telecom) and Berkshire,
formed CTI to purchase the analog television and radio transmission operations
of the BBC (the "BBC Transmission Business"). The Company owns 34.3% of CTI.
The BBC Transmission Business included ownership of approximately 780 towers
in the United Kingdom and rights to locate broadcast transmission equipment on
an additional 558 towers in the United Kingdom owned by NTL, CTI's primary
competitor. In addition, CTI entered into a 10-year contract with the BBC to
provide analog television and radio transmission services. With the
acquisition of the BBC Transmission Business, the Company, through its
affiliation with CTI, gained access to an expertise in broadcast transmission
upon which the Company believes it can capitalize in other markets. See
"Prospectus Summary--Summary Financial and Other Data of CTI," "Risk Factors--
Relationship with Minority Owned Affiliate; Potential Conflicts of Interests"
and "Certain Relationships and Related Transactions."
In August 1997, CCIC expanded its tower footprints and enhanced its domestic
network services offerings by consummating the Crown Merger. The assets
acquired through the Crown Merger included 61 owned towers and exclusive
leasing rights on 147 other towers and rooftop sites, most of which are
located in and around the greater Pittsburgh area, giving the Company a
significant presence in that market. The remaining Crown communication sites
are located in Pennsylvania, West Virginia, Kentucky, Ohio and Delaware. The
Crown assets included engineering and operational expertise and management
experience. The Crown Merger also provided the Company with relationships with
major wireless communications carriers such as Aerial Communications, AirTouch
Cellular, Bell Atlantic Mobile, AT&T Wireless, PageNet, Nextel and Sprint PCS.
As a result of the Crown Merger, the Company believes it is one of the largest
domestic independent owners and providers of tower sites and wireless network
services.
BUSINESS STRATEGY
The Company's objective is to become the leading global provider of
communication sites and network services to the wireless communications and
broadcasting industries. Management believes that the Company's experience in
establishing and expanding its existing tower footprints, its significant
relationships with wireless communications companies and its ability to offer
customers its in-house technical and operational expertise, uniquely position
it to take advantage of available opportunities, to increase cash flow and to
achieve its strategic goals. Key elements of the Company's strategy are to:
. INCREASE UTILIZATION OF TOWER CAPACITY. The Company seeks to take
advantage of the operating leverage of its site rental business by
increasing the amount of antennae space leased on its owned or managed
communication sites. The Company believes that many of its towers have
significant capacity available for antennae space rental and actively
markets this space to wireless communications carriers and broadcasters.
The Company further believes that increased utilization of its tower
capacity can be achieved at low incremental cost, thereby yielding
significant contribution margin. In addition, the Company both will
continue to build towers with the capacity to accommodate multiple
tenants and both existing and emerging technologies.
. EXPAND TOWER FOOTPRINTS. The Company intends to enhance its existing
tower footprints and to establish new clusters of towers in targeted
markets, particularly those that have not yet been significantly built
out by carriers. As the Company has demonstrated in western
Pennsylvania, it believes that once a strategic critical mass of towers
is established in a particular region, the Company can attract wireless
operators by offering the advantages of well-positioned communication
sites from
63
a single source. The Company is pursuing this strategy through both the
construction of new towers and the acquisition of existing towers. The
Company's tower construction strategy is not based on speculative tower
development but rather on the construction of multiple tenant towers
with long-term "anchor" tenants. The Company believes that such a
strategy significantly reduces the risk of developing new sites for its
tower footprints. The Company intends to focus on working with anchor
tenants to build in strategic locations, including those that enhance
the Company's existing clusters of towers, expand its coverage or extend
its coverage on highways linking municipal markets. For example,
pursuant to the Nextel Agreement, the Company has options to construct
up to 250 multiple tenant towers with Nextel as an anchor tenant along
certain interstate corridors. The Company may also pursue acquisitions
involving towers or other tower companies, particularly those with the
potential to create or augment a critical mass of clustered towers in
new or existing markets. Pursuant to the Nextel Agreement, the Company
has exercised an option to purchase 50 of Nextel's existing towers
clustered in various markets, including Philadelphia, Houston, Dallas
and San Antonio. See "--Significant Contracts."
. PROVIDE A FULL RANGE OF SERVICES. The Company maintains in-house
technical and operational expertise to support the development of its
tower footprints and to offer wireless communications carriers and
broadcasters a portfolio of technical and operational network services
to exploit the trend towards outsourcing and the demand for
sophisticated radio frequency technical competence and services.
Management believes that the ability to offer end-to-end services (site
selection and acquisition, antennae installation, site development and
construction and network design) is a key competitive advantage as
wireless communications carriers and broadcasters prefer to work with
independent tower operators that can credibly offer the convenience,
consistency and efficiency of complete network design and operational
solutions. Management also believes that the Company's experience in
building its own tower footprints, as well as its in-house expertise,
differentiates it from many of its competitors and strengthens the
Company's ability to increase utilization of its existing towers and its
ability to attract anchor tenants to its towers.
. CAPITALIZE ON RELATIONSHIPS WITH KEY CUSTOMERS. The Company intends to
leverage its existing strategic relationships, contracts and reputation
for quality service to secure additional site rental, tower build-out
and network services contracts. For example, the Company has developed
contractual relationships with a number of regional and national
carriers, including Aerial Communications, Bell Atlantic Mobile, Nextel
and Sprint PCS, that provide the Company with a platform from which to
expand into multiple markets and increase antennae space rented on its
existing towers. In addition, the Company's customer-oriented approach,
technical expertise and focus on quality service has enabled it to
secure contracts such as the Bell Atlantic Agreement which, as of
December 31, 1997, provided the Company with exclusive rights to lease
antennae space on 117 existing Bell Atlantic towers (as well as all
future towers constructed during the term of the agreement) located
primarily in western Pennsylvania and West Virginia. See "--Significant
Contracts."
. CAPITALIZE ON CTI'S EXPERTISE AND OPPORTUNITIES. CTI, the Company's
34.3%-owned affiliate, employs a corps of engineers and technical
personnel who designed and built the broadcast transmission network for
the BBC. CTI owns and operates one of the world's most established radio
and television broadcasting networks, including both the infrastructure
and transmission equipment located on 780 owned and 558 licensed towers.
CTI provides analog television and radio transmission services to the
BBC under a 10-year contract and has recently won bids to enter into
transmission contracts to design, build and operate DTT networks for
four of the six national licenses recently awarded in the United
Kingdom. The Company intends to leverage its relationship with CTI to
capitalize on opportunities to design, build, own and manage towers,
networks and other infrastructure for the broadcasting industry in the
United States and international markets. In addition, the Company
intends to leverage its wireless expertise in the United States by
providing wireless network services to CTI to capitalize on the growth
of wireless communications in the United Kingdom. Finally, the Company
is in discussions with certain of the other holders of equity interests
in CTI with respect to
64
potential transactions pursuant to which CTI would become a subsidiary
of the Company. There can be no assurance that any such transaction will
be consummated.
. PURSUE GROWTH THROUGH ACQUISITIONS. The Company continually evaluates
potential acquisitions, investments and strategic alliances. The Company
views such transactions as a means to expand its operations within its
existing markets and to enter new markets, including international
opportunities. The Company's acquisition and investment criteria include
the existence of high quality assets, capacity to add tenants,
attractive location for wireless build-out and return on capital.
COMMUNICATION SITE FOOTPRINTS
The Company owns 240 towers, manages 133 towers and 80 revenue producing
rooftop sites, and is in the process of building 14 towers. Most of the
Company's existing towers are located in three major regions: western
Pennsylvania, the southwestern United States and Puerto Rico. The following
table indicates, as of December 31, 1997, the type and geographic
concentration of the Company's towers and revenue producing rooftop sites:
NUMBER OF
TYPE OF SITE COMMUNICATION SITES % OF TOTAL
------------ ------------------- ----------
Towers:
Pennsylvania............................... 178 39.3%
Texas...................................... 85 18.8
New Mexico................................. 34 7.5
Mississippi................................ 21 4.6
Puerto Rico................................ 14 3.1
West Virginia.............................. 14 3.1
Arizona.................................... 13 2.9
North Carolina............................. 4 0.9
Oklahoma................................... 3 0.6
Nevada..................................... 2 0.4
All Others................................. 5 1.1
--- -----
373 82.3
Rooftops(a).................................. 80 17.7
--- -----
Total.................................... 453 100.0%
=== =====
- --------
(a) The Company manages an additional 1,356 rooftop sites throughout the
United States that are available for leasing to its customers.
The Company expects to significantly broaden its existing tower footprints
and expand into new strategically clustered sites by building additional
towers. To that end, the Company has developed and maintains and deploys for
its own use extensive network design and radio frequency engineering expertise
and tower construction capabilities. The Company plans to leverage its network
design expertise to build towers in areas where carriers' signals fail to
transmit in their coverage area. The areas, commonly known as "dead spots,"
are attractive tower locations for the Company. Building a tower only after
securing an anchor tenant, the Company usually has been able to add additional
carriers that have the same "dead spot." The Company also plans to leverage
such expertise and experience in building new towers by entering into build-
out or purchase contracts with various carriers, such as the Nextel Agreement.
As of December 31, 1997, the Company was building 14 towers in western
Pennsylvania, Ohio, Texas, South Carolina and North Carolina to enhance its
regional presence in these areas. As part of the Nextel Agreement, the Company
plans to build up to another 250 towers along interstate highways in the
midwestern and eastern United States over the next two years. See "--
Significant Contracts."
In addition, the Company plans to use the towers acquired in the Crown
Merger as a model for the towers it intends to build when population density
and perceived demand are such that the Company believes the economics of such
towers are justified. Management believes the Crown towers are superior to
those of its competitors because of their capacity and quality engineering.
The multiple tenant design of the Crown towers
65
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. Using only hot dipped galvanized structures exceeding
the standards of the American National Standards Institute, Electronics
Industry Association and Telecommunications Industry Association, the Company
builds towers capable of accommodating a large number of wireless antennae.
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 if capacity is reached. The tower site is zoned for
multiple carriers at the time the tower is constructed to allow new carriers
to quickly utilize the Company's site. In addition, the towers, equipment
shelters and site compounds are engineered to protect and maintain the
structural integrity of the site. Tower sites are designed to withstand severe
wind, lightning and icing conditions, have shelters with exclusive security
card access and are surrounded by 10 foot barbed wire fences.
The Company also plans to acquire towers to develop new tower footprints or
to broaden existing tower footprints. As part of the Nextel Agreement, the
Company has exercised an option to acquire 50 of Nextel's existing towers. The
Company believes that these towers will provide it with a nucleus of strategic
clusters in Philadelphia, Houston, Dallas and San Antonio. The Company plans
to acquire additional towers from carriers, such as Nextel, and other
independent tower operators as opportunities present themselves, although
there are currently no agreements with regard to any such acquisitions.
The Company generally believes it has significant capacity on a number of
its towers. Many of the towers it acquired prior to the Crown Merger, however,
may require significant modifications and improvements to raise them to the
quality specifications of the Crown towers or to add additional customers. The
Company intends to pursue these upgrades where it believes it can achieve
appropriate returns to merit the necessary expenditure.
PRODUCTS AND SERVICES
The Company is a leading provider of communication sites and wireless
network services. The Company's products and services can be broadly
categorized as either site rental or network services. Network services
provided by the Company include site selection and acquisition, antennae
installation, site development and construction and network design.
Site Rental
The Company rents antennae space on its owned and managed towers and
rooftops to a variety of carriers operating cellular, PCS, SMR, ESMR, paging
and other networks. The Company's site rental business has its headquarters in
Pittsburgh, with sales offices in Houston, Albuquerque, Philadelphia and San
Juan. In 1997, after giving pro forma effect to the Transactions, the
Company's site rental business would have had revenues of $15.6 million and
EBITDA before corporate development of $10.6 million.
Tower Site Rental
The Company leases space to its customers on its owned and managed towers.
The Company generally receives fees for installing customers' equipment and
antennae on a tower (as provided in the Company's network services programs)
and also receives monthly rental payments from customers payable under site
leases. The majority of the Company's outstanding customer leases, and the new
leases typically entered into by the Company, 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.
Monthly lease pricing varies with the number of antennae installed on each
tower. A PCS, cellular or other broadband customer that has multiple antennae
and other equipment mounted at 100 to 180 feet on the tower generally pays
approximately three times the amount of aggregate monthly rents paid by a
paging or other narrowband customer that requires a single antenna at heights
greater than 200 feet.
The Company also provides a range of site maintenance services in order to
support and enhance its site rental business. The Company believes that by
offering services such as antennae, bay station and tower
66
maintenance and security monitoring, it is able to offer quality services to
its existing customers and attract future customers to its communication
sites. Crown was 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 co-location.
The following table describes the Company's top 10 revenue producing towers:
DECEMBER 1997
NUMBER OF MONTHLY
NAME LOCATION HEIGHT (FT) TENANT LEASES REVENUE
- ---- -------- ----------- ------------- -------------
Crane...................... Pennsylvania 450 100 $ 76,015
Bluebell................... Pennsylvania 300 110 63,223
Lexington.................. Kentucky 500 89 45,502
Monroeville................ Pennsylvania 500 64 39,620
Sandia Crest............... New Mexico 140 16 28,305
Cranberry.................. Pennsylvania 400 50 27,136
Cerro de Punta............. Puerto Rico 220 39 25,617
Beaver..................... Pennsylvania 500 43 24,768
El Yunque.................. Puerto Rico 200 36 24,662
Greensburg................. Pennsylvania 375 36 24,420
--- --------
Total.................... 583 $379,268
=== ========
The Company has entered into master lease agreements with Aerial
Communications, Bell Atlantic Mobile, 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,
lease space on towers in the Pittsburgh major trading area ("Pittsburgh MTA"),
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 the
Company has a 10-year master lease term through October 2006, with two 10-year
renewal options. The Company has also entered into an independent contractor
agreement with Nextel. The Bell Atlantic Mobile agreement has a 25-year master
lease term through December 2020. The Company has also entered into a master
lease agreement with Bell Atlantic whereby the Company has the right to lease
antennae space to customers on towers controlled by Bell Atlantic Mobile. See
"--Significant Contracts."
The Company has significant site rental opportunities arising out of its
agreements with Bell Atlantic Mobile and Nextel. In its lease agreement with
Bell Atlantic Mobile, the Company has exclusive leasing rights for 130
existing towers and currently has sublessees on 44 of these towers in the
greater Pittsburgh area. The lease agreement provides that the Company may
sublet space on any of these towers to another carrier subject to certain
approval rights of Bell Atlantic Mobile. To date Bell Atlantic Mobile has
never failed to approve a sublease proposed by the Company. See "--Significant
Contracts--Bell Atlantic Mobile."
Rooftop Site Rental
The Company is a leading rooftop site management company. Through its
subsidiary, Spectrum, the Company develops new sources of revenue for building
owners by effectively managing all aspects of rooftop telecommunications,
including two-way radio systems, microwave facilities, fiber optics, wireless
cable, paging and rooftop infrastructure services. Spectrum's staff includes
radio frequency engineers, managers, technicians and licensing personnel with
extensive experience.
The Company generally enters into management agreements with building owners
and receives a percentage of the revenues generated from the tenant license
agreements. Specifically, the Company designs and contracts
67
these sites, actively seeks multiple wireless communications carriers,
prepares end-user license agreements, and then manages and enforces the
agreements. In addition, the Company handles billing and collections and all
calls and questions regarding the site, totally relieving the building's
management of this responsibility.
Through Spectrum, the Company focuses on providing electronic compatibility
for antennae, and maximization of revenue for building owners. In the United
States, radio frequencies are assigned by the FCC but are not coordinated by
proposed site. For this reason, Spectrum has developed its own computerized
engineering program to determine the electronic compatibility of all users at
each site. This program enables Spectrum to maximize site usage. Spectrum
surveys each site and evaluates its location, height, physical and electronic
characteristics, and its engineers prepare a computer analysis to determine
the optimum location for different types of equipment and frequencies. Based
on this analysis, potential site users are identified.
In addition to the technical aspects of site management, the Company
provides operational support for both wireless communications carriers looking
to build out their wireless networks, and building owners seeking to outsource
their site rental activities. The Company stores and regularly updates
relevant site data, such as the location of communications and broadcast
equipment, into a database, which can be utilized to help wireless
communications carriers plan and build out their networks.
Network Services
Through designing, building and operating its own communication sites, the
Company has developed an in-house expertise in certain value-added services
that it offers to the wireless communications and broadcasting industries.
Because the Company views itself as a turnkey provider with "end-to-end"
design, construction and operating expertise, it offers its 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 site selection and acquisition, antennae installation, site
development and construction and network design.
Site Selection and Acquisition
The Company is engaged in site selection and site acquisition services for
its own purposes and for third parties, primarily through its subsidiary, TEA,
which has 15 years of experience serving clients in the communications, public
utility, energy and transportation industries.
The site selection and acquisition process begins with the network design.
Highway corridors, population centers and topographical features are
identified within a carrier's existing or proposed network, and tests are
performed to monitor PCS, cellular, ESMR and other frequencies in order to
locate the systems then operating in that geographic area and identify any
gaps in coverage. Based on this data, the radio frequency engineering
department issues a "search ring," generally of a one-mile radius, 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 ("GIS") specialists select the most suitable sites, based on
demographics, traffic patterns and signal characteristics. Once a site is
selected and the terms of the purchase or lease 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, the
Company's construction department takes over the process of constructing the
site.
To capitalize on the growing concerns over tower proliferation, the Company
has developed a program called "Network Solutions" through which it will
attempt to form strategic alliances with local governments to create a single
communications network in their communities. To date the Company's efforts
have focused on western Pennsylvania, where it has formed alliances with three
municipalities. These alliances are intended to accommodate wireless
communications 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 communications carriers and wireless customers.
68
TEA, the Company's site acquisition subsidiary, specializes in negotiating
leases with landowners and in securing zoning approvals. In addition to its
successful record in the United States, TEA has extensive experience managing
build-outs in Europe, South America and Australia. TeleStructures, a
subsidiary of the Company, provides solutions to the NIMBY dilemma of wireless
companies by building more environmentally neutral and aesthetically
acceptable towers. TeleStructures' designs include a clock tower, bell tower
and others that will allow communications companies to build in areas that
otherwise would not permit a tower to be built. Upon completion of the
Refinancing, TeleStructures will be merged with and into TEA.
In 1997, the Company provided site acquisition services to eight customers,
including Aerial Communications, Bell Atlantic Mobile, Nextel and Sprint PCS.
TEA also provided site acquisition services to GTE Mobilnet, BellSouth
Mobility, AirTouch Cellular and Nextel, among others. These customers engage
the Company and TEA for such site selection and acquisition services on either
a fixed price contract or a time and materials basis.
Site Development and Construction and Antennae Installation
The Company has provided site development and construction and antennae
installation services to the communications industry for over 14 years. The
Company has extensive experience in the development and construction of tower
sites and the installation of antennae, microwave dishes and electrical and
telecommunications lines. The Company's site development and construction
services include clearing sites, laying foundations and electrical and
telecommunications lines, and constructing equipment shelters and towers. The
Company has designed and built and presently maintains tower sites for a
number of its wireless communications customers and a substantial part of its
own tower network. The Company can provide cost-effective and timely
completion of construction projects in part because its site development
personnel are cross-trained in all areas of site development, construction and
antennae installation. A varied inventory of heavy construction equipment and
materials are maintained by the Company at its 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. The Company
generally sets 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 the Company may negotiate fees on individual sites or
for groups of sites.
The Company installs antennae and microwave dishes for its customers on its
owned and managed towers. With more than 14 years of experience and skilled
personnel, the Company has the capability and expertise to install antennae
systems for its paging, cellular, PCS, SMR, ESMR, microwave and broadcasting
customers. As this service is performed, the Company uses its technical
expertise to ensure that there is no interference with other tenants. The
Company typically bills for its antennae installation services on a fixed
price basis.
The Company's construction management capabilities reflect Crown's extensive
experience in the construction of networks and towers. For example, Crown was
instrumental in launching networks for Sprint PCS, Nextel and Aerial
Communications in the Pittsburgh MTA. In addition, Crown supplied these
carriers with all project management and engineering services which included
antennae design and interference analyses.
In 1997, the Company provided site development and construction and antennae
services to approximately 21 customers, including Nextel, Sprint PCS, AT&T
Wireless, Aerial Communications and Bell Atlantic Mobile.
Network Design
The Company has extensive experience in network design and engineering.
While the Company maintains sophisticated network design services primarily to
support the location and construction of Company-owned multiple tenant towers,
the Company does from time to time provide network design services to carriers
and other customers on a consulting contract basis. The Company's network
design services provide customers with relevant information including
recommendations regarding location and height of towers, appropriate types of
antennae, transmission power and frequency selection and related fixed network
considerations.
69
In designing networks and identifying optimal tower sites, the Company's
radio frequency system design engineers and GIS specialists endeavor to
optimize the coverage of a proposed tower and also conduct radio frequency
emission level testing and analysis for all types of wireless communications
carriers. These specialists have succeeded in designing for diverse network
requirements, including those servicing the challenging topography of the
greater Pittsburgh market.
In 1997, the Company provided network design services primarily for its own
footprints and also for certain customers, including Triton Communications,
Nextel and Aerial Communications. These customers are typically charged on a
time and materials basis.
Broadcast-Related Services
The Company also provides site rental and service to customers in the
broadcasting industry. Electronic news gathering ("ENG") systems benefit from
the towers and services offered by the Company. The ENG trucks, often in the
form of local television station news vans with telescoping antennae on their
roofs, send live news transmission back to the studio from the scene of an
important event. Typically, these vans cannot send signals back from beyond
about 25 miles. In addition, if they are shielded from the television
transmitter site, they cannot make the connection even at close range. The
Company has developed an ENG repeater system that can be used on many of its
towers in western Pennsylvania. This system allows the ENG van to send a
signal to one of the Company's local towers where the signal is retransmitted
back to the television transmitter site. The retransmission of the signal from
the Company's tower to the various television transmitter sites is done via a
microwave link. The Company charges the station for the ENG receiver system at
the top of its tower and also charges them for the microwave dish they place
on its tower. The Company's ENG customers are affiliates of the NBC, ABC, CBS
and Fox networks.
The Company also has 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. Management believes that this
experience may help the Company negotiate favorable antenna site lease rates
and construction contracts for both tower and rooftop sites, and to gain an
expertise in the complex issues surrounding electronic compatibility and RF
engineering.
CTI
The Company has a 34.3% equity investment in CTI, which owns and operates
one of the world's most established analog transmission networks. CTI provides
transmission services in the United Kingdom for both of the BBC television
stations, five BBC radio stations (including the first digital audio broadcast
station in the United Kingdom) and two commercial radio stations through its
network of 3,460 transmitters in service, which cover 99.4% of the U.K.
population. These transmitters are located at approximately 1,300 towers, more
than half of which are CTI-owned (or leased or licensed to it by third
parties) and the balance of which are licensed to CTI under a site-sharing
agreement (the "Site-Sharing Agreement") with CTI's principal competitor, NTL.
At December 31, 1997, CTI was constructing 13 new towers on existing sites and
had 28 site acquisition projects in process for its new tower sites. At
January 1, 1998, CTI employed 466 people in the United Kingdom. For the year
ended March 31, 1997 and the nine months ended December 31, 1997, CTI produced
revenues of $127.2 million ((Pounds)77.0 million) and $93.7 million
((Pounds)56.8 million), respectively, and EBITDA of $49.7 million
((Pounds)30.1 million) and $42.4 million ((Pounds)25.7 million), respectively.
See "Risk Factors--Relationship with Minority Owned Affiliate; Potential
Conflicts of Interest."
CTI's core revenue generating activity is the domestic analog terrestrial
transmission of radio and television programs broadcast by the BBC. CTI's
business, which was formerly owned by the BBC, was privatized under the
Broadcasting Act 1996 and sold to CTI in February 1997. At the time the BBC's
business was acquired by CTI, CTI entered into a 10-year transmission contract
with the BBC (the "BBC Transmission Agreement") for the provision of domestic
terrestrial analog television and radio transmission services. In the fiscal
year ended March 31, 1997, approximately 70% of the total revenues of the CTI
business arose in connection with services
70
provided to the BBC. The BBC Transmission Agreement provides for charges of
approximately (Pounds)46 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 to reflect inflation.
Analog terrestrial broadcast is the primary mode of transmission for
television and radio programs in the United Kingdom, and management expects it
to remain so for at least the next 15 years. Although the public currently
receives broadcast television and radio in the United Kingdom via analog
transmission, the U.K. broadcasting industry is preparing itself for the
conversion from analog to digital transmission technology. CTI is well
positioned to benefit from the conversion to digital terrestrial transmission
and has recently entered into transmission contracts for DTT with the winners
(including the BBC) of four of the six DTT licenses granted by the British
government.
The BBC transmission network also provides a valuable initial footprint for
the creation of wireless communications networks. CTI generates site rental
revenue in the United Kingdom by leasing sites on its broadcast towers to
wireless communications carriers. At the time of its privatization, the BBC
Transmission Business had third party revenue from site rental of
approximately (Pounds)9.8 million per year. Currently, approximately 200
companies rent space on approximately 288 of CTI's 780 towers. These site
rental agreements have normally been for three to 12 years and are generally
subject to rent reviews every three years. CTI's largest (by revenue) site
rental customers consist mainly of wireless communications carriers such as
Telecom Securicor Cellular Radio Limited, Vodafone Limited, Vodapage Limited
and Orange Personal Communications Limited. 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 Transmission Business is no longer
constrained by restrictions on commercial activities previously imposed under
the BBC's ownership.
In addition to the BBC Transmission Agreement, CTI has 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. CTI also
provides complete site management, preventive maintenance, fault repair and
system management services to the Scottish Ambulance Service. Finally, CTI
maintains a mobile radio system for the Greater Manchester Police and also
provides maintenance and repair services for transmission equipment and site
infrastructure.
CTI provides broadcasting and telecommunications engineering services to
various customers in the United Kingdom and overseas. 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 two
years, consulting contracts in Thailand, Uganda, Indonesia, Anguilla, Poland
and Sri Lanka.
SIGNIFICANT CONTRACTS
The Company has many agreements with telecommunications providers, including
leases, site management contracts and independent contractor agreements. The
Company's agreement with Nextel and its reciprocal leasing arrangements with
Bell Atlantic Mobile present unique opportunities for the Company to (i)
acquire clusters of towers in new markets, (ii) expand existing tower
footprints by constructing multiple tenant towers with long-term anchor
tenants and (iii) increase utilization of existing towers and rooftop sites.
Nextel Agreement
On July 11, 1997, in connection with Nextel's proposed merger with PCI, the
Company and Nextel entered into the Nextel Agreement, which establishes the
framework under which the Company and Nextel will conduct joint operations for
the development of infrastructure within the Nextel markets described below.
Under the first part of this agreement, the Company has exercised an option to
purchase 50 existing towers from Nextel, out of an inventory of approximately
180 towers used in digital or analog transmission in the greater metropolitan
areas of Denver and Philadelphia and in certain areas of the states of Texas
and Florida, for a purchase price of
71
approximately $14.4 million. As of February 24, 1998, the Company has closed
on the purchase of 46 of such 50 towers for an aggregate purchase price of
$10.0 million, and expects to close on the remaining four towers within the
next 60 days.
In addition to the purchase option, the Nextel Agreement provides that the
Company has the exclusive right and option to (i) develop, construct, own and
operate or (ii) purchase and operate, up to 250 new towers within selected
metropolitan areas, including Dallas and Houston, and parts of the interstate
highway corridors traversing the following states: Texas, Oklahoma, Louisiana,
Arkansas, Mississippi, Alabama, Georgia, South Carolina, North Carolina,
Tennessee, Kentucky, Virginia, Pennsylvania, New York, Ohio, Maryland and New
Jersey. This option extends from July 1997 until a minimum of 250 potential
sites have been tendered to the Company. At March 25, 1998, Nextel had
tendered 137 sites to the Company, 76 of which have been accepted by the
Company. Of these 76 sites, 29 sites are in the permitting process, 1 site is
under construction and 46 sites are completed. Nextel will perform all site
acquisition work, including entering into agreements with the fee owners of
sites. If the Company waives its option to construct or purchase new towers
for an identified site tendered to it by Nextel, Nextel may construct the
tower itself or contract with a third party for the construction. If the
Company exercises its option to construct and own a tower, it will reimburse
Nextel for all costs of such site acquisition work. If Nextel constructs a
tower and the Company elects to purchase the constructed tower, the Company
will reimburse Nextel for all site acquisition and construction costs
associated with such towers. Following the completion of construction of each
tower, Nextel and the Company will, pursuant to Nextel's master lease
agreement, enter into a five-year lease contract with four five-year renewal
periods, at the option of Nextel. Nextel has a one-time right of first refusal
for a five-year period to lease additional space within one designated 20-foot
section of each tower.
If the Company elects to construct a new site, construction is to be
completed within a 60-day construction period that will not begin prior to
receipt of all regulatory permits and approvals (or a shorter period as
mutually agreed). In the event that the Company fails to complete any site
within the construction period, Nextel will be entitled to receive liquidated
damages for each such failure. If the Company fails to commence or complete
construction or to complete the installation of towers and related equipment
within the construction period, Nextel may exercise its option to purchase
such site at cost (after giving the Company an opportunity to cure). Nextel
may terminate the Nextel Agreement if the Company fails to complete
construction within the prescribed construction period or if Nextel exercises
its purchase option following certain construction delays by the Company for
the greater of five towers or 5% of the aggregate number of total sites
committed to within a rolling eight-month period. In addition, the Nextel
Agreement provides that it may be terminated by Nextel upon either the
insolvency or liquidation of the Company or in the event that Nextel's
proposed acquisition of PCI does not occur by December 31, 1997, and it may be
terminated by the Company upon the insolvency or liquidation of Nextel.
According to public filings, Nextel consummated its acquisition of PCI on
November 12, 1997. See "Risk Factors--Reliance on Nextel Agreement."
Bell Atlantic Mobile
On December 29, 1995, the Company and Bell Atlantic Mobile entered into two
separate 25-year master lease agreements relating to their towers in the
Pittsburgh MTA, one establishing certain terms and conditions of Bell Atlantic
Mobile's tenancy on the Company's towers and the other establishing certain
terms and conditions of the Company's sale of tenancy to other parties on
towers controlled by Bell Atlantic Mobile. In addition to providing site
rental revenue to the Company, the master leases allow each of the Company and
Bell Atlantic Mobile to sublease space on each other's towers in return for a
percentage of the rental revenue generated thereby.
Bell Atlantic Mobile's master lease of space on the Company's towers
provides that Bell Atlantic Mobile's monthly site rental payments per tower
depend on the size of the equipment installed on the tower, the size of the
equipment building and the number of antennae. Rents are adjusted periodically
based on the Consumer Price Index. The Company performs all work at Bell
Atlantic Mobile's sites for tenants, including antennae installation,
grounding and foundations. Both of these master lease agreements included
rights of first refusal
72
relating to certain spaces on towers leased by one of the parties for which
the other party had received a bona fide offer to buy. In connection with the
Crown Merger, the parties amended these master lease agreements to eliminate
the rights of first refusal, and Bell Atlantic waived any such rights under
these agreements that otherwise would have arisen in connection with the Crown
Merger.
The Company also leases space on all of Bell Atlantic Mobile's towers in the
Pittsburgh MTA (the "Bell Atlantic Agreement"). The terms and conditions of
the Company's master lease of space on towers controlled by Bell Atlantic
Mobile are substantially similar to Bell Atlantic Mobile's master lease with
the Company. In order for the Company to sublease space on a tower controlled
by Bell Atlantic Mobile to another tenant, however, the Company must receive
the written consent of Bell Atlantic Mobile, which consent cannot be
unreasonably withheld, unless such sublease is to a cellular or PCS provider,
in which case Bell Atlantic Mobile may or may not consent to the sublease in
its absolute discretion. To date, the Company has 120 sublease contracts on
Bell Atlantic Mobile-controlled towers, and Bell Atlantic Mobile has never
refused to consent to a sublease proposed by the Company.
CUSTOMERS
In both its site rental and network services businesses, the Company works
with a number of customers in a variety of businesses including PCS, ESMR,
paging and broadcasting. The Company works with both large national carriers
such as Sprint PCS, Nextel, AT&T/Cellular One and Omnipoint, and smaller local
regional or private operators such as Aerial Communications, Crescent
Communications and BellSouth Mobility. For the year ended December 31, 1997,
the Company's largest customers were Sprint PCS and Nextel (including PCI),
together representing 8.2% and 29.0%, respectively, of site rental and 15.7%
and 16.1%, respectively, of network services revenues. For the year ended
December 31, 1997, no customer accounted for more than 10.0% of the Company's
revenues, other than Sprint PCS and Nextel (including PCI), which accounted
for approximately 13.7% and 19.6%, respectively, of the Company's consolidated
pro forma revenues. Nextel revenues are expected to grow as the Company
purchases Nextel towers and builds out Nextel interstate corridor sites. The
following is a list of the Company's top ten site rental and network and other
services customers, by percentage of pro forma revenues for the year ended
December 31, 1997.
TOP 10 SITE RENTAL AND NETWORK SERVICES CUSTOMERS
PRO FORMA REVENUES
FOR YEAR
ENDED DECEMBER 31,
SITE RENTAL 1997 % OF TOTAL SITE RENTAL REVENUES
- ----------- ------------------ -------------------------------
PCI(a)..................... $2,722,480 17.5%
Nextel(a).................. 1,784,319 11.5
Sprint PCS................. 1,283,209 8.2
PageNet.................... 934,550 6.0
Aerial Communications...... 570,050 3.7
Mobile Communications...... 392,983 2.5
Bell Atlantic Mobile....... 369,759 2.4
AT&T/Cellular One.......... 308,055 2.0
Crescent Communications.... 197,299 1.3
CommSite................... 162,337 1.0
---------- ----
Total.................... $8,725,041 56.1%
========== ====
73
PRO FORMA REVENUES
FOR YEAR
ENDED DECEMBER 31, % OF TOTAL NETWORK SERVICES
NETWORK SERVICES & OTHER 1997 & OTHER REVENUES
- ------------------------ ------------------ ---------------------------
Nextel......................... $ 6,649,193 16.1%
Sprint PCS..................... 6,503,263 15.7
Omnipoint...................... 4,777,940 11.6
GTE............................ 3,749,852 9.1
Aerial Communications.......... 3,600,832 8.7
AT&T/Cellular One.............. 2,326,922 5.6
Hawaiian Wireless.............. 1,697,859 4.1
BellSouth Mobility ............ 1,156,371 2.8
PageNet........................ 854,004 2.1
Bell Atlantic Mobile........... 572,058 1.4
----------- ----
Total........................ $31,888,294 77.2%
=========== ====
- --------
(a) PCI merged into a subsidiary of Nextel on November 12, 1997. See "Risk
Factors--Reliance on Nextel Agreement."
As of December 31, 1997, the Company had approximately 2,449 individual
leases on its 453 tower and rooftop sites. The following is a list of some of
the Company's leading site rental customers by industry segment and the
percentage of the Company's December 1997 monthly site rental revenues derived
from each industry segment:
CUSTOMERS BY INDUSTRY
DECEMBER
MONTHLY % OF TOTAL
REVENUES DECEMBER
NUMBER OF BY SITE RENTAL
INDUSTRY SELECTED CUSTOMERS TENANT LEASES INDUSTRY REVENUES
- -------- ------------------ ------------- ---------- -----------
Paging.................. AirTouch Cellular, American
Paging, PageNet 784 $ 350,397 24.5%
SMR/ESMR................ Nextel, SMR Direct 306 338,594 23.7
PCS..................... Aerial Communications, Sprint
PCS, Western Wireless 233 337,177 23.6
Cellular................ AT&T Wireless, Bell Atlantic
Mobile 155 127,985 9.0
Private Industrial
Users.................. IBM, Phillips Petroleum 529 92,186 6.5
Governmental Agencies... FBI, INS, Puerto Rico Police 186 76,039 5.3
Broadcasting............ Hearst Argyle Television,
Trinity Broadcasting 87 44,574 3.1
Data.................... Ardis, RAM Mobile Data 103 30,714 2.1
Other................... WinStar 46 20,323 1.4
Utilities............... Equitable Resources, Nevada
Power 20 10,787 0.8
----- ---------- -----
Total................................................. 2,449 $1,428,776 100.0%
===== ========== =====
SALES AND MARKETING
The Company's sales and marketing personnel, located in Pittsburgh, Houston,
Albuquerque, Atlanta, Philadelphia and San Juan, Puerto Rico, target carriers
expanding their networks, entering new markets, bringing new technologies to
market and requiring maintenance or add-on business. The Company's objective
is to pre-sell capacity on the Company's towers by promoting sites prior to
actual construction. The Company utilizes numerous public and proprietary
databases to develop detailed target marketing programs directed at auction
block license awardees, existing tenants and specific market groups. The
marketing department also works to maintain the Company's visibility within
the wireless communications industry through regular public relations
74
efforts. These efforts include actively participating in trade shows and
generating regular press releases, newsletters and targeted mailings
(including promotional flyers). The Company's promotional activities range
from advertisements and site listings in industry publications to maintaining
a presence at national trade shows. The Company's network services
capabilities are marketed in conjunction with its tower footprints.
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.
COMPETITION
The Company competes with other independent tower owners, some of which also
provide site rental and network services; carriers, which own and operate
their own tower networks; service companies that provide engineering and site
acquisition services; and other potential competitors, such as utilities,
outdoor advertisers and broadcasters, some of which have already entered the
tower industry. Wireless communications carriers that own and operate their
own tower networks generally are substantially larger and have greater
financial resources than the Company. The Company believes 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. The Company also
competes for acquisition and new tower construction opportunities with
wireless communications carriers, site developers and other independent tower
operating companies and believes 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 the Company.
The following is a list of certain of the tower companies that compete with
the Company: American Tower Corporation (an affiliate of Clear Channel
Communication), American Tower Systems (currently a wholly owned subsidiary of
American Radio Systems), Lodestar Communications, Motorola, Omni America (an
affiliate of Hicks, Muse, Tate and Furst), Pinnacle Tower, SBA Communications,
TeleCom Towers (an affiliate of Cox Communications) and Unisite.
The following companies are primarily competitors for the Company's site
management activities: AAT, APEX, Comsite International, JJS Leasing, Inc.,
Motorola, Signal One, Subcarrier Communications and Tower Resources
Management.
The Company believes that the majority of TEA's 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. TEA
offers its services nationwide and the Company believes it is 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. The
Company believes 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. The Company
believes that TEA competes favorably in these areas.
PROPERTIES
The Company's interests in its 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
75
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. The Company's 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 the Company
allows the landlord to use tower space in lieu of paying all or part of the
land rent. As of December 31, 1997, the Company had approximately 130 land
leases. Pursuant to the Senior Credit Facility, the Company's senior lenders
have liens on a substantial number of the Company's land leases and other
property interests in the United States.
LEGAL PROCEEDINGS
The Company is 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 the
Company's financial condition or results of operations.
EMPLOYEES
At January 1, 1998, the Company employed 385 people. The Company's future
success will depend, in part, on its ability to continue to attract, retain
and motivate highly qualified technical, marketing, engineering and management
personnel.
The Company is not a party to any collective bargaining agreements and has
not experienced any strikes or work stoppages, and management believes that
the Company's employee relations are good.
REGULATORY AND ENVIRONMENTAL 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.
Pursuant to the requirements of the Communications Act of 1934, as amended,
the FCC, in conjunction with the FAA, has developed standards to consider
proposals for new or modified antennae structures. These standards mandate
that the FCC and the FAA consider the height of proposed antennae structures,
the relationship of the structure to existing natural or man-made obstructions
and the proximity of the antennae structures to runways and airports.
Proposals to construct or to modify existing antennae 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 has been registered with
the FCC or a determination has been made that such registration is not
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 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 preempted certain state and local zoning authorities'
jurisdiction over the construction, modification and placement of towers. The
new law prohibits any action that would (i) discriminate between different
providers of personal wireless services or (ii) ban altogether the
construction, modification or placement of radio communications towers.
Finally, the 1996 Telecom Act requires the federal government to
76
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.
Owners and operators of antennae may be subject to, and therefore must
comply with, Environmental Laws. The FCC's decision to license a proposed
tower may be subject to environmental review pursuant to the National
Environmental Policy Act of 1969 ("NEPA"), which requires federal agencies to
evaluate the environmental impacts of their decisions under certain
circumstances. The FCC has issued regulations implementing NEPA. Such
regulations place responsibility on each applicant to investigate any
potential environmental effects of operations and to disclose any significant
effects on the environment in an environmental assessment prior to
constructing a tower. In the event the FCC determines the proposed tower would
have a significant environmental impact based on the standards the FCC has
developed, the FCC would be required to prepare an environmental impact
statement. This process could significantly delay the registration of a
particular tower.
As an owner and operator of real property, the Company is subject to certain
Environmental Laws which may impose strict, joint and several liability for
the cleanup of on-site or off-site contamination and related personal or
property damages. The Company is also subject to certain Environmental Laws
that govern tower placement, including pre-construction environmental studies.
Operators of towers must also take into consideration certain RF emissions
regulations that impose a variety of procedural and operating requirements.
The potential connection between RF 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 the Company has not been
subject to any claims relating to RF emissions, it is presently evaluating
certain of its towers in the United Kingdom to determine whether RF emission
reductions are possible. The Company believes that it is 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 the Company's
business, results of operations, or financial condition.
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.
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 under the Telecommunications Act 1984 and the Wireless Telegraphy Act
1949. 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.
77
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the directors and
executive officers of the Company (ages as of January 1, 1998):
NAME AGE POSITIONS WITH THE COMPANY
---- --- --------------------------
Ted B. Miller, Jr. .............. 46 Chief Executive Officer and Vice Chairman
of the Board of Directors
David L. Ivy..................... 51 President and Director
Charles C. Green, III............ 51 Executive Vice President and Chief
Financial Officer
John L. Gwyn..................... 50 Executive Vice President
Robert A. Crown.................. 43 Director
Carl Ferenbach................... 55 Chairman of the Board of Directors
Garth H. Greimann................ 43 Director
Randall A. Hack.................. 50 Director
David C. Hull, Jr. .............. 53 Director
Edward C. Hutcheson, Jr. ........ 52 Director
J. Landis Martin................. 52 Director
Robert F. McKenzie............... 54 Director
Jeffrey H. Schutz................ 46 Director
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
the Company since 1995. Mr. Miller co-founded CTC in 1994. He was the
President of the Company and CTC from November 1996 to August 1997. Since
February 1997, Mr. Miller has been the Managing Director, Chief Executive
Officer and a director of CTI. Mr. Miller is a founding member of InterComp
Technologies, L.C., a company providing payroll tax services in the former
Soviet Union, and has served on its Board of Managers since 1994. In 1986, Mr.
Miller founded Interstate Realty Corporation ("Interstate"), a real estate
brokerage and consulting company, and has been its President and Chief
Executive Officer since inception. Mr. Miller is a director of VISI and a
director and/or an officer of each wholly owned subsidiary of the Company.
DAVID L. IVY has been the President of the Company since August 1997, and
was elected as a director of the Company in June 1997. From October 1996 to
August 1997, he served as Executive Vice President and Chief Financial Officer
of the Company. Since 1995, he has been the President of DLI, Inc., a real
estate 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 VISI and a director and/or officer of
each wholly owned subsidiary of the Company.
CHARLES C. GREEN, III has been an Executive Vice President and Chief
Financial Officer of the Company since September 1997. Mr. Green was the
President and Chief Operating Officer of Torch Energy Advisors Incorporated
("Torch"), 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. and Bellwether Exploration
Company. He has been a Chartered Financial Analyst since 1974.
78
JOHN L. GWYN has been an Executive Vice President of the Company since
August 1997. From February to August 1997, Mr. Gwyn served as Senior Vice
President of the Company 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. Mr.
Gwyn is a director and/or an officer of each wholly owned subsidiary of the
Company with the exception of Crown Communication.
ROBERT A. CROWN founded the Crown Business in 1980 and has been the
President and Chief Operating Officer since its inception. Mr. Crown is the
Chief Executive Officer of Crown Communication and was elected as a director
of the Company 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 Crowns for election as a director of the Company.
CARL FERENBACH was elected as the Chairman of the Board of Directors of the
Company in April 1997. Since its founding in 1986, Mr. Ferenbach has been a
Managing Director of Berkshire, a private equity investment firm that manages
four investment funds with approximately $750 million of capital. Mr.
Ferenbach is also the Chairman of the Board of Directors of CTI, and currently
serves on the Board of Directors of Wisconsin Central Transportation
Corporation, Tranz Rail Limited and U.S. Can Corporation. Pursuant to the
Stockholders Agreement, Mr. Ferenbach was the nominee of Berkshire Partners
Group (as defined) for election as a director of the Company.
GARTH H. GREIMANN was elected as a director of the Company in April 1997.
Mr. Greimann has been a Managing Director of Berkshire, Third Berkshire
Associates LLC and Fourth Berkshire Associates LLC, since 1993. He was a Vice
President of Berkshire from 1989 to 1993. Mr. Greimann also serves on the
Board of Directors of Profit Recovery Group International, Inc., and Trico
Marine Services, Inc. ("Trico"). Pursuant to an oral agreement among the
Investors (as defined), Mr. Greimann was the nominee of Berkshire Partners
Group for election as a director of the Company.
RANDALL A. HACK was elected as a director of the Company 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 the Company.
DAVID C. HULL, JR. was elected as a director of the Company in January 1997.
Mr. Hull has been a General Partner of Centennial Fund IV, L.P. ("Centennial
Fund IV") and Centennial Fund V, L.P. ("Centennial Fund V"), each a venture
capital fund, since 1994 and 1996, respectively. Since 1990, he has held
various positions at Centennial Holdings, Inc. ("CHI"), a venture capital
management company, and is currently an Executive Vice President. Since 1986,
he has held various positions at Criterion Investments, Inc., a venture
capital management company, and is currently an Executive Vice President. Mr.
Hull also serves on the Board of Directors of CardioGenesis Corporation and
several private companies. Pursuant to an oral agreement among the Investors,
Mr. Hull was the nominee of Centennial Group for election as a director of the
Company.
EDWARD C. HUTCHESON, JR. has been a director of the Company since 1995, was
the Chief Executive Officer of the Company from its inception to October 1996
and was the Chairman of the Board of Directors of the Company from its
inception to October 1997. Mr. Hutcheson co-founded CTC in 1994. Since January
1997, Mr. Hutcheson has been associated with the corporate finance group of
Harris, Webb & Garrison, an investment banking firm based in Houston. During
1994, he was involved in private investment activities leading to the creation
of the Company. From 1990 to 1993, he was the President, Chief Operating
Officer and a director of Baroid Corporation ("Baroid"), a company engaged the
petroleum services business. Mr. Hutcheson also serves on the Board of
Directors of Trico and Titanium Metals Corporation ("Timet").
79
J. LANDIS MARTIN was elected as a director of the Company in 1995. Mr.
Martin has been Chairman of Timet since 1987 and Chief Executive Officer of
Timet since January 1995. He also served as President of Timet from January
1995 to February 1996. Mr. Martin has served as Chairman of Tremont
Corporation ("Tremont") since 1990 and as Chief Executive Officer and a
director of Tremont since 1988. Mr. Martin has served as President and Chief
Executive Officer of NL Industries, Inc. ("NL"), a manufacturer of specialty
chemicals, since 1987 and as a director of NL since 1986. From 1990 until its
acquisition by Dresser Industries, Inc. ("Dresser") in 1994, Mr. Martin served
as Chairman of the Board and Chief Executive Officer of Baroid. In addition to
Tremont and NL, Mr. Martin is a director of Dresser, which is engaged in the
petroleum services, hydrocarbon processing and engineering industries, and
Apartment Investment Management Corporation, a real estate investment trust.
ROBERT F. MCKENZIE was elected as a director of the Company 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.
JEFFREY H. SCHUTZ was elected as a director of the Company 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 the
Company.
Directors are elected annually to serve until the next annual meeting of
stockholders and until their successors are elected and qualified. Officers
are elected by and serve at the discretion of the Board of Directors.
BOARD COMMITTEES
The Company's 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. Ferenbach,
Crown, Miller, Schutz and Hack, 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, Martin, Schutz and McKenzie, 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. Greimann, Hack, Hull and Hutcheson, reviews the
Company's audit policies and oversees the engagement of the Company's
independent auditors, as well as developing financing strategies for the
Company and approving outside suppliers to implement these strategies. The
Nominating and Corporate Governance Committee, composed of Messrs. Greimann,
Hull, Hutcheson, McKenzie and Martin, is responsible for nominating new Board
members and for an annual review of Board performance.
DIRECTORS' COMPENSATION AND ARRANGEMENTS
The three outside directors of the Company receive compensation for their
service as directors ($1,000 per meeting for attendance at meetings of the
Board of Directors and each committee thereof), and all directors are
reimbursed for expenses incidental to attendance at such meetings. In
September 1997, CCIC's Board of Directors approved a fee of $150,000 per annum
to Berkshire (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 $10,000 in 1996 for specific
consulting assignments requested by the Chief Executive Officer. Messrs.
Ferenbach, Greimann, Hull and Schutz are indemnified by the respective
entities which they represent on CCIC's Board of Directors.
The Company's By-laws provides for the annual election of directors at
stockholders' meetings. The Company's Amended Certificate provides that the
holders of the Preferred Stock (as defined), voting together and separately
from other classes, are entitled to elect five directors, the holders of
Series A Convertible Preferred Stock are entitled to elect two directors, and
the holders of Preferred Stock and Common Stock (as defined),
80
voting together as a single class, are entitled to elect two directors (with
the Preferred Stock being considered on an "as converted" basis). Pursuant to
the Stockholders Agreement, Robert A. Crown, Barbara Crown or their permitted
transferees have the right to designate one nominee for election as a
director, and the other investors and stockholders party thereto have agreed
to vote in favor of this nominee. See "Description of Capital Stock--
Stockholders Agreement."
EXECUTIVE COMPENSATION
The following table sets forth the cash and non-cash compensation paid by or
incurred on behalf of the Company to its Chief Executive Officer and the four
other executive officers (collectively, the "named executive officers") for
each of the three years ended December 31, 1997.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
AWARDS
NUMBER OF
SECURITIES
ANNUAL COMPENSATION UNDERLYING
---------------------- OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) SARs (#)(a) COMPENSATION ($)
- --------------------------- ---- ---------- --------- ------------ ----------------
Ted B. Miller, Jr........ 1997 $281,575 $656,250 125,000 $ --
Chief Executive Officer 1996 152,600 75,000 -- --
and Vice Chairman of the 1995 146,154 -- 69,000 --
Board of Directors
David L. Ivy............. 1997 200,000 300,000 50,000 --
President and Director 1996 37,500(b) -- 35,000 35,000(c)
1995 -- -- -- --
Charles C. Green, III.... 1997 75,000(d) -- 50,000 --
Executive Vice President 1996 -- -- -- --
and Chief Financial 1995 -- -- -- --
Officer
John L. Gwyn............. 1997 160,424(e) -- 45,000 --
Executive Vice President 1996 -- -- -- --
1995 -- -- -- --
Robert A. Crown.......... 1997 109,961(f) -- -- --
Director and Chief 1996 -- -- -- --
Executive Officer of 1995 -- -- -- --
Crown Communication
- --------
(a) All awards are for options to purchase the number of shares of Class B
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. Crown began working for the Company upon consummation of the Crown
Merger on August 15, 1997, at an annual salary of $275,000.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
VALUE AT
ASSUMED ANNUAL
RATES OF STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM (a)
----------------------------------------------------------- ---------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARs
UNDERLYING GRANTED TO
OPTIONS/SARs EMPLOYEES IN EXERCISE OR
NAME GRANTED (#) FISCAL YEAR BASE PRICE ($/Sh) EXPIRATION DATE 5% ($) 10% ($)
- ---- ------------ ------------ ----------------- --------------- ---------- ----------
Ted B. Miller, Jr....... 125,000 20.5% $21.00 5/31/07 $1,650,848 $4,183,574
David L. Ivy............ 50,000 8.2 21.00 5/31/07 660,339 1,673,430
Charles C. Green, III... 50,000 8.2 21.00 8/3/07 660,339 1,673,430
John L. Gwyn............ 45,000 7.4 21.00 5/31/07 594,305 1,506,087
Robert A. Crown......... -- -- -- -- -- --
- --------
(a) The potential realizable value assumes a per-share market price at the
time of the grant to be approximately equal to the exercise price with an
assumed rate of appreciation of 5% and 10%, respectively, compounded
annually for 10 years.
81
The following table details the December 31, 1997 year end estimated value
of each named executive officer's unexercised stock options. All unexercised
options are to purchase the number of shares of Class B Common Stock
indicated.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND YEAR-END OPTION/SAR VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/ IN-THE-MONEY OPTIONS/
SARs AT YEAR-END(#) SARs AT YEAR-END ($)
SHARES ACQUIRED VALUE EXERCISABLE (E)/ EXERCISABLE (E)/
NAME ON EXERCISE (#) REALIZED ($) UNEXERCISABLE (U)(a) UNEXERCISABLE (U)(b)
- ---- --------------- ------------ ---------------------- ---------------------
Ted B. Miller, Jr....... -- -- 81,500(E) $2,659,010(E)
112,500(U) 1,860,750(U)
David L. Ivy............ -- -- 13,750(E) 306,175(E)
71,250(U) 1,414,725(U)
Charles C. Green, III... -- -- --(E) --(E)
50,000(U) 827,000(U)
John L. Gwyn............ -- -- --(E) --(E)
45,000(U) 744,300(U)
Robert A. Crown......... -- -- --(E) --(E)
--(U) --(U)
- --------
(a) Fifty percent of the options to purchase Class B Common Stock granted in
1994, 1995 and 1996 become exercisable at 10% per year from the date of
grant. The other fifty percent of the options vest upon achievement of a
stated internal rate of return.
(b) The estimated value of exercised in-the-money stock options held at the
end of 1997 assumes a per-share fair market value of $37.54 and per-share
exercise prices of $2.00, $12.00 and $21.00, as applicable.
Stock Option Plan
The Company has adopted the 1995 Stock Option Plan (the "Stock Option
Plan"). The purpose of the Stock Option Plan is to advance the interests of
the Company by providing additional incentives and motivations which help the
Company to attract, retain and motivate key employees, directors and
consultants. The description set forth below summarizes the general terms of
the Stock Option Plan and the options granted pursuant to the Stock Option
Plan.
Pursuant to the Stock Option Plan, the Company can grant options to purchase
up to 1,153,000 shares of Class B Common Stock. Options granted under the
Stock Option Plan are nonqualified stock options which will not qualify as
incentive stock options pursuant to Section 422 of the Code. The price at
which a share of Class B Common Stock may be purchased upon exercise of an
option granted under the Stock Option Plan will be determined by the Board of
Directors and may be less than the fair market value of the Class B Common
Stock on the date that the option is granted. The exercise price may be paid
in cash, in shares of Class B Common Stock (valued at fair market value at the
date of exercise) or by a combination of such means of payment, as may be
determined by the Board.
Key employees, directors or consultants of the Company (including its
subsidiaries and affiliates) are eligible to receive options under the Stock
Option Plan. The Stock Option Plan is administered by the Board and the Board
is authorized to interpret and construe the Stock Option Plan. Subject to the
terms of the 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 Stock Option Plan.
No options may be granted under the Stock Option Plan after July 31, 2005,
which is ten years from the date the Stock Option Plan was originally adopted
and approved by the Board and stockholders of the Company. The Stock Option
Plan will remain in effect until all options granted under the Stock Option
Plan have been
82
exercised or expired. The Board, in its discretion, may terminate the Stock
Option Plan at any time with respect to any shares of Class B Common Stock for
which options have not been granted. The Stock Option Plan may be amended by
the Board without the consent of the stockholders of the Company, other than
as to a material increase in benefits, an increase in the number of shares
that may be subject to options under the Stock Option Plan or a change in the
class of individuals eligible to receive options under the Stock Option Plan.
However, no change in any option previously granted under the 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 Stock Option Plan, options are exercisable during the period
specified in each option agreement; provided, 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 service with
the Company as an employee, director or consultant. A change in control
generally accelerates the vesting of options granted to employees and some of
the options vest upon an initial public offering or the achievement of
specific business goals or objectives. An option generally must be exercised
within 12 months of a holder ceasing to be involved with the Company as an
employee, director or consultant as a result of death and within 3 months if
the cessation is for other reasons. Shares of Class B Common Stock subject to
forfeited or terminated options again become available for option awards. The
Board may, subject to certain restrictions in the Stock Option Plan, extend or
accelerate the vesting or exercisability of an option or waive restrictions in
an option agreement.
The Stock Option Plan provides that the total number of shares covered by
the 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 the 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 Class B Common Stock received pursuant to the exercise of the option will
be equal to the fair market value of the shares on the exercise date if the
exercise price is paid in cash. The Company will generally have a deduction in
parity with the amount realized by the holder. The Company has the right to
deduct and withhold applicable taxes relating to taxable income realized by
the holder upon exercise of the option and may withhold cash, shares or any
combination in order to satisfy or secure its withholding tax obligation.
As of January 31, 1997, options to purchase a total of 999,227 shares of
Class B Common Stock have been granted. Options for 72,625 shares of Class B
Common Stock have been exercised, options for 7,000 shares have been forfeited
and options for 919,602 shares remain outstanding. The outstanding options are
for (i) 69,000 shares with an exercise price of $2.00 per share, (ii) 18,750
shares with an exercise price of $6.00 per share, (iii) 10,000 shares with an
exercise price of $8.00 per share, (iv) 35,000 shares with an exercise price
of $12.00 per share, (v) 343,625 shares with an exercise price of $21.00 per
share, (vi) 4,627 shares with an exercise price of $23.80 per share, (vii)
65,000 shares with an exercise price of $30.00 per share, and (viii) 373,600
shares with exercise prices of $37.50 or $37.54 per share. The options
exercisable at $2.00 per share are fully vested and held by Ted B. Miller, Jr.
As of December 31, 1997, vested and exercisable options also include options
for (i) 7,750 shares at $6.00 per share, (ii) 2,500 shares at $8.00 per share,
(iii) 8,750 shares at $12.00 per share, (iv) 25,275 shares at $21.00 per share
and (v) 32,500 shares at $30.00 per share. Except for the 4,627 options with
an exercise price of $23.80 per share, the exercise prices for these options
were equal to or in excess of the estimated fair value of the Class B Common
Stock at the grant dates (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, the Company did not
recognize compensation cost related to the grant of these options. The 4,627
options were issued in 1998 in exchange for services received from
nonemployees; as such, the Company will account for the issuance of these
options in 1998 based on the fair value of the services received.
The Company is currently reviewing its stock option plan and other
compensation arrangements in light of its recent acquisition of the Crown
Business. The Company expects to make some changes to the Stock Option Plan,
but there are no definitive proposals at this time. The changes to the Stock
Option Plan could be material.
83
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
1995 INVESTMENTS
On January 11, 1995, Ted B. Miller, Jr. and Edward C. Hutcheson, Jr.
(collectively, the "Initial Stockholders") acquired 270,000 shares of CTC
Class A Common Stock, par value $.01 per share, for $270,000. Also, on January
11, 1995, pursuant to a Securities Purchase and Loan Agreement, dated as of
January 11, 1995, among CTC, 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
(collectively, the "Berkshire Fund III Group") and J. Landis Martin
(collectively, the "CTC Purchasers"), CTC issued to the CTC Purchasers (i)
270,000 shares of CTC Class B Common Stock, par value $.01 per share, for
$270,000, (ii) 730,380 shares of CTC Series A Convertible Preferred Stock, par
value $.01 per share, for $4,382,280 and (iii) $3,867,720 principal amount of
CTC Convertible Secured Subordinated Notes for $3,867,720. As of February
1997, all the CTC Convertible Secured Subordinated Notes had been converted
into 644,620 shares of Company Series A Convertible Preferred Stock. The
proceeds received on January 11, 1995 were used by the Company for the
acquisition of towers and ancillary assets from PCI and for working capital.
Pursuant to a Securities Exchange Agreement (the "Securities Exchange
Agreement"), dated as of April 27, 1995, among the Company, CTC, the Initial
Stockholders and the CTC Purchasers, such parties effectively made CCIC the
holding company of CTC and converted some of the obligations of CTC into
capital stock of CCIC. Transactions pursuant to the Securities Exchange
Agreement included (i) Centennial Fund IV transferring 208,334 shares of CTC
Series A Convertible Preferred Stock to Berkshire Fund III Group in exchange
for $1,250,004 principal amount of CTC Convertible Secured Subordinated Notes,
(ii) Berkshire Fund III Group and J. Landis Martin converting all remaining
CTC Convertible Secured Subordinated Notes held by them ($742,452 principal
amount) into 123,742 shares of CTC Series A Convertible Preferred Stock, (iii)
all the outstanding shares of capital stock of CTC being exchanged for similar
stock of CCIC and (iv) the remaining CTC Convertible Secured Subordinated
Notes ($3,125,268 principal amount) becoming convertible into shares of CCIC
Series A Convertible Preferred Stock, par value $.01 per share ("Series A
Convertible Preferred Stock") (all of which notes were subsequently converted
in February 1997).
As a result of the exchange of CTC capital stock for CCIC capital stock,
each Initial Stockholder received 135,000 shares of Class A Common Stock, par
value $.01 per share, of CCIC ("Class A Common Stock"), Centennial Fund IV
received 216,000 shares of Class B Common Stock and 145,789 shares of Series A
Preferred Stock, Mr. Martin received 41,666 shares of Series A Preferred Stock
and Berkshire Fund III Group received 54,000 shares of Class B Common Stock
and 666,667 shares of Series A Preferred Stock. In July 21, 1995, Robert F.
McKenzie became a party by amendment to the Securities Exchange Agreement and
received 8,333 shares of Series A Preferred Stock.
1996 INVESTMENTS
Pursuant to a Securities Purchase Agreement, dated as of July 15, 1996,
among the Company, Berkshire Fund III Group, Centennial Fund IV, J. Landis
Martin, Edward C. Hutcheson, Jr. and Robert F. McKenzie, the Company privately
placed 864,568 shares of its Series B Convertible Preferred Stock, par value
$.01 per share ("Series B Convertible Preferred Stock"), 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 (i) the purchase of the towers and microwave
and SMR businesses from Motorola in Puerto Rico, (ii) an option payment
relating to the acquisition of TEA and TeleStructures and (iii) working
capital.
1997 INVESTMENTS
Pursuant to a Securities Purchase Agreement, dated as of February 14, 1997,
among the Company, Centennial Fund V and Centennial Entrepreneurs Fund V, L.P.
(collectively, the "Centennial Fund V
84
Investors" and, together with Centennial Fund IV, the "Centennial Group"),
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" and, together with Nassau Capital, the "Nassau Group"), Fay,
Richwhite Communications Limited ("Fay Richwhite"), J. Landis Martin and
Robert F. McKenzie, the Company privately placed 3,529,832 shares of its
Series C Convertible Preferred Stock, par value $.01 per share ("Series C
Convertible Preferred Stock"), 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 the Company to
fund a portion of its investment in CTI.
In March 1997, Edward C. Hutcheson, Jr. exercised stock options for 69,000
shares of Class B Common Stock. The Company repurchased these shares and
61,687 shares of his Class A Common Stock for $3,422,118.
In May 1997, in connection with the Company's acquisition of the stock of
TeleStructures, TEA and TeleShare, Inc. (the "TEA Companies"), the Company
issued 107,142 shares of Class B Common Stock to the shareholders of the TEA
Companies: 48,214 shares to Bruce W. Neurohr, 48,214 shares to Charles H.
Jones and 10,714 shares to Terrel W. Pugh.
In June 1997, Messrs. Miller and Ivy received special bonuses, related to
their services in structuring and negotiating the CTI Investment, including
arranging the consortium partners who participated with the Company 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, subsidiaries of the Company.
As consideration for these transactions, the Crowns received a cash payment of
$25.0 million, a promissory note of the Company aggregating approximately
$75.0 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 1,465,000 shares of Class B Common Stock. In
addition, the Company assumed approximately $26.0 million of indebtedness of
the Crown Business. The Company 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 the Company, American Home Assurance Company ("AHA"), New York Life
Insurance Company ("New York Life"), The Northwestern Mutual Life Insurance
Company ("Northwestern Mutual"), PNC Venture Corp., J. Landis Martin and
affiliates of AHA, the Company privately placed of 292,995 shares of its
Senior Convertible Preferred Stock for an aggregate purchase price of
$29,299,500, together with warrants to purchase 117,198 shares of Class B
Common Stock at $37.54 per share (subject to adjustment, including weighted
average antidilution adjustments). AHA and its affiliates paid $15,099,500 for
150,995 shares and warrants to purchase 60,338 shares of Class B Common Stock.
New York Life and Northwestern Mutual each paid $6,000,000 for 60,000 shares
and warrants to purchase 24,000 shares of Class B Common Stock. PNC Venture
Corp. paid $2,000,000 for 20,000 shares and warrants to purchase 8,000 shares
of Class B Common Stock. Mr. Martin paid $200,000 for 2,000 and warrants to
purchase 800 shares of Class B Common Stock. The proceeds received on August
13, 1997 were used by the Company to fund a portion of the Crown Merger and
working capital.
Pursuant to a Securities Purchase Agreement, dated as of October 31, 1997,
among the Company, 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 AHA), 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
145,800 shares of Class B Common Stock at $37.54 per share (subject to
adjustment, including weighted average antidilution adjustments).
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Berkshire Partners Group paid $3,500,000 for 35,000 shares and warrants to
purchase 14,000 shares of Class B Common Stock. Centennial V Investors paid
$1,000,000 for 10,000 shares and warrants to purchase 4,000 shares of Class B
Common Stock. Nassau Group and Fay Richwhite each paid $2,500,000 for 25,000
shares and warrants to purchase 10,000 shares of Class B Common Stock. Harvard
paid $14,950,000 for 149,500 shares and warrants to purchase 59,800 shares of
Class B Common Stock. Prime paid $5,000,000 for 50,000 shares and warrants to
purchase 20,000 shares of Class B Common Stock. AHA paid $1,500,000 for 15,000
shares and warrants to purchase 6,000 shares of Class B Common Stock. New York
Life paid $300,000 for 3,000 shares and warrants to purchase 1,200 shares of
Class B Common Stock. Northwestern Mutual paid $4,000,000 for 40,000 shares
and warrants to purchase 16,000 shares of Class B Common Stock. PNC Venture
Corp. paid $1,000,000 for 10,000 shares and warrants to purchase 4,000 shares
of Class B Common Stock. J. Landis Martin paid $200,000 for 2,000 shares and
warrants to purchase 600 shares of Class B Common Stock.
OTHER TRANSACTIONS
The Company has entered into a services agreement (the "Services Agreement")
with CTI whereby the Company provides CTI with various services relating to
accounting, finance, infrastructure development and management, information
technology and marketing, and whereby the Chief Executive Officer and the
President of the Company each provide their commercial and financial expertise
to CTI. In exchange for such services, the Company is paid an annual fee of
(Pounds)240,000 (subject to adjustment by mutual agreement after the third
contractual year) and is reimbursed for all reasonable out-of-pocket expenses
incurred by the Company in connection with the performance of such services.
Under the Services Agreement, CTI also has an option to receive site
acquisition and development training from the Company for which the Company
will receive additional fees to be separately agreed by the parties.
Castle Transmission Services (Holdings) Ltd ("CTSH"), the parent company of
CTI, and its four major shareholders (each a "CTSH Shareholder"), including
the Company, entered into a Shareholders' Agreement on January 23, 1997,
governing the management and operation of CTSH and its subsidiaries (the "CTSH
Shareholders' Agreement"). The CTSH Shareholders' Agreement provides, among
other things, for (i) unanimous approval by all CTSH Shareholders (for so long
as such CTSH Shareholder owns at least 15% of the share capital of CTSH) as to
material transactions by CTSH or a subsidiary, (ii) standstill restrictions on
the transfer of shares in CTSH by any of the CTSH Shareholders prior to the
earlier of January 23, 2000 or a public offering of those shares on any stock
exchange or trading association, subject to limited exceptions, (iii) a right
for CTSH Shareholders who together own not less than 40% of the shares in
issue to require the listing of the entire share capital of CTSH on a stock
exchange or trading association, (iv) certain rights of preemption after
January 23, 2000, (v) certain demand registration rights at any time after
January 23, 2000, and (vi) "piggyback" registration rights whereby a CTSH
Shareholder may elect to participate, subject to certain conditions, in
certain proposed public offerings.
Robert J. Coury, a director of Crown Communication, and Crown Communication
have entered into a 15-month management consulting agreement beginning in
October 1997, with compensation set at $20,000 for the first month and $10,000
per month thereafter. In addition, pursuant to a Memorandum of Understanding
Regarding Management and Governance of CCIC and Crown Communication, dated as
of August 15, 1997, Mr. Coury received options for 15,000 shares of Class B
Common Stock. As of December 31, 1997, 7,500 of these options have vested. 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.
The Company leases office space in a building formerly owned by its Vice
Chairman and Chief Executive Officer. Lease payments for such office space
amounted to $130,000, $50,000 and $22,000 for the years ended December 31,
1997, 1996 and 1995, 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. The lease also
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provides the Company a right of first refusal on the entire fifth floor of the
building. Interstate Realty Corporation, a company owned by the Company's Vice
Chairman and Chief Executive Officer, will receive 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 ("Idlewood"), 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 $60,000.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 208,313 shares of
Class A Common Stock, 11,302,796 shares of Class B Common Stock (the Class A
Common Stock and Class B Common Stock collectively, "Common Stock") and
6,435,228 shares of the preferred stock, $.01 par value per share ("Preferred
Stock"). As of October 31, 1997, there were 208,313 shares of Class A Common
Stock, 1,873,433 shares of Class B Common Stock and 6,435,228 shares of
Preferred Stock outstanding.
CLASS A COMMON STOCK AND CLASS B COMMON STOCK
Voting Rights
Each share of Class B Common Stock is entitled to one vote and each share of
Class A Common Stock is entitled to the number of votes per share that equals
the number of shares of Class B Common Stock into which each share of Class A
Common Stock is convertible (currently set at 1.523148 shares of Class B
Common Stock for each share of Class A Common Stock and referred to as "Class
A Common Stock as converted") on all matters submitted to a vote of the
stockholders. There is no cumulative voting. The Class A Common Stock and
Class B Common Stock vote together as a single class on all matters presented
for a vote of the stockholders, except as provided under the Delaware General
Corporation Law (the "DGCL"). All the outstanding shares of Class A Common
Stock are held by the Initial Stockholders. The holders of Class A Common
Stock, voting as a separate class, are entitled to elect one director. All the
outstanding shares of Class B Common Stock are held by directors, executive
officers, other employees and affiliates of the Company or its subsidiaries.
Dividends
Each share of Class A Common Stock and of Class B Common Stock is entitled
to receive dividends if, as and when declared by the Board out of funds
legally available therefor. Identical dividends, if any, must be paid on both
the Class B Common Stock and the Class A Common Stock as converted at any time
that dividends are paid on either, except that dividends payable on shares of
the Class B Common Stock are payable only in shares of the Class B Common
Stock and dividends payable on shares of the Class A Common Stock are payable
only in shares of the Class A Common Stock.
Convertibility
Each share of Class A Common Stock is convertible at any time at the
holder's option into 1.523148 shares of fully paid and nonassessable shares of
Class B Common Stock. Shares of Class A Common Stock are convertible at the
Company's option into shares of Class B Common Stock at the rate described
above, simultaneously with the conversion of outstanding shares of Preferred
Stock pursuant to the mandatory conversion provisions as discussed below under
"--Preferred Stock." In the case of any reorganization or reclassification of
the capital stock that entitles holders of Class B Common Stock to receive
stock, securities or assets in exchange for Class B Common Stock, then similar
provision must be made for holders of Class A Common Stock as converted.
Shares of Class B Common Stock are not convertible.
Liquidation Rights
In the event of the dissolution of the Company, after satisfaction of
amounts payable to creditors and distribution to the holders of outstanding
Preferred Stock, if any, of amounts to which they may be preferentially
entitled, holders of Class A Common Stock as converted and Class B 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 the Company may issue, and there are no redemption provisions or sinking
fund provisions applicable to the Class A Common Stock or
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Class B Common Stock, nor is either class subject to calls or assessments by
the Company. All outstanding shares of Common Stock are legally issued, fully
paid and nonassessable.
PREFERRED STOCK
General
The authorized Preferred Stock is divided into 1,383,333 shares designated
Series A Convertible Preferred Stock, 864,568 shares designated Series B
Convertible Preferred Stock, 3,529,832 shares designated Series C Convertible
Preferred Stock and 657,495 shares designated Senior Convertible Preferred
Stock. All the authorized Preferred Stock is outstanding.
The Board does not have the authority to amend the Amended Certificate or to
take other corporate action without approval by the holders of at least 66.67%
of the outstanding shares of Preferred Stock (calculated on an "as converted"
share-for-share basis), voting or consenting together, if such amendment or
corporate action would adversely affect or significantly alter rights of
holders of Preferred Stock; create or authorize the creation of additional
shares of Class A Common Stock or capital stock senior to or on a parity with
any Preferred Stock or increase the authorized amount of Preferred Stock; or
permit the grant of warrants or options except Common Stock issuable on
conversion of Preferred Stock or options granted pursuant to the Plan.
Furthermore, for so long as 25% of the aggregate number of shares of Preferred
Stock originally issued remains outstanding, the Company will not without the
approval of at least 66.67% of the holders of the then outstanding Preferred
Stock as converted: (i) issue debt securities which are convertible into,
exchangeable for or otherwise entitle the holder thereof to receive equity
securities, other than securities issued in connection with borrowing by the
Company from banks or other institutional lenders; (ii) redeem, repurchase or
acquire for value any shares of Common Stock; or (iii) merge or consolidate
with another entity if at least a majority of the voting power of the Company
(or the surviving entity) would not be owned by the holders of the capital
stock of the Company before such merger or consolidation. Finally, no
amendments or modifications to or waivers of the Preferred Stock may be made
without the written consent or affirmative vote of holders of at least 66.67%
of the then outstanding Preferred Stock as converted. The issuance of
Preferred Stock, while providing flexibility in connection with possible
financings, acquisitions and other corporate transactions, could, under
certain circumstances, make it more difficult for a third party to gain
control of the Company. Further, any change to a provision involving the
maturity redemption, mandatory conversion or a significant modification
relating to the Senior Convertible Preferred Stock is subject to approval of
66.67% of the outstanding shares of the Senior Convertible Preferred Stock
(taking into account holders of only Senior Convertible Preferred Stock other
than Class B Common Stock held as a result of converting Senior Convertible
Preferred Stock or the exercise of warrants issued in conjunction with the
issuance of Senior Convertible Preferred Stock (the "Required Senior Preferred
Holders")).
Voting Rights. The Preferred Stock will vote together with all classes and
series of capital stock except as specified herein or under the DGCL. Each
share of Preferred Stock entitles the holder thereof to such number of votes
per share as equals the number of Class B Common Stock into which each share
of Preferred Stock is then convertible.
Dividends. Subject to the terms of the Indenture, the holders of the Senior
Convertible Preferred Stock are entitled to receive dividends at a compounded
rate of 12.5% per share per annum based upon (i) $100 per share (subject to
adjustment) and (ii) accrued unpaid cumulative dividends. Such dividends
accrued will be cumulative until paid, and if any such accrued cumulative
dividends are not declared and paid, the deficiency will first be paid in full
before any dividend or other distribution is paid or declared with respect to
the Company's capital stock (other than Senior Convertible Preferred Stock)
now or hereinafter outstanding. Further, any such dividend not paid in cash
within five days of the annual dividend date shall be paid only in the form of
Senior Convertible Preferred Stock.
Each share of the Series A Convertible Preferred Stock, Series B Convertible
Preferred Stock and Series C Convertible Preferred Stock (collectively, the
"Series Convertible Preferred Stock") is entitled to receive
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dividends if, as and when declared by the Board out of funds legally available
therefor and on a parity with dividends with respect to Class B Common Stock
on an as converted basis. No dividends may be declared by the Board on any
class of stock ranking junior to the Senior Convertible Preferred Stock unless
full cumulative dividends have been or contemporaneously are declared and paid
with respect to the Senior Convertible Preferred Stock. No dividends shall be
paid on Series Convertible Preferred Stock or Common Stock without the
approval of the Required Senior Preferred Holders.
Convertibility. Each share of Senior Convertible Preferred Stock plus
accrued unpaid dividends may be converted at the holder's option into shares
of Class B Common Stock. The conversion ratio equals $100 per share of Senior
Convertible Preferred Stock plus accrued unpaid dividends divided by $37.54
(subject to adjustment in the case of stock dividends, stock splits,
reorganizations, reclassifications or similar events affecting the Class B
Common Stock). The $37.54 amount will be reduced to 85% of the price per share
to the public if the Company consummates an initial registered public offering
of Class B Common Stock with a price below $44.17 per share (subject to
adjustment) and all the shares of Senior Convertible Preferred Stock convert
in connection with such offering. Weighted average antidilution protection is
also applicable to the $37.54 amount if Class B Common Stock is effectively
issued below such price (as adjusted) in a nonpublic offering.
Each share of Series Convertible Preferred Stock may be converted at the
holder's option into Class B Common Stock on a share-for-share basis (subject
to adjustment in the case of stock dividends, stock splits, reclassifications,
reorganizations and similar events affecting the Class B Common Stock).
All the Preferred Stock is subject to mandatory conversion upon a firm
commitment underwritten public offering in which aggregate proceeds to the
Company are at least $30 million and the price per share to the public of
Class B Common Stock is at least $100 per share (as adjusted for stock splits
and similar events). The conversion ratios for all Preferred Stock are subject
to weighted average antidilution protection and to adjustment for stock
splits, stock dividends, reorganizations, reclassifications and similar
transactions.
Board Size and Seats. The Company may not, without the written consent or
affirmative vote of at least 66.67% of the then outstanding shares of
Preferred Stock (on an as converted basis) consenting or voting together (as
the case may be), separately from all other classes and series of capital
stock, increase the maximum number of directors constituting the Board in
excess of 11. In addition, holders of Preferred Stock voting together,
separately from all other classes and series of capital stock, are entitled to
elect five directors, and the holders of Preferred Stock and both classes of
Common Stock, voting together as a single class, are entitled to elect five
directors (with the Preferred Stock entitled to vote on an as converted
basis). The holders of Class A Common Stock are entitled to elect one
director.
Senior Convertible Preferred Stock
In August 1997, the Board authorized the issuance and sale of 292,995 shares
of Senior Convertible Preferred Stock, par value $.01 per share, designated as
the "Senior Convertible Preferred Stock." In October 1997, the Board
authorized the issuance and sale of an additional 364,500 shares of Senior
Convertible Preferred Stock.
Rank. The Senior Convertible Preferred Stock ranks, with respect to dividend
rights and rights on liquidation, senior to the Common Stock and the Series
Convertible Preferred Stock.
Liquidation Rights. In the event of the dissolution, liquidation or winding
up of the affairs of the Company (including a merger, reorganization or
consolidation involving a transfer of 50% of the voting power of the Company),
after satisfaction of amounts payable to creditors, holders of shares of
Senior Convertible Preferred Stock are entitled to receive distributions in an
amount equal to the greater of (i) $100 (subject to adjustment), plus, in the
case of each share, accrued and unpaid cumulative dividends thereon and such
additional incremental amount sufficient to produce an annualized cumulative
internal rate of return of 18%, and (ii) such amount per share that such
holders would receive if such shares were converted into shares of Class B
Common Stock
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immediately prior to the dissolution, liquidation or winding up of the affairs
of the Company, in preference to any payment to holders of Common Stock,
Series Convertible Preferred Stock or any other securities ranking junior to
the Senior Convertible Preferred Stock.
Other Provisions. There are no preemptive rights to subscribe for any
additional securities which the Company may issue, and there are no sinking
fund provisions applicable to the Senior Convertible Preferred Stock, nor is
the Senior Convertible Preferred Stock subject to assessments by the Company.
Fifty percent of the Senior Convertible Preferred Stock is subject to a one
time call on or before August 31, 1998 at $100 per share plus an annualized
internal rate of return of 18%. The holders of Senior Convertible Preferred
Stock will have the right to require redemption on the earlier of 91 days
after the tenth anniversary date of issuance of the Notes or May 15, 2008 at a
price equal to $100 per share plus accrued cumulative unpaid dividends.
Further, unconverted Senior Convertible Preferred Stock will mature on the
earlier of 91 days after the tenth anniversary date of issuance of the Notes
or May 15, 2008 and is redeemable at $100 per share plus accrued cumulative
unpaid dividends; provided, the price shall be increased to the amount the
holders of Senior Convertible Preferred Stock would have received if there is
a dissolution, liquidation or winding up of the Company within 12 months of
the redemption. The $100 per share redemption price for Senior Convertible
Preferred Stock is subject to adjustment for stock splits, stock dividends,
reorganizations, reclassifications and similar events.
Series A Convertible Preferred Stock
In April 1995, the Board authorized the exchange by CTC stockholders of
their capital stock in CTC for capital stock in the Company with the same
designations, rights and preferences, including shares of Preferred Stock, par
value $.01 per share, designated as the "Series A Convertible Preferred
Stock." Of the 1,383,333 shares of Series A Convertible Preferred Stock
outstanding, 862,455 shares were issued in connection with the exchange
(including 132,075 shares issued on conversion of the Company's Convertible
Secured Subordinated Notes) and 520,878 of such shares were issued upon the
conversion of the Company's Convertible Secured Subordinated Notes in February
1997.
Rank. The Series A Convertible Preferred Stock ranks, with respect to
dividend rights, senior to the Common Stock, on parity with the Series B
Convertible Preferred Stock and Series C Convertible Preferred Stock and
junior to the Senior Convertible Preferred Stock. The Series A Convertible
Preferred Stock ranks, with respect to rights on liquidation and redemption,
senior to the Common Stock and junior to the Series B Convertible Preferred
Stock, Series C Convertible Preferred Stock and Senior Convertible Preferred
Stock.
Liquidation Rights. In the event of the dissolution, liquidation or winding
up of the affairs of the Company (including a merger, reorganization or
consolidation involving a transfer of 50% of the voting power of the Company),
after satisfaction of amounts payable to creditors, holders of shares of
Series A Convertible Preferred Stock are entitled to receive distributions in
an amount equal to the greater of (i) $6.00 (subject to adjustment) and (ii)
such amount per share that such holders would receive if such shares were
converted into shares of Class B Common Stock immediately prior to the
dissolution, liquidation or winding up of the affairs of the Company, in
preference to any payment to holders of Common Stock or any other securities
ranking junior to the Series A Convertible Preferred Stock.
Other Provisions. There are no preemptive rights to subscribe for any
additional securities which the Company may issue, and there are no sinking
fund provisions applicable to the Series A Convertible Preferred Stock, nor is
the Series A Convertible Preferred Stock subject to calls or assessments by
the Company. The holders of Series A Convertible Preferred Stock have the
right to require the redemption on the earlier of 91 days after the tenth
anniversary date of issuance of the Notes or May 15, 2008 at $6.00 per share
(subject to adjustment) plus declared unpaid dividends.
Series B Convertible Preferred Stock
In July 1996, the Board of Directors authorized the issuance and sale of
864,568 shares of Preferred Stock, par value $.01 per share, designated as the
"Series B Convertible Preferred Stock."
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Rank. The Series B Convertible Preferred Stock ranks, with respect to
dividend rights, senior to the Common Stock, on parity with the Series A
Convertible Preferred Stock and Series C Convertible Preferred Stock and
junior to the Senior Convertible Preferred Stock. The Series B Convertible
Preferred Stock ranks, with respect to rights on liquidation and redemption,
senior to the Common Stock and Series A Convertible Preferred Stock, on parity
with the Series C Convertible Preferred Stock and junior to the Senior
Convertible Preferred Stock.
Liquidation Rights. In the event of the dissolution, liquidation or winding
up of the affairs of the Company (including a merger, reorganization or
consolidation involving a transfer of 50% of the voting power of the Company),
after satisfaction of amounts payable to creditors, holders of shares of
Series B Convertible Preferred Stock are entitled to receive distributions in
an amount equal to the greater of (i) $12.00 (subject to adjustment) and (ii)
such amount per share that such holders would receive if such shares were
converted into shares of Class B Common Stock immediately prior to the
dissolution, liquidation or winding up of the affairs of the Company, in
preference to any payment to holders of Common Stock or any other securities
ranking junior to the Series B Convertible Preferred Stock.
Other Provisions. There are no preemptive rights to subscribe for any
additional securities which the Company may issue, and there are no sinking
fund provisions applicable to the Series B Convertible Preferred Stock, nor is
the Series B Convertible Preferred Stock subject to calls or assessments by
the Company. The holders of Series B Convertible Preferred Stock have the
right to require the redemption on the earlier of 91 days after the tenth
anniversary date of issuance of the Notes or May 15, 2008 at $12.00 per share
(subject to adjustment) plus declared unpaid dividends.
Series C Convertible Preferred Stock
In February 1997, the Board of Directors authorized the issuance and sale of
3,529,832 shares of Preferred Stock, par value $.01 per share, designated as
the "Series C Convertible Preferred Stock."
Rank. The Series C Convertible Preferred Stock ranks, with respect to
dividend rights, senior to the Common Stock, on parity with the Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock and
junior to the Senior Convertible Preferred Stock. The Series C Convertible
Preferred Stock ranks, with respect to rights on liquidation and redemption,
senior to the Common Stock and Series A Convertible Preferred Stock, on parity
with the Series B Convertible Preferred Stock and junior to the Senior
Convertible Preferred Stock.
Liquidation Rights. In the event of the dissolution, liquidation or winding
up of the affairs of the Company (including a merger, reorganization or
consolidation involving a transfer of 50% of the voting power of the Company),
after satisfaction of amounts payable to creditors, holders of shares of
Series C Convertible Preferred Stock are entitled to receive distributions in
an amount equal to the greater of (i) $21.00 (subject to adjustment) and (ii)
such amount per share that such holders would receive if such shares were
converted into shares of Class B Common Stock immediately prior to the
dissolution, liquidation or winding up of the affairs of the Company, in
preference to any payment to holders of Common Stock or any other securities
ranking junior to the Series C Convertible Preferred Stock.
Other Provisions. There are no preemptive rights to subscribe for any
additional securities which the Company may issue and there are no sinking
fund provisions applicable to the Series C Convertible Preferred Stock, nor is
the Series C Convertible Preferred Stock subject to calls or assessments by
the Company. The holders of Series C Convertible Preferred Stock have the
right to require the redemption on the earlier of 91 days after the tenth
anniversary date of issuance of the Notes or May 15, 2008 at $21.00 per share
(subject to adjustment) plus declared unpaid dividends.
WARRANTS
In connection with the offering of the Senior Convertible Preferred Stock in
August 1997 and October 1997, the Company issued warrants to purchase an
aggregate of 262,998 shares of Class B Common Stock at a price
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of $37.54 per share, provided that the price per share shall be reduced to 85%
of the price per share to the public if the Company consummates an initial
registered public offering of Class B Common Stock with a price below $44.17
per share. The exercise price is subject to weighted average antidilution
protection on terms similar to the Preferred Stock conversion price. These
warrants are exercisable at any time prior to August 16, 2007, in the case of
the warrants issued in August 1997, and October 31, 2007, in the case of the
warrants issued in October 1997.
STOCKHOLDERS AGREEMENT
Pursuant to the Amended and Restated Stockholders Agreement, dated as of
August 15, 1997, among the Company, the Initial Stockholders, Robert A. Crown
and Barbara Crown (together with the Initial Stockholders, the "Individual
Stockholders") and the other major investors (the "Investors") in the
Company's capital stock, the parties agreed to certain rights and restrictions
with respect to the shares of the Company's capital stock (the "Shares") they
hold, including the following:
Transfer Restrictions. Subject to certain limited exceptions, neither of the
Crowns (so long as either of them is employed by the Company or any of its
subsidiaries or affiliates) nor the Initial Stockholders shall dispose of any
Shares except to the Company or as provided in the Stockholders Agreement.
Rights of First Refusal. The Stockholders Agreement includes various rights
of first refusal in the event an Individual Stockholder or an Investor
(collectively, "Investment Parties") proposes to transfer Shares to a third
party. The specific terms of the rights of first refusal vary depending upon
whether the Shares are being transferred by the Crowns, by an Initial
Stockholder or by an Investor, but in each case the right provides that the
nontransferring parties or the Company have a purchase right before such
proposed transfer may be consummated.
Come-Along Rights. The Stockholders Agreement includes "come-along" rights
in the event of certain proposed transfers of Shares by an Investment Party.
Following application of the right of first refusal procedures described
above, each party to the Stockholders Agreement has the right to include its
Shares (or pro rata portion thereof) in the proposed transfer triggering the
right of first refusal.
Take-Along Rights. The Stockholders Agreement provides that if, at any time
prior to a Qualified Public Offering (defined as a firm commitment
underwriting of Common Stock in which the per share offer price is at least
$100 and the Company receives at least $30,000,000 in net proceeds),
Investment Parties holding at least 66.67% of the Shares owned by all
Investment Parties (such persons being referred to as the "Take Along Group")
determine to sell or exchange (in a business combination or otherwise) 50% or
more of the total number of Shares then issuable or outstanding, then, upon
written notice of the Take Along Group, each other Investment Party shall be
obligated to sell that percentage of its Shares that is equal to the aggregate
percentage of the Take Along Group's Shares being sold or exchanged by the
Take Along Group in the same transaction.
Right to Call and Put Securities. The Stockholders Agreement provides the
Company and the Investment Parties with certain call rights on the Shares of
Ted B. Miller, Jr. in the event his employment terminates for any reason prior
to a Qualified Public Offering. In addition, Mr. Miller has certain put rights
with respect to his Shares if his employment is terminated without cause, or
by virtue of his death, disability or retirement in accordance with Company
policy.
Designation of Nominees by Crowns and by Investors. So long as the Crowns or
certain of their permitted transferees among their families or their heirs
shall have in the aggregate a 5% or greater interest in the Common Stock of
the Company, Robert A. Crown, Barbara Crown and/or such transferees shall have
the right to designate one nominee for election as a director of the Company.
The Company has committed to using its best efforts to reduce the 5% target
amount to a 2.5% target amount. Of the five directors to be elected by holders
of the Company's Preferred Stock pursuant to the terms contained in the
Amended Certificate, in addition to the director to be nominated by the
Crowns, (i) Centennial Group has the right to designate two nominees for
election as a director of the Company; (ii) certain entities affiliated with
Berkshire Partners Group have the right
93
to designate two nominees for election as a director of the Company; and (iii)
Nassau Group has the right to designate one nominee for election as a director
of the Company. At each meeting, or written action in lieu of a meeting of
stockholders of the Company, at or by which directors nominated by the Crowns
or by the holders of Preferred Stock, voting separately, are to be elected,
each Investor and Individual Stockholder shall vote all of its Shares to elect
as directors of the Company, such nominees.
The Stockholders Agreement also provides for the designation of four other
directors by the agreement of the Individual Stockholders and Investors as a
group holding 66.67% of the outstanding capital stock of the Company entitled
to vote in the election of directors (calculated on an "as converted" basis).
Right of First Offer. The Stockholders Agreement provides that the Company
shall, prior to any issuance by the Company of certain of its securities
(other than debt securities with no equity feature) and subject to certain
ownership conditions, offer to certain Investors and Individual Stockholders
the right to purchase all such securities for cash at an amount equal to the
price or other consideration for which such securities are to be issued.
Covenants. The Company is also subject to a number of negative covenants
under the Stockholders Agreement, including, among other things, limitations
on liens, indebtedness, investments, distributions or related party
transactions.
Registration Rights. The Stockholders Agreement provides that, at any time
after the earliest of (i) six months after the first registration statement
covering a public offering of the Company's securities shall have become
effective, (ii) six months after the Company shall have become a reporting
company under the Exchange Act and (iii) July 1, 1999, the Investors and
Individual Stockholders holding at least 33% of the restricted stock then
issuable or outstanding may require the Company to register such shares under
the Securities Act on two occasions, provided that the reasonably anticipated
net proceeds to such holders would exceed $5.0 million on each occasion.
The Stockholders Agreement also grants registration rights whereby the
Investors and Stockholders holding 17.5% of the shares of restricted stock
may, at any time the Company is eligible to file a registration statement on
Form S-3, request the Company on five occasions to use its best efforts to
file a registration statement covering the shares specified in such notice, as
long as the reasonably anticipated price to the public of such offering would
exceed $1.0 million on each occasion.
The Stockholders Agreement also provides for unlimited piggyback
registration rights. Pursuant to the Stockholders Agreement, each time the
Company proposes to register its securities under the Securities Act for sale
to the public, whether for its own account or for the account of other
securityholders or both, it will give written notice to the Investors and
Individual Stockholders holding restricted stock to allow their participation
in the registration, unless the managing underwriter of the offering
determines that the total number of such securities to be registered will
adversely effect the marketing of the securities to be sold by the Company. In
such case, the securities proposed to be included by such requesting holders
of restricted stock will be reduced on a pro rata basis, unless any shares to
be included in such offering are for the account of any person other than the
Company or the requesting holders of restricted stock.
The Company has agreed to pay the costs and expenses incurred in connection
with each demand and piggyback registration and each registration on Form S-3,
other than underwriting discounts and commissions.
Term. The Stockholders Agreement will terminate immediately prior to a firm
commitment underwritten public offering pursuant to an effective registration
statement on Form S-1 (or its equivalent). However, the Stockholders Agreement
provides that so long as the Crowns or their permitted transferees have in the
aggregate a 5% or greater interest in the Company's Common Stock, the Crowns
or such transferees shall continue to have the right to designate one nominee
(or a successor to such nominee) for election as a director of the Company
despite the agreement otherwise terminating. The Company has committed to
using its best efforts to reduce the 5% target amount to a 2.5% target amount.
The Stockholders Agreement further provides that the Investors and Individual
Stockholders will vote their shares to elect the Crowns' nominee as a
director.
94
OWNERSHIP OF CAPITAL STOCK
The table below sets forth, as of January 31, 1998, certain information with
respect to the beneficial ownership of Capital Stock by (i) each person who is
known by the Company to be the beneficial owner of more than 5% of Class B
Common Stock of the Company on a fully diluted basis and (ii) each of the
directors and executive officers of the Company and all directors and
executive officers as a group. As of that date, the Company had outstanding
the following amounts: Class A Common Stock--208,313 shares; Class B Common
Stock--1,873,433 shares; Series A Preferred Stock--1,383,333 shares; Series B
Preferred Stock--864,568 shares; Series C Preferred Stock--3,529,832 shares;
and Senior Convertible Preferred Stock--657,495 shares. Each share of Class A
Common Stock is convertible into 1.523148 shares of Class B Common Stock. This
table also gives effect to shares that may be acquired pursuant to options and
convertible preferred stock, as described in the footnotes below.
PERCENTAGE OF
FULLY TOTAL VOTING
DILUTED POWER OF
NUMBER OF PERCENTAGE OF CLASS B FULLY DILUTED
SHARES CLASS COMMON CLASS B
EXECUTIVE OFFICERS AND BENEFICIALLY BENEFICIALLY STOCK COMMON
DIRECTORS(a) TITLE OF CLASS OWNED(b) OWNED EQUIVALENT(c) STOCK
---------------------- -------------- ------------ ------------- ------------- -------------
Ted B. Miller, Jr. ..... Class A Common Stock 135,000(d) 64.8% 205,625 3.8%
Class B Common Stock(e) 81,500 4.2 259,600
David L. Ivy............ Class B Common Stock(f) 23,750 1.3 140,000 1.1
Charles C. Green, III... Class B Common Stock(g) -- -- 65,000 *
John L. Gwyn............ Class B Common Stock(h) 9,500 * 53,500 *
Robert A. Crown(i)...... Class B Common Stock 1,465,000 78.2 1,482,500 12.0
Edward C. Hutcheson,
Jr.(j)................. Class A Common Stock 73,313 35.2 111,667 1.1
Class B Common Stock(k) 1,250 * 10,000
Series B Preferred Stock 8,333 1.0 8,333
J. Landis Martin(l)..... Class B Common Stock(m) 6,125 * 24,500 1.4
Series A Preferred Stock 41,666 3.0 41,666
Series B Preferred Stock 41,667 4.8 41,667
Series C Preferred Stock 47,619 1.3 47,619
Senior Preferred Stock 4,000 * 12,741(n)
Robert F. McKenzie(o)... Class B Common Stock(p) 6,125 * 24,500 *
Series A Preferred Stock 8,333 * 8,333
Series B Preferred Stock 4,167 * 4,167
Series C Preferred Stock 2,500 * 2,500
Directors and executive
officers as a group
(8 persons total)...... Class A Common Stock 208,313 100.0 317,292 20.6
Class B Common Stock(q) 1,593,250 80.2 2,059,600
Series A Preferred Stock 49,999 3.6 49,999
Series B Preferred Stock 54,167 6.3 54,167
Series C Preferred Stock 50,119 1.4 50,119
Senior Preferred Stock 4,000 * 12,741(r)
Berkshire Fund III, A
Limited
Partnership(s)......... Class B Common Stock 51,309 2.7 51,309 9.8
Series A Preferred Stock 633,444 45.8 633,444
Series B Preferred Stock 475,082 55.0 475,082
Senior Preferred Stock 17,968 2.7 56,596(t)
Berkshire Fund IV,
Limited
Partnership(s)......... Series C Preferred Stock 944,156 26.7 944,156 8.0
Senior Preferred Stock 14,627 2.2 46,072(u)
Berkshire Investors
LLC(s)................. Class B Common Stock 2,691 * 2,691 1.3
Series A Preferred Stock 33,223 2.4 33,223
Series B Preferred Stock 24,918 2.9 24,918
Series C Preferred Stock 94,415 2.7 94,415
Senior Preferred Stock 2,405 * 7,575(v)
Centennial Fund IV,
L.P.(w)................ Class B Common Stock 216,000 11.5 216,000 9.7
Series A Preferred Stock 666,667 48.2 666,667
Series B Preferred Stock 310,401 35.9 310,401
Centennial Fund V,
L.P.(w)................ Series C Preferred Stock 714,286 20.2 714,286 6.0
Senior Preferred Stock 9,700 1.5 30,553(x)
Centennial Entrepreneurs
Fund V, L.P.(w)........ Series C Preferred Stock 22,095 * 22,095 *
Senior Preferred Stock 300 * 944(y)
Nassau Capital Partners
II, L.P.(z)............ Series C Preferred Stock 922,831 26.1 922,831 8.1
Senior Preferred Stock 24,845 3.8 78,257(aa)
NAS Partners I,
L.L.C.(z).............. Series C Preferred Stock 5,740 * 5,740 *
Senior Preferred Stock 155 * 488(bb)
(footnotes on following page)
95
(footnotes from preceding page)
- --------
* Less than 1%.
(a) Except as otherwise indicated, the address of each person named 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, convertible notes or convertible preferred stock exercisable or
convertible within 60 days of the date 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 the Company's knowledge, except as otherwise
indicated, beneficial ownership includes sole voting and dispositive power
with respect to all shares.
(c) Includes the full amounts of options of Class B Common Stock that have
been granted, whether vested and exercisable or not. Each share of Class A
Common Stock is shown as converted into 1.523148 shares of Class B Common
Stock. For the Senior Convertible Preferred Stock, a conversion price of
$37.54 and accrued dividends through January 31, 1998, is assumed.
(d) Mr. Miller holds 121,870 shares of Class A Common Stock personally and
13,130 shares of Class A Common Stock are held in trust for the benefit of
his children.
(e) Includes 81,500 options which have vested as of March 31, 1998.
(f) Includes 13,750 options which have vested as of March 31, 1998.
(g) Represents 65,000 options granted to Mr. Green which are not yet
exercisable.
(h) Includes 9,000 options which have vested as of March 31, 1998.
(i) Includes 739,000 shares owned by Mr. Crown, 701,000 shares owned by his
spouse, over which she has sole voting and dispositive power, and 25,000
shares that are jointly owned. Also represents 17,500 options granted to
Mr. Crown which are not yet exercisable. Mr. Crown's principal business
address is c/o Crown Communication Inc., 375 Southpointe Blvd.,
Canonsburg, PA 15317.
(j) Mr. Hutcheson's principal business address is 5599 San Felipe, Suite 301,
Houston, TX 77056.
(k) Includes 1,250 options which have vested as of March 31, 1998.
(l) Mr. Martin's principal business address is c/o Tremont Corporation, 1999
Broadway, Suite 4300, Denver, CO 80202.
(m) Includes 6,125 options which have vested as of March 31, 1998.
(n) Includes warrants for 1,600 shares of Class B Common Stock.
(o) Mr. McKenzie's principal business address is 60 Kearney Street, Denver, CO
80220.
(p) Includes 2,500 options which have vested as of March 31, 1998.
(q) Includes 114,125 options which have vested as of March 31, 1998.
(r) Includes warrants for 1,600 shares of Class B Common Stock.
(s) Berkshire Partners Group has approximately 19.2% of the total voting power
of the Class B Stock on a fully diluted basis. Carl Ferenbach, the
Chairman of the Board of Directors of the Company, and Garth H. Greimann,
a director of the Company, are Managing Directors of Berkshire Fund III, A
Limited Partnership, and Berkshire Fund IV, Limited Partnership. The
principal business address of the Berkshire Partners Group is c/o
Berkshire Partners LLC, One Boston Place, Suite 3300, Boston, MA 02108-
4401.
(t) Includes warrants for 7,187 shares of Class B Common Stock.
(u) Includes warrants for 5,851 shares of Class B Common Stock.
(v) Includes warrants for 962 shares of Class B Common Stock.
(w) Centennial Group has approximately 15.9% of the total voting power of the
Class B Common Stock on a fully diluted basis. Jeffrey Schutz and David
Hull, directors of the Company, are each General Partners of Centennial
Fund IV and Centennial Fund V. In addition, Messrs. Hutcheson, Martin and
McKenzie are investors in Centennial Entrepreneurs Fund V, L.P., which is
managed by CHI. Mr. Martin is also an investor in and a director of CHI
and is a limited partner in Centennial Fund IV and Centennial Fund V. The
principal business address of Centennial Group is c/o The Centennial
Funds, 1428 Fifteenth Street, Denver, CO 80202-1318.
(x) Includes warrants for 3,880 shares of Class B Common Stock.
(y) Includes warrants for 120 shares of Class B Common Stock.
(z) Nassau Group has approximately 8.1% of the total voting power of the Class
B Common Stock on a fully diluted basis. Randall Hack, a director of the
Company, 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.
(aa) Includes warrants for 9,938 shares of Class B Common Stock.
(bb) Includes warrants for 62 shares of Class B Common Stock.
96
DESCRIPTION OF THE SENIOR CREDIT FACILITY
Two wholly owned subsidiaries of CCIC, CTC and CTC(PR) (collectively, the
"Borrowers"), have entered into the Senior Credit Facility with a group of
banks and other financial institutions led by KeyBank National Association
("KeyBank") 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 January 5, 1998, the Borrowers had unused borrowing availability
under the Senior Credit Facility of approximately $93.6 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 (i) net proceeds of certain asset
sales, (ii) net proceeds of certain required capital contributions to CTC by
CCIC relating to the proceeds from the sale of equity, convertible or debt
securities, subject to certain exceptions, (iii) net proceeds of any unused
insurance proceeds and (iv) 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 secured by
substantially all the assets of CCIC's subsidiaries. The Borrowers'
obligations under the Senior Credit Facility are also guaranteed by each
direct and indirect majority owned domestic subsidiary of CCIC and secured by
substantially all the assets of each direct and indirect majority owned
domestic subsidiary of CCIC. In addition, the Senior Credit Facility is
guaranteed on a limited recourse basis by CCIC, limited in recourse to the
pledged capital stock of CTC(PR) and CCIC's domestic subsidiaries. The capital
stock of CTSH will not be pledged to secure the Senior Credit Facility.
The loans under the Senior Credit Facility will bear interest, at the
Borrowers' option, at either (A) a "base rate" equal to the KeyBank'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 will 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 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, CTC 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 Notes); provided that
the amount of such dividends or distributions does not exceed (i) $6.0 million
in any year ending on or prior to the fifth anniversary of the October
Refinancing (such period being the period prior to the date that the Notes
begin to accrue cash interest) and (ii) $33.0 million in any year thereafter.
The Senior Credit Facility also allows CTC to pay
97
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 Notes, may not be made
by CTC 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 Indenture will result in a default under the Senior Credit
Facility.
98
DESCRIPTION OF THE NOTES
GENERAL
The Old Notes were issued and the New Notes will be issued pursuant to an
Indenture (the "Indenture") dated as of November 25, 1997 between the Company
and United States Trust Company of New York, as trustee (the "Trustee"), a
copy of which has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part. The terms of the New Notes will be
identical in all material respects with the terms of the Old Notes, except
that the New Notes have been registered under the Securities Act and are
issued free of any covenant regarding registration, including the payment of
additional interest upon failure to file or have declared effective an
exchange offer registration statement or to consummate the Exchange Offer by
certain dates. The New Notes and the Old Notes are deemed the same series of
Notes under the Indenture and are entitled to the benefits thereof.
Accordingly, unless specifically stated to contrary, the following description
applies equally to the Old Notes and the New Notes. The following is a summary
of certain provisions of the Indenture and the Notes, does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
all the provisions of the Indenture (including the definitions of certain
terms therein and those terms made a part thereof by the Trust Indenture Act
of 1939, as amended (the "Trust Indenture Act")) and the Notes. Capitalized
terms used in the following description and not otherwise defined therein
shall have the meanings assigned to them in the Indenture. Copies of the
Indenture and Registration Rights Agreement are available as set forth below
under "--Additional Information." The definitions of certain terms used in the
following summary are set forth below under "--Certain Definitions." For
purposes of this summary, the term "Company" refers only to Crown Castle
International Corp. and not to any of its Subsidiaries.
The Notes represent general unsecured obligations of the Company and rank
pari passu in right of payment with all future unsecured senior Indebtedness
of the Company. However, the operations of the Company are conducted through
its Subsidiaries and, therefore, the Company is dependent upon the cash flow
of its Subsidiaries to meet its obligations, including its obligations under
the Notes. The Company's Subsidiaries will not be guarantors of the Notes and
the Notes will be effectively subordinated to all Indebtedness (including all
borrowings under the Senior Credit Facility) and other liabilities and
commitments (including trade payables and lease obligations) of the Company's
Subsidiaries. Any right of the Company to receive assets of any of its
Subsidiaries upon the latter's liquidation or reorganization (and the
consequent right of the Holders of the Notes to participate in those assets)
will be effectively subordinated to the claims of that Subsidiary's creditors,
except to the extent that the Company is itself recognized as a creditor of
such Subsidiary, in which case the claims of the Company would still be
subordinate to any security in the assets of such Subsidiary and any
indebtedness of such Subsidiary senior to that held by the Company. As of
January 5, 1998, the Company's Subsidiaries had $4.7 million of Indebtedness
outstanding, and had approximately $93.6 million of unused borrowing
availability under the Senior Credit Facility. The provisions of the Senior
Credit Facility contain substantial restrictions on the ability of such
Subsidiaries to dividend or distribute cash flow or assets to the Company. See
"Risk Factors--Holding Company Structure; Restrictions on Access to Cash Flow
of Subsidiaries" and "Description of the Senior Credit Facility."
As of the date of the Indenture, all of the Company's Subsidiaries will be
Restricted Subsidiaries. However, under certain circumstances, the Company
will be able to designate current or future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries will not be subject to many of the
restrictive covenants set forth in the Indenture. CTSH, the Company's U.K.
affiliate, will not be a Subsidiary of the Company as of the date of the
Indenture and will not, therefore, be subject to the provisions of the
Indenture. See "Risk Factors--Relationship with Minority Owned Affiliate;
Potential Conflicts of Interests."
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount at maturity to $251.0
million and will mature on November 15, 2007. The Old Notes were offered at a
substantial discount from their principal amount at maturity. See "Certain
United States Federal Income Tax Considerations--U.S. Holders--Interest and
Original Issue Discount." Until November 15, 2002, no interest (other than
Liquidated Damages, if any) will accrue, but the Accreted Value will accrete
(representing the amortization of original issue discount) between the date of
99
original issuance and November 15, 2002, on a semiannual bond equivalent basis
using a 360-day year comprised of twelve 30-day months such that the Accreted
Value shall be equal to the full principal amount of the Notes on November 15,
2002 (the "Full Accretion Date"). The initial Accreted Value per $1,000 in
principal amount of Notes is $597.65 (representing the original price at which
Old Notes were offered in the Offering of the Old Notes). Beginning on
November 15, 2002, interest on the Notes will accrue at the rate of 10.625%
per annum and will be payable in U.S. dollars semiannually in arrears on May
15 and November 15, commencing on May 15, 2003, to Holders of record on the
immediately preceding May 1 and November 1. Holders of record on such record
dates will become irrevocably entitled to receive accrued interest and
Liquidated Damages, if any, in respect of the interest period during which
such record date occurs as of the close of business on such record date.
Interest on the Notes will accrue from the most recent date to which interest
has been paid or, if no interest has been paid, from the date of original
issuance. Interest will be computed on the basis of a 360-day year comprised
of twelve 30-day months. Principal, premium, if any, and interest and
Liquidated Damages, if any, on the Notes will be payable at the office or
agency of the Company maintained for such purpose within the City and State of
New York or, at the option of the Company, payment of interest and Liquidated
Damages may be made by check mailed to the Holders of the Notes at their
respective addresses set forth in the register of Holders of Notes; provided
that all payments of principal, premium, interest and Liquidated Damages with
respect to Notes the Holders of which have given wire transfer instructions to
the Company will be required to be made by wire transfer of immediately
available funds to the accounts in the United States specified by the Holders
thereof. Until otherwise designated by the Company, the Company's office or
agency in New York will be the office of the Trustee maintained for such
purpose. The Notes will be issued in denominations of $1,000 and integral
multiples thereof.
OPTIONAL REDEMPTION
Except as described below, the Notes will not be redeemable at the Company's
option prior to November 15, 2002. Thereafter, the Notes will be subject to
redemption at any time at the option of the Company, in whole or in part, upon
not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below plus accrued
and unpaid interest and Liquidated Damages thereon, if any, to the applicable
redemption date (subject to the right of Holders of record on the relevant
record date to receive interest and Liquidated Damages due on the relevant
interest payment date), if redeemed during the twelve-month period beginning
on November 15 of the years indicated below:
YEAR PERCENTAGE
---- ----------
2002........................................................... 105.313%
2003........................................................... 103.542
2004........................................................... 101.771
2005 and thereafter............................................ 100.000
During the first 36 months after the date of original issuance of the Old
Notes, the Company may on any one or more occasions redeem up to 35% of the
aggregate principal amount at maturity of Notes originally issued at a
redemption price of 110.625% of the Accreted Value thereof on the redemption
date, plus Liquidated Damages thereon, if any, to the redemption date (subject
to the right of Holders of record on the relevant record date to receive
Liquidated Damages, if any, due on the relevant interest payment date), with
the net cash proceeds of one or more Public Equity Offerings and/or Strategic
Equity Investments; provided that at least 65% of the aggregate principal
amount at maturity of Notes originally issued remains outstanding immediately
after the occurrence of such redemption (excluding Notes held by the Company
or any of its Subsidiaries); and provided, further, that such redemption shall
occur within 60 days of the date of the closing of such Public Equity Offering
and/or Strategic Equity Investment.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which
the Notes are listed, or, if the Notes are not so listed, on a pro rata basis,
by lot or by such method as the Trustee shall deem fair and appropriate;
provided that no Notes of $1,000 or less shall be redeemed in part. Notices of
100
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 Notes to be redeemed at
its registered address. Notices of redemption may not be conditional. If any
Note is to be redeemed in part only, the notice of redemption that relates to
such Note shall state the portion of the principal amount thereof to be
redeemed. A new Note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the Holder thereof upon cancellation of
the original Note. Notes called for redemption become due on the date fixed
for redemption. On and after the redemption date, interest ceases to accrue on
Notes or portions of them called for redemption.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such Holder's Notes pursuant to the
offer described below (the "Change of Control Offer") at an offer price in
cash equal to 101% of the aggregate principal amount thereof 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 interest and
Liquidated Damages, if any, due on the relevant interest payment date), to the
date of purchase or, in the case of repurchases of Notes prior to the Full
Accretion Date, at a purchase price equal to 101% of the Accreted Value
thereof on the date of repurchase plus Liquidated Damages thereon, if any
(subject to the right of Holders of record on the relevant record date to
receive Liquidated Damages, if any, due on the relevant interest payment
date), to such date of repurchase (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 Notes 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 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 Notes 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 Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating
the aggregate principal amount of Notes or portions thereof being purchased by
the Company. The Paying Agent will promptly mail to each Holder of Notes so
tendered the Change of Control Payment for such Notes, and the Trustee will
promptly authenticate and mail (or cause to be transferred by book entry) to
each Holder a new Note equal in principal amount to any unpurchased portion of
the Notes surrendered, if any; provided that each such new Note will be in a
principal amount of $1,000 or an integral multiple thereof.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the 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.
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
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
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described under "--Certain Covenants--Incurrence of Indebtedness and Issuance
of Preferred Stock," "--Certain Covenants--Liens" and "--Certain Covenants--
Sale and Leaseback Transactions." Such restrictions can only be waived with
the consent of the Holders of a majority in principal amount of the Notes then
outstanding. Except for the limitations contained in such covenants, however,
the Indenture will not contain any covenants or provisions that may afford
holders of the Notes protection in the event of certain highly leveraged
transactions.
The Senior Credit Facility limits the Company's access to the cash flow of
its Subsidiaries and will, therefore, restrict the Company's ability to
purchase any Notes. The Senior Credit Facility also provides that the
occurrence of certain change of control events with respect to the Company
constitute a default thereunder. In the event that a Change of Control occurs
at a time when the Company's Subsidiaries are prohibited from making
distributions to the Company to purchase Notes, the Company could cause its
Subsidiaries to seek the consent of the lenders under the Senior Credit
Facility to allow such distributions 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
purchasing Notes. In such case, the Company's failure to purchase tendered
Notes would constitute an Event of Default under the Indenture which would, in
turn, constitute a default under the Senior Credit Facility. Future
indebtedness of the Company and its Subsidiaries may contain prohibitions on
the occurrence of certain events that would constitute a Change of Control or
require such indebtedness to be repurchased upon a Change of Control.
Moreover, the exercise by the holders of their right to require the Company to
repurchase the Notes could cause a default under such indebtedness, even if
the Change of Control itself does not, due to the financial effect of such
repurchase on the Company. Finally, the Company's ability to pay cash to the
Holders of Notes 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 Notes Upon a Change of Control" and "Risk Factors--Holding
Company Structure; Restrictions on Access to Cash Flow of Subsidiaries." 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 Indenture applicable to a Change of Control Offer made by the
Company and purchases all Notes validly tendered and not withdrawn under such
Change of Control Offer. The provisions under the Indenture relative to the
Company's obligation to make an offer to repurchase the Notes 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 Notes 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 Notes to require
the Company to repurchase such Notes 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 Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless (i) 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 Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) 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; provided that the amount of (x) 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 Notes or any guarantee
thereof)
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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 (y) 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), shall be deemed to be cash for purposes of this provision.
Within 360 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: (a) reduce Indebtedness under a Credit Facility; (b) reduce other
Indebtedness of any of the Company's Restricted Subsidiaries; (c) the
acquisition of all or substantially all the assets of a Permitted Business;
(d) 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; or (e) 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 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 $5.0 million,
the Company will be required to make an offer to all Holders of Notes and all
holders of other senior Indebtedness of the Company containing provisions
similar to those set forth in the Indenture with respect to offers to purchase
or redeem with the proceeds of sales of assets (an "Asset Sale Offer") to
purchase the maximum principal amount (or accreted value, as applicable) of
Notes and such other senior Indebtedness of the Company 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, as applicable) 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 Indenture and such other senior Indebtedness of the Company. To the
extent that any 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 Indenture. If the aggregate principal amount of Notes and
such other senior Indebtedness of the Company tendered into such Asset Sale
Offer surrendered by Holders thereof exceeds the amount of Excess Proceeds,
the Trustee shall select the Notes and such other senior 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.
CERTAIN COVENANTS
Restricted Payments
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly: (i) 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
distributions payable in Equity Interests (other than Disqualified Stock) of
the Company or to the Company or a Restricted Subsidiary of the Company); (ii)
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); (iii) 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 Notes, except a payment of
interest or principal at Stated Maturity; or (iv) make any Restricted
Investment (all such payments and other actions set forth in clauses (i)
through (iv) above being collectively referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(a) no Default shall have occurred and be continuing or would occur as a
consequence thereof; and
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(b) 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;" and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the date of the Indenture (excluding Restricted Payments
permitted by clauses (ii), (iii) and (iv) of the next succeeding
paragraph), is less than the sum, without duplication, of (i) 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 date of the Indenture 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
(ii) 100% of the aggregate net cash proceeds received by the Company since
the date of the Indenture 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 (x) 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 (iii) to
the extent that any Restricted Investment that was made after the date of
the Indenture 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 (iv) to the extent that
any Unrestricted Subsidiary of the Company is designated as a Restricted
Subsidiary after the date of the Indenture, the lesser of (A) the fair
market value of the Company's Investment in such Subsidiary as of the date
of such designation, or (B) the sum of (x) the fair market value of the
Company's Investment in such Subsidiary as of the date on which such
Subsidiary was originally designated as an Unrestricted Subsidiary and (y)
the amount of any Investments made in such Subsidiary subsequent to such
designation (and treated as a Restricted Payment) by the Company or any
Restricted Subsidiary; provided that in the event the Unrestricted
Subsidiary designated as a Restricted Subsidiary is CTSH, the references in
clause (A) and (B) of this clause (iv) to fair market value of the
Company's Investment in such Subsidiary shall mean the amount by which the
fair market value of such Investment exceeds 34.3% of the fair market value
of CTSH as a whole, plus (v) 50% of any dividends received by the Company
or a Restricted Subsidiary after the date of the Indenture 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 (i) 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
Indenture; (ii) 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 substantially concurrent sale (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 (c) (ii) of the preceding paragraph; (iii) the
defeasance, redemption, repurchase or other acquisition of subordinated
Indebtedness with the net cash proceeds from an incurrence of Permitted
Refinancing Indebtedness; or (iv) the designation of CTSH as an Unrestricted
Subsidiary immediately following the Roll-Up.
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 the date of the Indenture be transferred to or
held by an Unrestricted Subsidiary. For purposes of making such determination,
all outstanding Investments by the Company and its Restricted
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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
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 Trustee.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that 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, however, that the Company may
incur Indebtedness (including Acquired Debt) or issue shares of Disqualified
Stock and the Company's Restricted Subsidiaries may incur Eligible
Indebtedness if, in each case, (i) no Default shall have occurred and be
continuing or would occur as a consequence thereof and (ii) 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
6.5 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 (collectively,
"Permitted Debt") if no Default shall have occurred and be continuing or would
occur as a consequence thereof:
(i) 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) $100.0 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;
(ii) the incurrence by the Company and its Restricted Subsidiaries of the
Existing Indebtedness;
(iii) the incurrence by the Company of Indebtedness represented by the
Notes and the New Notes;
(iv) 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 (iv), not to exceed $5.0 million at any one time outstanding;
(v) 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 (other than intercompany Indebtedness) that was permitted by
the Indenture to be incurred under the first paragraph hereof or clauses
(ii) or (iii) or this clause (v) of this paragraph;
(vi) 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, however, that (i) if the
105
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 Notes 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;
(vii) 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 Indenture to be outstanding or
currency exchange risk;
(viii) 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 Indenture;
(ix) 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 (viii), the
Company would have been permitted to incur at least $1.00 of additional
indebtedness (other than Permitted Debt) immediately after such incurrence
pursuant to the Debt to Adjusted Consolidated Cash Flow Ratio test set
forth in the first paragraph of this covenant, calculated as if such
incurrence had occurred as of the actual date of incurrence and the related
acquisition or designation (as applicable) 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;
(x) the incurrence by the Company of Indebtedness not to exceed, at any
one time outstanding, 2.0 times the aggregate net cash proceeds from the
issuance and sale, other than to a Subsidiary, of Equity Interests (other
than Disqualified Stock) of the Company since the date of the Indenture
(less the amount of such proceeds used to make Restricted Payments as
provided in clause (c)(ii) of the first paragraph or clause (ii) 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 Notes and the Weighted Average Life to
Maturity of such Indebtedness is longer than that of the Notes; and
(xi) the incurrence by the Company or any of its Restricted Subsidiaries
of additional Indebtedness in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding, not to exceed $5.0 million.
The Indenture also provides that (i) the Company will not incur any
Indebtedness that is contractually subordinated in right of payment to any
other Indebtedness of the Company unless such Indebtedness is also
contractually subordinated in right of payment to the Notes on substantially
identical terms; provided, however, that no Indebtedness of the Company shall
be deemed to be contractually subordinated in right of payment to any other
Indebtedness of the Company solely by virtue of being unsecured and (ii) the
Company will not permit any of its Unrestricted Subsidiaries to incur any
Indebtedness other than Non-Recourse Debt.
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 (i) through (xi) above or is entitled
to be incurred pursuant to the first paragraph of this covenant, the Company
shall, in its sole discretion, classify 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.
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Liens
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or suffer to exist any Lien securing Indebtedness or trade payables on any
asset now owned or hereafter acquired, or any income or profits therefrom or
assign or convey any right to receive income therefrom, except Permitted
Liens.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that 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 (i)(a) pay dividends or make any
other distributions to the Company or any of its Restricted Subsidiaries (1)
on its Capital Stock or (2) with respect to any other interest or
participation in, or measured by, its profits, or (b) pay any indebtedness
owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or
advances to the Company or any of its Restricted Subsidiaries or (iii)
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 (a) Existing
Indebtedness as in effect on the date of the Indenture or Indebtedness under
the Senior Credit Facility, 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 as in effect on the date of the Indenture or in the Senior Credit
Facility, (b) encumbrances and restrictions applicable to CTSH and its
Subsidiaries, as the same are in effect as of the date on which CTSH 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 CTSH as in
effect on the date on which CTSH becomes a Restricted Subsidiary, (c) the
Indenture and the Notes, (d) applicable law, (e) 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 Indenture to be incurred, (f) by reason of customary non-
assignment provisions in leases or licenses entered into in the ordinary
course of business, (g) purchase money obligations for property acquired in
the ordinary course of business that impose restrictions of the nature
described in clause (iii) above on the property so acquired, (h) the
provisions of agreements governing Indebtedness incurred pursuant to clause
(iv) of the second paragraph of the covenant described above under the caption
"--Incurrence of Indebtedness and Issuance of Preferred Stock," (i) any
agreement for the sale of a Restricted Subsidiary that restricts that
Restricted Subsidiary pending its sale, (j) 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, (k) Liens permitted to be incurred pursuant to
the provisions of the covenant described under the caption "--Liens" that
limit the right of the debtor to transfer the assets subject to such Liens,
(l) provisions with respect to the disposition or distribution of assets or
property in joint venture agreements and other similar agreements and (m)
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 Indenture provides that 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
107
entity unless (i) 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; (ii) 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 Notes and the Indenture pursuant to a supplemental indenture in a
form reasonably satisfactory to the Trustee; (iii) immediately after such
transaction no Default exists; and (iv) 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 and 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 Indenture provides that 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 (i) 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 (ii) the Company
delivers to the 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 $5.0 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. Notwithstanding the foregoing, the
following items shall not be deemed to be Affiliate Transactions: (i) 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, (ii) transactions
between or among the Company and/or its Restricted Subsidiaries, (iii) payment
of directors fees in an aggregate annual amount not to exceed $25,000 per
Person, (iv) Restricted Payments that are permitted by the provisions of the
Indenture described above under the caption "--Restricted Payments," (v) the
issuance or sale of Equity Interests (other than Disqualified Stock) of the
Company, and (vi) transactions pursuant to the provisions of the Services
Agreement, the CTSH Shareholders' Agreement and the Stockholders Agreement as
the same are in effect on the date of the Indenture.
Sale and Leaseback Transactions
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, enter into any sale and leaseback transaction;
provided that the Company or any of its Restricted Subsidiaries may enter into
a sale and leaseback transaction if (i) the Company or such Restricted
Subsidiary, as applicable, could have (a) incurred Indebtedness in an amount
equal to the Attributable Debt relating to such sale and leaseback transaction
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" and (b) incurred a
Lien to secure such Indebtedness pursuant to the covenant described above
108
under the caption "--Liens," (ii) the gross cash proceeds of such sale and
leaseback transaction are at least equal to the fair market value (as
determined in good faith by the Board of Directors) of the property that is
the subject of such sale and leaseback transaction and (iii) the transfer of
assets in such sale and leaseback transaction is permitted by, and the Company
applies the proceeds of such transaction in compliance with, the covenant
described above under the caption "--Repurchase at the Option of Holders--
Asset Sales."
Limitation on Issuances and Sales of Capital Stock of Restricted Subsidiaries
The Indenture provides that the Company (i) 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 (ii) 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."
Limitations on Issuances of Guarantees of Indebtedness
The Indenture provides that the Company will not permit any Restricted
Subsidiary, directly or indirectly, to Guarantee or pledge any assets to
secure the payment of any other Indebtedness of the Company unless such
Subsidiary simultaneously executes and delivers a supplemental indenture to
the Indenture providing for the Guarantee of the payment of the Notes by such
Subsidiary, which Guarantee shall be senior to or pari passu with such
Subsidiary's Guarantee of or pledge to secure such other Indebtedness.
Notwithstanding the foregoing, any such Guarantee by a Subsidiary of the Notes
shall provide by its terms that it shall be automatically and unconditionally
released and discharged upon any sale, exchange or transfer, to any Person
other than a Subsidiary of the Company, of all of the Company's stock in, or
all or substantially all the assets of, such Subsidiary, which sale, exchange
or transfer is made in compliance with the applicable provisions of the
Indenture. The form of such Guarantee will be attached as an exhibit to the
Indenture.
Business Activities
The Indenture provides that 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
The Indenture provides that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Notes are outstanding, the Company will furnish to the Holders of
Notes (i) 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 (ii) 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
109
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. In addition, the Company
will, for so long as any Notes remain outstanding, furnish to the Holders and
to securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Notes; (ii) default in payment when
due of the principal of or premium, if any, on the Notes; (iii) failure by the
Company or any of its Subsidiaries 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 Indenture applicable
thereto; (iv) failure by the Company or any of its Subsidiaries for 30 days
after notice to comply with any of its other agreements in the Indenture or
the Notes; (v) 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 date of the Indenture, 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
$5.0 million or more; (vi) failure by the Company or any of its Significant
Subsidiaries to pay final judgments aggregating in excess of $5.0 million,
which judgments are not paid, discharged or stayed for a period of 60 days; or
(vii) certain events of bankruptcy or insolvency with respect to the Company
or any of its Restricted Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount at maturity of the then outstanding Notes
may declare all the Notes 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
Notes will become due and payable without further action or notice. Holders of
the Notes may not enforce the Indenture or the Notes except as provided in the
Indenture. Subject to certain limitations, Holders of a majority in principal
amount at maturity of the then outstanding Notes may direct the Trustee in its
exercise of any trust or power.
The Holders of a majority in aggregate principal amount at maturity of the
Notes then outstanding by notice to the Trustee may on behalf of the Holders
of all of the Notes waive any existing Default or Event of Default and its
consequences under the Indenture except a continuing Default or Event of
Default in the payment of interest on, or the principal of, the Notes.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder of the Notes 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 Note, the 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
Notes. In addition, the Company is required to deliver to the 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 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.
110
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
Notes, the Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each Holder of Notes by accepting a
Note waives and releases all such liability. The waiver and release are part
of the consideration for issuance of the Notes. 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 Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
and Liquidated Damages on such Notes when such payments are due from the trust
referred to below, (ii) the Company's obligations with respect to the Notes
concerning issuing temporary Notes, registration of Notes, mutilated,
destroyed, lost or stolen Notes and the maintenance of an office or agency for
payment and money for security payments held in trust, (iii) the rights,
powers, trusts, duties and immunities of the Trustee, and the Company's
obligations in connection therewith and (iv) the Legal Defeasance provisions
of the 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 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 Notes. 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 Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, 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 Notes on the stated maturity or on the
applicable redemption date, as the case may be, and the Company must specify
whether the Notes are being defeased to maturity or to a particular redemption
date; (ii) in the case of Legal Defeasance, the Company shall have delivered
to the Trustee an opinion of counsel in the United States reasonably
acceptable to the 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 date of the Indenture, 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
Notes will 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; (iii) in the case of
Covenant Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders of the outstanding Notes 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; (iv) 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; (v)
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 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; (vi) the Company must have delivered to the
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
111
or similar laws affecting creditors' rights generally; (vii) the Company must
deliver to the Trustee an Officers' Certificate stating that the deposit was
not made by the Company with the intent of preferring the Holders of Notes
over the other creditors of the Company with the intent of defeating,
hindering, delaying or defrauding creditors of the Company or others; and
(viii) the Company must deliver to the 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.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the 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 Note selected for
redemption. Also, the Company is not required to transfer or exchange any Note
for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note 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 Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount at maturity of the Notes then outstanding
(including, without limitation, consents obtained in connection with a
purchase of, or tender offer or exchange offer for, Notes), and any existing
default or compliance with any provision of the Indenture or the Notes may be
waived with the consent of the Holders of a majority in principal amount at
maturity of the then outstanding Notes (including consents obtained in
connection with a tender offer or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed
maturity of any Note or alter the provisions with respect to the redemption of
the Notes (specifically excluding the provisions relating to the covenants
described above under the caption "--Repurchase at the Option of Holders"),
(iii) reduce the rate of or change the time for payment of interest on any
Note, (iv) waive a Default or Event of Default in the payment of principal of
or premium, if any, or interest on the Notes (except a rescission of
acceleration of the Notes by the Holders of at least a majority in aggregate
principal amount of the Notes and a waiver of the payment default that
resulted from such acceleration), (v) make any Note payable in money other
than that stated in the Notes, (vi) make any change in the provisions of the
Indenture relating to waivers of past Defaults or the rights of Holders of
Notes to receive payments of principal of or premium, if any, or interest on
the Notes, (vii) waive a redemption payment with respect to any Note
(specifically excluding the payment required by one of the covenants described
above under the caption "--Repurchase at the Option of Holders"), (viii)
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 Notes or (ix) make any change in the foregoing
amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Company's obligations to Holders of Notes in the case of a
merger or consolidation, to make any change that would provide any additional
rights or benefits to the Holders of Notes or that does not adversely affect
the legal rights under the Indenture of any such Holder, or to comply with
requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
112
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the 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 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 in principal amount at maturity of the then
outstanding Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Indenture provides that in case an Event of
Default shall occur (which shall not be cured), the 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 Trustee will
be under no obligation to exercise any of its rights or powers under the
Indenture at the request of any Holder of Notes, unless such Holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to Crown Castle
International Corp., 510 Bering Drive, Suite 500, Houston, Texas 77057,
Attention: Secretary.
BOOK-ENTRY, DELIVERY AND FORM
The New Notes will be represented by one or more Notes in registered, global
form without interest coupons (collectively, the "Global Notes"). The Global
Notes will be deposited upon issuance with the Trustee 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 Notes 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 Notes may not be exchanged for
Notes in certificated form except in the limited circumstances described
below. See "--Depositary Procedures--Exchange of Book-Entry Notes for
Certificated Notes." Except in the limited circumstances described below,
owners of beneficial interests in the Global Notes will not be entitled to
receive physical delivery of Certificated Notes (as defined below). Transfers
of beneficial interests in the Global Notes 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 Trustee will act as Paying Agent and Registrar. The Notes may
be presented for registration of transfer and exchange at the offices of the
Registrar.
DEPOSITARY PROCEDURES
The following description of the operations and procedures of DTC is
provided solely as a matter of convenience. These operations and procedures
are solely within the control of DTC and are subject to changes by DTC from
time to time. The Company takes no responsibility for these operations and
procedures and urges investors to contact DTC or its participants directly to
discuss these matters.
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "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 (collectively,
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.
113
DTC has also advised the Company that, pursuant to procedures established by
it, (i) upon deposit of the Global Notes, DTC will credit the accounts of
Participants designated by the Initial Purchasers with portions of the
principal amount of the Global Notes and (ii) ownership of such interests in
the Global Notes 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 Notes).
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTEREST IN THE GLOBAL NOTES WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
"HOLDERS" THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal of, and premium, if any, Liquidated
Damages, if any, and interest on a Global Note registered in the name of DTC
or its nominee will be payable to DTC in its capacity as the registered Holder
under the Indenture. Under the terms of the Indenture, the Company and the
Trustee will treat the persons in whose names the Notes, including the Global
Notes, are registered as the owners thereof for the purpose of receiving such
payments and for any and all other purposes whatsoever. Consequently, neither
the Company, the Trustee nor any agent of the Company or the Trustee has or
will have any responsibility or liability for (i) 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 Notes, 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 Notes or (ii) any other matter relating to
the actions and practices of DTC or any of its Participants
or Indirect Participants. DTC has advised the Company that its current
practice, upon receipt of any payment in respect of securities such as the
Notes (including principal and interest), 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 Notes 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 Trustee
or the Company. Neither the Company nor the Trustee will be liable for any
delay by DTC or any of its Participants in identifying the beneficial owners
of the Notes, and the Company and the Trustee may conclusively rely on and
will be protected in relying on instructions from DTC or its nominee for all
purposes.
Interests in the Global Notes 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." Transfers between Participants in DTC will be
effected in accordance with DTC's procedures, and will be settled in same day
funds.
DTC has advised the Company that it will take any action permitted to be
taken by a Holder of Notes only at the direction of one or more Participants
to whose account DTC has credited the interests in the Global Notes and only
in respect of such portion of the aggregate principal amount of the Notes as
to which such Participant or Participants has or have given such direction.
However, if there is an Event of Default under the Notes, DTC reserves the
right to exchange the Global Notes for legended Notes in certificated form,
and to distribute such Notes to its Participants.
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the Global Notes among Participants in DTC, it is under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. Neither the Company nor the
Trustee nor any of their respective agents will have any responsibility for
the performance by DTC or its participants or indirect participants of its
obligations under the rules and procedures governing its operations.
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Exchange of Book-Entry Notes for Certificated Notes
A Global Note is exchangeable for definitive New Notes in registered
certificated form ("Certificated Notes") if (i) DTC (x) notifies the Company
that it is unwilling or unable to continue as depositary for the Global Notes
and the Company thereupon fails to appoint a successor depositary or (y) has
ceased to be a clearing agency registered under the Exchange Act, (ii) the
Company, at its option, notifies the Trustee in writing that it elects to
cause the issuance of the Certificated Notes or (iii) there shall have
occurred and be continuing a Default or Event of Default with respect to the
Notes. In addition, beneficial interests in a Global Note may be exchanged for
Certificated Notes upon request but only upon prior written notice given to
the Trustee by or on behalf of DTC in accordance with the Indenture. In all
cases, Certificated Notes delivered in exchange for any Global Note 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).
Exchange of Certificated Notes for Book-Entry Notes
New Notes issued in certificated form may not be exchanged for beneficial
interests in any Global Note unless the transferor first delivers to the
Trustee a written certificate (in the form provided in the Indenture) to the
effect that such transfer will comply with the appropriate transfer
restrictions applicable to such New Notes.
Same Day Settlement and Payment
The Indenture will require that payments in respect of the Notes represented
by the Global Notes (including principal, premium, if any, interest and
Liquidated Damages, if any) be made by wire transfer of immediately available
funds to the accounts specified by the Holder of Global Notes. With respect to
Notes in certificated form, the Company will make all payments of principal,
premium, if any, interest and Liquidated Damages, if any, 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 Notes represented by the Global Notes are 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
Notes will, therefore, be required by the Depositary to be settled in
immediately available funds. The Company expects that secondary trading in any
certificated Notes will also be settled in immediately available funds.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
Holders of the New Notes are not entitled to any registration rights with
respect to the New Notes. The Company 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, the Company agreed to file with the Commission the Exchange Offer
Registration Statement on the appropriate form under the Securities Act with
respect to the New Notes. The registration statement of which this Prospectus
is a part constitutes the Exchange Offer Registration Statement. The
Registration Rights Agreement provides that if (i) the Company is 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 (ii) any Holder of Transfer Restricted Securities
notifies the Company 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
Notes 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 Notes acquired directly from the Company or an
affiliate of the Company, the Company will file with the Commission a Shelf
Registration Statement to cover resales of the Notes by the Holders thereof,
subject to such Holders satisfying certain conditions relating to the
provision of information in connection with the Shelf Registration Statement.
The Company has agreed that it 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 Note until (i) the date on
which such Old Note has been exchanged by a person other than a broker-dealer
for a New Note in the Exchange Offer, (ii) following the
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exchange by a broker-dealer in the Exchange Offer of an Old Note for a New
Note, the date on which such New Note 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, (iii) the
date on which such Old Note has been effectively registered under the
Securities Act and disposed of in accordance with the Shelf Registration
Statement or (iv) the date on which such Old Note is distributed to the public
pursuant to Rule 144 under the Act.
The Registration Rights Agreement provides that (i) the Company will file an
Exchange Offer Registration Statement with the Commission on or prior to 45
days after the Closing Date, (ii) the Company 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,
(iii) unless the Exchange Offer would not be permitted by applicable law or
Commission policy, the Company will commence the Exchange Offer and use its
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 Notes in exchange for
all Old Notes tendered prior thereto in the Exchange Offer and (iv) if
obligated to file the Shelf Registration Statement, the Company will use its
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) the Company fails 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 (the "Effectiveness Target Date"), or (c) the
Company fails 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 the Company will pay Liquidated Damages to each Holder of
Notes, 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 Accreted Value of the Notes held by such Holder. The
amount of the Liquidated Damages will increase by an additional $.05 per week
per $1,000 of the Accreted Value of the Notes 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 Accreted Value of the Notes. All accrued Liquidated Damages
will be paid by the Company 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 Notes, 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.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Accreted Value" means, as of any date of determination the sum of (a) the
initial Accreted Value (which is $597.65 per $1,000 in principal amount at
maturity of Notes) and (b) the portion of the excess of the principal amount
at maturity of each Note over such initial Accreted Value which shall have
been amortized through such date, such amount to be so amortized on a daily
basis and compounded semiannually on each May 15 and November 15 at the rate
of 10.625% per annum from the date of original issuance of the Notes through
the date of determination computed on the basis of a 360-day year of twelve
30-day months. The Accreted Value of any Note on or after the Full Accretion
Date shall be equal to 100% of its stated principal amount.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness 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,
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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 (ii) 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 (i) 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 Indenture described
above under the caption "--Repurchase at the Option of Holders--Change of
Control" and/or the provisions described above under the caption "--Repurchase
at the Option of Holders--Merger, Consolidation or Sale of Assets" and not by
the provisions of the Asset Sale covenant, and (ii) 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 (i) or (ii), 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: (i) a transfer of assets by the Company to a
Restricted Subsidiary or by a Restricted Subsidiary to the Company or to
another Restricted Subsidiary, (ii) an issuance of Equity Interests by a
Subsidiary to the Company or to another Restricted Subsidiary, (iii) a
Restricted Payment that is permitted by the covenant described above under the
caption "--Certain Covenants--Restricted Payments," (iv) grants of leases or
licenses in the ordinary course of business and (v) disposals of Cash
Equivalents.
"Attributable Debt" in respect of a sale and leaseback transaction means, at
the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"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 (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) 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.
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"Cash Equivalents" means (i) United States dollars, (ii) 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, (iii) 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, (iv) repurchase obligations with a term of not
more than seven days for underlying securities of the types described in
clauses (ii) and (iii) above entered into with any financial institution
meeting the qualifications specified in clause (iii) above, (v) 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 (vi) money market funds at least 95%
of the assets of which constitute Cash Equivalents of the kinds described in
clauses (i)-(v) of this definition.
"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: (i) 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; (ii) the adoption of a plan relating to the liquidation
or dissolution of the Company; (iii) 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 the date of the Indenture, will not be deemed to cause a
Change of Control under this clause (iii) 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; (iv) the first day on which a majority
of the members of the Board of Directors of the Company are not Continuing
Directors; or (v) 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 (i) 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 (ii) 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, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of
letter of credit or bankers' acceptance financings, and net payments (if
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any) pursuant to Hedging Obligations), to the extent that any such expense was
deducted in computing such Consolidated Net Income, plus (iii) 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 (iv) 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 (i) the total amount of
Indebtedness of such Person and its Restricted Subsidiaries, plus (ii) 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 (iii) 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 (i) 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, (ii) 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, (iii) the cumulative effect of a change in
accounting principles shall be excluded and (iv) 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 (i) was a member of such Board of
Directors on the date of the Indenture, (ii) 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 (iii) 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 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.
"CTSH" means Castle Transmission Services (Holdings) Ltd and its successors.
"Debt to Adjusted Consolidated Cash Flow Ratio" means, as of any date of
determination, the ratio of (a) the Consolidated Indebtedness of the Company
as of such date to (b) the sum of (1) 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 (2) 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
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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.
"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 Notes 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 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 Offer" means exchange and issuance by the Company of a principal
amount of New Notes (which shall be registered pursuant to the Exchange Offer
Registration Statement) equal to the outstanding principal amount of Notes
that are tendered by such Holders 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 date of the Indenture, until such amounts are repaid.
"Full Accretion Date" means November 15, 2002.
"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
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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 date of the
Indenture.
"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 (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) 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 borrowed money or evidenced
by bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or 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 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 caption "--
Certain Covenants--Restricted Payments."
"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.
"New Notes" means the Company's 10 5/8% Senior Discount Notes due 2007 to be
issued pursuant to the Indenture: (i) in the Exchange Offer or (ii) as
contemplated by Section 4 of the Registration Rights Agreement.
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"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, (i) 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 (ii) 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 (i) 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, (ii) taxes paid or payable
as a result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), (iii) 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, (iv) all distributions and other payments required
to be made to minority interest holders in Restricted Subsidiaries as a result
of such Asset Sale, (v) 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 (vi) 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 (v) or (vi) above, the amount so reserved shall be
deemed to be Net Proceeds from an Asset Sale as of the date of such reversal.
"Non-Recourse Debt" means Indebtedness (i) 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 and (ii) 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 (iii) 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 (iii) will not apply to any Indebtedness incurred by CTSH and its
Subsidiaries prior to the date CTSH becomes a Subsidiary).
"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 date of the
Indenture and any other business related, ancillary or complementary to any
such business.
"Permitted Investments" means (a) any Investment in the Company or in a
Restricted Subsidiary of the Company; (b) any Investment in Cash Equivalents;
(c) 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; provided, that any such Investment by
the Company or any Restricted Subsidiary of the Company in CTSH or its
Subsidiaries shall not be a Permitted Investment if CTSH is thereafter
designated an Unrestricted Subsidiary pursuant to clause (iv) of the second
paragraph of the covenant described above under the caption "--Certain
Covenants--Restricted Payments;" (d) 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
122
described above under the caption "--Repurchase at the Option of Holders--
Asset Sales;" (e) any acquisition of assets solely in exchange for the
issuance of Equity Interests (other than Disqualified Stock) of the Company;
(f) receivables created in the ordinary course of business; (g) loans or
advances to employees made in the ordinary course of business not to exceed
$1.0 million at any one time outstanding; (h) securities and other assets
received in settlement of trade debts or other claims arising in the ordinary
course of business; (i) purchases of additional Equity Interests in CTSH for
cash pursuant to the Shareholders' Agreement as the same is in effect on the
date of the Indenture for aggregate cash consideration not to exceed $20
million since the date of the Indenture; and (j) other Investments in
Permitted Businesses not to exceed 5% 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 Liens" means (i) Liens securing Eligible Indebtedness of the
Company under one or more Credit Facilities that was permitted by the terms of
the Indenture to be incurred or (ii) Liens securing any Indebtedness of any of
the Company's Restricted Subsidiaries that was permitted by the terms of the
Indenture to be incurred; (iii) Liens in favor of the Company; (iv) Liens
existing on the date of the Indenture; (v) Liens for taxes, assessments or
governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently concluded, provided that any reserve or other appropriate provision
as shall be required in conformity with GAAP shall have been made therefor;
(vi) Liens securing Indebtedness permitted to be incurred under clause (iv) of
the second paragraph of the covenant described above under the caption "--
Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock;" and (vii) Liens incurred in the ordinary course of business of the
Company or any Restricted Subsidiary of the Company with respect to
obligations that do not exceed $5.0 million at any one time outstanding and
that (a) are not incurred in connection with the borrowing of money or the
obtaining of advances or credit (other than trade credit in the ordinary
course of business) and (b) do not in the aggregate materially detract from
the value of the property or materially impair the use thereof in the
operation of business by the Company or such Restricted Subsidiary.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries 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); provided that: (i) the principal
amount (or initial accreted value, if applicable) of such Permitted
Refinancing Indebtedness does not exceed the principal amount of (or accreted
value, if applicable), plus accrued interest on, the Indebtedness so extended,
refinanced, renewed, replaced, defeased or refunded (plus the amount of
expenses and prepayment premiums incurred in connection therewith); (ii) 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
being extended, refinanced, renewed, replaced, defeased or refunded; (iii) if
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded is subordinated in right of payment to the Notes, such Permitted
Refinancing Indebtedness is subordinated in right of payment to, the Notes on
terms at least as favorable to the Holders of Notes as those contained in the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; and (iv) 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.
"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,
TeleDiffusion de France International S.A. 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
123
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.
"Related Party" with respect to any Principal means (A) any controlling
stockholder, 80% (or more) owned Subsidiary of such Principal or (B) 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 (A).
"Registration Statement" means any registration statement of the Company
relating to (a) an offering of New Notes pursuant to an Exchange Offer or (b)
the registration for resale of Transfer Restricted Securities pursuant to the
Shelf Registration Statement, in each case, (i) that is filed pursuant to the
provisions of the Registration Rights Agreement and (ii) including the
Prospectus included therein, all amendments and supplements thereto (including
post-effective amendments) and all exhibits and material incorporated by
reference therein.
"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.
"Roll-Up" means the transaction pursuant to which CTSH becomes a Subsidiary
of the Company.
"Senior Credit Facility" means that certain loan agreement, dated as of
April 26, 1995, as amended by the first amendment dated as of June 26, 1996,
the second amendment dated as of January 17, 1997, the third amendment dated
as of April 3, 1997, and the fourth amendment dated as of October 31, 1997, by
and among Keybank National Association and PNC Bank, National Association, as
arrangers and agents for those financial institutions listed therein, and
Castle Tower Corporation and Castle Tower Corporation (PR), 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.
"Shareholders' Agreement" means the agreement entered into by CTSH and its
four major shareholders, including the Company, on January 23, 1997, governing
the management and operation of CTSH and its Subsidiaries.
"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 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."
"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.
"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.
124
"Subsidiary" means, with respect to any Person, (i) 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 (ii) 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).
"Total Equity Market Capitalization" of any Person means, as of any day of
determination, the sum of (i) 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 (ii) the liquidation value of any
outstanding shares of preferred stock of such Person on such day.
"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
Trustee) 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.
"Transfer Restricted Securities" means each Note, until the earliest to
occur of (a) the date on which such Note is exchanged in the Exchange Offer
and entitled to be resold to the public by the Holder thereof without
complying with the prospectus delivery requirements of the Act, (b) the date
on which such Note has been disposed of in accordance with a Shelf
Registration Statement, (c) the date on which such Note is disposed of by a
Broker-Dealer pursuant to the "Plan of Distribution" contemplated by the
Exchange Offer Registration Statement (including delivery of the Prospectus
contained therein) or (d) the date on which such Note is distributable to the
public pursuant to Rule 144 under the Act.
"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: (a) has no
Indebtedness other than Non-Recourse Debt; (b) 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; (c) 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; (d) has not
guaranteed or otherwise directly or indirectly provided credit support for any
Indebtedness of the Company or any of its Restricted Subsidiaries; and (e) 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.
125
Any such designation by the Board of Directors shall be evidenced to the
Trustee by filing with the 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 caption "--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
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
covenant described above under the caption "--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 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
caption "--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
at any date, the number of years obtained by dividing (i) 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, 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 (ii) the then outstanding
principal amount of such Indebtedness.
"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.
126
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following general discussion summarizes certain of the material U.S.
federal income tax considerations of the Exchange Offer to holders of the Old
Notes. This discussion is a summary for general information only and does not
consider all aspects of U.S. federal income tax that may be relevant to a
holder of the Old Notes in light of such holder's personal circumstances. This
discussion also does not address the U.S. federal income tax consequences to
holders subject to special treatment under the U.S. federal income tax laws,
such as dealers in securities or foreign currency, tax-exempt entities, banks,
thrifts, insurance companies, persons that hold the Notes as part of a
"straddle," a "hedge" against currency risk or a "conversion transaction,"
persons that have a "functional currency" other than the U.S. dollar, and
investors in pass-through entities. In addition, this discussion does not
describe any tax consequences arising out of the tax laws of any state, local
or foreign jurisdiction.
This discussion is based upon the Code, existing and proposed regulations
thereunder, Internal Revenue Service ("IRS") rulings and pronouncements and
judicial decisions now in effect, all of which are subject to change (possibly
on a retroactive basis). The Company has not and will not seek any rulings or
opinions from the IRS or counsel with respect to the matters discussed below.
There can be no assurance that the IRS will not take positions concerning the
tax consequences of the Exchange Offer which are different from those
discussed herein.
HOLDERS OF OLD NOTES SHOULD CONSULT THEIR OWN ADVISORS CONCERNING THE
APPLICATION OF U.S. FEDERAL INCOME TAX LAWS, AS WELL AS THE LAWS OF ANY STATE,
LOCAL OR FOREIGN TAXING JURISDICTION, TO THE EXCHANGE OFFER IN LIGHT OF THEIR
PARTICULAR SITUATIONS.
The exchange of Old Notes for New Notes pursuant to the Exchange Offer
should not constitute a taxable exchange. As a result, (i) a holder should not
recognize taxable gain or loss as a result of exchanging Old Notes for New
Notes pursuant to the Exchange Offer; (ii) the holding period of the New Notes
should include the holding period of the Old Notes exchanged therefor and
(iii) the adjusted tax basis of the New Notes should be the same as the
adjusted tax basis of the Old Notes exchanged therefor immediately before the
exchange.
127
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account in connection
with the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. 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 Notes received in exchange for Old Notes if
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that for a period of 180 days after
the Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer that requests such documents in the Letter of
Transmittal, for use in connection with any such resale. In addition, until
July 15, 1998 (90 days after the date of this Prospectus), all dealers
effecting transactions in the New Notes may be required to deliver a
prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account in
connection with 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 Notes 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 and/or the purchasers of any such New Notes. Any
broker-dealer that resells New Notes that were received by it for its own
account in connection with the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act, and any profit on any
such resale of New Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the
Securities 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
Securities Act.
LEGAL MATTERS
The validity of the New Notes offered hereby will be passed upon for the
Company by Cravath, Swaine & Moore, New York, New York.
EXPERTS
The consolidated financial statements and schedule of the Company at
December 31, 1996 and 1997, and for each of the three years in the period
ended December 31, 1997, the combined financial statements of Crown for each
of the two years in the period ended December 31, 1996 and the seven months
ended July 31, 1997, 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, and the financial statements of TEA Group
Incorporated at December 31, 1996 and for the year then ended, have been
included herein in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
The financial statements of TEA Group Incorporated at December 31, 1995 and
for the year then ended, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
128
INDEX TO FINANCIAL STATEMENTS
CROWN CASTLE INTERNATIONAL CORP.
Report of KPMG Peat Marwick LLP, Independent Certified Public
Accountants.............................................................. F-2
Consolidated Balance Sheet as of December 31, 1996 and 1997............... F-3
Consolidated Statement of Operations for each of the three years in the
period ended December 31, 1997........................................... F-4
Consolidated Statement of Cash Flows for each of the three years in the
period ended December 31, 1997........................................... F-5
Consolidated Statement of Stockholders' Equity (Deficit) for each of the
three years in the period ended December 31, 1997........................ F-6
Notes to Consolidated Financial Statements for each of the three years in
the period ended December 31, 1997....................................... F-7
CROWN COMMUNICATIONS
Report of KPMG Peat Marwick LLP, Independent Certified Public
Accountants.............................................................. F-24
Combined Statement of Income for each of the two years in the period ended
December 31, 1996 and for the seven month period ended July 31, 1997..... F-25
Combined Statement of Cash Flows for each of the two years in the period
ended December 31, 1996 and for the seven month period ended July 31,
1997..................................................................... F-26
Notes to Combined Financial Statements for each of the two years in the
period ended December 31, 1996 and for the seven month period ended July
31, 1997................................................................. F-27
TEA GROUP INCORPORATED
Report of Ernst & Young LLP, Independent Auditors......................... F-30
Report of KPMG Peat Marwick LLP, Independent Certified Public
Accountants.............................................................. F-31
Balance Sheet as of December 31, 1995 and 1996............................ F-32
Statement of Income for each of the two years in the period ended December
31, 1996, and for each of the three month periods ended March 31, 1996
and 1997 (unaudited)..................................................... F-33
Statement of Shareholders' Equity for each of the two years in the period
ended December 31, 1996.................................................. F-34
Statement of Cash Flows for each of the two years in the period ended
December 31, 1996, and for each of the three month periods ended March
31, 1996 and 1997 (unaudited)............................................ F-35
Notes to Financial Statements for each of the two years in the period
ended December 31, 1996.................................................. F-36
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND THE BBC HOME SERVICE
TRANSMISSION BUSINESS
Report of KPMG, Chartered Accountants .................................... F-39
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-40
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-41
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-42
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-43
Notes to the Consolidated Financial Statements............................ F-44
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, 1996 and 1997, and the
related consolidated statements of operations, cash flows and stockholders'
equity (deficit) for each of the three years in the period ended December 31,
1997. 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, 1996 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
February 20, 1998
F-2
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
-----------------
1996 1997
ASSETS ------- --------
Current assets:
Cash and cash equivalents................................ $ 7,343 $ 55,078
Receivables:
Trade, net of allowance for doubtful accounts of $32 and
$177 at December 31, 1996 and 1997, respectively....... 840 9,264
Other................................................... 1,081 811
Inventories.............................................. -- 1,322
Prepaid expenses and other current assets................ 149 681
------- --------
Total current assets................................... 9,413 67,156
Property and equipment, net................................ 26,753 81,968
Investments in affiliates.................................. 2,101 59,082
Goodwill and other intangible assets, net of accumulated
amortization of $47 and $3,997 at December 31, 1996 and
1997, respectively........................................ 820 152,541
Deferred financing costs and other assets, net of
accumulated amortization of $153 and $743 at December 31,
1996 and 1997, respectively .............................. 2,139 10,644
------- --------
$41,226 $371,391
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable......................................... $ 1,048 $ 7,760
Accrued interest......................................... 49 --
Accrued compensation and related benefits................ -- 1,792
Other accrued liabilities................................ 508 2,398
Long-term debt, current maturities....................... 140 --
------- --------
Total current liabilities.............................. 1,745 11,950
Accrued interest........................................... 729 --
Long-term debt, less current maturities.................... 21,912 156,293
Site rental deposits and other liabilities................. 1,500 607
------- --------
Total liabilities...................................... 25,886 168,850
------- --------
Commitments and contingencies (Note 11)
Redeemable preferred stock, $.01 par value; 6,435,228
shares authorized:
Senior Convertible Preferred Stock; shares issued:
December 31, 1996--none and December 31, 1997--657,495
(stated at redemption value; aggregate liquidation value
of $0 and $68,916, respectively)........................ -- 67,948
Series A Convertible Preferred Stock; shares issued:
December 31, 1996--862,455 and December 31, 1997--
1,383,333 (stated at redemption and aggregate
liquidation value)...................................... 5,175 8,300
Series B Convertible Preferred Stock; 864,568 shares
issued (stated at redemption and aggregate liquidation
value).................................................. 10,375 10,375
Series C Convertible Preferred Stock; shares issued:
December 31, 1996--none and December 31, 1997--3,529,832
(stated at redemption and aggregate liquidation value).. -- 74,126
------- --------
Total redeemable preferred stock....................... 15,550 160,749
------- --------
Stockholders' equity (deficit):
Common stock, $.01 par value; 11,511,109 shares
authorized:
Class A Common Stock; shares issued: December 31, 1996--
270,000 and December 31, 1997--208,313 ................ 3 2
Class B Common Stock; shares issued: December 31, 1996--
297,666 and December 31, 1997 -- 1,873,433 ............ 3 19
Additional paid-in capital............................... 762 58,248
Cumulative foreign currency translation adjustment....... -- 562
Accumulated deficit...................................... (978) (17,039)
------- --------
Total stockholders' equity (deficit) .................. (210) 41,792
------- --------
$41,226 $371,391
======= ========
See notes to consolidated financial statements.
F-3
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------- ------- --------
Net revenues:
Site rental..................................... $ 4,052 $ 5,615 $ 11,010
Network services and other...................... 6 592 20,395
------- ------- --------
4,058 6,207 31,405
------- ------- --------
Operating expenses:
Costs of operations (exclusive of depreciation
and amortization):
Site rental.................................... 1,226 1,292 2,213
Network services and other..................... -- 8 13,137
General and administrative...................... 729 1,678 6,824
Corporate development........................... 204 1,324 5,731
Depreciation and amortization................... 836 1,242 6,952
------- ------- --------
2,995 5,544 34,857
------- ------- --------
Operating income (loss)........................... 1,063 663 (3,452)
Other income (expense):
Equity in losses of unconsolidated affiliate.... -- -- (1,138)
Interest and other income....................... 53 193 1,951
Interest expense and amortization of deferred
financing costs................................ (1,137) (1,803) (9,254)
------- ------- --------
Loss before income taxes.......................... (21) (947) (11,893)
Provision for income taxes........................ -- (10) (49)
------- ------- --------
Net loss.......................................... (21) (957) (11,942)
Dividends on Senior Convertible Preferred Stock... -- -- (2,199)
------- ------- --------
Net loss after deduction of dividends on Senior
Convertible Preferred Stock...................... $ (21) $ (957) $(14,141)
======= ======= ========
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,
--------------------------
1995 1996 1997
------- ------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................... $ (21) $ (957) $(11,942)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization.................... 836 1,242 6,952
Amortization of deferred financing costs and
discount on long-term debt...................... 36 55 2,159
Equity in losses of unconsolidated affiliate..... -- -- 1,138
Changes in assets and liabilities, excluding the
effects of acquisitions:
Increase in accounts payable.................... 406 323 1,824
Decrease (increase) in receivables.............. (226) (1,695) 1,353
Increase in inventories, prepaid expenses and
other assets................................... (63) (23) (1,472)
Increase (decrease) in accrued interest......... 472 306 (396)
Increase (decrease) in other liabilities........ 232 219 (240)
------- ------- --------
Net cash provided by (used for) operating
activities.................................... 1,672 (530) (624)
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in affiliates......................... -- (2,101) (59,487)
Acquisitions of businesses, net of cash acquired.. (16,512) (10,925) (33,962)
Capital expenditures.............................. (161) (890) (18,035)
------- ------- --------
Net cash used for investing activities......... (16,673) (13,916) (111,484)
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.......... 6,168 -- 150,010
Proceeds from issuance of capital stock........... 5,072 10,503 139,867
Principal payments on long-term debt.............. -- (130) (113,881)
Incurrence of financing costs..................... (343) (180) (7,798)
Net borrowings (payments) under revolving credit
agreements....................................... 4,700 11,000 (6,223)
Purchase of capital stock......................... -- -- (2,132)
------- ------- --------
Net cash provided by financing activities...... 15,597 21,193 159,843
------- ------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS.......... 596 6,747 47,735
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..... -- 596 7,343
------- ------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR........... $ 596 $ 7,343 $ 55,078
======= ======= ========
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Conversion of stockholder's Convertible Secured
Subordinated Notes to Series A Convertible
Preferred Stock.................................. $ 743 $ -- $ 3,657
Amounts recorded in connection with acquisitions
(see Note 2):
Fair value of net assets acquired, including
goodwill and other intangible assets............ 17,801 10,958 197,235
Issuance of long-term debt....................... 762 -- 78,102
Assumption of long-term debt..................... 295 -- 27,982
Issuance of Class B Common Stock................. -- -- 57,189
Amounts due to seller............................ 232 33 --
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid..................................... $ 628 $ 1,442 $ 7,533
Income taxes paid................................. -- -- 26
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)
CUMULATIVE
CLASS A CLASS B FOREIGN
COMMON STOCK COMMON STOCK ADDITIONAL CURRENCY
------------------- --------------------- PAID-IN TRANSLATION ACCUMULATED
SHARES ($.01 PAR) SHARES ($.01 PAR) CAPITAL ADJUSTMENT DEFICIT TOTAL
------- ---------- --------- ---------- ---------- ----------- ----------- -------
Balance, January 1,
1995................... -- $ -- -- $ -- $ -- $ -- $ -- $ --
Issuances of capital
stock................. 270,000 3 286,666 3 634 -- -- 640
Net loss............... -- -- -- -- -- -- (21) (21)
------- ---- --------- ---- ------- ---- -------- -------
Balance, December 31,
1995................... 270,000 3 286,666 3 634 -- (21) 619
Issuances of capital
stock................. -- -- 11,000 -- 128 -- -- 128
Net loss............... -- -- -- -- -- -- (957) (957)
------- ---- --------- ---- ------- ---- -------- -------
Balance, December 31,
1996................... 270,000 3 297,666 3 762 -- (978) (210)
Issuances of capital
stock................. -- -- 1,645,767 17 57,696 -- -- 57,713
Purchase of capital
stock................. (61,687) (1) (70,000) (1) (210) -- (1,920) (2,132)
Foreign currency
translation
adjustments........... -- -- -- -- -- 562 -- 562
Dividends on Senior
Convertible Preferred
Stock................. -- -- -- -- -- -- (2,199) (2,199)
Net loss............... -- -- -- -- -- -- (11,942) (11,942)
------- ---- --------- ---- ------- ---- -------- -------
Balance, December 31,
1997................... 208,313 $ 2 1,873,433 $ 19 $58,248 $562 $(17,039) $41,792
======= ==== ========= ==== ======= ==== ======== =======
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 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 (a Delaware corporation) was organized on April 20, 1995. On
April 27, 1995, the stockholders of Castle Tower Corporation ("CTC")
contributed all of the outstanding shares of CTC's stock to the Company in
exchange for shares of the Company's stock. CTC (a Delaware corporation) was
organized on December 21, 1994 and began operations on January 1, 1995. The
Company and CTC have treated this exchange of securities as a reorganization
of entities under common control. As such, the transaction has been accounted
for as if it were a pooling of interests on January 1, 1995.
The Company owns, operates and manages wireless transmission towers and
rooftop sites, and also provides an array of related infrastructure and
network support services to the wireless communications and radio and
television broadcasting industries. The Company's primary business focus is
the leasing of antennae space on multiple tenant towers and rooftops to a
variety of wireless communications carriers under long-term lease contracts.
The Company's transmission towers and rooftop sites are located throughout the
United States and in Puerto Rico.
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
F-7
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
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 site selection and acquisition 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 of events that
F-8
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Financial Instruments
The carrying amount of cash and cash equivalents approximates fair value for
these instruments. The estimated fair value of the 10 5/8% Senior Discount
Notes is based on quoted market prices, and the estimated fair value of the
Convertible Secured Subordinated Notes is based on the most recent price at
which shares of the Company's stock were sold (see Note 5). 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
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, 1996 DECEMBER 31, 1997
------------------ --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- --------- ---------
(IN THOUSANDS OF DOLLARS)
Cash and cash equivalents.......... $ 7,343 $ 7,343 $ 55,078 $ 55,078
Long-term debt..................... (22,052) (25,736) (156,293) (161,575)
Interest rate swap agreement....... -- -- -- (97)
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 plan (see Note 8). 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 8 for the disclosures required by SFAS 123.
Recent Accounting Pronouncements
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, Earnings per Share ("SFAS 128"). SFAS 128 establishes new
standards for computing and presenting earnings per share ("EPS") amounts for
companies with publicly held common stock or potential common stock. The new
standards require the presentation of both basic and diluted EPS amounts for
companies with complex capital structures. Basic EPS is computed by dividing
income available to common stockholders by the weighted-average number of
common shares outstanding for the period, and excludes the effect of
potentially dilutive securities (such as options, warrants and convertible
securities) which are convertible into common stock. Dilutive EPS reflects the
potential dilution from such convertible securities. SFAS 128 is effective for
periods ending after December 15, 1997. The Company will adopt the
requirements of SFAS 128 at such time as it has publicly held common stock.
F-9
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, Disclosure of Information about Capital Structure ("SFAS
129"). SFAS 129 establishes standards for disclosing information about a
company's outstanding debt and equity securities and eliminates exemptions
from such reporting requirements for nonpublic companies. SFAS 129 is
effective for periods ending after December 15, 1997. The Company has adopted
the requirements of SFAS 129 in its financial statements for the year ended
December 31, 1996.
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 will adopt the requirements of SFAS 130 in 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 will adopt the requirements of SFAS 131 in 1998.
2. ACQUISITIONS
During the three years in the period ended December 31, 1997, 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.
Pittencrieff Communications, Inc. ("PCI")
From January 9, 1995 through November 1, 1995, the Company acquired 127
telecommunications towers and related assets, net of certain outstanding
liabilities, from PCI. The total purchase price of $16,179,000 consisted of
$15,122,000 in cash, a note payable to PCI for $762,000 and the assumption of
a note payable to a third party for $295,000.
The Company entered into a license agreement with PCI under which PCI leases
space on certain of the towers for its telecommunications equipment. This
license agreement was assumed by Nextel Communications, Inc. ("Nextel") upon
its acquisition of PCI in 1997. The license agreement commenced on January 1,
1995 and expires on December 31, 2008, at which time Nextel has the option to
renew the license agreement for an additional three year term.
The Company also entered into a management agreement with PCI under which
PCI managed the towers for the Company. The term of this management agreement
was for one year commencing on January 1, 1995. The Company paid a management
fee to PCI equal to 15% of the revenues generated by the towers. Such
management fees amounted to $553,000 for the year ended December 31, 1995. The
Company began managing the towers on January 1, 1996.
F-10
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Spectrum Engineering Company ("Spectrum")
On October 30, 1995, the Company acquired substantially all of the property
and equipment of Spectrum for $1,185,000 in cash. Spectrum provides management
services for building rooftop antenna sites. The Company recognized goodwill
of $870,000 in connection with this 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 1995 and 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 $1,476,000 consisted
of $1,211,000 in cash and a $265,000 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 107,142
shares of the Company's Class B 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, antennae 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 1,465,000 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 7), 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
F-11
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1998, the Company merged CTC with and into CCI, establishing CCI as the
principal operating subsidiary of the Company.
Pro Forma Results of Operations (Unaudited)
The following unaudited pro forma summary presents consolidated results of
operations for the Company as if (i) the Motorola and other acquisitions had
been consummated on January 1, 1996 and (ii) the TEA and Crown acquisitions
and the investment in Castle Transmission Services (Holdings) Ltd ("CTI") had
been consummated as of January 1 for both 1996 and 1997. Appropriate
adjustments have been reflected for depreciation and amortization, 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 (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,
--------------------------
1996 1997
------------ ------------
(IN THOUSANDS OF DOLLARS)
Net revenues........................................ $ 45,480 $ 56,851
Net loss............................................ (14,475) (16,082)
Agreement with 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 20, 1998, the Company had purchased 36 of such towers for an
aggregate price of $8,383,000 in cash. In addition, the Nextel Agreement
provides the Company with the option to construct or purchase up to 250 new
towers for Nextel in various geographic corridors.
3. PROPERTY AND EQUIPMENT
The major classes of property and equipment are as follows:
DECEMBER 31,
ESTIMATED --------------------------
USEFUL LIVES 1996 1997
------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
Land.............................. $ 125 $ 1,053
Telecommunications towers ........ 5-20 years 24,295 72,834
Transportation and other
equipment........................ 5-10 years -- 4,379
Telecommunications equipment...... 20 years 3,690 4,013
Office furniture and equipment.... 5-7 years 612 4,541
------------ ------------
28,722 86,820
Less: accumulated depreciation.... (1,969) (4,852)
------------ ------------
$ 26,753 $ 81,968
============ ============
Depreciation expense for the years ended December 31, 1996 and 1997 was
$1,151,000 and $2,886,000, respectively. Accumulated depreciation on
telecommunications towers and related equipment was $1,820,000 and $3,850,000
at December 31, 1996 and 1997, respectively. At December 31, 1997, minimum
rentals receivable under existing operating leases for towers are as follows:
years ending December 31, 1998--$15,307,000; 1999--$13,614,000; 2000--
$12,270,000; 2001--$10,108,000; 2002--$3,442,000; thereafter--$3,195,000.
F-12
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. INVESTMENTS IN AFFILIATES
Investment in Castle Transmission Services (Holdings) Ltd ("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 7) 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 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 accounts for its investment in CTI
utilizing the equity method of accounting.
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. At December
31, 1996, approximately $953,000 of such reimbursable costs are included in
other receivables on the Company's consolidated balance sheet.
The Company receives a monthly service fee from CTI of approximately $33,000
as compensation for certain management services. This fee is included in
network services and other revenues on the Company's consolidated statement of
operations.
CTI uses the British pound as the functional currency for its operations.
The Company translates its equity in the earnings and losses of CTI using the
average exchange rate for the period, and translates its investment in CTI
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.
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-13
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Summarized financial information for CTI is as follows:
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
DECEMBER 31,
1997
-------------------------
(IN THOUSANDS OF DOLLARS)
Net revenues..................................... $103,531
Operating expenses............................... 86,999
--------
Operating income................................. 16,532
Interest income.................................. 553
Interest expense and amortization of deferred
financing costs................................. (20,404)
Provision for income taxes....................... --
--------
Net loss......................................... $ (3,319)
========
Investment in Visual Intelligence Systems, Inc. ("VISI")
On June 23, 1997, the Company made an investment in VISI of $2,000,000 (of
which $100,000 was paid in 1996). VISI intends to provide computerized
geographic information for a variety of business applications, including the
acquisition and design of telecommunications sites. The Company's investment
was made in the form of 15,000 shares of VISI's common stock at a price of
$2.00 per share, along with a Convertible Subordinated Note for $1,970,000
(the "VISI Note"). The VISI Note is convertible (at the option of the Company)
into shares of VISI's common stock at a conversion price of $2.00 per share,
bears interest at 7.11% per year and is due on May 31, 2007. The 15,000 shares
of common stock purchased by the Company represent an ownership interest of
approximately 1.14% in VISI. The Company accounts for its investment in VISI's
common stock utilizing the cost method of accounting.
F-14
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
-----------------
1996 1997
------- --------
(IN THOUSANDS OF
DOLLARS)
Senior Credit Facility................................... $ -- $ 4,700
Bank Credit Agreement:
Revolving Credit Facility.............................. 15,700 --
Term Note.............................................. 2,300 --
10 5/8% Senior Discount Notes due 2007, net of discount.. -- 151,593
Promissory Note payable to PCI........................... 632 --
Convertible Secured Subordinated Notes payable to stock-
holder.................................................. 3,125 --
Other.................................................... 295 --
------- --------
22,052 156,293
Less: current maturities................................. (140) --
------- --------
$21,912 $156,293
======= ========
Bank Credit Agreement and Senior Credit Facility
On April 26, 1995, CTC entered into a credit agreement with a bank (as
amended, the "Bank Credit Agreement"). The Bank Credit Agreement 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 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 7), 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). 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).
As of December 31, 1997, approximately $93,600,000 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, 1997. Upon the merger of CTC into CCI in January 1998, CCI became the
primary borrower under the Senior Credit Facility.
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.
F-15
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Senior Credit Facility is secured by substantially all of the assets of
the Company's subsidiaries and the Company's pledge of the capital stock of
its subsidiaries. In addition, the Senior Credit Facility is guaranteed by the
Company. As of December 31, 1997, 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% (10.0% and 8.98%, respectively, at December 31, 1997). 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, 1997, 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 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 the Promissory Note payable, including
accrued interest thereon, to PCI; 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 at December 31, 1997.
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 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, 1997, the Company was
precluded from paying dividends on its capital stock under the terms of the
Indenture.
Reporting Requirements Under the Indenture (Unaudited)
As of December 31, 1997, the Company does not have any Unrestricted
Subsidiaries (as defined in the Indenture). The following information (as such
capitalized terms are defined in the Indenture) is presented solely for the
purpose of measuring compliance with respect to the terms of the Indenture;
such information is not intended as an alternative measure of operating
results or cash flow from operations (as determined in accordance
F-16
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
(IN
THOUSANDS
OF
DOLLARS)
---------
Tower Cash Flow, for the three months ended December 31, 1997.... $ 3,118
========
Consolidated Cash Flow, for the twelve months ended December 31,
1997............................................................ $ 13,150
Less: Tower Cash Flow, for the twelve months ended December 31,
1997............................................................ (10,625)
Plus: four times Tower Cash Flow, for the three months ended
December 31, 1997............................................... 12,472
--------
Adjusted Consolidated Cash Flow, for the twelve months ended
December 31, 1997............................................... $ 14,997
========
Promissory Note Payable to PCI
This note bore interest at a rate of 8% per annum, called for equal annual
payments of principal and interest and was secured by the tower sites
purchased from PCI. The Company repaid this note with a portion of the
proceeds from the issuance of its 10 5/8% Senior Discount Notes (as discussed
above).
Convertible Secured Subordinated Notes Payable to Stockholder
These notes accrued interest at a rate of 8% per annum, payable at maturity,
and were secured by substantially all of CTC's assets. The notes provided that
the holder had the option, at any time, to convert such notes, in whole or in
part, into shares of the Company's Series A Convertible Preferred Stock at a
conversion price of $6.00 per share. On April 27, 1995, a portion of the notes
with aggregate principal balances of $743,000 was converted into 123,742
shares of the Company's stock and the related accrued interest was paid to the
holder. On February 24, 1997, the remaining $3,125,000 principal amount of the
notes was converted into 520,878 shares of the Company's stock and, by mutual
agreement with the holder, the related accrued interest was forfeited. Upon
conversion of the notes, the principal amount and the forfeited interest were
accounted for as increases to redeemable preferred stock and additional paid-
in capital, respectively.
Restricted Net Assets of Subsidiaries
Under the terms of the Senior Credit Facility, the Company's subsidiaries
are limited in the amount of dividends which can be paid to the Company. 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 subsidiaries. The restricted net
assets of the Company's subsidiaries totaled $232,229,000 at December 31,
1997.
Interest Rate Swap Agreement
The interest rate swap agreement has an outstanding notional amount of
$17,925,000 at January 29, 1997 (inception) and terminates on February 24,
1999. The Company pays a fixed rate of 6.28% on the notional amount and
receives a floating rate based on LIBOR. This agreement effectively changes
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.
F-17
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES
The provision for income taxes consists of the following:
YEARS ENDED DECEMBER 31,
------------------------
1995 1996 1997
-------- -------- ----------
(IN THOUSANDS OF DOLLARS)
Current:
Puerto Rico................................ $ -- $ 10 $ 49
====== ======== ==========
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,
------------------------
1995 1996 1997
-------- -------- ----------
(IN THOUSANDS OF DOLLARS)
Benefit for income taxes at statutory rate... $ (7) $ (322) $(4,044)
Amortization of intangible assets ........... -- -- 478
Puerto Rico taxes............................ -- 10 49
Expenses for which no federal tax benefit was
recognized.................................. 5 5 28
Changes in valuation allowances.............. 2 315 3,650
Other........................................ -- 2 (112)
------ -------- ----------
$ -- $ 10 $ 49
====== ======== ==========
The components of the net deferred income tax assets and liabilities are as
follows:
DECEMBER 31,
---------------------------
1996 1997
------------ -------------
(IN THOUSANDS OF DOLLARS)
Deferred income tax liabilities:
Property and equipment........................ $ 1,307 $ 2,487
Intangible assets............................. 49 276
Puerto Rico earnings.......................... -- 75
Other......................................... -- 38
------------ -------------
Total deferred income tax liabilities....... 1,356 2,876
------------ -------------
Deferred income tax assets:
Net operating loss carryforwards.............. 1,639 6,800
Noncompete agreement.......................... 19 37
Receivables allowance......................... 15 6
Valuation allowances.......................... (317) (3,967)
------------ -------------
Total deferred income tax assets, net....... 1,356 2,876
------------ -------------
Net deferred income tax liabilities............. $ -- $ --
============ =============
Valuation allowances of $317,000 and $3,967,000 were recognized to offset
net deferred income tax assets as of December 31, 1996 and 1997, respectively.
At December 31, 1997, the Company has net operating loss carryforwards of
approximately $20,000,000 which are available to offset future federal taxable
income. These loss carryforwards will expire in 2010 through 2012. The
utilization of the loss carryforwards is subject to certain limitations.
F-18
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. REDEEMABLE 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 are entitled to receive cumulative
dividends at the rate of 12.5% per share, compounded annually. At December 31,
1997, such accrued and unpaid dividends amounted to $2,199,000. Any payment of
such dividends would be in the form of additional shares of Senior Preferred
Stock until such time as the Company is permitted to pay cash dividends on its
capital stock under the terms of the Indenture (see Note 5). At the option of
the holder, each share of Senior Preferred Stock (plus any accrued and unpaid
dividends) is convertible, at any time, into shares of the Company's Class B
Common Stock at a conversion price of $37.54 (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 represents the estimated fair value of the Class B Common
Stock on that date. The holders of the Senior Preferred Stock are entitled to
vote together with the holders of the Company's other preferred stock on an
as-converted basis.
The Company has the one-time right, within one year from the date of
issuance, to redeem 50% of the outstanding shares of Senior Preferred Stock at
a price per share which represents an annualized cumulative rate of return of
18%. If not earlier converted or redeemed, the shares of Senior Preferred
Stock are subject to mandatory redemption by the Company, at a price per share
of $100 plus any accrued and unpaid dividends through that date, upon the
earlier of (i) 91 days after the tenth anniversary date of the issuance of the
Notes; or (ii) May 15, 2008. The Senior Preferred Stock also calls for a
preference, in the event of a liquidation or a change in voting control, equal
to a price per share which represents an annualized cumulative rate of return
of 18%. With respect to dividend, redemption and liquidation preferences, the
rights of the holders of the Senior Preferred Stock are senior to the
Company's other preferred and common stock.
The purchasers of the Senior Preferred Stock were also issued warrants to
purchase an aggregate 262,998 shares of the Company's Class B Common Stock at
an exercise price of $37.54 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 represents the estimated fair value of the Class B Common Stock
on that date. As such, the Company has not assigned any value to the warrants
in its consolidated financial statements.
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") are
generally entitled to one vote per share on all matters presented to a vote of
the Company's stockholders. The holders of the Series Preferred Stock are also
entitled to receive dividends, if and when declared, at the same rate as
dividends are declared and paid with respect to the Company's common stock. At
the option of the holder, each share of Series Preferred Stock is convertible,
at any time, into one share of the Company's Class B Common Stock. The
outstanding shares of Series Preferred Stock will automatically convert into
an equal number of shares of Class B Common Stock in the event of an
underwritten public offering of the Company's common stock, subject to certain
conditions.
F-19
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Upon the earlier of (i) 91 days after the tenth anniversary date of the
issuance of the Notes; or (ii) May 15, 2008, the outstanding shares of Series
A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock are
redeemable, at the option of the holder, at a price per share of $6.00, $12.00
and $21.00, respectively, plus any accrued and unpaid dividends through the
date of redemption. The Series Preferred Stock also call for liquidation
preferences equal to such respective redemption prices. With respect to
redemption and liquidation preferences, the rights of the holders of the
Series C Preferred Stock and the Series B Preferred Stock are senior to the
Series A Preferred Stock and the common stock, and the rights of the holders
of the Series A Preferred Stock are senior to the common stock.
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).
8. STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock
At the option of the holder, each share of the Company's Class A Common
Stock is convertible, at any time, into 1.52315 shares of the Company's Class
B Common Stock. The holders of the Class B Common Stock are entitled to one
vote per share on all matters presented to a vote of the Company's
stockholders, and the holders of the Class A Common Stock are entitled to a
number of votes equivalent to the number of shares of Class B Common Stock
into which their shares of Class A Common Stock are convertible. The holders
of the Class A Common Stock are also entitled to receive dividends, if and
when declared, on an equivalent basis with the holders of the Class B Common
Stock. In the event of an underwritten public offering of its common stock
which results in the conversion of the Preferred Stock (see Note 7), the
Company may, at its option, require that all outstanding shares of Class A
Common Stock be converted into Class B Common Stock.
In March 1997, the Company repurchased, and subsequently retired, 162,958
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.
F-20
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 1,153,000 shares
of the Company's Class B Common Stock are 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. A
summary of awards granted under the 1995 Stock Option Plan is as follows for
the years ended December 31, 1995, 1996 and 1997:
1995 1996 1997
------------------------ ------------------------ ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- -------------- --------- -------------- --------- --------------
Options outstanding at
beginning of year...... -- -- 165,000 $2.65 210,000 4.47
Options granted......... 165,000 $2.65 45,000 11.11 608,500 27.32
Options exercised....... -- -- -- -- (72,625) 2.69
Options forfeited....... -- -- -- -- (7,000) 6.00
------- ------- -------
Options outstanding at
end of year............ 165,000 2.65 210,000 4.47 738,875 23.45
======= ======= =======
Options exercisable at
end of year............ -- -- 144,250 $2.17 145,775 12.45
======= ======= =======
In November 1996, options which were granted in 1995 for the purchase of
138,000 shares were modified such that those options became fully vested. A
summary of options outstanding as of December 31, 1997 is as follows:
WEIGHTED-
AVERAGE
NUMBER OF REMAINING NUMBER OF
EXERCISE OPTIONS CONTRACTUAL OPTIONS
PRICE OUTSTANDING LIFE EXERCISABLE
-------- ----------- ----------- -----------
$ 2.00 69,000 8.0 years 69,000
6.00 18,750 7.9 years 7,750
8.00 10,000 8.4 years 2,500
12.00 35,000 8.8 years 8,750
21.00 343,625 9.5 years 25,275
30.00 65,000 9.8 years 32,500
37.50-37.54 197,500 9.9 years --
------- -------
738,875 9.4 years 145,775
======= =======
F-21
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The weighted-average fair value of options granted during the years ended
December 31, 1995, 1996 and 1997 was $0.43, $2.48 and $6.50, 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):
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
--------- --------- ---------
Risk-free interest rate........................ 5.3% 6.4% 6.1%
Expected life.................................. 3.2 years 4.0 years 4.5 years
Expected volatility............................ 0% 0% 0%
Expected dividend yield........................ 0% 0% 0%
The exercise prices for options granted during the years ended December 31,
1995, 1996 and 1997 were equal to or in excess of the estimated fair value of
the Company's Class B Common Stock at the date of grant. As such, no
compensation cost was recognized for stock options during those years (see
Note 1). 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, 1995, 1996 and 1997 would have been $33,000,
$973,000 and $12,586,000, 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, 1997, the Company had the following shares reserved for
future issuance:
Class B Common Stock:
Senior Preferred Stock........................................... 1,810,012
Series A Preferred Stock......................................... 1,383,333
Series B Preferred Stock......................................... 864,568
Series C Preferred Stock......................................... 3,529,832
Class A Common Stock............................................. 317,292
1995 Stock Option Plan........................................... 1,153,000
Warrants......................................................... 262,998
---------
9,321,035
=========
9. 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 15% or 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 for the year ended
December 31, 1997.
10. 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 $22,000,
$50,000 and $130,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
Included in other receivables at December 31, 1997 are amounts due from
employees of the Company totaling $499,000.
F-22
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
At December 31, 1997, minimum rental commitments under operating leases are
as follows: years ending December 31, 1998--$2,634,000; 1999--$2,483,000;
2000--$2,021,000; 2001--$1,791,000; 2002--$1,131,000; thereafter--$17,228,000.
Rental expense for operating leases was $208,000, $277,000 and $1,712,000 for
the years ended December 31, 1995, 1996 and 1997, 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.
12. 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
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.
For the years ended December 31, 1995, 1996 and 1997, the Company's revenues
from PCI and Nextel amounted to $2,566,000, $2,634,000 and $5,998,000,
respectively.
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summary quarterly financial information for the years ended December 31,
1996 and 1997 is as follows:
THREE MONTHS ENDED
-------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS OF DOLLARS)
1996:
Net revenues...................... $ 1,221 $1,238 $ 1,846 $ 1,902
Operating income.................. 306 71 196 90
Net loss.......................... (32) (280) (243) (402)
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)
F-23
INDEPENDENT AUDITORS' REPORT
The Owners of Crown Communications,
Crown Network Systems, Inc.,
Crown Mobile Systems, Inc., Airport
Communications, Inc. and E-90, Ltd.:
We have audited the accompanying combined statements of income and cash
flows of Crown Communications, Crown Network Systems, Inc., Crown Mobile
Systems, Inc., Airport Communications, Inc. and E-90, Ltd. (collectively,
Crown Communications) for the years ended December 31, 1995 and 1996 and for
the seven month period ended July 31, 1997. These combined financial
statements are the responsibility of Crown Communications' management. Our
responsibility is to express an opinion on these combined 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 audits to
obtain reasonable assurance about whether the combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
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 combined financial statements referred to above present
fairly, in all material respects, the combined results of operations and cash
flows of Crown Communications for the years ended December 31, 1995 and 1996
and for the seven month period ended July 31, 1997 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Pittsburgh, Pennsylvania
March 23, 1998
F-24
CROWN COMMUNICATIONS
COMBINED STATEMENT OF INCOME
(IN THOUSANDS OF DOLLARS)
SEVEN
YEARS ENDED MONTHS
DECEMBER 31, ENDED
---------------- JULY 31,
1995 1996 1997
------- ------- --------
Net revenues:
Site rental....................................... $ 3,632 $ 5,120 $ 4,550
Network services and other........................ 7,384 14,260 13,137
------- ------- -------
11,016 19,380 17,687
Operating costs and expenses:
Site rental....................................... 763 1,691 1,421
Network services and other........................ 3,944 8,632 5,841
General and administrative expenses............... 2,625 3,150 3,761
Depreciation and amortization..................... 568 1,168 1,006
------- ------- -------
7,900 14,641 12,029
------- ------- -------
Operating income................................ 3,116 4,739 5,658
Other income (expense):
Interest and other income (expense)............... 19 (53) (26)
Interest expense.................................. (785) (1,175) (925)
------- ------- -------
Net income...................................... $ 2,350 $ 3,511 $ 4,707
======= ======= =======
See accompanying notes to combined financial statements.
F-25
CROWN COMMUNICATIONS
COMBINED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
SEVEN
MONTHS
YEARS ENDED ENDED
DECEMBER 31, JULY
------------------ 31,
1995 1996 1997
-------- -------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................... $ 2,350 $ 3,511 $ 4,707
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 568 1,168 1,006
Gain on sale of equipment....................... (71) -- --
Changes in operating assets and liabilities:
Accounts receivable............................ 205 (1,594) (1,612)
Inventory...................................... (173) 73 (527)
Prepaid expenses and other current assets...... (22) (117) (13)
Accrued network services....................... -- (653) 653
Deferred installation costs.................... 356 (154) 154
Other assets................................... (20) (36) (78)
Accounts payable............................... 149 1,195 419
Accrued expenses............................... 216 508 (350)
Customer deposits.............................. 43 (2) 106
Deferred revenue............................... (627) 263 734
-------- -------- -------
Net cash provided by operating activities..... 2,974 4,162 5,199
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................. (5,670) (8,658) (12,425)
Proceeds from sale of equipment.................. -- 6 --
-------- -------- -------
Net cash used for investing activities........ (5,670) (8,652) (12,425)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable.......... 14,929 22,614 9,256
Principal payments on notes payable.............. (11,689) (15,808) (706)
Distributions to owners.......................... (873) (2,809) (1,532)
Capital contribution............................. -- 103 --
-------- -------- -------
Net cash provided by financing activities..... 2,367 4,100 7,018
-------- -------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS......... (329) (390) (208)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.. 1,093 764 374
-------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........ $ 764 $ 374 $ 166
======== ======== =======
Supplemental disclosure of cash flow information--
interest paid.................................... $ 764 $ 1,175 $ 775
======== ======== =======
See accompanying notes to combined financial statements.
F-26
CROWN COMMUNICATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS)
(1)BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The accompanying combined financial statements include the accounts of Crown
Communications (CCM), a sole proprietorship, Crown Network Systems, Inc.
(CNS), a subchapter S corporation, Crown Mobile Systems, Inc. (CMS), a
subchapter S corporation, Airport Communications, Inc. (ACI), a subchapter S
corporation and E-90, Ltd. (E-90), a Pennsylvania Business Trust
(collectively, Crown Communications or the Company). These entities are all
under common ownership. All significant intercompany accounts and transactions
have been eliminated.
Crown Communications is a communication site development and management
company. The Company's core business is the development of high density
communication facilities. The majority of these facilities are located
throughout western Pennsylvania. The Company leases antenna and transmitter
space on communication towers to companies using or providing wireless
telephone, paging and specialized mobile radio services.
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.
(b) Cash and Cash Equivalents
The Company considers cash in depository institutions and short-term
investments with original maturities of three months or less to be cash and
cash equivalents.
(c) Inventory
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
(d) Property and Equipment
Property and equipment is stated at cost, net of accumulated depreciation.
Depreciation on property and equipment is computed utilizing methods which
approximate the straight-line method over the estimated useful lives of the
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 is 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 combined financial statements.
F-27
CROWN COMMUNICATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS)
(e) Other Assets
Other assets include deferred financing costs which are amortized over the
estimated term of the related borrowing.
(f) Revenue Recognition
Equipment sales revenues are recognized when products are delivered to
customers.
Site rental revenue is recognized ratably over the terms of the respective
leases. Such leases have terms that are generally five years.
Network services revenues are recognized under a method which approximates
the completed contract method. This method is used because typical network
services are completed in 3 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. The network services are considered
complete at the point in time in which the terms and conditions of the
contract and/or agreement have been substantially completed. Revenues from
completed contracts which have not been billed at the end of an accounting
period are presented as accrued network services.
Costs and revenues associated with installations not complete at the end of
an accounting period are deferred and recognized when the installation becomes
operational. Any losses on contracts are recognized at such time as they
become known.
(2) INCOME TAXES
CCM is operated as a sole proprietorship and all income or loss is passed
through to the personal tax return of the owners. The shareholders for CNS,
CMS and ACI have elected under subchapter S of the Internal Revenue Code to
pass through all income or loss to the individual tax return of the
shareholders. E-90 is operated as a Pennsylvania Business Trust and has
elected to be taxed as a partnership. Accordingly, no provision for income
taxes has been recorded in the accompanying financial statements.
(3) RETIREMENT SAVINGS PLAN
The Company sponsors a Retirement Savings Plan (the "Plan"), which qualifies
for treatment under section 401(k) of the Internal Revenue Code. Substantially
all full-time employees are eligible to participate by electing to contribute
1% to 15% of their gross pay to the Plan. Under the Plan, the Company matches
a portion of each employee's contribution up to certain limits. Each
employee's contribution is fully vested when contributed, and the Company's
matching contribution begins vesting after an employee has completed two years
of service and becomes fully vested after six years of service. For the years
ended December 31, 1995 and 1996, and the seven months ended July 31, 1997,
the Company's expense for the Plan was $6, $59 and $44, respectively.
F-28
CROWN COMMUNICATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS)
(4) COMMITMENTS AND CONTINGENCIES
The Company leases land, office space and site space on towers and rooftops
through contracts that expire in various years through 2095. The Company has
purchase and renewal options and is committed to various escalation provisions
under certain of these leases. Rental expense under operating leases was $306,
$669 and $718 for the years ended December 31, 1995 and 1996, and the seven
months ended July 31, 1997, respectively. At July 31, 1997, minimum rental
commitments under operating leases are as follows:
YEARS ENDING
DECEMBER 31,
------------
1997............................................................ $ 659
1998............................................................ 1,800
1999............................................................ 1,700
2000............................................................ 1,500
2001............................................................ 1,300
Thereafter...................................................... 17,200
-------
$24,159
=======
The Company is involved in various claims and legal actions 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 combined financial position or results of
operations.
(5) CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk are primarily cash and cash equivalents and accounts
receivable. 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 western Pennsylvania. The Company mitigates
its concentrations of credit risk with respect to accounts receivable by
actively monitoring the creditworthiness of its customers. Historically, the
Company has not incurred any significant credit related losses.
For the year ended December 31, 1995, the Company recognized revenues from
two individual customers in the amount of $4,139 and $668. For the year ended
December 31, 1996, the Company recognized revenues from three individual
customers in the amount of $3,700, $2,600 and $1,400. For the seven months
ended July 31, 1997, the Company recognized revenues from three individual
customers in the amount of $4,784, $4,246 and $2,377.
(6) SUBSEQUENT EVENTS
In July 1997, the owners of CCM, CNS and CMS entered into an asset purchase
and merger agreement with Crown Castle International Corp. ("CCIC"). In August
1997, such agreement was amended and restated, and CCIC 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.
F-29
REPORT OF INDEPENDENT AUDITORS
Board of Directors
TEA Group Incorporated
We have audited the balance sheet of TEA Group Incorporated as of December
31, 1995, and the related statements of income, shareholders' equity and cash
flows 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 audit.
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 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 audit provides 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 TEA Group Incorporated as
of December 31, 1995, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Atlanta, Georgia
February 28, 1996
F-30
INDEPENDENT AUDITORS' REPORT
The Board of Directors
TEA Group Incorporated:
We have audited the accompanying balance sheet of TEA Group Incorporated as
of December 31, 1996, and the related statements of income, shareholders'
equity, and cash flows 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 audit.
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 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 audit provides 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 TEA Group Incorporated as
of December 31, 1996, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Atlanta, Georgia
August 15, 1997
F-31
TEA GROUP INCORPORATED
BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
--------------
1995 1996
ASSETS ------ ------
Current assets:
Cash.............................................................. $ 5 $ --
Accounts receivable, net of allowance for doubtful accounts of
$100 and $1 at December 31, 1995 and 1996, respectively (note 5):
Billed.......................................................... 4,637 3,553
Unbilled........................................................ 1,335 465
Employee advances................................................. -- 14
Note and accrued interest receivable--related party............... 58 6
Prepaid expenses.................................................. 24 3
------ ------
Total current assets.......................................... 6,059 4,041
------ ------
Property and equipment, at cost:
Leasehold improvements............................................ 9 9
Office and computer equipment..................................... 757 831
Furniture and fixtures............................................ 343 345
Computer software................................................. -- 85
------ ------
1,109 1,270
Less accumulated depreciation and amortization.................... (653) (787)
------ ------
456 483
Other assets........................................................ 62 47
------ ------
$6,577 $4,571
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable (note 2)............................................ $2,733 $ 107
Accounts payable.................................................. 1,328 1,366
Accrued compensation and related benefits......................... 557 445
Other accrued expenses............................................ -- 52
------ ------
Total current liabilities..................................... 4,618 1,970
Commitments (note 3)
Shareholders equity (note 7):
Common stock, $1 par value, 10,000 shares authorized; 550 shares
issued and
outstanding...................................................... 1 1
Additional paid-in capital........................................ 11 11
Retained earnings................................................. 1,947 2,589
------ ------
Total shareholders equity..................................... 1,959 2,601
------ ------
$6,577 $4,571
====== ======
See accompanying notes to financial statements.
F-32
TEA GROUP INCORPORATED
STATEMENT OF INCOME
(IN THOUSANDS OF DOLLARS)
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
---------------- --------------
1995 1996 1996 1997
------- ------- ------ ------
(UNAUDITED)
Network services and other revenues, net
(note 6).................................... $23,585 $18,010 $4,376 $4,873
Operating costs and expenses:
Services and other (exclusive of
depreciation and amortization)............ 18,770 14,406 3,280 4,048
General and administrative expenses........ 4,077 2,295 529 482
Depreciation and amortization.............. 127 134 31 38
------- ------- ------ ------
22,974 16,835 3,840 4,568
------- ------- ------ ------
Operating income......................... 611 1,175 536 305
Other income (expense):
Interest and other income.................. 17 3 -- --
Interest expense........................... (158) (127) (47) (5)
------- ------- ------ ------
Income before income taxes............... 470 1,051 489 300
Income taxes (note 1(d))..................... -- -- -- --
------- ------- ------ ------
Net income............................... $ 470 $ 1,051 $ 489 $ 300
======= ======= ====== ======
See accompanying notes to financial statements.
F-33
TEA GROUP INCORPORATED
STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
COMMON STOCK ADDITIONAL TOTAL
-------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNTS CAPITAL EARNINGS EQUITY
------ ------- ---------- -------- -------------
Balance at January 1,
1995................... 550 $ 1 $11 $2,359 $2,371
Net income.............. -- -- -- 470 470
Shareholder
distributions.......... -- -- -- (882) (882)
--- --- --- ------ ------
Balance at December 31,
1995................... 550 1 11 1,947 1,959
Net income.............. -- -- -- 1,051 1,051
Shareholder
distributions.......... -- -- -- (409) (409)
--- --- --- ------ ------
Balance at December 31,
1996................... 550 $ 1 $11 $2,589 $2,601
=== === === ====== ======
See accompanying notes to financial statements.
F-34
TEA GROUP INCORPORATED
STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
-------------- --------------
1995 1996 1996 1997
------ ------ ------ ------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................. $ 470 $1,051 $ 489 $ 300
Adjustment to reconcile net income to net
cash provided by (used for) operating
activities:
Depreciation and amortization............. 127 134 31 38
Provision for doubtful accounts (note 6).. -- 355 125 --
Gain on sale of property and equipment,
and other assets......................... (12) (1) (1) --
Decrease (increase) in:
Billed accounts receivable.............. (1,714) 729 (103) (735)
Unbilled accounts receivable............ (336) 870 1,439 119
Other assets............................ (25) 29 (15) (73)
Increase (decrease) in:
Accounts payable........................ 381 37 (1,219) (925)
Accrued expenses........................ 142 (59) (101) 37
------ ------ ------ ------
Net cash provided by (used for)
operating activities................. (967) 3,145 645 (1,239)
------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......... (250) (161) (29) (23)
Proceeds from sale of property and
equipment, and other assets................ 25 1 1 --
Increase in deposits........................ 16 -- -- --
Payments received on note receivable........ -- 45 8 --
------ ------ ------ ------
Net cash used for investing
activities........................... (209) (115) (20) (23)
------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving
credit agreement........................... 2,057 (2,626) 276 1,262
Shareholder distributions................... (882) (409) -- --
------ ------ ------ ------
Net cash provided by (used for)
financing activities................. 1,175 (3,035) 276 1,262
------ ------ ------ ------
Net increase (decrease) in cash....... (1) (5) 901 --
CASH AT BEGINNING OF PERIOD................... 6 5 5 --
------ ------ ------ ------
CASH AT END OF PERIOD......................... $ 5 $ -- $ 906 $ --
====== ====== ====== ======
Supplemental disclosure of cash flow
information--cash paid during the period for
interest..................................... $ 149 $ 138 $ 47 $ --
====== ====== ====== ======
See accompanying notes to financial statements.
F-35
TEA GROUP INCORPORATED
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS)
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
TEA Group Incorporated (the "Company") provides services to the wireless
telecommunications and energy transmission industries. These services include
providing right-of-way, site acquisition, engineering design and drafting,
project management, and staff leasing to wireless telecommunications and
energy transmission companies in the United States and internationally.
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities as of the date of the financial statements
and revenues and expenses for the reporting period to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
The financial statements for the three months ended March 31, 1996 and 1997
are unaudited; however, they include all adjustments (consisting only of
normal recurring adjustments) which, in the opinion of management, are
necessary to present fairly the results of operations and cash flows for the
three months ended March 31, 1996 and 1997. Accounting measurements at interim
dates inherently involve greater reliance on estimates than at year end. The
results of operations for the interim periods presented are not necessarily
indicative of the results to be expected for the entire year.
(b) Revenue Recognition
The Company's revenues are derived primarily from 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 priced contracts, and 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 to
estimated total contract costs. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined.
(c) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is provided over the estimated useful lives of the
assets on a straight-line basis. Leasehold improvements are amortized over the
shorter of their estimated useful lives or the remaining lease term. Property
and equipment are depreciated over the following estimated useful lives:
YEARS
-----
Leasehold improvements.............................................. 5
Office and computer equipment....................................... 5
Furniture and fixtures.............................................. 7
Computer software................................................... 5
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, on January 1, 1996. This statement
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. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount
of an asset to future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell. Adoption of this
statement did not have an impact on the Company's financial statements.
F-36
TEA GROUP INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS)
(d) Income Taxes
The shareholders of the Company have elected to be taxed under the
Subchapter S Corporation provisions of the Internal Revenue Code. As a result
of this election, Federal and state income taxes related to the results of
operations of the Company are passed through to, and are the responsibility
of, the Company's shareholders. Accordingly, no provision for income taxes has
been recorded in the accompanying financial statements.
(e) Fair Value of Financial Instruments
The carrying value of the notes payable approximates the estimated fair
value for this instrument since it bears interest at a floating market rate.
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, DECEMBER 31,
1995 1996
----------------- --------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -----
Cash....................................... $ 5 $ 5 $ -- $ --
Notes payable.............................. (2,733) (2,733) (107) (107)
(2) NOTES PAYABLE
The Company has a revolving line of credit with a bank for working capital
purposes (as amended, the "Bank Line of Credit"). The Bank Line of Credit
provides for up to $5,000 of working capital borrowings and up to $200 of
borrowings for purchases of equipment. At December 31, 1996, outstanding
working capital borrowings under the Bank Line of Credit amounted to $107.
Borrowings are secured by the Company's receivables, property and equipment,
intangibles and cash balances, and bear interest at a rate per annum equal to
(i) the bank's prime rate or (ii) a Eurodollar interbank offered rate (LIBOR)
plus 2.45% (8.25% and 7.95%, respectively, at December 31, 1996). Interest is
payable monthly. The Bank Line of Credit requires the Company to maintain
certain financial covenants and places limitations on its ability to, among
other things, incur debt and liens, undertake transactions with affiliates and
make investments.
On July 30, 1997, the Bank Line of Credit was amended to decrease the
available borrowings to $3,000 and extend the maturity date to June 30, 1998.
Borrowings now bear interest at a rate per annum equal to LIBOR plus 2.7%
(8.39% at July 31, 1997). In addition, the amended Bank Line of Credit now
restricts the ability of the Company to pay dividends.
(3) COMMITMENTS
The Company has noncancelable operating leases for office space. Future
minimum lease payments under the operating leases with remaining terms of one
year or more at December 31, 1996 are summarized as follows:
YEARS ENDING
DECEMBER 31,
------------
1997............................................................... $316
1998............................................................... 315
1999............................................................... 289
2000............................................................... 43
----
$963
====
Rent expense under all cancelable and noncancelable operating leases for
1995 and 1996 was $459 and $608, respectively.
F-37
TEA GROUP INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS)
(4)EMPLOYEE BENEFIT PLAN
The Company maintains a 401(k) profit sharing and retirement plan (the
"Plan") for the benefit of all eligible employees. Employees may elect to
contribute up to 15% of their eligible compensation to the Plan. The Plan
provides for employer matching contributions at the discretion of the
Company's Board of Directors. The Company provided $66 and $29 in expense for
contributions for 1995 and 1996, respectively.
(5)RELATED PARTY TRANSACTIONS
Accounts receivable balances at December 31, 1995 and 1996 include
approximately $398 and $94, respectively, from an affiliated company related
to expenses incurred by the Company on behalf of the affiliated company.
(6) CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk are primarily cash and trade receivables. The Company mitigates
its risk with respect to cash 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 and energy transmission industries. The
Company mitigates its concentrations of credit risk with respect to trade
receivables by actively monitoring the creditworthiness of its customers. In
connection with a disputed receivable with a customer, the Company wrote off
$310 during 1996.
For the year ended December 31, 1995, the Company had five customers
representing 19%, 18%, 16%, 13% and 11% of net revenues, respectively. For the
year ended December 31, 1996, the Company had two customers which accounted
for 35% and 14% of net revenues, respectively, and one customer which
accounted for approximately 59% of accounts receivable at December 31, 1996.
(7)SUBSEQUENT EVENT
In July 1996, the Company, its shareholders, and certain affiliated
companies entered into an agreement with Crown Castle International Corp.
("CCIC") which provided CCIC with an option to acquire various ownership
interests in the Company. On May 12, 1997, CCIC acquired all of the Company's
common stock.
F-38
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-39
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 FROM APRIL 1,
FROM APRIL 1, FEBRUARY 28, 1997
YEAR ENDED 1996 1997 TO
MARCH 31, TO FEBRUARY 27, TO MARCH 31, DECEMBER 31,
NOTE 1996 1997 1997 1997
------ -------------- --------------- ------------- --------------
(Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000
Turnover................ 3 70,367 70,614 6,433 56,752
Changes in stocks and
work in progress....... (635) (554) 340 747
Own work capitalised.... 4,653 3,249 170 1,127
Raw materials and
consumables............ 14 (1,155) (446) (2,410)
Other external charges.. (34,750) (26,191) (1,668) (13,811)
Staff costs............. 4 (17,197) (16,131) (1,421) (14,345)
Depreciation and other
amounts written off
tangible and intangible
assets................. 5 (12,835) (13,038) (1,819) (16,854)
Other operating
charges................ (1,832) (2,792) (344) (2,430)
---------- ---------- --------- ----------
(62,582) (56,612) (5,188) (47,976)
Operating profit........ 7,785 14,002 1,245 8,776
Other interest
receivable and similar
income................. -- -- 49 288
Interest payable and
similar charges........ 7 -- -- (969) (12,419)
---------- ---------- --------- ----------
Profit/(loss) on
ordinary activities
before and after
taxation............... 3-6, 8 7,785 14,002 325 (3,355)
Additional finance cost
of non-equity shares... -- -- (318) (2,862)
---------- ---------- --------- ----------
Retained profit/(loss)
for the period......... 7,785 14,002 7 (6,217)
========== ========== ========= ==========
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-40
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,
1996 1997 1997
NOTE ---------------- ------------ ---------------
(Pounds)000 (Pounds)000 (Pounds)000
FIXED ASSETS
Intangible............... 9 -- 46,573 46,056
Tangible................. 10 202,592 206,162 206,134
------- -------- --------
202,592 252,735 252,190
CURRENT ASSETS
Stocks................... 11 1,750 807 1,340
Debtors.................. 12 4,714 10,344 13,230
Cash at bank and in
hand.................... -- 9,688 8,152
------- -------- --------
6,464 20,839 22,722
Creditors: amounts falling
due within one year....... 13 (6,627) (14,820) (29,139)
------- -------- --------
Net current
assets/(liabilities)...... (163) 6,019 (6,417)
------- -------- --------
Total assets less current
liabilities............... 202,429 258,754 245,773
Creditors: amounts falling
due after more than one
year...................... 14 -- (154,358) (143,748)
Provisions for liabilities
and charges............... 15 -- (1,723) (2,157)
------- -------- --------
Net assets................. 202,429 102,673 99,868
======= ======== ========
CAPITAL AND RESERVES
Corporate funding........ 202,429 -- --
Called up share capital.. 16 -- 102,348 102,898
Profit and loss account.. 17 -- 325 (3,030)
------- -------- --------
202,429 102,673 99,868
======= -------- --------
SHAREHOLDERS'
FUNDS/(DEFICIT)
Equity................... 109 (6,107)
Non-equity............... 102,564 105,975
-------- --------
102,673 99,868
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-41
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
PERIOD FROM FEBRUARY 28, APRIL 1,
YEAR ENDED APRIL 1, 1996 1997 1997
MARCH 31, TO FEBRUARY 27, TO MARCH 31, TO DECEMBER 31,
1996 1997 1997 1997
NOTE -------------- ---------------- ------------ ---------------
(Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000
Cash inflow from
operating activities... 21 24,311 26,427 5,756 27,983
Returns on investment
and servicing of
finance................ 22 -- -- (885) (2,428)
Capital expenditure and
financial investments.. 22 (17,190) (20,092) (748) (14,361)
Acquisitions and
disposals.............. 22 -- -- (251,141) (307)
---------- ---------- -------- --------
Cash inflow/(outflow)... 7,121 6,335 (247,018) 10,887
Financing............... 22
Net (decrease) in
corporate funding...... (7,121) (6,335) -- --
Issuance of shares...... -- -- 102,348 550
Increase/(decrease) in
debt................... -- -- 154,358 (12,973)
---------- ---------- -------- -------
(7,121) (6,335) 256,706 (12,423)
---------- ---------- -------- -------
Increase/(decrease) in
cash................... -- -- 9,688 (1,536)
========== ========== ======== =======
Reconciliation of net
cash flow to movement
in net debt............ 23
Increase/(decrease) in
cash in the period..... -- -- 9,688 (1,536)
Cash (inflow)/outflow
from (increase)/decrease in
debt................... -- -- (154,358) 12,973
---------- ---------- -------- -------
Change in net debt
resulting from cash
flow................... -- -- (144,670) 11,437
New finance leases...... -- -- -- (711)
Amortisation of bank
loan issue costs....... -- -- -- (2,087)
Amortisation of
Guaranteed Bonds....... -- -- -- (55)
---------- ---------- --------- -------
Movement in net debt in
the period............. -- -- (144,670) 8,584
Net debt at beginning of
the period............. -- -- -- (144,670)
---------- ---------- --------- -------
Net debt at end of the
period................. -- -- (144,670) (136,086)
========== ========== ========== =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-42
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
----------------------------- ----------------------------
PERIOD FROM
PERIOD FROM FEBRUARY 28, PERIOD FROM
YEAR ENDED APRIL 1, 1996 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
Profit/(loss) for the
period................. 7,785 14,002 325 (3,355)
Net (decrease) in
corporate funding...... (7,121) (6,335) -- --
New share capital
subscribed............. -- -- 102,348 550
---------- ----------- ---------- ---------
Net additions/(deductions)
to corporate funding/
shareholders' funds.... 664 7,667 102,673 (2,805)
Opening corporate
funding/shareholders'
funds.................. 201,765 202,429 -- 102,673
---------- ----------- --------- ---------
Closing corporate
funding/shareholders'
funds.................. 202,429 210,096 102,673 99,868
========== =========== ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-43
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
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.
F-44
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND
THE BBC HOME SERVICE TRANSMISSION BUSINESS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 subsidiary 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
improvements........................... 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
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.
F-45
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND
THE BBC HOME SERVICE TRANSMISSION BUSINESS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
F-46
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND
THE BBC HOME SERVICE TRANSMISSION BUSINESS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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-47
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 ma-
chinery--rentals pay-
able 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-48
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 over-
drafts................. -- -- 934 3,315
On all other loans...... -- -- -- 6,934
Finance charges payable
in respect of finance
leases and hire pur-
chase 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 loss 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-49
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-50
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-51
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,
1996 1997 1997
------------ ------------ ---------------
(Pounds)000 (Pounds)000 (Pounds)000
Work in progress (see note 13).... -- -- 274
Spares and manufacturing stocks... 1,750 807 1,066
----- --- -----
1,750 807 1,340
===== === =====
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-52
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,
1997 1997
------------ ---------------
(Pounds)000 (Pounds)000
Guaranteed Bonds.............................. -- 120,582
Bank loans and overdrafts..................... 154,358 22,945
Obligations under finance leases and hire pur-
chase contracts.............................. -- 221
------- -------
154,358 143,748
======= =======
Debts can be analysed as falling due:
in one year or less, or on demand............. -- --
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.
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.
F-53
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND
THE BBC HOME SERVICE TRANSMISSION BUSINESS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 March 31, 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-54
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 MARCH 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-55
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 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-56
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-57
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 represents 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-58
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)
======= ======= ======== ========
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)
======== ====== ====== ========
F-59
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND
THE BBC HOME SERVICE TRANSMISSION BUSINESS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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.
F-60
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND
THE BBC HOME SERVICE TRANSMISSION BUSINESS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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"), 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.
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.
F-61
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND
THF BBC HOME SERVICE TRANSMISSION BUSINESS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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. No options have been granted to date under the All Employee
Share Option Scheme.
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 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. Management is
not able to determine the amount of any compensation charge for the year ended
December 31, 1998 at this time.
F-62
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND
THE BBC HOME SERVICE TRANSMISSION BUSINESS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
(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.
F-63
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND
THF BBC HOME SERVICE TRANSMISSION BUSINESS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Summary combined statements of cash flows for Castle Transmission prepared
in accordance with US GAAP are set out below:
HOME SERVICE CASTLE TRANSMISSION
--------------------------- ----------------------------
PERIOD FROM
YEAR PERIOD FROM FEBRUARY 28, PERIOD FROM
ENDED APRIL 1, 1996 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
Net cash provided by
operating activities... 24,311 28,146 4,871 25,555
Net cash used by
investing activities... (17,190) (21,811) (52,889) (14,668)
Net cash (used)/provided
by financing
activities............. (7,121) (6,335) 57,706 (12,423)
------- ------- ------- -------
Net increase/(decrease)
in cash and cash
equivalents............ -- -- 9,688 (1,536)
Cash and cash
equivalents at
beginning of period.... -- -- -- 9,688
------- ------- ------- -------
Cash and cash
equivalents at end of
period................. -- -- 9,688 8,152
======= ======= ======= =======
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
--------------------------- ---------------------------------
YEAR PERIOD FROM PERIOD FROM PERIOD FROM
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
Net profit/(loss) as
reported in the profit
and loss accounts...... 7,785 14,002 325 (3,355)
US GAAP adjustments:
Depreciation
adjustment on
tangible fixed
assets............... 3,707 3,993 -- --
Pensions.............. -- -- -- 65
Capitalised interest.. -- -- 78 801
------ ------ ---- ------
Net income/(loss) under
US GAAP................ 11,492 17,995 403 (2,489)
Additional finance cost
of non-equity shares... -- -- (318) (2,862)
------ ------ ---- ------
Net income/(loss)
attributable to
ordinary shareholders
under US GAAP.......... 11,492 17,995 85 (5,351)
====== ====== ==== ======
F-64
CASTLE TRANSMISSION SERVICES (HOLDINGS) LTD AND SUBSIDIARIES AND
THE BBC HOME SERVICE TRANSMISSION BUSINESS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
HOME SERVICE CASTLE TRANSMISSION
------------ ---------------------------
AT MARCH 31, AT DECEMBER 31,
------------------------ ---------------
1996 1997 1997
------------ ----------- ---------------
(Pounds)000 (Pounds)000 (Pounds)000
Corporate funding/shareholders'
funds as reported in the balance
sheets............................ 202,429 102,673 99,868
US GAAP adjustments:
Depreciation adjustment on
tangible fixed assets........... (35,945) -- --
Pensions......................... -- -- 65
Capitalised interest............. -- 78 879
Redeemable preference shares
(including additional finance
cost of non-equity shares)...... -- (102,564) (105,975)
------- -------- --------
Corporate funding/shareholders'
funds/(deficit) under US GAAP..... 166,484 187 (5,163)
======= ======== ========
F-65
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE INI-
TIAL PURCHASERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE NEW NOTES OFFERED
HEREBY NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY OF THE NEW NOTES TO ANY PERSON IN ANY JURISDICTION IN WHICH IT
WOULD BE UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEI-
THER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN
THE FACTS SET FORTH IN THIS PROSPECTUS OR INCORPORATED BY REFERENCE HEREIN OR
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
-----------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary....................................................... 1
Risk Factors............................................................. 19
Use of Proceeds.......................................................... 28
Capitalization........................................................... 29
Unaudited Pro Forma Condensed Consolidated Statement of Operations....... 30
Selected Financial and Other Data of CCIC................................ 33
Selected Financial and Other Data of Crown............................... 35
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 37
The Exchange Offer....................................................... 49
Industry Background...................................................... 56
Business................................................................. 62
Management............................................................... 78
Certain Relationships and Related Transactions........................... 84
Description of Capital Stock............................................. 88
Ownership of Capital Stock............................................... 95
Description of the Senior Credit Facility................................ 97
Description of the Notes................................................. 99
Certain United States Federal Income Tax Considerations.................. 127
Plan of Distribution..................................................... 128
Legal Matters............................................................ 128
Experts.................................................................. 128
Index to Financial Statements............................................ F-1
-----------------
UNTIL JULY 15, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
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$251,000,000
CROWN CASTLE INTERNATIONAL CORP.
OFFER TO EXCHANGE ITS 10 5/8% SENIOR DISCOUNT NOTES DUE 2007, WHICH HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, FOR UP TO $251,000,000 PRINCIPAL AMOUNT AT MATURITY OF ITS
OUTSTANDING
10 5/8% SENIOR DISCOUNT NOTES DUE 2007
-----------------
PROSPECTUS
-----------------
APRIL 16, 1998
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