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Outfront Median i n e t e e n 98 C r o w n C a s t l e I n t e r n a t i o n a l A n n u a l R e p o r t C r o w n C a s t l e I n t e r n a t i o n a l c o r p o r a t e p r o f i l e Crown Ca s t l e In t e r n at i o n a l Cor p. develops, deploys, owns and operates technologically advanced shared wireless infrastructure including an extensive network of towers and rooftops as well as analog and digital audio and television broadcast transmission systems. We offer near-universal broadcast coverage in the UK and significant wireless communication cover- age to more than 95% of the UK population and in 18 of the top 40 cellular markets (including 15 of the top 24 markets east of the Mississippi River) in the United States. We also have tower clusters located in an additional eight of the top 50 markets (by population) in the United States. Crown Castle is headquartered in Houston, Texas. T e c h n o l o g y l e a d e r s h i p Crown Castle aggregates 77 years of experience in designing and operating broadcast transmission net- works and 20 years of experience in the ownership, leasing, design and deployment of wireless commu- nications sites. We are recognized as the technology leader in our sector and are noted for our many corporate achievements: > First tower company to offer a complete turnkey tower infrastructure service program. > First tower company to establish an international presence. > First major privatization of a national broadcast transmission network (with the British Broadcasting Corporation). > First rollout of a digital audio broadcast system. > First rollout of a commercial digitally trans- mitted terrestrial television service. > First major wireless carrier deal in our industry (with Bell Atlantic Mobile). > First major wireless carrier deal outside the United States (with One2One). > First major PCS carrier deal in our industry (with Powertel). F i n a n c i a l h i g h l i g h t s Years Ended December 31, 1996 1997 1998 (In thousands of dollars) Net revenues: Site rental and broadcast transmission . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Network services and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,615 592 $ 6,207 EBITDA: Site rental and broadcast transmission . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,555 Network services and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,650) $ 1,905 $ $ $ $ 11,010 20,395 $ 75,028 38,050 31,405 $ 113,078 7,682 (4,182) 3,500 $ $ 44,661 (7,597) 37,064 Total sites owned and managed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214 453 1,608 Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Redeemable preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 890 41,226 22,052 15,550 Total stockholders’ equity (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (210) $ 18,035 $ 138,759 371,391 156,293 160,749 41,792 1,523,230 429,710 201,063 737,562 A c q u i s i t i o n H i s t o r y [ n u m b e r o f s i t e s ] M a r k e t C a p i t a l i z a t i o n [ t h o u s a n d s o f d o l l a r s ] N e t W o r t h H i s t o r y [ t h o u s a n d s o f d o l l a r s ] P r o F o r m a E B I T D A [ t h o u s a n d s o f d o l l a r s ] 0 7 2 , 6 2 8 7 , 4 7 6 , 1 $ 7 2 1 4 7 1 3 5 4 4 1 2 5 9 / 1 5 9 / 2 1 6 9 / 2 1 7 9 / 2 1 8 9 / 2 1 8 0 6 , 1 8 9 / 2 1 a m r o F o r P 3 6 2 , 4 0 4 $ 2 5 3 , 0 1 $ 1 5 7 , 1 3 $ 5 9 / 2 1 6 9 / 2 1 7 9 / 2 1 8 9 / 8 8 9 / 2 1 0 4 5 $ 5 9 / 1 8 7 4 , 0 5 0 , 3 $ 0 4 5 $ 5 9 / 1 1 5 2 6 , 8 3 9 $ 2 0 2 , 5 8 $ 1 4 5 , 2 0 2 $ 4 9 7 , 5 $ 0 4 3 , 5 1 $ 5 9 / 2 1 6 9 / 2 1 7 9 / 2 1 8 9 / 2 1 0 5 1 , 3 1 $ 9 9 8 , 1 $ 7 2 6 , 2 $ 5 9 / 2 1 6 9 / 2 1 7 9 / 2 1 8 9 2 1 / 0 0 . 0 $ 5 9 / 1 T o o u r f e l l o w s h a r e h o l d e r s Although this is our first year reporting to you as a public company, Crown Castle International Corp. aggregates Through these actions, we have positioned Crown Castle as the partner of choice globally for leaders in the broadcast and more than 77 years of experience at broadcast transmission and wireless telecommunications industries that are seeking to out- network management and 20 years of experience in the owner- source the operation of their transmission towers and networks. ship, leasing and management of wireless communications sites. We believe that our ability to raise approximately $150 Because of this longstanding expertise at offering the broadcast million in an initial public offering and then to raise another and wireless telecommunications industries comprehensive, end- $200 million through the issuance of preferred stock shortly to-end transmission services, we have been able to turn our debut thereafter is Wall Street’s tacit recognition of Crown Castle’s year as a public company into one of phenomenal success. premier positioning within its industry. Continuing a long string of technological innovations, we launched the world’s first commercial digital audio broadcast sys- 1 9 9 8 E B I T D A g r o w s b y 9 5 9 % tem and the world’s first commercial digital terrestrial television The enthusiasm I am expressing to you throughout this (DTT) system. As part of our strategy to grow through acquisi- letter is based on rock-solid financial performance. We ended tion and innovative partnerships, we announced a 1998 with revenue growth of 260% and a pro forma revenue communications industry first — the formation of a joint run rate of $210 million. This reflects both revenue growth venture to acquire the wireless communications towers of of our existing operations as well as additional revenue Bell Atlantic Mobile. We also increased our ownership interest in through acquisition. our United Kingdom (UK) operations to 80% through a share Earnings before interest, taxes, depreciation and amortiza- exchange agreement with Castle Transmission Services tion (EBITDA) increased to a pro forma run rate of $85 million, (Holdings) Ltd shareholders. Additionally, we acquired showing that we have been able to manage our revenue growth Millennium Communications Limited, increasing our site port- effectively for profitability. Notably, EBITDA grew at a faster folio and strengthening our already formidable site acquisition pace than revenues. We believe that healthy EBITDA growth is an important sign of Crown Castle’s financial strength in 1998. and development expertise in the UK. Progressing toward our objective of owning the best portfolio of broadcast and wireless communications towers and rooftops, Crown Castle ended 1998 owning approximately 1,600 tightly clustered towers in major metropolitan areas throughout the United States and the UK. 2 T e d B . M i l l e r , J r . C h i e f E x e c u t i v e O f f i c e r o f C r o w n C a s t l e I n t e r n a t i o n a l C o r p . G r o w t h t h r o u g h a c q u i s i t i o n i n a c o n s o l i d a t i n g i n d u s t r y approximately1,850 wireless communications towers via a taxable sale through a master sublease. We also agreed to enter As their industries become increasingly competitive and into a five-year, 500-tower build-to-suit contract. global, broadcasters and wireless communications providers One2One. Our UK operating subsidiary entered into an are seeking to focus resources on their customers and are look- agreement to manage, operate, lease-up and ultimately own 821 ing to outsource the design, development, ownership and communications towers. We also will manage and own, when operation of their transmission infrastructure to third parties. completed, up to 500 build-to-suit towers planned over the next With a proven track record of providing end-to-end services, three years. This carrier transaction is the first of its kind in the UK including network design and site selection, site acquisition, and has doubled the size of our UK tower portfolio. development and construction, antenna installation, and net- Powertel. We entered into a definitive agreement to acquire work and site ownership and operation, Crown Castle is well 650 communications sites from Powertel, Inc. Powertel has positioned to meet this need. Our objective is to be the lead- extensive coverage in the Southeast as well as more than 3,000 ing consolidator of wireless network infrastructure and the miles of highway coverage. chosen partner of premier broadcasters and wireless service These acquisitions add a number of strategically important providers on a global basis. markets to our network of dense tower clusters, giving us signifi- Throughout 1998 and in the quarter immediately follow- cant wireless communications coverage in 18 of the top 40 cellu- ing the close of the fiscal year, Crown Castle entered into lar markets in the United States (including 15 of the top 24 several significant transactions with industry leaders. In com- markets east of the Mississippi River) and to over 95%of the pop- petitive bid situations, where expertise in ensuring network ulation in the UK. On a pro forma basis reflecting these agree- integrity was and is the differentiating factor, these world-class ments, Crown Castle’s communications portfolio now exceeds carriers chose Crown Castle as their transmission infrastruc- 7,000 total sites, including 1999’s forecasted build-to-suits. ture partner of choice: The British Broadcasting Corporation (BBC), Bell Atlantic Bell Atlantic Mobile. We formed a joint venture to own and manage 1,458 of Bell Atlantic Mobile’s towers. Additionally, we Mobile, BellSouth Mobility, Powertel and One2One have shown their confidence in Crown Castle by voting with their will construct 700 build-to-suit towers over the next five years. entire networks. In the cases of Bell Atlantic Mobile and BellSouth Mobility. Crown Castle signed a preliminary BellSouth Mobility, they also have chosen to take a significant agreement with BellSouth Mobility to control and operate equity interest in our Company. 3 C r o w n C a s t l e is the par tner of choice for leaders in the broadcast and wireless telecommunications industr y that are seeking to outsource the ownership and operation of their transmission networks. I n v e s t i n g i n p e o p l e a n d o p e r a t i o n s t o s u p p o r t r a p i d g r o w t h 1 9 9 9 i s s h a p i n g u p t o b e a n e q u a l l y i m p r e s s i v e y e a r To support this growth, we significantly strengthened our Today, Crown Castle is a leading domestic and international worldwide management team, especially in the areas of infor- provider of wireless communications and broadcast transmis- mation technology, financial and legal controls, sales and mar- sion infrastructure and related services. We own, operate and keting, and operations. Notably, we appointed a new president manage towers, rooftop sites and broadcast transmission net- for our United States operating company who has longstand- works and provide a full range of complementary services. ing experience in the wireless industry. We launched a series of Virtually no other company in our industry comes close to major information technology initiatives to scale our infra- matching our levels of service and expertise. structure to support expected future growth, and we estab- lished development teams in targeted countries to set the stage for our continued global expansion. Recognizing that a critical factor to our ongoing success will be our ability to assimilate significant new tower portfolios quickly and accurately, we implemented a new accelerated integration process. This procedure was the linchpin to our successful integration of more than 1,400 Bell Atlantic Mobile towers within 90 days of the start of the process, and it will be a model for future integrations. Since year-end, we decentralized our delivery of sales, oper- ations, maintenance and project/construction management in the United States. We created new regions that are aligned with We enter 1999 with these key objectives: > To maximize tower capacity utilization through significantly expanded, customer-focused sales and marketing programs. > To acquire additional tower portfolios globally, working in partnership with wireless communications carriers to assume ownership of their existing towers. > To leverage our transmission experience in order to acquire existing national broadcast transmission networks. > To maintain technology leadership with expertise in the design and deployment of existing and emerging technologies. how our key customers are organized so that we can establish close local relationships at the point where decisions are made. This structure is similar to the successful team-based approach Worldwide, we see several significant trends that make this a time of great opportunity for Crown Castle. Globally, carri- ers are becoming more receptive to the US/UK model of out- used in our UK operations. sourcing their tower networks to competent partners. In addition, community opposition to new transmission tower 4 W i t h t h e a n t i c i p a t e d c o m p l e t i o n of our announced carrier agreements, and the construction of our forecasted build-to-suits, we will be the largest independent owner of tower and site infrastructure in the world as measured by revenue, EBITDA, and number of towers and rooftops owned, operated and managed. construction, long present in the United States and UK, has wireless Internet access). These all represent significant new begun to emerge globally. This will foster a global regulatory sources of demand for our tower and rooftop network. The and zoning environment that encourages co-location, a par- auction of third-generation licenses is expected to begin in the ticular business strength of Crown Castle. UK in early 2000 and follow in Europe shortly thereafter. In the broadcast area, we are pursuing opportunities in sev- Some industry experts suggest that this represents an oppor- eral countries where governments with national broadcast tunity that will equal or exceed the entire wireless voice mar- transmission networks, as well as commercial broadcasters, are ket. We are well positioned to participate as both an exploring the outsourcing or privatization of their networks. infrastructure provider and as a designer, owner and operator Along with the global introduction of digital audio and digital of third-generation networks. terrestrial television broadcast networks, including high-defi- nition television (HDTV) in the United States, these represent I n s u m m a r y significant opportunities for Crown Castle to replicate its UK We have come a long way since 1995 when we acquired our success in other countries. first 127 towers. We believe our Company and this industry In wireless telephony, current trends present tremendous still are in their infancy, with no finish line in sight. We thank opportunities for your Company. The introduction of “one- you for choosing Crown Castle as your partner for participat- rate” all-inclusive and pre-paid pricing plans and continued ing in the future potential of this industry. We also would like strong subscriber growth have caused a tremendous increase in to thank our many employees, whose dedication to growth network usage and resulted in capacity roadblocks on carriers’ and excellence has made this year such a success. networks. This creates demand for our towers and rooftops as carriers race to increase capacity and quality of coverage. I look forward to reporting to you on our future progress. The continued deployment and expansion of an increasing number of wireless systems each year also represent a strong S i n c e r e l y , opportunity for us to expand our global footprint. We’re particularly excited about the deployment of new technologies, including fixed wireless, wireless local loop, two-way paging and third-generation wireless mobile multi- media (which combines voice, messaging, video, data and T e d B . M i l l e r , J r . C h i e f E x e c u t i v e O f f i c e r 5 6 R a p i d g r o w t h i n w i r e l e s s s e r v i c e s h a s i n c r e a s e d t h e n e e d f o r l e s s - o b t r u s i v e t o w e r s o l u t i o n s . The Unipole, f r o m o u r T e l e S t r u c t u r e s s u b s i d i a r y , a t t h e h i s t o r i c 1 8 5 6 P o y d r u s H o m e i n N e w O r l e a n s r e p r e - s e n t s t h e f u t u r e o f a n t e n n a d e s i g n , d e l i v e r i n g h i g h - q u a l i t y c o v e r a g e w i t h m i n i m a l v i s u a l i m p a c t . 7 C o r p o r a t e o v e r v i e w T h e N o k i a 9 1 1 0 , an innovative wireless device with early third-generation features. C r ow n C a s t l e ow n s , operates and manages wireless communications and broadcast transmission infrastructure However, while the need for communications towers has grown dramatically, municipalities that view such towers as an and networks. We are recognized as an industry leader because eyesore have tried to slow their proliferation. we provide high-quality, end-to-end network design, develop- ment and operational services. P r o v i d i n g s o l u t i o n s The industries that we serve, wireless communications and This is where Crown Castle comes in. We have been a pioneer broadcasting, have been experiencing explosive growth and of co-location, where we place multiple forms of communica- technological change. As competition in the wireless telecom- tions transmission on the same tower. This significantly munications market has increased, the price to consumers for reduces the need for individual towers and increases the rev- wireless services has been dropping while demand for higher- enue generated by each tower. Additionally, we have designed quality, uninterrupted coverage has been growing. This has led a series of virtually invisible or “hidden in plain sight” towers to increased need for communications towers throughout disguised as a functional lamppost, clock tower, flagpole or major markets and along major highway corridors. Because building attachment. carriers have needed to commit precious capital to the acqui- By clustering our towers densely throughout major metro- sition and retention of customers and the development of new politan areas and on major highway corridors, we have been able products, they have sought to outsource the design, develop- to provide unparalleled signal coverage, ensuring that broadcasts ment and management of their communications towers. are uninterrupted and that wireless phone calls stay connected. At the same time, the television broadcasting industry has been experiencing significant change. Digital terrestrial televi- T h e C r o w n C a s t l e a d v a n t a g e sion (DTT) is to be deployed throughout the United States, Crown Castle represents an effective solution to the dilemma the UK and countries in Europe and Asia over the next five faced by local officials who want to limit tower proliferation years. To accommodate the rollout of DTT, broadcasters must while also being responsive to communications industries that enhance and expand their existing transmission networks sig- nificantly. As a result, broadcasters also have sought to out- need more towers. We are committed to co-location and to the transfer of source the design, development and ownership of their ownership of proprietary one-carrier tower networks to a com- communications infrastructure to competent managers for pany dedicated to serving all wireless providers in the commu- turnkey network operations. nity on one shared network. While other companies in the 8 T h i r d - g e n e r a t i o n wireless mobile multimedia will enable mobile users to access the Internet, make calls, check e-mail, transmit and receive data, and view video over a high - speed wireless connection. Third-generation networks may represent an opportunity larger than the current wireless voice market. industry are trying to do this, they typically have towers that We’re well on our way to achieving this goal. Including the are scattered throughout the United States and are unable to completed One2One and Bell Atlantic Mobile transactions offer the complete signal coverage throughout major markets and the projected completion of transactions with BellSouth that Crown Castle can provide. Mobility and Powertel during 1999, Crown Castle will be the However, Crown Castle is much more than a tower com- largest independent owner of tower and site infrastructure in pany providing co-location opportunities. We can manage fully the world, as measured by revenue and EBITDA and by clus- the end-to-end transmission of a wireless provider’s signal, ters of towers and rooftops owned, operated and managed. supplying the type of technical management and consulting Since our first acquisition of 127 towers in 1995, we have services that others cannot. grown our portfolio of high-quality, densely clustered towers In the UK, we manage the transmission of the BBC’s and sites by more than 1,100%. analog and digital audio and television broadcast signals and The core of this portfolio consists of tower clusters own the transmission network. We also provide end-to-end designed for 850 MHz coverage that enabled the initial cellu- digital terrestrial television transmission services for the BBC lar carriers to offer market coverage in major population and for commercial broadcaster OnDigital. We have a 67% centers. This type of tower cluster also is positioned ideally to market share of digital terrestrial television transmission serve as the core of a PCS or two-way paging network or for services in the UK. S t r a t e g i c m i s s i o n the deployment of new technology such as wireless data. We supplement this core with the construction of selective build- to-suit towers and the acquisition of PCS and other tower Globally, our mission is to develop, deploy, own and operate portfolios that merge nicely with the 850 MHz footprint technologically advanced wireless infrastructure. For Crown without significant overlap. Castle, this means owning, managing and operating the right In many of the markets we serve, it would be impossible infrastructure around the world – infrastructure that covers for a carrier to build a new tower network today that offered significant population bases. It also means building world-class sales and marketing capabilities to lease the infrastructure and comparable coverage, given the carrier’s need to access the market quickly as well as the current regulatory and zoning continuing to lead the industry in our ability to design, devel- environment. This is a significant barrier to entry that protects op and deploy wireless networks for existing and emerging and maintains Crown Castle’s position as a leader in the com- wireless technologies. munications marketplace. 9 A h i s t o r y o f C r o w n C a s t l e T h e N e t w o r k O p e r a t i o n s C e n t e r monitors our tower network 24 hours a day. Crown Castle was founded with a simple mission — to create the world’s largest antenna site services company in When we acquired Crown Communications in August 1997, we added extensive construction and site acquisition alliance with wireless communications providers. We acquired expertise, a dense tower cluster covering the Pittsburgh our first tower portfolio in the Southwestern United States in marketplace, and towers in western Pennsylvania and the 1995. We quickly learned that the business is not just about Northeastern United States. With its dense tower cluster, Crown numbers of towers. To succeed, we also must deliver valuable Communications was able to help a number of carriers to markets to our broadcast and wireless communications cus- deploy in the Pittsburgh market quickly. Rapid deployment has tomers with our towers, along with network services deployed high value to a carrier in its race to acquire customers. on our towers that add value for our customers. Recognizing the value to our customers of our ability to deliver With the acquisition of the BBC’s Home Service Broadcast full market coverage of desirable populations, we have followed Transmission Division in February 1997, Crown Castle the strategy of acquiring and building dense tower clusters in became the owner and operator of both the towers and the important markets and corridors ever since. Our acquisitions in transmission network that broadcast signals throughout the 1998 and 1999 show the success of this focused strategy. UK. We also recognized the hidden value of a tower network We believe that all towers are not created equal and that our that can deliver significant coverage of important markets wireless carrier and broadcast customers, as well as emerging when it comes to rolling out new services. By owning the new technology players, value partners who quickly can deliv- transmission network as well as the tower system and by offer- er coverage and end-to-end services in important markets. As ing end-to-end transmission management, we can offer signif- you examine our recent portfolio acquisitions (see maps on icantly more value to our customers than our competitors can. pages 18-19), you will see the impact we can deliver for our cus- We demonstrated this by winning digital terrestrial televi- tomers in the United States and UK with our tight tower clus- sion contracts in which we are responsible for designing, ters. It’s an impact that reaches 99% of the population in the building, owning and operating the transmission network that UK and offers significant coverage in 18 of the top 40 United carries the signal and the majority of the towers on which it broadcasts. This new service captured 67% of the market for States cellular markets (including 15 of the top 24 markets east of the Mississippi River). It’s an impact measured by quality of digital terrestrial television transmission networks in the UK. We’re much more than just a tower company—we’re a wireless technology company. coverage and speed of deployment of new technologies. And it’s an impact that we believe would be impossible to recreate today in the current zoning and regulatory environment. 10 U n i t e d S t a t e s o p e r a t i o n s In the United States, significant reductions in pricing and all-inclusive “one-rate” plans have made wireless services New York, we are able to offer an extensive inventory of state- owned structures and rooftops, rights-of-way and land as cost-competitive with traditional wireline services for long dis- potential site locations. In areas where a rooftop location is tance calls for the first time, causing users to shift to wireless called for, Spectrum Site Management, Crown Castle’s communications. This shift, along with significant subscriber rooftop, building top and building riser management compa- growth, is causing a rapid increase in demand for wireless ny, will locate or acquire an appropriate site for the customer. communications services. We are investing more than $1.5 For locations where the visual environment requires spe- billion in the United States to expand our wireless infrastruc- cial consideration, Crown Castle’s TeleStructures subsidiary ture in order to help our customers meet this demand. offers “hidden in plain sight” tower solutions where multi-ten- We offer full end-to-end service to our customers, whether ant antenna sites are camouflaged in clock towers, flagpoles, they need tower locations or building rooftops. We also pro- carriage light monopoles and other visually attractive struc- vide the expertise to perform turnkey network design where tures, including building attachments. required. Typically, however, our customers design their own Crown Communications oversees the civil, electrical and network and present us with a series of search rings – geo- mechanical engineering of the site, the construction of the graphic areas where they desire an antenna site. tower, and the installation of the customer’s antenna. Crown We first examine our existing site portfolio, as well as others, Communications has its own construction capabilities and to identify potential co-location opportunities that will meet manages qualified in-market contractors to deliver a cost-effec- the customer’s needs. For areas where we cannot offer an exist- tive tower solution, using our proprietary Project Tracking ing site, TEA Group, our site acquisition and development System to ensure that the project comes in on time and on bud- company, identifies potential raw land that can be acquired or get. The sites then are linked to our Network Operations Center, leased for a tower site. Where the location will support a robust where the towers are monitored around the clock for proper multi-tenant tower, we will build the tower for the customer on operation and compliance with FAA tower lighting regulations. a build-to-suit basis, with the customer as an anchor tenant. TEA Group acquires the site and works with local government After careful evaluation of Crown Castle and our com- petitors, carriers choose us as the operator of choice because agencies to secure zoning approval and permits. we are able to operate their critical tower assets in a high-qual- We often are able to offer sites where others cannot. For ity, reliable way. example, through exclusive arrangements with the State of 11 12 H e a d q u a r t e r s o f C a s t l e T r a n s m i s s i o n I n t e r n a t i o n a l L t d ( C T I ) , o u r U K o p e r a t i o n s , i n W a r w i c k , E n g l a n d . C T I l a u n c h e d t h e w o r l d ’ s f i r s t c o m m e r c i a l d i g i t a l a u d i o b r o a d c a s t a n d d i g i t a l t e r r e s t r i a l t e l e v i s i o n n e t w o r k s i n 1 9 9 8 . V i e w e r s c a n r e c e i v e t h e s e h i g h - q u a l i t y d i g i t a l s i g n a l s o v e r t h e i r existing a n t e n n a s . 13 G l o b a l s c o p e T h e T e c h n i c a l O p e r at i o n s C e n t e r continuously monitors tower and transmitter operations to ensure uninterr upted universal broadcast coverage in the UK. 1999 w i l l b e a y e a r in which major transmission and carrier portfolios will come onto the global market. Crown announced our second major United States carrier portfolio transaction with BellSouth Mobility, effectively adding 1,850 Castle will be an active participant in the bidding process when towers in major markets throughout the Southeastern United we recognize a strategic fit at an attractive price. States. In addition, we announced our agreement to acquire In expanding our global portfolio, proprietary evaluation Powertel’s PCS portfolio of 650 towers, which added additional techniques enable us to assess accurately the underlying value Southeastern markets. We also closed an agreement with in potential acquisitions. We drive test the markets to identify One2One to acquire their portfolio of 821 towers in the UK, gaps in coverage for deployed carriers and assess demand for adding significant urban coverage as well as filling in our in-fill and dead zone coverage on their existing networks. We national UK portfolio. carefully examine licensed wireless operators’ deployment We continue to pursue additional opportunities globally as plans to assess potential for new system build-out. This enables governments begin to follow the UK’s example of privatizing us to establish sound portfolio valuations based on realistic their national broadcast networks. Our demonstrated exper- lease-up targets using existing licensed technologies. tise in this area makes Crown Castle an ideal potential partner Crown Castle started building its infrastructure portfolio for governments seeking to privatize a national asset. We can in 1995 with the acquisition of 127 towers in the United ensure such governments that the critical communications States, followed shortly in 1996 by our first offshore acquisi- functions that are so important to their citizens will continue tion in Puerto Rico. In 1997, we expanded to the UK, with the to be managed professionally. acquisition of the Home Service Broadcast Transmission We also work closely with our existing customers and with Division of the BBC, and added to our United States portfolio infrastructure vendors to pursue global opportunities. Clients with the acquisition of Crown Communications. In 1998, we like Bell Atlantic and BellSouth also have significant internation- significantly expanded our tower footprints in the United al interests. Crown Castle do Brasil is working closely in Brazil States and UK through additional acquisitions and our joint with a major equipment vendor in order to provide site acquisi- venture with Bell Atlantic Mobile. We also established devel- opment teams in Brazil, Mexico and Australia to seek out tion and project management support on a system build-out. Crown Castle additionally is pursuing opportunities with additional expansion opportunities. international wireless providers that are considering outsourcing So far in 1999, we have agreed to add three significant or expanding their networks in countries that have a high poten- portfolios to the Crown Castle network. In March, we tial for successful co-location portfolio development. 14 U n i t e d K i n g d o m o p e r a t i o n s In February 1997, Crown Castle became the world’s first global independent owner and provider of broadcast and Company as a major provider of build-to-suit capabilities in the UK market. telecommunications infrastructure and services by acquiring Recently, we closed an unprecedented agreement with the the Home Service Broadcast Transmission Division of the BBC. UK wireless carrier One2One for the management, operation, This acquisition gave us access to nearly 1,300 terrestrial broad- lease-up and ultimate ownership of 821 existing communica- casting sites, the majority of which we own and manage, pro- tions towers and up to 500 build-to-suit towers to be con- viding near-universal broadcast coverage to the UK. structed at their expense. The first of its kind in the UK, this As a result, Crown Castle now owns and operates one of transaction makes One2One’s portfolio of existing towers the world’s most established television and radio transmission available to other telecommunications operators and broad- networks. Since 1997, we have provided transmission services casters through Castle Transmission International Ltd, our UK for two BBC television networks, six national BBC radio serv- subsidiary. This agreement doubles the size of our UK tower ices (including the first digital audio broadcast service in the portfolio and further secures our position as the largest inde- UK), 37 local BBC radio stations and two non-BBC national pendent wireless infrastructure provider in the UK. commercial radio services through our network of transmit- While the pace of activity in the UK is impressive, we ters. Our network reaches 99.4% of the UK population. believe that additional strategic acquisitions will become avail- Crown Castle continues to expand its presence in Britain able within the UK throughout 1999. and was chosen to design, build and operate a shared digital Of particular interest is the upcoming auction in the UK of terrestrial television (DTT) network for four of the six nation- licenses for third-generation wireless mobile multimedia al licenses awarded in the UK, including those for commercial (Universal Mobile Telecommunications Service or UMTS). broadcaster OnDigital. Launched in 1998, this initial DTT UMTS will enable mobile users to access the Internet, make network represented the world’s first digital transmission of calls, check e-mail, exchange data, and view video over a high- television signals received through existing domestic television speed wireless connection. While a number of existing carriers antennae. We currently plan to quadruple the size of our DTT network in 1999. are applying for UMTS licenses, we expect at least one new play- er to enter the market. Our expanded national network and In October1998,we acquired Millennium Communications extensive experience in designing, deploying and operating Limited, adding 102 towers and significant site acquisition transmission networks makes us an ideal partner to participate and development capabilities. This acquisition established the in the implementation of this exciting technology. 15 16 O u r C r y s t a l P a l a c e s i t e r e a c h e s m o r e t h a n 11 m i l l i o n p e o p l e w i t h b r o a d c a s t c o v e r a g e . O u r largest revenue-producing tower i n t h e U K , i t s e r v e s a n a l o g a n d d i g i t a l t e l e v i s i o n , d i g i t a l r a d i o , w i r e l e s s t e l e c o m , p o i n t - t o - p o i n t d a t a a n d t w o - w a y r a d i o t e n a n t s . 17 G p r e s e n c e U S P R Existing infrastr ucture Bell Atlantic Mobile towers BellSouth Mobility towers Power tel towers A H J 1995 Acquired Southwestern United States towers. O 1998 Acquired Millennium Communications Limited, adding 102 wireless towers and significant site acqui- J 1996 Acquired Puerto Rico strategic cluster. sition and development expertise in the UK. F 1997 Acquired BBC’s Home Service Broadcast Transmission Division, including national broadcast network D 1998 Announced world’s first carrier outsource deal with Bell Atlantic Mobile, establishing a majority-owned and RF-engineering and network design capabilities. joint venture for the ownership, marketing, operation and main- A 1997 Acquired Crown Communications with a strategic tower cluster in Pittsburgh, towers in western tenance of strategic clusters totaling 1,458 towers. These are located in the Northeastern and Southwestern United States and provide coverage in major markets including Boston, Charlotte, Pennsylvania and parts of the Northeast, and construction and New York / New Jersey metro area, Philadelphia, Phoenix and site acquisition expertise. Pittsburgh and throughout New England. The transaction closed in March 1999. U n i t e d K i n g d o m Existing infrast r ucture Mille nnium towers One 2One acquisition March 1999 Announced our second United States carrier outsource deal with BellSouth Mobility, consisting of a master March 1999 Announced the first PCS outsource transac- tion, a definitive agreement for the acquisition from Powertel, sale and lease-back of economic rights to approximately 1,850 Inc. of 650 communications towers located in strategic mar- towers covering major markets throughout Florida, Georgia, kets throughout the Southeastern United States, including Tennessee, Kentucky, Alabama, Mississippi, Louisiana and Atlanta, Birmingham and Jacksonville, and along more than Indiana. 3,000 miles of highway corridors. March 1999 Announced and closed the first non-United States carrier outsource deal with One2One, consisting of a management and marketing agreement and ultimate purchase of 821 communications towers throughout the UK, with extensive coverage of metropolitan areas. 19 C r o w n C a s t l e a t a g l a n c e C r ow n C a s t l e o f f e r s full end-to-end wireless and broadcast network design, deployment and management, using its extensive network of towers and rooftops offering coverage throughout the United States and the UK. Headquartered in Houston, Texas, Crown Castle and its oper- ating companies provide a wide range of services to the broad- cast, wireless communications and data industries: P r i m a r y s e r v i c e s > Leasing Antenna Space on Wireless and Broadcast Multi- Tenant Towers and Rooftops. > Designing, Developing and Operating Analog and Digital Broadcast Transmission Networks. R e l a t e d s e r v i c e s c a p a b i l i t i e s > Network/Site Management, Marketing and Maintenance. > Network Design and Site Selection. > Radio Frequency Engineering. M a j o r c o m p a n i e s a n d s u b s i d i a r i e s Crown Castle International Corp. – Holding company pro- vides due diligence, acquisition, financing, strategic planning and business development expertise. Castle Transmission International Ltd – UK operating com- pany offers broadcast transmission management, analog and digital broadcast network design services, and broadcast and wireless site sharing arrangements on a tower network that covers 99% of the UK for broadcast services and 95% of the UK for wireless communications. Crown Communication Inc. – United States operating com- pany manages and markets United States and Puerto Rico tower assets and provides end-to-end development, deploy- ment and network management services. Crown Atlantic Company LLC – Majority-owned joint ven- ture formed with Bell Atlantic Mobile to own, operate and lease joint venture assets that initially include 1,458 towers in the Northeastern and Southwestern United States originally > Site Acquisition, Development and Construction. contributed by Bell Atlantic Mobile. > Antenna Installation. We serve many types of customers, including: > Cellular Carriers. > PCS/PCN Carriers. > Television and Radio Broadcasters. > SMR/ESMR/PM /TETRA Operators. > Governmental Agencies. > Private Industrial Users. > Wireless Data Networks. > Traditional and Two-Way Paging System Operators. > Utilities. > Public Telecommunications Companies. > Fixed Wireless and Wireless Local Loop System Operators. Additional information about the Crown Castle International Corp. family of companies can be found at our web site, http://www.crowncastle.com. TEA Group Incorporated – Provides site acquisition and development services to Crown Communication Inc. and third-party customers globally. TeleStructures, Inc. – Provides specialty applications towers, monopoles, building attachments and other structures designed to be “hidden in plain sight” for visually sensitive environments. TeleStructures operates in the United States, UK, Brazil and Mexico and serves markets worldwide. Spectrum Site Management Corporation – Provides site acquisition, development and management services for rooftop sites as well as building riser management in the United States. Millennium Communications Limited – Offers site acquisi- tion and construction services throughout the UK. Crown Castle do Brasil Ltda — Development company that seeks opportunities in Brazil. Crown Castle de Mexico, S.A. de CV – Development com- pany that seeks opportunities in Mexico. Crown Castle Australia Limited – Development company that seeks opportunities in Australasia. 20 F i n a n c i a l s e c t i o n T a b l e o f C o n t e n t s Selected Financial Da t a . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 2 Ma n a g e m e n t’s Discussion and Analysis of Financial Condition and Results of Op e r a t i o n s . . . . . . . . . . . . . . . . . . . . . . . . . .2 3 Independent Au d i t o r s’ Re p o rt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 7 Consolidated Balance Sh e e t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 8 Consolidated Statement of Operations and Compre h e n s i ve Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 9 Consolidated Statement of Cash Fl ow s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 0 Consolidated Statement of St o c k h o l d e r s’ Equity (De f i c i t ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 1 Notes to Consolidated Financial St a t e m e n t s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 2 Ma rket for the Company’s Common Equity and Related Stockholder Ma t t e r s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 5 Corporate In f o r m a t i o n . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 6 21 S e l e c t e d F i n a n c i a l D a t a The results of operations for the years ended December 31, 1995, 1996, 1997 and 1998 are not comparable as a result of business acquisitions. Results of operations of these acquired businesses are included in the Company’s consolidated financial statements for the periods after the re s p e c t i ve dates of acquisition. The information set forth below should be read in conjunction with “ Ma n a g e m e n t’s Discussion and Analysis of Financial Condition and Results of Op e r a t i o n s” and the Company’s consolidated financial statements. Years Ended December 31, 1 9 9 5 1996 1997 1 9 9 8 ( In thousands of dollars, except per share amounts) Consolidated Statement of Operations Da t a : Net re ve n u e s : Site rental and broadcast transmission . . . . . . . . . . . . . $ Ne t w o rk services and other . . . . . . . . . . . . . . . . . . . . . Total net re ve n u e s . . . . . . . . . . . . . . . . . . . . . . . . . . Costs of operations: Site rental and broadcast transmission . . . . . . . . . . . . . Ne t w o rk services and other . . . . . . . . . . . . . . . . . . . . . Total costs of operations . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . . . Corporate deve l o p m e n t . . . . . . . . . . . . . . . . . . . . . . . . . . Non-cash compensation charges . . . . . . . . . . . . . . . . . . . . De p reciation and amort i z a t i o n . . . . . . . . . . . . . . . . . . . . . Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . Equity in earnings (losses) of unconsolidated affiliate . . . . In t e rest and other income (expense) . . . . . . . . . . . . . . . . . In t e rest expense and amortization of 4 , 0 5 2 6 4 , 0 5 8 1 , 2 2 6 — 1 , 2 2 6 7 2 9 2 0 4 — 8 3 6 1 , 0 6 3 — 5 3 $ 5 , 6 1 5 5 9 2 6 , 2 0 7 1 , 2 9 2 8 1 , 3 0 0 1 , 6 7 8 1 , 3 2 4 — 1 , 2 4 2 6 6 3 — 1 9 3 d e f e r red financing costs . . . . . . . . . . . . . . . . . . . . . . . . ( 1 , 1 3 7 ) ( 1 , 8 0 3 ) Loss before income taxes and minority intere s t s . . . . . . . . Provision for income taxe s . . . . . . . . . . . . . . . . . . . . . . . . Minority intere s t s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends on pre f e r red stock . . . . . . . . . . . . . . . . . . . . . . Net loss after deduction of dividends on pre f e r red stock . . $ ( 2 1 ) — — ( 2 1 ) — ( 2 1 ) Loss per common share — basic and diluted . . . . . . . . . . $ ( 0 . 0 1 ) ( 9 4 7 ) ( 1 0 ) — ( 9 5 7 ) — ( 9 5 7 ) ( 0 . 2 7 ) $ $ $ $ $ 1 1 , 0 1 0 2 0 , 3 9 5 3 1 , 4 0 5 2 , 2 1 3 1 3 , 1 3 7 1 5 , 3 5 0 6 , 8 2 4 5 , 7 3 1 — 6 , 9 5 2 ( 3 , 4 5 2 ) ( 1 , 1 3 8 ) 1 , 9 5 1 ( 9 , 2 5 4 ) ( 1 1 , 8 9 3 ) ( 4 9 ) — ( 1 1 , 9 4 2 ) ( 2 , 1 9 9 ) ( 1 4 , 1 4 1 ) ( 2 . 2 7 ) $ 7 5 , 0 2 8 3 8 , 0 5 0 1 1 3 , 0 7 8 2 6 , 2 5 4 2 1 , 5 6 4 4 7 , 8 1 8 2 3 , 5 7 1 4 , 6 2 5 1 2 , 7 5 8 3 7 , 2 3 9 ( 1 2 , 9 3 3 ) 2 , 0 5 5 4 , 2 2 0 ( 2 9 , 0 8 9 ) ( 3 5 , 7 4 7 ) ( 3 7 4 ) ( 1 , 6 5 4 ) ( 3 7 , 7 7 5 ) ( 5 , 4 1 1 ) ( 4 3 , 1 8 6 ) ( 1 . 0 2 ) $ $ Common shares outstanding— basic and diluted (in thousands) . . . . . . . . . . . . . . . . . . 3 , 3 1 6 3 , 5 0 3 6 , 2 3 8 4 2 , 5 1 8 Other Consolidated Da t a : E B I T D A * . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Su m m a ry cash flow information: Net cash provided by (used for) operating activities . . . Net cash used for investing activities . . . . . . . . . . . . . . Net cash provided by financing activities . . . . . . . . . . . Cash dividends declare d . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Balance Sheet Data (at period end): Cash and cash equiva l e n t s . . . . . . . . . . . . . . . . . . . . . . . . $ Pro p e rty and equipment, net . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Redeemable pre f e r red stock . . . . . . . . . . . . . . . . . . . . . . . Total stockholders’ equity (deficit) . . . . . . . . . . . . . . . . . . 1 , 8 9 9 $ 1 , 9 0 5 $ 3 , 5 0 0 $ 3 7 , 0 6 4 1 , 6 7 2 ( 1 6 , 6 7 3 ) 1 5 , 5 9 7 — 5 9 6 1 6 , 0 0 3 1 9 , 8 7 5 1 1 , 1 8 2 5 , 1 7 5 6 1 9 $ ( 5 3 0 ) ( 1 3 , 9 1 6 ) 2 1 , 1 9 3 — 7 , 3 4 3 2 6 , 7 5 3 4 1 , 2 2 6 2 2 , 0 5 2 1 5 , 5 5 0 ( 2 1 0 ) $ ( 6 2 4 ) ( 1 1 1 , 4 8 4 ) 1 5 9 , 8 4 3 — 5 5 , 0 7 8 8 1 , 9 6 8 3 7 1 , 3 9 1 1 5 6 , 2 9 3 1 6 0 , 7 4 9 4 1 , 7 9 2 4 4 , 9 7 6 ( 1 4 9 , 2 4 8 ) 3 4 5 , 2 4 8 — $ 2 9 6 , 4 5 0 5 9 2 , 5 9 4 1 , 5 2 3 , 2 3 0 4 2 9 , 7 1 0 2 0 1 , 0 6 3 7 3 7 , 5 6 2 *EBITDA is defined as operating income (loss) plus depreciation and amortization and non-cash compensation charges. EBITDA is presented as additional information because man- agement believes it to be a useful indicator of the Company’s ability to meet debt service and capital expenditure re q u i rements. It is not, howe ve r, intended as an altern a t i ve measure of o p e rating results or cash flow from operations (as determined in accordance with generally accepted accounting principles). Fu rt h e rm o re, the Company’s measure of EBITDA may not be comparable to similarly titled measures of other companies. 22 M a n a g e m e n t ’ s D i s c u s s i o n a n d A n a l y s i s o f F i n a n c i a l C o n d i t i o n a n d R e s u l t s o f O p e r a t i o n s The following discussion sets forth separately the historical consolidated results of operations of Crown Castle International Corp. and subsidiaries (the “Company” or “CCIC”) and Castle Transmission Se rvices (Holdings) Ltd and subsidiaries (“CTSH”) and is intended to assist in understanding (1) CCIC’s consolidated financial condition as of December 31, 1998 and its consolidated results of operations for each year in the thre e - year period ended December 31, 1998 and (2) CTS H ’s consolidated results of oper- ations for each twe l ve-month period in the two-year period ended Ma rch 31, 1998. This discussion should be read in conjunction with “Selected Financial Da t a” and the consolidated financial statements and related notes included elsew h e re in this document. Results of operations of the acquired businesses that are wholly and majority owned are included in our consolidated financial state- ments for the periods subsequent to the re s p e c t i ve dates of acquisition. As such, our results of operations for the year ended December 31, 1998 are not comparable to the year ended December 31, 1997, and the results for the year ended December 31, 1997 are not comparable to the year ended December 31, 1996. O v e r v i e w The continued growth of our business depends substantially on the condition of the wireless communications and broadcast indus- tries. We believe that the demand for communications sites will continue to grow and expect that, due to increased competition, w i reless carriers will continue to seek operating and capital efficiencies by (1) outsourcing certain network services and the build- out and operation of new and existing infrastru c t u re and (2) co-locating antennas and transmission equipment on multiple tenant t owers. In addition, wireless carriers are beginning to seek to sell their wireless communications infrastru c t u re to, or establish joint ve n t u res with, experienced infrastru c t u re providers, such as the Company, that have the ability to manage network s . Fu rt h e r, we believe that wireless carriers and broadcasters will continue to seek to outsource the operation of their towers and, e ve n t u a l l y, their transmission networks, including the transmission of their signals. Management believes that our ability to man- age towers and transmission networks and our proven track re c o rd of providing services addressing all aspects of signaling systems f rom the originating station to the terminating re c e i ve r, or “e n d - t o - e n d” services, to the wireless communications and bro a d c a s t- ing industries position us to capture such business. The willingness of wireless carriers to utilize our infrastru c t u re and related services is affected by numerous factors, including consumer demand for wireless services, interest rates, cost of capital, availability of capital to wireless carriers, tax policies, willing- ness to co-locate equipment, local restrictions on the proliferation of towers, cost of building towers and technological changes affecting the number of communications sites needed to provide wireless communications services to a given geographic area. Ou r re venues that are derived from the provision of transmission services to the broadcasting industry will be affected by the timing of the roll-out of digital terrestrial television broadcasts in both the United Kingdom and the United States, as well as in other coun- tries around the world, consumer demand for digital terrestrial broadcasting, interest rates, cost of capital, zoning restrictions on t owers and the cost of building towe r s . As an important part of our business strategy, we will seek (1) to maximize utilization of our tower capacity, (2) to utilize the e x p e rtise of United States and United Kingdom personnel to capture global growth opportunities, (3) to partner with wireless car- riers to assume ownership of their existing towers and (4) to acquire existing transmission networks globally as opportunities arise. 23 M a n a g e m e n t ’ s D i s c u s s i o n a n d A n a l y s i s o f F i n a n c i a l C o n d i t i o n a n d R e s u l t s o f O p e r a t i o n s ( c o n t i n u e d ) R e s u l t s o f O p e r a t i o n s Our primary sources of re venues are from (1) the rental of antenna space on towers and rooftop sites, (2) the provision of network s e rvices and (3) the provision of analog and digital broadcast transmission serv i c e s . C C I C C C I C ’s primary sources of re venues are from (1) the rental of antenna space on towers and rooftop sites and (2) the provision of n e t w o rk services, which includes network design and site selection, site acquisition, site development and construction and anten- na installation. Site rental re venues are re c e i ved primarily from wireless communications companies, including those operating in the follow i n g categories of wireless communications: cellular, personal communications services, paging, specialized mobile radio, enhanced spe- c i a l i zed mobile radio and microw a ve. Site rental re venues are generally re c o g n i zed on a monthly basis under lease agreements, which typically have original terms of five years (with three or four optional re n ewal periods of five years each). Average re venues for CCIC’s managed rooftop sites are less than for the owned and managed towers because a substantial portion of the re venues from the ten- ants at rooftop sites is remitted to the building owner or manager. Ne t w o rk services re venues consist of re venues from (1) network design and site selection, (2) site acquisition, (3) site deve l o p- ment and construction, (4) antenna installation and (5) other services. Ne t w o rk services re venues are re c e i ved primarily from wire- less communications companies. Ne t w o rk services re venues are re c o g n i zed under service contracts which provide for billings on either a fixed price basis or a time and materials basis. Demand for CCIC’s network services fluctuates from period to period and within periods. Consequently, the operating results of CCIC’s network services businesses for any particular period may va ry sig- n i f i c a n t l y, and should not be considered as indicative of longer-term results. CCIC also derives re venues from the ownership and operation of microw a ve radio and specialized mobile radio networks in Pu e rto Rico where CCIC owns radio wave spectrum in the 2,000 MHz and 6,000 MHz range (for microw a ve radio) and the 800 MHz range (for specialized mobile radio). These re ve n u e s a re generally re c o g n i zed under monthly management or service agre e m e n t s . Costs of operations for site rental primarily consist of land leases, repairs and maintenance, utilities, insurance, pro p e rty taxes and monitoring costs as well as, in the case of managed sites, rental payments. For any given towe r, such costs are re l a t i vely fixed over a monthly or an annual time period. As such, operating costs for owned towers do not generally increase significantly as additional cus- tomers are added. Howe ve r, rental expenses at certain managed towers increase as additional customer antennas are added, re s u l t i n g in higher incremental re venues 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 constru c t i o n and materials costs. CCIC incurs these network services costs (1) to support its internal operations, including construction and main- tenance of its owned towers, and (2) to maintain the employees necessary to provide end-to-end services to third parties re g a rdless of the level of such business at any time. We believe that our experienced staff enables us to provide the type of end-to-end services that enhance our ability to acquire access to the infrastru c t u re of wireless carriers and to attract significant build-to-suit contracts. General and administrative expenses consist primarily of employee compensation and related benefits costs, adve rtising, p rofessional and consulting fees, office rent and related expenses and travel costs. Corporate development expenses re p resent costs i n c u r red 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 towe r s . De p reciation and amortization charges relate to CCIC’s pro p e rty and equipment (primarily towers, construction equipment and vehicles), goodwill and other intangible assets re c o rded in connection with business acquisitions. De p reciation of towers and a m o rtization of goodwill are computed with a useful life of 20 years. Amortization of other intangible assets (principally the va l u e of existing site rental contracts at Crown Communications) is computed with a useful life of 10 years. De p reciation of constru c t i o n equipment and vehicles are generally computed with useful lives of 10 years and 5 years, re s p e c t i ve l y. 24 In May 1997, we completed the acquisition of TEA Group and Te l e St ru c t u res (“TEA”). In August 1997, we completed the acquisition of Crown Communications. In August 1998, we completed a share exchange with the shareholders of CTSH, under which our ownership of CTSH increased from approximately 34.3% to 80%. In October 1998, CTSH completed the acquisition of Millennium Communications Limited. Results of operations of these acquired businesses are included in our consolidated finan- cial statements for the periods subsequent to the re s p e c t i ve dates of acquisition. As such, our results of operations for the year ended December 31, 1998 are not comparable to the year ended December 31, 1997, and the results for the year ended December 31, 1997 a re not comparable to the year ended December 31, 1996. See “—CTSH” for a description of the re venues and operating expenses that are included in CCIC’s consolidated results of operations subsequent to the completion of the share exchange in August 1998. The following information is derived from CCIC’s historical Consolidated Statements of Operations for the periods indicated. Year En d e d December 31, 1996 Year En d e d December 31, 1997 Year En d e d December 31, 1998 Pe rc e n t of Ne t Re ve n u e s Pe rc e n t of Ne t Re ve n u e s Pe rc e n t of Ne t Re ve n u e s A m o u n t A m o u n t A m o u n t ( In thousands of dollars) Net re ve n u e s : Site rental and broadcast transmission . . . . $ 5 , 6 1 5 9 0 . 5% $ 1 1 , 0 1 0 3 5 . 1% $ 7 5 , 0 2 8 Ne t w o rk services and other . . . . . . . . . . . . 5 9 2 9 . 5 2 0 , 3 9 5 6 4 . 9 3 8 , 0 5 0 6 6 . 4% 3 3 . 6 Total net re ve n u e s . . . . . . . . . . . . . 6 , 2 0 7 1 0 0 . 0 3 1 , 4 0 5 1 0 0 . 0 1 1 3 , 0 7 8 1 0 0 . 0 Operating expenses: Costs of operations: Site rental and b roadcast transmission . . . . . . . . . . 1 , 2 9 2 Ne t w o rk services and other . . . . . . . . . 8 Total costs of operations . . . . . . . . General and administrative . . . . . . . . . . . . Corporate deve l o p m e n t . . . . . . . . . . . . . . . Non-cash compensation charges . . . . . . . . 1 , 3 0 0 1 , 6 7 8 1 , 3 2 4 — De p reciation and amort i z a t i o n . . . . . . . . . 1 , 2 4 2 Operating income (loss) . . . . . . . . . . . . . . . . . 6 6 3 Other income (expense): Equity in earnings (losses) of unconsolidated affiliate . . . . . . . . . . In t e rest and other income (expense) . . . . . — 1 9 3 In t e rest expense and amortization 2 3 . 0 1 . 4 2 1 . 0 2 7 . 0 2 1 . 3 — 2 0 . 0 1 0 . 7 — 3 . 1 2 , 2 1 3 1 3 , 1 3 7 1 5 , 3 5 0 6 , 8 2 4 5 , 7 3 1 — 6 , 9 5 2 2 0 . 1 6 4 . 4 4 8 . 9 2 1 . 7 1 8 . 3 — 2 2 . 1 2 6 , 2 5 4 2 1 , 5 6 4 4 7 , 8 1 8 2 3 , 5 7 1 4 , 6 2 5 1 2 , 7 5 8 3 7 , 2 3 9 3 5 . 0 5 6 . 7 4 2 . 3 2 0 . 8 4 . 1 1 1 . 3 3 2 . 9 ( 3 , 4 5 2 ) ( 1 1 . 0 ) ( 1 2 , 9 3 3 ) ( 1 1 . 4 ) ( 1 , 1 3 8 ) 1 , 9 5 1 ( 3 . 6 ) 6 . 2 2 , 0 5 5 4 , 2 2 0 1 . 8 3 . 7 of deferred financing costs . . . . . . . . . . ( 1 , 8 0 3 ) ( 2 9 . 0 ) ( 9 , 2 5 4 ) ( 2 9 . 5 ) ( 2 9 , 0 8 9 ) ( 2 5 . 7 ) Loss before income taxes and minority intere s t s . . . . . . . . . . . . . . . . . . . Provision for income taxe s . . . . . . . . . . . . . . . Minority intere s t s . . . . . . . . . . . . . . . . . . . . . . ( 9 4 7 ) ( 1 0 ) — ( 1 5 . 2 ) ( 0 . 2 ) — ( 1 1 , 8 9 3 ) ( 4 9 ) — ( 3 7 . 9 ) ( 0 . 1 ) — ( 3 5 , 7 4 7 ) ( 3 7 4 ) ( 1 , 6 5 4 ) ( 3 1 . 6 ) ( 0 . 3 ) ( 1 . 5 ) Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ ( 9 5 7 ) ( 1 5 . 4 ) % $ ( 1 1 , 9 4 2 ) ( 3 8 . 0 ) % $ ( 3 7 , 7 7 5 ) ( 3 3 . 4 ) % 25 M a n a g e m e n t ’ s D i s c u s s i o n a n d A n a l y s i s o f F i n a n c i a l C o n d i t i o n a n d R e s u l t s o f O p e r a t i o n s ( c o n t i n u e d ) C o m p a r i s o n o f Y e a r s E n d e d D e c e m b e r 3 1 , 1 9 9 8 a n d 1 9 9 7 Consolidated revenues for 1998 were $113.1 million, an increase of $81.7 million from 1997. This increase was primarily attrib- utable to (1) a $64.0 million, or 581.5%, increase in site rental and broadcast transmission revenues, of which $52.5 million was attributable to CTSH and $11.5 million was attributable to the Crown Communications operations; (2) an $11.4 million i n c rease in network services re venues from the Crown Communications operations; and (3) $5.6 million in network services revenues from CTSH. Costs of operations for 1998 we re $47.8 million, an increase of $32.5 million from 1997. This increase was primarily attribut- able to (1) a $24.0 million increase in site rental and broadcast transmission costs, of which $20.1 million was attributable to CTS H and $3.9 million was attributable to the Crown Communications operations; (2) a $3.8 million increase in network services costs related to the Crown Communications operations; and (3) $4.2 million in network services costs from CTSH. Costs of operations for site rental and broadcast transmission as a percentage of site rental and broadcast transmission re venues increased to 35.0% for 1998 from 20.1% for 1997, primarily due to (1) higher costs attributable to the CTSH operations which are inherent with CTS H ’s b roadcast transmission business; and (2) higher costs for the Crown Communications operations. Costs of operations for network s e rvices as a percentage of network services re venues decreased to 56.7% for 1998 from 64.4% for 1997, primarily due to improve d margins from the Crown Communications operations. Margins from the Crown Communications network services operations va ry from period to period, often as a result of increasingly competitive market conditions. General and administrative expenses for 1998 we re $23.6 million, an increase of $16.7 million from 1997. This increase was primarily attributable to (1) an $11.3 million increase in expenses related to the Crown Communications operations; (2) a $2.8 million increase in expenses at our corporate office; and (3) $2.4 million in expenses at CTSH. General and administrative expens- es as a percentage of re venues decreased for 1998 to 20.8% from 21.7% for 1997 because of lower overhead costs as a perc e n t a g e of re venues for CTSH, partially offset by higher overhead costs as a percentage of re venues for Crown Communications and the i n c rease in costs at our corporate office. Corporate development expenses for 1998 were $4.6 million, a decrease of $1.1 million from 1997. Corporate development expenses for 1997 included nonrecurring compensation charges associated with the CTSH investment of (1) $0.9 million for c e rtain executive bonuses; and (2) the repurchase of shares of our common stock from a member of our board of directors, which resulted in compensation charges of $1.3 million. Corporate development expenses for 1998 included discre t i o n a ry bonuses related to our performance totaling approximately $1.8 million for certain members of our management. We have re c o rded non-cash compensation charges of $12.8 million related to the issuance of stock options to certain employ- ees and exe c u t i ves. Such charges are expected to amount to approximately $1.6 million per year through 2002 and approx i m a t e l y $0.8 million in 2003. See “— Compensation Charges Related to Stock Option Gr a n t s . ” De p reciation and amortization for 1998 was $37.2 million, an increase of $30.3 million from 1997. This increase was prima- rily attributable to (1) a $9.5 million increase in depreciation and amortization related to the pro p e rty and equipment, goodwill and other intangible assets acquired in the Crown Communications acquisition; and (2) $20.3 million of depreciation and amor- tization related to the pro p e rty and equipment and goodwill from CTS H . The equity in earnings (losses) of unconsolidated affiliate re p resents our 34.3% share of CTS H ’s net earnings (losses) for the periods from Ma rch 1997 through August 1998 (at which time the share exchange with CTS H ’s shareholders was completed). Fo r the eight months ended August 31, 1998, after making appropriate adjustments to CTS H ’s results of operations for such period to conform to generally accepted accounting principles of the United States, CTSH had net re venues, operating income, intere s t expense (including amortization of deferred financing costs) and net income of $97.2 million, $18.6 million, $13.4 million and $6.0 million, re s p e c t i ve l y. Included in CTS H ’s results of operations for such period are non-cash compensation charges for approx- imately $3.8 million related to the issuance of stock options to certain members of CTS H ’s management. In t e rest and other income for 1997 includes a $1.2 million fee re c e i ved in Ma rch 1997 as compensation for leading the inve s t- ment consortium which provided the equity financing for CTSH. In t e rest income for 1998 resulted primarily from (1) the inve s t- ment of excess proceeds from the sale of the 105⁄8% discount notes in November 1997; and (2) the investment of the net pro c e e d s f rom the initial public offering in August 1998. See “—Liquidity and Capital Re s o u rc e s . ” 26 In t e rest expense and amortization of deferred financing costs for 1998 was $29.1 million, an increase of $19.8 million, or 214.3%, from 1997. This increase was primarily attributable to amortization of the original issue discount on the 105⁄8% discount notes and interest on CTS H ’s indebtedness. Minority interests re p resent the minority share h o l d e r’s 20% interest in CTS H ’s operations. C o m p a r i s o n o f Y e a r s E n d e d D e c e m b e r 3 1 , 1 9 9 7 a n d 1 9 9 6 Consolidated re venues for 1997 we re $31.4 million, an increase of $25.2 million from 1996. This increase was primarily attribut- able to (1) a $5.4 million, or 96.1%, increase in site rental re venues, of which $4.2 million was attributable to the Crow n Communications operations and $0.7 million was attributable to the Pu e rto Rico operations; (2) $10.4 million in network serv- ices re venues from TEA; and (3) $7.2 million in network services re venues from the Crown Communications operations. T h e remainder of the increase was largely attributable to higher re venues from specialized mobile radio and microw a ve radio services in Pu e rto Rico and the monthly service fees re c e i ved from CTSH beginning in Ma rch 1997. Costs of operations for 1997 we re $15.4 million, an increase of $14.1 million from 1996. This increase was primarily attributable to (1) $8.5 million of network services costs related to the TEA operations; (2) $3.9 million of network services costs related to the Crow n C o m m u n i c a t i o n s operations; and (3) $0.9 million in site rental costs attributable to the Crown Communications operations. Costs of operations for site rental as a percentage of site rental re venues decreased to 20.1% for 1997 from 23.0% for 1996 because of incre a s e d utilization of the towers located in the So u t h western United States and Pu e rto Rico. Costs of operations for network services as a per- centage of network services re venues we re 64.4% for 1997, reflecting lower margins that are inherent in the network services businesses a c q u i red in 1997. General and administrative expenses for 1997 we re $6.8 million, an increase of $5.1 million from 1996. This increase was pri- marily attributable to $3.0 million of expenses related to the Crown Communications operations and $1.4 million of expenses re l a t- ed to the TEA operations, along with an increase in costs of $0.2 million at CCIC’s corporate office. General and administrative expenses as a percentage of re venues decreased for 1997 to 21.7% from 27.0% for 1996 because of lower overhead costs as a per- centage of re venues for the Crown Communications operations and T E A . Corporate development expenses for 1997 we re $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 CTSH investment of (1) $0.9 million for c e rtain exe c u t i ve bonuses and (2) the re p u rchase of shares of CCIC’s common stock from a member of its board of directors, which resulted in compensation charges of $1.3 million. The remaining $2.2 million of the increase in corporate development expenses was attributable to a higher allocation of personnel costs, along with an overall increase in such costs, associated with an increase in acquisition and business development activities. De p reciation and amortization for 1997 was $7.0 million, an increase of $5.7 million from 1996. This increase was primarily attributable to (1) $4.7 million of depreciation and amortization related to the pro p e rty and equipment, goodwill and other intan- gible assets acquired in the Crown Communications acquisition; (2) $0.5 million of depreciation and amortization related to the p ro p e rty and equipment and goodwill acquired in the acquisitions of TEA Group and Te l e St ru c t u res; and (3) $0.3 million re s u l t- ing from twe l ve months of depreciation related to the pro p e rty and equipment acquired in the Pu e rto Rico acquisition. The equity in losses of unconsolidated affiliate of $1.1 million re p resents CCIC’s 34.3% share of CTS H ’s net loss for the period fro m Ma rch through December 1997. After making appropriate adjustments to CTS H ’s results of operations for such period to conform to generally accepted accounting principles of the United States, CTSH had net re venues, operating income, interest expense (including a m o rtization of deferred financing costs) and net losses of $103.5 million, $16.5 million, $20.4 million and $3.3 million, re s p e c t i ve l y. In t e rest and other income for 1997 includes a $1.2 million fee re c e i ved in Ma rch 1997 as compensation for leading the inve s t- ment consortium which provided the equity financing for CTSH, the impact on earnings of which was partially offset by cert a i n e xe c u t i ve bonuses related to the CTSH investment and included in corporate development expenses. In t e rest income for 1997 resulted primarily from the investment of excess proceeds from the sale of CCIC’s Series C conve rtible pre f e r red stock in Fe b ru a ry 1997. 27 M a n a g e m e n t ’ s D i s c u s s i o n a n d A n a l y s i s o f F i n a n c i a l C o n d i t i o n a n d R e s u l t s o f O p e r a t i o n s ( c o n t i n u e d ) In t e rest expense and amortization of deferred financing costs for 1997 was $9.3 million, an increase of $7.5 million, or 413.3%, f rom 1996. This increase was primarily attributable to (1) commitment fees related to an unfunded interim loan facility related to the Crown Communications acquisition and an unfunded re volving credit facility; (2) interest on notes payable to the former stockholders of Crown Communications for a portion of the purchase price of that business; (3) amortization of the original issue discount on the 105⁄8% discount notes; (4) interest and fees associated with borrowings under CCIC’s bank credit facility which we re used to finance the Crown Communications acquisition on an interim basis; (5) interest on outstanding borrowings assumed in connection with the Crown Communications acquisition; and (6) interest on borrowings under CCIC’s bank credit facility which we re used to finance the acquisition of the Pu e rto Rico system. C T S H C TS H ’s primary sources of re venues are from (1) the provision of analog and digital broadcast transmission services to the BBC and commercial broadcasters; (2) the rental of antenna space on towers; and (3) the provision of network services, which includes b roadcast consulting, network design and site selection, site acquisition, site development and antenna installation and site man- agement and other serv i c e s . Broadcast transmission services re venues are re c e i ved for both analog and digital transmission services. Monthly analog transmis- sion re venues are principally re c e i ved from the BBC under a contract with an initial 10-year term through Ma rch 31, 2007. Di g i t a l transmission services re venues from the BBC and ONdigital are re c o g n i zed under contracts with initial terms of 12 years thro u g h November 15, 2010. Monthly re venues from these digital transmission contracts increase over time as the network rollout pro g re s s e s . Site rental re venues are re c e i ved from other broadcast transmission service providers (primarily NTL) and wireless communi- cations companies, including all four UK cellular operators (Cellnet, Vodafone, On e 2 One and Orange). As of December 31, 1998, a p p roximately 200 companies rented space on approximately 514 of CTS H ’s 919 towers and rooftops. Site rental re venues are generally re c o g n i zed on a monthly basis under lease agreements with original terms of three to twe l ve years. Such lease agre e m e n t s generally re q u i re annual payments in advance, and include rental rate adjustment provisions between one and three years from the commencement of the lease. Site rental re venues are expected to become an increasing portion of CTS H ’s total UK re venue base, and we believe that the demand for site rental from communication service providers will increase in line with the expected grow t h of these communication services in the UK. Ne t w o rk services re venues consist of (1) network design and site selection, site acquisition, site development and antenna instal- lation (collective l y, “n e t w o rk design and deve l o p m e n t”); and (2) site management and other services. Ne t w o rk design and deve l- opment services are provided to (1) a number of broadcasting and related organizations, both in the UK and other countries; (2) all four UK cellular operators; and (3) a number of other wireless communications companies, including Dolphin and Hi g h w a y One. These services are usually subject to a competitive bid, although a significant pro p o rtion result from an operator coming onto an existing CTSH site. Re venues from such services are re c o g n i zed on either a fixed price or a time and materials basis. Site man- agement and other services, consisting of both network monitoring and equipment maintenance, are carried out in the UK for a number of emergency service organizations. CTSH re c e i ves re venues for such services under contracts with original terms of b e t ween three and five years. Such contracts provide fixed prices for network monitoring and variable pricing dependent on the leve l of equipment maintenance carried out in a given period. Costs of operations for broadcast transmission services consist primarily of employee compensation and related benefits costs, utilities, rental payments under the Si t e - Sharing Agreement with NTL, circuit costs and repairs and maintenance on both trans- mission equipment and stru c t u re s . 28 Site rental operating costs consist primarily of employee compensation and related benefits costs, utilities and repairs and main- tenance. The majority of such costs are re l a t i vely fixed in nature, with increases in re venue from new installations on existing sites generally being achieved without a corresponding increase in costs. Costs of operations for network services consist primarily of employee compensation and related benefits costs and on-site con- s t ruction and materials costs. General and administrative expenses consist primarily of office occupancy and related expenses, travel costs, professional and consulting fees, adve rtising, insurance and employee training and re c ruitment costs. Corporate development expenses re p re s e n t costs incurred in connection with acquisitions and development of new business initiatives. These expenses consist primarily of external professional fees related to specific activities and allocated compensation, benefits and overhead costs that are not dire c t- ly related to the administration or management of CTS H ’s existing lines of business. De p reciation and amortization charges relate to CTS H ’s pro p e rty and equipment (primarily towers, broadcast transmission equipment and associated buildings) and goodwill re c o rded in connection with the acquisition of the home service transmission business from the BBC. De p reciation of towers is computed with useful lives of 20 to 25 years; depreciation of broadcast trans- mission equipment is computed with a useful life of 20 years; and depreciation of buildings is computed with useful lives ranging f rom 20 to 50 years. Amortization of goodwill is computed with a useful life of 20 ye a r s . The following information is derived from the Consolidated Profit and Loss Accounts of (1) CTSH for periods subsequent to February 28, 1997 (the date of inception of CTSH’s operations) and (2) the BBC home service transmission business for peri- ods prior to that date. For purposes of the following discussion, CTSH’s results for the month ended March 31, 1997 have been combined with the results of the BBC home service transmission business for the eleven months ended February 27, 1997, and CTSH’s results for the nine months ended December 31, 1997 have been combined with its results for the three months ended Ma rch 31, 1998. The following discussion presents an analysis of such combined results for the twe l ve-month periods ended March 31, 1998 and 1997. Results for CTSH are not comparable to results from the BBC home service transmission business due to differences in the carrying amounts of pro p e rty and equipment and goodwill. As of December 31, 1997, CTS H changed its fiscal year end for financial re p o rting purposes from Ma rch 31 to December 31; as such, the results for the thre e months ended March 31, 1998 are unaudited. C TSH uses the British pound sterling as the functional currency for its operations. The following amounts have been translat- ed to United States dollars using the average noon buying rate for each period. The following amounts reflect certain adjustments to present the results of operations in accordance with generally accepted accounting principles of the United States. For the re s u l t s of the BBC home service transmission business, such adjustments affect depreciation and amortization expense as a result of dif- f e rences in the carrying amounts for pro p e rty and equipment; for CTSH, such adjustments affect (1) operating expenses as a re s u l t of differences in the accounting for pension costs, and (2) interest expense as a result of the capitalization of interest costs in c o nnection with constructed assets. 29 M a n a g e m e n t ’ s D i s c u s s i o n a n d A n a l y s i s o f F i n a n c i a l C o n d i t i o n a n d R e s u l t s o f O p e r a t i o n s ( c o n t i n u e d ) Twe l ve Months En d e d Ma rch 31, 1997 Twe l ve Months En d e d Ma rch 31, 1998 Pe rc e n t of Ne t Re ve n u e s Pe rc e n t of Ne t Re ve n u e s A m o u n t A m o u n t ( In thousands of dollars) Net re ve n u e s : Site rental and broadcast transmission . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1 1 2 , 1 2 2 9 1 . 7% $ 1 1 3 , 5 5 8 Ne t w o rk services and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 0 , 0 9 0 8 . 3 1 3 , 7 3 1 8 9 . 2% 1 0 . 8 Total net re ve n u e s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 2 , 2 1 2 1 0 0 . 0 1 2 7 , 2 8 9 1 0 0 . 0 Operating expenses: Costs of operations: Site rental and broadcast transmission . . . . . . . . . . . . . . . . . . . . . . . . 6 1 , 3 3 9 Ne t w o rk services and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 , 9 1 2 Total costs of operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 7 , 2 5 1 General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 , 1 9 6 Corporate deve l o p m e n t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — De p reciation and amort i z a t i o n . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 7 , 2 5 6 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 0 , 5 0 9 Other income (expense): In t e rest and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 9 In t e rest expense and amortization of deferred financing costs . . . . . . . . . ( 1 , 4 3 4 ) Income (loss) before income taxe s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 9 , 1 5 4 Provision for income taxe s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 5 4 . 7 5 8 . 6 5 5 . 0 5 . 9 — 1 4 . 1 2 5 . 0 0 . 1 ( 1 . 2 ) 2 3 . 9 — 5 3 , 9 5 7 6 , 0 7 5 6 0 , 0 3 2 8 , 6 2 6 2 , 3 0 3 3 7 , 3 8 2 1 8 , 9 4 6 7 4 6 ( 2 4 , 2 0 1 ) ( 4 , 5 0 9 ) — 4 7 . 5 4 4 . 2 4 7 . 1 6 . 8 1 . 8 2 9 . 4 1 4 . 9 0 . 6 ( 1 9 . 0 ) ( 3 . 5 ) — Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2 9 , 1 5 4 2 3 . 9% $ ( 4 , 5 0 9 ) ( 3 . 5 )% C o m p a r i s o n o f T w e l v e M o n t h s E n d e d M a r c h 3 1 , 1 9 9 8 a n d T w e l v e M o n t h s E n d e d M a r c h 3 1 , 1 9 9 7 Consolidated re venues for the twe l ve months ended Ma rch 31, 1998 we re $127.3 million, an increase of $5.1 million from the twe l ve months ended Ma rch 31, 1997. This increase was primarily attributable to (1) a $1.4 million increase in broadcast transmission serv i c- es and site rental re venues and (2) a $3.6 million increase in network services and other re venues. Re venues from the BBC for the twe l ve months ended Ma rch 31, 1998 amounted to $79.5 million, or 62.5% of total re venues, as compared to $85.5 million, or 70.0% of total re venues, for the twe l ve months ended Ma rch 31, 1997. Re venues from NTL for the twe l ve months ended Ma rch 31, 1998 amounted to $11.8 million, or 9.2% of total re venues. Ne t w o rk services re venues for the twe l ve months ended Ma rch 31, 1998 consisted of $10.6 million from network design and development services and $3.1 million from site management and other serv i c e s . Costs of operations for the twe l ve months ended Ma rch 31, 1998 we re $60.0 million, a decrease of $7.2 million from the twe l ve months ended Ma rch 31, 1997. This decrease was primarily attributable to a $7.4 million decrease in broadcast transmission serv i c e s and site rental costs, partially offset by a $0.2 million increase in network services and other costs. Costs of operations as a perc e n t a g e of re venues for broadcast transmission services and site rental we re 47.5% for the twe l ve months ended Ma rch 31, 1998, as compare d to 54.7% for the twe l ve months ended Ma rch 31, 1997. This decrease was attributable to (1) increases in site rental re venues from exist- ing sites with little change in site operating costs; and (2) the elimination, as of Fe b ru a ry 28, 1997, of certain costs recharged to the BBC home service transmission business by the BBC. Costs of operations as a percentage of re venues for network services and other we re 30 44.2% for the twe l ve months ended Ma rch 31, 1998, as compared to 58.6% for the twe l ve months ended Ma rch 31, 1997. T h i s d e c rease was attributable to (1) a higher pro p o rtion of broadcast consulting re venues, which result in higher margins than certain other n e t w o rk design and development services; and (2) the elimination, as of Fe b ru a ry 28, 1997, of certain costs recharged to the BBC home s e rvice transmission business by the BBC. Costs of operations for site rental and broadcast transmission for the twe l ve months ended Ma rch 31, 1998 includes non-cash compensation charges for $1.1 million related to the issuance of stock options to certain employe e s . General and administrative expenses for the twe l ve months ended Ma rch 31, 1998 we re $8.6 million, an increase of $1.4 million f rom the twe l ve months ended Ma rch 31, 1997. As a percentage of re venues, general and administrative expenses we re 6.8% and 5.9% for the twe l ve months ended Ma rch 31, 1998 and 1997, re s p e c t i ve l y. This increase was attributable to costs incurred by CTSH as a separate enterprise which we re not directly incurred by the BBC home service transmission business as a part of the BBC. Corporate development expenses for the twe l ve months ended Ma rch 31, 1998 relate primarily to costs incurred in connection with certain projects in Australasia and non-cash compensation charges for $1.8 million related to the issuance of stock options to c e rtain exe c u t i ve s . De p reciation and amortization for the twe l ve months ended Ma rch 31, 1998 was $37.4 million, an increase of $20.1 million fro m the twe l ve months ended Ma rch 31, 1997. Monthly charges for depreciation and amortization increased for periods subsequent to Fe b ru a ry 28, 1997 due to (1) a decrease in the estimated useful lives for certain transmission and power plant equipment from 25 to 20 years; and (2) the amortization of goodwill re c o rded in connection with the acquisition of the BBC home service transmission business. In t e rest and other income for the twe l ve months ended Ma rch 31, 1998 resulted primarily from (1) the investment of exc e s s p roceeds from amounts drawn under CTS H ’s bank credit facilities in Fe b ru a ry 1997; and (2) the investment of cash generated fro m operations during the period. In t e rest expense and amortization of deferred financing costs for the twe l ve months ended Ma rch 31, 1998 was $24.2 million. T h i s amount was comprised of (1) $4.9 million related to amounts drawn under the CTSH credit facility; (2) $15.6 million related to the C TSH bonds; and (3) $3.7 million for the amortization of deferred financing costs. In t e rest expense and amortization of deferred financ- ing costs of $1.4 million for the twe l ve months ended Ma rch 31, 1997 was attributable to amounts drawn under the CTSH credit facility. The BBC home service transmission business did not incur any financing costs as a part of the BBC prior to Fe b ru a ry 28, 1997. L i q u i d i t y a n d C a p i t a l R e s o u r c e s Our business strategy contemplates substantial capital expenditures (1) in connection with the expansion of our tower portfolios by p a rtnering with wireless carriers to assume ownership or control of their existing towers, by pursuing build-to-suit opportunities and by pursuing other tower acquisition opportunities; and (2) to acquire existing transmission networks globally as opportunities arise. Since its inception, CCIC has generally funded its activities (other than acquisitions and investments) through excess proceeds fro m contributions of equity capital. CCIC has financed acquisitions and investments with the proceeds from equity contributions, bor- rowings under our senior credit facilities, issuances of debt securities and the issuance of pro m i s s o ry notes to sellers. Since its incep- tion, CTSH has generally funded its activities (other than the acquisition of the BBC home service transmission business) thro u g h cash provided by operations and borrowings under CTS H ’s credit facility. CTSH financed the acquisition of the BBC home serv i c e transmission business with the proceeds from equity contributions and the issuance of the CTSH bonds. For the years ended December 31, 1996, 1997 and 1998, our net cash provided by (used for) operating activities was ($0.5 mil- lion), ($0.6 million) and $45.0 million, re s p e c t i ve l y. For the years ended December 31, 1996, 1997 and 1998, our net cash pro- vided by financing activities was $21.2 million, $159.8 million and $345.2 million, re s p e c t i ve l y. Our primary financing-re l a t e d activities in 1998 included the follow i n g : Exchangeable Pre f e r red Stock Offering. On December 16, 1998, we privately placed 200,000 shares of our 123⁄4% Se n i o r Exchangeable Pre f e r red Stock due 2010, with a liquidation pre f e rence of $1,000 per share, resulting in net proceeds to us of a p p roximately $193.0 million. We used a portion of the net proceeds of the exchangeable pre f e r red stock offering to repay our outstanding indebtedness under Crown Communications’ senior credit facility. We used the remainder of the net proceeds of the exchangeable pre f e r red stock offering to finance a portion of our investment in the Bell Atlantic Mobile joint ve n t u re . 31 M a n a g e m e n t ’ s D i s c u s s i o n a n d A n a l y s i s o f F i n a n c i a l C o n d i t i o n a n d R e s u l t s o f O p e r a t i o n s ( c o n t i n u e d ) Initial Public Offering. On August 18, 1998, we completed our initial public offering at a price to the public of $13.00 per share . We sold 12,320,000 shares of our common stock and received proceeds of $151.0 million (after underwriting discounts of $9.1 million but before other expenses of our initial public offering, which totaled approximately $4.1 million). We used the net proceeds from our initial public offering to finance a portion of our investment in the Bell Atlantic Mobile joint ve n t u re . Capital expenditures we re $138.8 million for the twe l ve months ended December 31, 1998, of which $3.7 million we re for CCIC, $84.9 million we re for Crown Communications and $50.2 million we re for CTSH. We anticipate that we will build, t h rough the end of 1999, between 900 and 1,200 towers at an aggregate cost of between $170.0 million and $220.0 million. We also expect that the capital expenditure re q u i rements related to the roll-out of digital broadcast transmission in the UK will be a p p roximately £40.0 million ($66.5 million). In addition to capital expenditures in connection with build-to-suits, we expect to apply a significant amount of capital to finance the cash portion of the consideration being paid in connection with the proposed transactions. In connection with the Bell Atlantic Mobile joint ve n t u re, we issued approximately 15.6 million shares of our common stock and contributed $250.0 million in cash to the joint ve n t u re. The joint ve n t u re borrowed approximately $180.0 million under a committed $250.0 million re volving credit facility, following which the joint ve n t u re made a $380.0 million cash distribution to Bell Atlantic Mo b i l e . In connection with the proposed Be l l South transaction, we will issue approximately 9.1 million shares of our common stock and pay Be l l South $430.0 million in cash. We have deposited $50.0 million in an escrow account pending the first closing of the transaction, which we funded through a loan agreement we entered into on Ma rch 15, 1999. We expect to use a portion of the net p roceeds from proposed underwritten public offerings of our common stock and debt securities to finance this transaction. In connection with the proposed Powe rtel acquisition, we will pay Powe rtel $275.0 million in cash. We have deposited $50.0 million, which we funded through the Ma rch 15, 1999 loan agreement, in an escrow account to be applied to the purchase price at closing. We expect to use a portion of the net proceeds of our proposed offerings to finance this transaction. We expect that the completion of the proposed transactions and the execution of our new tower build, or build-to-suit pro g r a m , will have a material impact on our liquidity. We expect that once integrated, these transactions will have a positive impact on l i q u i d i t y, but will re q u i re some period of time to offset the initial adverse impact on liquidity. In addition, we believe that as new t owers become operational and we begin to add tenants, they should result in a long-term increase in liquidity. Our liquidity may also be materially impacted if we fail to complete the Be l l South transaction or the Powe rtel acquisition. If we complete our offerings and subsequently fail to complete the Be l l South transaction or the Powe rtel acquisition, the proceeds of the offerings would no longer be re q u i red to be allocated to finance such transactions and would be available to us as additional liquidi- t y. The increase in our liquidity, howe ve r, could be somewhat offset by any portion of the escrow payments made in connection with such transactions that we may forfeit as a result of not closing such transactions. Mo re import a n t l y, if we fail to consummate the proposed offerings or to consummate them on terms that result in less net pro- ceeds, we would have to seek alternative financing for the proposed transactions. In such event, there can be no assurance that we could obtain any such alternative financing and we may be forced to forego these transactions. If we forego either the pro p o s e d Be l l South transaction or the proposed Powe rtel acquisition, we would likely be forced to forfeit all or part of the related escrow pay- ments. If we we re to fail to consummate the proposed offerings, fail to consummate the proposed transactions and forfeit all or any significant portion of the $100.0 million in escrow payments made in connection with the proposed transactions, it would have a material adverse effect on the Company’s financial condition, including its ability to implement its current business strategy. To fund the execution of our business strategy, including the proposed transactions described in this document and the con- s t ruction of new towers that we have agreed to build, we expect to use the net proceeds of our offerings and borrowings ava i l a b l e under our United States and UK credit facilities. We will have additional cash needs to fund our operations in the future. We may also have additional cash needs in the near-term if additional tower acquisitions or build-to-suit opportunities arise. Some of the o p p o rtunities that we are currently pursuing could re q u i re significant additional capital. If we do not otherwise have cash ava i l a b l e , or borrowings under our credit facilities have otherwise been utilized, when our cash need arises, we would be forced to seek addi- tional debt or equity financing or to forego the opport u n i t y. In the event we determine to seek additional debt or equity financing, 32 t h e re can be no assurance that any such financing will be available, on commercially acceptable terms or at all, or permitted by the terms of our existing indebtedness. As of December 31, 1998, assuming we had completed our proposed offerings, we would have had consolidated cash and cash e q u i valents of $1,108.5 million (including $6.5 million at CTSH), consolidated long-term debt of $879.7 million, consolidated redeemable pre f e r red stock of $201.1 million and consolidated stockholders’ equity of $1,114.6 million. As of December 31, 1998, assuming we had completed the offerings and the recent and proposed transactions described in this document, we would have had consolidated cash and cash equivalents of $195.5 million (including $6.5 million at CTSH and $45.9 million at the Bell At l a n t i c Mobile joint ve n t u re), consolidated long-term debt of $1,059.7 million, consolidated redeemable pre f e r red stock of $201.1 million and consolidated stockholders’ equity of $1,491.6 million. As of Ma rch 1, 1999, Crown Communications and its subsidiaries had unused borrowing availability under its senior credit facil- ity of approximately $54.0 million, and CTSH had unused borrowing availability under its credit facility of approximately £24.0 mil- lion ($39.9 million). As of December 31, 1998, Crown Communications and its subsidiaries and CTSH and its subsidiaries had a p p roximately $77.6 million and £30.8 million ($51.2 million) of unused borrowing ava i l a b i l i t y, re s p e c t i ve l y, under Crow n C o m m u n i c a t i o n s’ senior credit facility and CTS H ’s credit facility. Upon its formation, the Bell Atlantic Mobile joint ve n t u re bor- rowed $180.0 million under a committed $250.0 million credit facility. Crown Communications’ senior credit facility, CTS H ’s c redit facility and the joint ve n t u re’s credit facility re q u i re that the re s p e c t i ve borrowers maintain certain financial covenants; in addi- tion, all three credit facilities place restrictions on the ability of the borrower and its subsidiaries to, among other things, incur debt and liens, pay dividends, make capital expenditures, undertake transactions with affiliates and make investments. These facilities also limit the ability of the borrowing subsidiaries to pay dividends to CCIC. If CCIC is unable to refinance its subsidiary debt or renegotiate the terms of such debt, CCIC may not be able to meet its debt s e rvice re q u i rements, including interest payments on the 105⁄8% discount notes, in the future. Prior to May 15, 2003, the intere s t expense on our 105⁄8% discount notes will be comprised solely of the amortization of original issue discount. T h e re a f t e r, the 105⁄8% discount notes will re q u i re annual cash interest payments of approximately $26.7 million. Prior to December 15, 2003, we do not expect to pay cash dividends on our exchangeable pre f e r red stock or, if issued, cash interest on the exchange debentures. T h e re a f t e r, assuming all dividends or interest have been paid-in-kind, our exchangeable pre f e r red stock or, if issued, the exchange debenture s will re q u i re annual cash dividend or interest payments of approximately $47.8 million. Annual cash interest payments on the CTS H bonds are £11.25 million ($18.7 million). In addition, Crown Communications’ senior credit facility and CTS H ’s credit facility will re q u i re periodic interest payments on amounts borrowed there u n d e r. As a holding company, CCIC will re q u i re distributions or dividends from its subsidiaries, or will be forced to use capital raised in debt and equity offerings, to fund its debt obligations, including interest payments on the 105⁄8% discount notes. As we described a b ove, the terms of the indebtedness of CCIC’s subsidiaries significantly limit such subsidiaries’ ability to distribute cash to CCIC. Our ability to make scheduled payments of principal of, or to pay interest on, our debt obligations, and our ability to refinance any such debt obligations, will depend on our future performance, which, to a certain extent, is subject to general economic, financial, com- p e t i t i ve, legislative, re g u l a t o ry and other factors that are beyond our control. We anticipate that we may need to refinance all or a por- tion of our indebtedness (including our 105⁄8% discount notes and the CTSH bonds) on or prior to its scheduled maturity. T h e re can be no assurance that we will be able to effect any re q u i red refinancings of our indebtedness on commercially reasonable terms or at all. R e p o r t i n g R e q u i r e m e n t s U n d e r t h e I n d e n t u r e G o v e r n i n g t h e 1 0 5 ⁄ 8 % D i s c o u n t N o t e s ( t h e “ I n d e n t u r e ” ) The following information (as such capitalized terms are defined in the In d e n t u re) is presented solely as a re q u i rement of the In d e n t u re; such information is not intended as an alternative measure of financial position, operating results or cash flow fro m operations (as determined in accordance with generally accepted accounting principles). Fu rt h e r m o re, our measure of the follow- ing information may not be comparable to similarly titled measures of other companies. Upon consummation of the share exchange with CTS H ’s shareholders, which increased our ownership interest in CTSH to 80%, we designated CTSH as an Un restricted Su b s i d i a ry. In addition, the net proceeds from our initial public offering we re placed into a newly formed subsidiary that was also designated as an Un restricted Su b s i d i a ry. Prior to these transactions, we did not have 33 M a n a g e m e n t ’ s D i s c u s s i o n a n d A n a l y s i s o f F i n a n c i a l C o n d i t i o n a n d R e s u l t s o f O p e r a t i o n s ( c o n t i n u e d ) any Un restricted Subsidiaries. Su m m a r i zed financial information for (1) the Company and its Restricted Subsidiaries and (2) the C o m p a n y’s Un restricted Subsidiaries is as follow s : December 31, 1998 Company and Re s t r i c t e d Su b s i d i a r i e s Cash and cash equiva l e n t s . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pro p e rty and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . In vestments in Un restricted Su b s i d i a r i e s . . . . . . . . . . . . . . . . Goodwill and other intangible assets, net . . . . . . . . . . . . . . . . Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1 , 7 8 5 1 9 , 5 8 5 1 6 5 , 2 0 5 7 4 4 , 9 4 1 1 4 3 , 7 2 9 1 5 , 4 4 0 Un re s t r i c t e d Su b s i d i a r i e s C o n s o l i d a t i o n El i m i n a t i o n s C o n s o l i d a t e d To t a l ( In thousands of dollars) $ 2 5 4 , 6 6 5 $ 2 6 , 0 8 1 4 2 7 , 3 8 9 — — — — ( 7 4 4 , 9 4 1 ) 4 2 6 , 0 1 1 3 , 3 4 0 — — $ 2 9 6 , 4 5 0 4 5 , 6 6 6 5 9 2 , 5 9 4 — 5 6 9 , 7 4 0 1 8 , 7 8 0 Cu r rent liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1 7 , 6 5 3 $ 7 5 , 2 3 4 $ 1 , 1 3 0 , 6 8 5 $ 1 , 1 3 7 , 4 8 6 $ $ ( 7 4 4 , 9 4 1 ) $ 1 , 5 2 3 , 2 3 0 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 7 3 , 5 9 9 Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority intere s t s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Redeemable pre f e r red stock . . . . . . . . . . . . . . . . . . . . . . . . . . St o c k h o l d e r s’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 0 8 — 2 0 1 , 0 6 3 7 3 7 , 5 6 2 2 5 6 , 1 1 1 2 2 , 0 1 5 3 9 , 1 8 5 — 7 4 4 , 9 4 1 ( 7 4 4 , 9 4 1 ) — — — — — $ 9 2 , 8 8 7 4 2 9 , 7 1 0 2 2 , 8 2 3 3 9 , 1 8 5 2 0 1 , 0 6 3 7 3 7 , 5 6 2 $ 1 , 1 3 0 , 6 8 5 $ 1 , 1 3 7 , 4 8 6 $ ( 7 4 4 , 9 4 1 ) $ 1 , 5 2 3 , 2 3 0 T h ree Months Ended December 31, 1998 Year Ended December 31, 1998 Company and Re s t r i c t e d Su b s i d i a r i e s Un re s t r i c t e d C o n s o l i d a t e d Su b s i d i a r i e s To t a l Company and Re s t r i c t e d Su b s i d i a r i e s Un re s t r i c t e d C o n s o l i d a t e d Su b s i d i a r i e s To t a l Net re ve n u e s . . . . . . . . . . . . . . . . . . . . . . . . . $ 1 7 , 0 3 0 $ 4 3 , 7 8 7 $ 6 0 , 8 1 7 $ 5 5 , 0 2 3 $ 5 8 , 0 5 5 $ 1 1 3 , 0 7 8 ( In thousands of dollars) Costs of operations (exc l u s i ve of d e p reciation and amort i z a t i o n ) . . . . . . . . General and administrative . . . . . . . . . . . . . . Corporate deve l o p m e n t . . . . . . . . . . . . . . . . . Non-cash compensation charges . . . . . . . . . . De p reciation and amort i z a t i o n . . . . . . . . . . . 7 , 0 6 9 6 , 8 8 3 1 , 7 8 7 5 2 3 4 , 8 7 9 1 8 , 1 1 7 1 , 6 6 6 — 8 7 4 2 5 , 1 8 6 8 , 5 4 9 1 , 7 8 7 1 , 3 9 7 1 5 , 2 5 5 2 0 , 1 3 4 Operating income (loss) . . . . . . . . . . . . . . . . ( 4 , 1 1 1 ) Equity in earnings of unconsolidated affiliate In t e rest and other income (expense) . . . . . . . — ( 2 8 5 ) 7 , 8 7 5 — 2 , 2 1 2 3 , 7 6 4 — 1 , 9 2 7 In t e rest expense and amortization 2 3 , 4 4 6 2 1 , 1 5 3 4 , 6 2 5 9 , 9 0 7 1 6 , 9 2 1 ( 2 1 , 0 2 9 ) 2 , 0 5 5 1 , 1 0 1 2 4 , 3 7 2 2 , 4 1 8 — 2 , 8 5 1 2 0 , 3 1 8 8 , 0 9 6 — 3 , 1 1 9 4 7 , 8 1 8 2 3 , 5 7 1 4 , 6 2 5 1 2 , 7 5 8 3 7 , 2 3 9 ( 1 2 , 9 3 3 ) 2 , 0 5 5 4 , 2 2 0 of deferred financing costs . . . . . . . . . . . . ( 5 , 8 2 3 ) ( 5 , 6 8 5 ) ( 1 1 , 5 0 8 ) ( 2 1 , 7 2 7 ) ( 7 , 3 6 2 ) ( 2 9 , 0 8 9 ) Provision for income taxe s . . . . . . . . . . . . . . . Minority intere s t s . . . . . . . . . . . . . . . . . . . . . ( 1 5 6 ) — — ( 1 , 3 2 6 ) ( 1 5 6 ) ( 1 , 3 2 6 ) ( 3 7 4 ) — — ( 1 , 6 5 4 ) ( 3 7 4 ) ( 1 , 6 5 4 ) Net income (loss) . . . . . . . . . . . . . . . . . . . . . $ ( 1 0 , 3 7 5 ) $ 3 , 0 7 6 $ ( 7 , 2 9 9 ) $ ( 3 9 , 9 7 4 ) $ 2 , 1 9 9 $ ( 3 7 , 7 7 5 ) 34 Tower Cash Fl ow and Adjusted Consolidated Cash Fl ow for the Company and its Restricted Subsidiaries is as follow s : ( In thousands of dollars) Tower Cash Fl ow, for the three months ended December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3 , 8 6 8 Consolidated Cash Fl ow, for the twe l ve months ended December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6 , 0 0 1 Less: Tower Cash Fl ow, for the twe l ve months ended December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 1 4 , 8 1 1 ) Plus: four times Tower Cash Fl ow, for the three months ended December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 5 , 4 7 2 Adjusted Consolidated Cash Fl ow, for the twe l ve months ended December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6 , 6 6 2 C o m p e n s a t i o n C h a r g e s R e l a t e d t o S t o c k O p t i o n G r a n t s During the period from April 24, 1998 through July 15, 1998, we granted options to employees and exe c u t i ves for the purchase of 3,236,980 shares of our common stock at an exe rcise price of $7.50 per share. Of such options, options for 1,810,730 shares vested upon completion of the initial public offering and the remaining options for 1,426,250 shares will vest at 20% per year over five years, begin- ning one year from the date of grant. In addition, we have assigned our right to re p u rchase 100,000 shares of our common stock from a stockholder (at a price of $6.26 per share) to two individuals (including a newly elected director). Since the granting of these options and the assignment of these rights to re p u rchase shares occurred subsequent to the date of the share exchange agreement with CTS H ’s share- holders and at prices substantially below the price to the public in the initial public offering, we have re c o rded a non-cash compensation charge related to these options and shares based upon the difference between the re s p e c t i ve exe rcise and purchase prices and the price to the public in the initial public offering. Such compensation charge will total approximately $18.4 million, of which approximately $10.6 million was re c o g n i zed upon completion of the initial public offering (for such options and shares which vested upon completion of the initial public offering), and the remaining $7.8 million is being re c o g n i zed over five years (approximately $1.6 million per year) thro u g h the second quarter of 2003. An additional $1.6 million in non-cash compensation charges will be re c o g n i zed through the third quart e r of 2001 for stock options issued to certain members of CTS H ’s management prior to the completion of the share exc h a n g e . I m p a c t o f R e c e n t l y I s s u e d A c c o u n t i n g S t a n d a r d s In April 1998, the Accounting St a n d a rds Exe c u t i ve Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-5, Re p o rting on the Costs of St a rt - Up Activities (“SOP 98-5”). SOP 98-5 re q u i res that costs of start - u p activities be charged to expense as incurred and broadly defines such costs. We have deferred certain costs incurred in connection with potential business initiatives and new geographic markets, and SOP 98-5 will re q u i re that such deferred costs be charged to results of operations upon its adoption. SOP 98-5 is effective for fiscal years beginning after December 15, 1998. We will adopt the re q u i rements of SOP 98-5 as of Ja n u a ry 1, 1999. The cumulative effect of the change in accounting principle for the adoption of SOP 98-5 will result in a charge to results of operations in our financial statements for the three months ending Ma rch 31, 1999; it is currently estimated that such charge will amount to approximately $2.3 million. In June 1998, the Financial Accounting St a n d a rds Board (the “FASB”) issued Statement of Financial Accounting St a n d a rds No. 133, Accounting for De r i va t i ve In s t ruments and Hedging Activities ( “ S FAS 133”). SFAS 133 re q u i res that deriva t i ve instruments be re c o g- n i zed as either assets or liabilities in the consolidated balance sheet based on their fair values. Changes in the fair values of such deriva t i ve i n s t ruments will be re c o rded either in results of operations or in other compre h e n s i ve income, depending on the intended use of the deriv- a t i ve instrument. The initial application of SFAS 133 will be re p o rted as the effect of a change in accounting principle. SFAS 133 is effec- t i ve for all fiscal quarters of fiscal years beginning after June 15, 1999. We will adopt the re q u i rements of SFAS 133 in our financial statements for the three months ending Ma rch 31, 2000. We have not yet determined the effect that the adoption of SFAS 133 will have on our consolidated financial statements. Y e a r 2 0 0 0 C o m p l i a n c e The year 2000 problem is the result of computer programs having been written using two digits (rather than four) to define the applicable ye a r. Any of our computer programs that have date-sensitive software may re c o g n i ze a date using “00” as 1900 rather 35 M a n a g e m e n t ’ s D i s c u s s i o n a n d A n a l y s i s o f F i n a n c i a l C o n d i t i o n a n d R e s u l t s o f O p e r a t i o n s ( c o n t i n u e d ) than the year 2000, or may not re c o g n i ze the date at all. This could result in a system failure or miscalculations causing d i s ruption of operations including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. In 1997 we established a year 2000 project to ensure that the issue re c e i ved appropriate priority and that necessary re s o u rces we re made available. This project includes the replacement of our worldwide business computer systems with systems that use pro g r a m s primarily from J.D. Ed w a rds, Inc. The new systems are expected to make approximately 90% of our business computer systems year 2000 compliant and are in production today. Remaining business software programs, including those supplied by vendors, will be made year 2000 compliant through the year 2000 project or they will be re t i red. None of our other information technology pro j- ects has been delayed due to the implementation of the year 2000 pro j e c t . Our year 2000 project is divided into the following phases: (1) inve n t o rying year 2000 items; (2) assigning priorities to identified items; (3) assessing the year 2000 compliance of items determined to be material to us; (4) repairing or replacing material items that are determined not to be year 2000 compliant; (5) testing material items; and (6) designing and implementing contingency and business continuation plans for each organization and company location. We have completed the inve n t o ry and priority assessment phases and a re 90% complete with the assessing compliance phase. The remaining items include various third party assurances re g a rding the ye a r 2000 status of their operations. We are now continuing with the testing phase of the year 2000 project. All critical broadcast equipment and non-information technology related equipment has been tested and is either year 2000 compliant, has been designated as year 2000 re a d y, or will be re p a i red or replaced by June 1999. A year 2000 ready designation implies the equipment or system will function with- out adverse effects beyond year 2000 but may not be aware of the century. All critical information technology systems have been desig- nated year 2000 compliant or are scheduled to be re t i red or remediated by July 1999. The testing phase is ongoing as hard w a re or system s o f t w a re is remediated, upgraded or replaced. Testing as well as remediation is scheduled for completion in July 1999. The final phase of our year 2000 project, contingency planning, will be completed and tested to the extent possible by September 1999. We have expended $6.9 million on the year 2000 project through December 31, 1998, of which approximately $6.8 million related to the implementation of the J.D. Ed w a rds Systems and related hard w a re. Funds for the year 2000 project are provided fro m a separate budget of $0.6 million for all items. The failure to correct a material year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect our results of operations, liquidity and financial condi- tion. Due to the general uncertainty inherent in the year 2000 problem, resulting in part from the uncertainty of the year 2000 readiness of third - p a rty suppliers and customers, we are unable to determine at this time whether the consequences of year 2000 f a i l u res will have a material impact on our results of operations, liquidity or financial condition. The year 2000 project is expected to significantly reduce our level of uncertainty about the year 2000 problem and, in part i c u l a r, about the year 2000 compliance and readiness of our material business partners. We believe that, with the implementation of new business systems and completion of the project as scheduled, the possibility of significant interruptions of normal operations should be re d u c e d . Q u a l i t a t i v e a n d Q u a n t i t a t i v e D i s c l o s u r e s a b o u t M a r k e t R i s k The Company, as a result of its international operating, investing and financing activities, is exposed to market risks, which include changes in foreign currency exchange rates and interest rates which may adversely affect its results of operations and financial posi- tion. In seeking to minimize the risks and/or costs associated with such activities, the Company manages exposure to changes in i n t e rest rates and foreign currency exchange rates. C e rtain financial instruments used to obtain capital are subject to market risks from fluctuations in market rates. The majority of our financial instruments, howe ve r, are long-term fixed interest rate notes and debentures. T h e re f o re, fluctuations in mark e t i n t e rest rates of 1% in 1999 would not have a material effect on the Company’s consolidated financial re s u l t s . The majority of our foreign currency transactions are denominated in the British pound sterling, which is the functional curre n- cy of CTSH. As these contracts are denominated and settled in the functional curre n c y, risks associated with currency fluctuations a re minimized to foreign currency translation adjustments. The Company does not currently hedge against foreign currency trans- lation risks and believes that foreign currency exchange risk is not significant to its operations. 36 I n d e p e n d e n t A u d i t o r s ’ R e p o r t T o t h e B o a r d o f D i r e c t o r s a n d S t o c k h o l d e r s o f C r o w n C a s t l e I n t e r n a t i o n a l C o r p . : We have audited the accompanying consolidated balance sheets of Crown Castle International Corp. and subsidiaries as of December 31, 1997 and 1998, and the related consolidated statements of operations and compre h e n s i ve loss, cash flows and stock- h o l d e r s’ equity (deficit) for each of the years in the thre e - year period ended December 31, 1998. These consolidated financial state- ments 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 re q u i re that we plan and p e rform 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 ove r a l l financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements re f e r red to above present fairly, in all material respects, the financial posi- tion of Crown Castle International Corp. and subsidiaries as of December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the years in the thre e - year period ended December 31, 1998, in conformity with generally accept- ed accounting principles. Houston, Te x a s Fe b ru a ry 24, 1999 37 C o n s o l i d a t e d B a l a n c e S h e e t ( I n t h o u s a n d s o f d o l l a r s ) December 31, 1 9 9 7 1 9 9 8 A s s e t s Cu r rent assets: Cash and cash equiva l e n t s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5 5 , 0 7 8 $ 2 9 6 , 4 5 0 Re c e i va b l e s : Trade, net of allowance for doubtful accounts of $177 and $1,535 at December 31, 1997 and 1998, re s p e c t i ve l y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ot h e r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . In ve n t o r i e s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pro p e rty and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . In vestments in affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill and other intangible assets, net of accumulated amortization of 9 , 2 6 4 8 1 1 1 , 3 2 2 6 8 1 6 7 , 1 5 6 8 1 , 9 6 8 5 9 , 0 8 2 3 2 , 1 3 0 4 , 2 9 0 6 , 5 9 9 2 , 6 4 7 3 4 2 , 1 1 6 5 9 2 , 5 9 4 2 , 2 5 8 $3,997 and $20,419 at December 31, 1997 and 1998, re s p e c t i ve l y . . . . . . . . . . . . . . . . . . . . . . 1 5 2 , 5 4 1 5 6 9 , 7 4 0 De f e r red financing costs and other assets, net of accumulated amortization of $743 and $1,722 at December 31, 1997 and 1998, re s p e c t i ve l y . . . . . . . . . . . . . . . . . . . . . . . . 1 0 , 6 4 4 1 6 , 5 2 2 $ 3 7 1 , 3 9 1 $ 1 , 5 2 3 , 2 3 0 L i a b i l i t i e s a n d S t o c k h o l d e r s ’ E q u i t y Cu r rent liabilities: Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7 , 7 6 0 $ Ac c rued intere s t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ac c rued compensation and related benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . De f e r red rental re venues and other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1 , 7 9 2 2 , 3 9 8 Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1 , 9 5 0 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 5 6 , 2 9 3 Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 0 7 Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 6 8 , 8 5 0 Commitments and contingencies (Note 12) Minority intere s t s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Redeemable pre f e r red stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 6 0 , 7 4 9 St o c k h o l d e r s’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1 , 7 9 2 4 6 , 0 2 0 1 5 , 6 7 7 5 , 1 8 8 2 6 , 0 0 2 9 2 , 8 8 7 4 2 9 , 7 1 0 2 2 , 8 2 3 5 4 5 , 4 2 0 3 9 , 1 8 5 2 0 1 , 0 6 3 7 3 7 , 5 6 2 $ 3 7 1 , 3 9 1 $ 1 , 5 2 3 , 2 3 0 See notes to consolidated financial statements. 38 C o n s o l i d a t e d S t a t e m e n t o f O p e r a t i o n s a n d C o m p r e h e n s i v e L o s s ( I n t h o u s a n d s o f d o l l a r s , e x c e p t p e r s h a r e a m o u n t s ) Net re ve n u e s : Site rental and broadcast transmission . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Ne t w o rk services and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses: Costs of operations (exc l u s i ve of depreciation and amort i z a t i o n ) : Site rental and broadcast transmission . . . . . . . . . . . . . . . . . . . . . . . . . . . Ne t w o rk services and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate deve l o p m e n t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-cash compensation charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . De p reciation and amort i z a t i o n . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Years Ended December 31, 1 9 9 6 1 9 9 7 1 9 9 8 5 , 6 1 5 5 9 2 6 , 2 0 7 1 , 2 9 2 8 1 , 6 7 8 1 , 3 2 4 — 1 , 2 4 2 5 , 5 4 4 $ 1 1 , 0 1 0 2 0 , 3 9 5 3 1 , 4 0 5 $ 7 5 , 0 2 8 3 8 , 0 5 0 1 1 3 , 0 7 8 2 , 2 1 3 1 3 , 1 3 7 6 , 8 2 4 5 , 7 3 1 — 6 , 9 5 2 3 4 , 8 5 7 2 6 , 2 5 4 2 1 , 5 6 4 2 3 , 5 7 1 4 , 6 2 5 1 2 , 7 5 8 3 7 , 2 3 9 1 2 6 , 0 1 1 Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 6 3 ( 3 , 4 5 2 ) ( 1 2 , 9 3 3 ) Other income (expense): Equity in earnings (losses) of unconsolidated affiliate . . . . . . . . . . . . . . . . . In t e rest and other income (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1 9 3 In t e rest expense and amortization of deferred financing costs . . . . . . . . . . . ( 1 , 8 0 3 ) Loss before income taxes and minority intere s t s . . . . . . . . . . . . . . . . . . . . . . . Provision for income taxe s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority intere s t s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends on pre f e r red stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 9 4 7 ) ( 1 0 ) — ( 9 5 7 ) — Net loss after deduction of dividends on pre f e r red stock . . . . . . . . . . . . . . . . . $ ( 9 5 7 ) Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ ( 9 5 7 ) Other compre h e n s i ve income: Fo reign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . — C o m p re h e n s i ve loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ ( 9 5 7 ) Loss per common share — basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . $ ( 0 . 2 7 ) Common shares outstanding — basic and diluted (in thousands) . . . . . . . . . . 3 , 5 0 3 ( 1 , 1 3 8 ) 1 , 9 5 1 ( 9 , 2 5 4 ) ( 1 1 , 8 9 3 ) ( 4 9 ) — ( 1 1 , 9 4 2 ) ( 2 , 1 9 9 ) ( 1 4 , 1 4 1 ) ( 1 1 , 9 4 2 ) 5 6 2 ( 1 1 , 3 8 0 ) ( 2 . 2 7 ) 6 , 2 3 8 $ $ $ $ 2 , 0 5 5 4 , 2 2 0 ( 2 9 , 0 8 9 ) ( 3 5 , 7 4 7 ) ( 3 7 4 ) ( 1 , 6 5 4 ) ( 3 7 , 7 7 5 ) ( 5 , 4 1 1 ) ( 4 3 , 1 8 6 ) ( 3 7 , 7 7 5 ) 1 , 1 2 8 ( 3 6 , 6 4 7 ) ( 1 . 0 2 ) 4 2 , 5 1 8 $ $ $ $ See notes to consolidated financial statements. 39 C o n s o l i d a t e d S t a t e m e n t o f C a s h F l o w s ( I n t h o u s a n d s o f d o l l a r s ) Cash flows from operating activities: Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Adjustments to reconcile net loss to net cash p rovided by (used for) operating activities: Years Ended December 31, 1 9 9 6 1 9 9 7 1 9 9 8 ( 9 5 7 ) $ ( 1 1 , 9 4 2 ) $ ( 3 7 , 7 7 5 ) De p reciation and amort i z a t i o n . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A m o rtization of deferred financing costs and discounts on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-cash compensation charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority intere s t s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity in losses (earnings) of unconsolidated affiliate . . . . . . . . . . . . . Changes in assets and liabilities, excluding the effects of acquisitions: In c rease in accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . In c rease (decrease) in deferred rental re venues and other liabilities . . In c rease (decrease) in accrued intere s t . . . . . . . . . . . . . . . . . . . . . . . De c rease (increase) in re c e i va b l e s . . . . . . . . . . . . . . . . . . . . . . . . . . In c rease in inventories, prepaid expenses and other assets . . . . . . . . Net cash provided by (used for) operating activities . . . . . . . . . . . 1 , 2 4 2 5 5 — — — 3 2 3 2 1 9 3 0 6 ( 1 , 6 9 5 ) ( 2 3 ) ( 5 3 0 ) 6 , 9 5 2 2 , 1 5 9 — — 1 , 1 3 8 1 , 8 2 4 ( 2 4 0 ) ( 3 9 6 ) 1 , 3 5 3 ( 1 , 4 7 2 ) ( 6 2 4 ) Cash flows from investing activities: Capital expenditure s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisitions of businesses, net of cash acquire d . . . . . . . . . . . . . . . . . . . . . In vestments in affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 8 9 0 ) ( 1 0 , 9 2 5 ) ( 2 , 1 0 1 ) ( 1 8 , 0 3 5 ) ( 3 3 , 9 6 2 ) ( 5 9 , 4 8 7 ) Net cash used for investing activities . . . . . . . . . . . . . . . . . . . . . . ( 1 3 , 9 1 6 ) ( 1 1 1 , 4 8 4 ) Cash flows from financing activities: Proceeds from issuance of capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net borrowings (payments) under re volving credit agre e m e n t s . . . . . . . . . . In c u r rence of financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pu rchase of capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . Principal payments on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 0 , 5 0 3 1 1 , 0 0 0 ( 1 8 0 ) — — ( 1 3 0 ) Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . 2 1 , 1 9 3 Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase in cash and cash equiv a l e n t s . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at beginning of y e a r . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at end of y e a r . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — 6 , 7 4 7 5 9 6 7 , 3 4 3 Su p p l e m e n t a r y schedule of non-cash investing and financing activities: C o n version of stockholder’s Conve rtible Se c u red 1 3 9 , 8 6 7 ( 6 , 2 2 3 ) ( 7 , 7 9 8 ) ( 2 , 1 3 2 ) 1 5 0 , 0 1 0 ( 1 1 3 , 8 8 1 ) 1 5 9 , 8 4 3 — 4 7 , 7 3 5 7 , 3 4 3 3 7 , 2 3 9 1 7 , 9 1 0 1 2 , 7 5 8 1 , 6 5 4 ( 2 , 0 5 5 ) 1 5 , 3 7 3 5 , 8 4 7 5 , 8 3 5 ( 7 , 4 5 0 ) ( 4 , 3 6 0 ) 4 4 , 9 7 6 ( 1 3 8 , 7 5 9 ) ( 1 0 , 4 8 9 ) — ( 1 4 9 , 2 4 8 ) 3 3 9 , 9 2 9 9 , 2 1 2 ( 3 , 0 1 0 ) ( 8 8 3 ) — — 3 4 5 , 2 4 8 3 9 6 2 4 1 , 3 7 2 5 5 , 0 7 8 $ 5 5 , 0 7 8 $ 2 9 6 , 4 5 0 Su b o rdinated Notes to Series A Conve rtible Pre f e r red St o c k . . . . . . . . . . $ — $ 3 , 6 5 7 $ — Amounts re c o rded in connection with acquisitions (see Note 2): Fair value of net assets acquired, including goodwill and other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issuance of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assumption of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amounts due to seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 0 , 9 5 8 — — — 3 3 1 9 7 , 2 3 5 5 7 , 1 8 9 7 8 , 1 0 2 2 7 , 9 8 2 — 4 3 1 , 4 5 3 4 2 0 , 9 6 4 — — — Supplemental disclosure of cash flow infor m a t i o n : In t e rest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 , 4 4 2 — $ 7 , 5 3 3 2 6 $ 6 , 2 7 6 4 4 6 See notes to consolidated financial statements. 40 C o n s o l i d a t e d S t a t e m e n t o f S t o c k h o l d e r s ’ E q u i t y ( D e f i c i t ) ( I n t h o u s a n d s o f d o l l a r s , e x c e p t s h a r e a m o u n t s ) Class A Common St o c k Class B Common St o c k Common St o c k Class A Common St o c k Sh a re s ($.01 Pa r ) Sh a re s ($.01 Pa r ) Sh a re s ($.01 Pa r ) Sh a re s ($.01 Pa r ) Cu m u l a t i ve Fo re i g n Cu r re n c y Tr a n s l a t i o n Ac c u m u l a t e d Ad j u s t m e n t De f i c i t Ad d i t i o n a l Pa i d - In C a p i t a l Balance, Ja n u a ry 1, 1996 . . . . . . . . . . . . 1 , 3 5 0 , 0 0 0 $ Issuances of capital stock . . . . . . . . . Net loss . . . . . . . . . . . . . . . . . . . . . . — — 3 — — 1 , 4 3 3 , 3 3 0 $ 5 5 , 0 0 0 — Balance, December 31, 1996 . . . . . . . . . 1 , 3 5 0 , 0 0 0 3 1 , 4 8 8 , 3 3 0 Issuances of capital stock . . . . . . . . . . — — 8 , 2 2 8 , 8 3 5 3 — — 3 1 7 Pu rchase of capital stock . . . . . . . . . . ( 3 0 8 , 4 3 5 ) ( 1 ) ( 3 5 0 , 0 0 0 ) ( 1 ) Fo reign currency translation a d j u s t m e n t s . . . . . . . . . . . . . . . . . Dividends on pre f e r red stock . . . . . . Net loss . . . . . . . . . . . . . . . . . . . . . . — — — — — — — — — Balance, December 31, 1997 . . . . . . . . . 1 , 0 4 1 , 5 6 5 2 9 , 3 6 7 , 1 6 5 C o n version of pre f e r red — — — 1 9 — $ — — $ — $ 6 3 4 $ — $ ( 2 1 ) $ — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 1 2 8 — 7 6 2 5 7 , 6 9 6 ( 2 1 0 ) — — — To t a l 6 1 9 1 2 8 — ( 9 5 7 ) ( 9 5 7 ) ( 9 7 8 ) ( 2 1 0 ) — 5 7 , 7 1 3 ( 1 , 9 2 0 ) ( 2 , 1 3 2 ) — 5 6 2 ( 2 , 1 9 9 ) ( 2 , 1 9 9 ) — — — — — 5 6 2 — — ( 1 1 , 9 4 2 ) ( 1 1 , 9 4 2 ) 5 8 , 2 4 8 5 6 2 ( 1 7 , 0 3 9 ) 4 1 , 7 9 2 stock to Common St o c k . . . . . . . — — — — 3 8 , 5 1 7 , 8 6 5 3 8 5 — — 1 6 4 , 7 1 2 — — 1 6 5 , 0 9 7 C o n version of Class A Common Stock and Class B Common Stock to Common St o c k . . . . . . ( 1 , 0 4 1 , 5 6 5 ) ( 2 ) ( 9 , 3 6 7 , 1 6 5 ) ( 1 9 ) 1 0 , 9 5 3 , 6 2 5 Issuances of capital stock . . . . . . . . . . Pu rchase of capital stock . . . . . . . . . . Non-cash compensation charges . . . Fo reign currency translation a d j u s t m e n t s . . . . . . . . . . . . . . . . . Dividends on pre f e r red stock . . . . . . Net loss . . . . . . . . . . . . . . . . . . . . . . — — — — — — — — — — — — — — — — — — — 3 3 , 7 9 3 , 4 5 3 — — — — — ( 1 4 1 , 0 7 0 ) — — — — 1 0 9 3 3 8 ( 1 ) — — — — — — — — — — — — — — — — ( 8 8 ) 1 1 , 3 4 0 , 0 0 0 1 1 3 5 6 0 , 7 7 9 — — — — — — — 5 6 1 , 2 3 0 — — ( 8 8 3 ) 1 2 , 3 8 4 ( 8 8 2 ) 1 2 , 3 8 4 — — — 1 , 1 2 8 — 1 , 1 2 8 — ( 5 , 4 1 1 ) ( 5 , 4 1 1 ) — ( 3 7 , 7 7 5 ) ( 3 7 , 7 7 5 ) Balance, December 31, 1998 . . . . . . . . . — $ — — $ — 8 3 , 1 2 3 , 8 7 3 $ 8 3 1 1 1 , 3 4 0 , 0 0 0 $ 1 1 3 $ 7 9 5 , 1 5 3 $ 1 , 6 9 0 $ ( 6 0 , 2 2 5 ) $ 7 3 7 , 5 6 2 See notes to consolidated financial statements. 41 N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s 1 . B a s i s o f P r e s e n t a t i o n a n d S u m m a r y o f S i g n i f i c a n t A c c o u n t i n g P o l i c i e s B a s i s o f P r e s e n t a t i o n The consolidated financial statements include the accounts of Crown Castle International Corp. and its majority and wholly ow n e d subsidiaries, collectively re f e r red to herein as the “Company.” All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to the prior ye a r’s financial statements to be consistent with the presentation in the current ye a r. The Company owns, operates and manages wireless communications sites and broadcast transmission networks. The Company also provides complementary services to its customers, including network design, radio frequency engineering, site acquisition, site d e velopment and construction, antenna installation and network management and maintenance. The Company’s communica- tions sites are located throughout the United States, in Pu e rto Rico and in the United Kingdom. In the United States and Pu e rt o Rico, the Company’s primary business is the leasing of antenna space to wireless operators under long-term contracts. In the Un i t e d Kingdom, the Company’s primary business is the operation of television and radio broadcast transmission networks; the Company also leases antenna space to wireless operators in the United Kingdom. The preparation of financial statements in conformity with generally accepted accounting principles re q u i res management to make estimates and assumptions that affect the re p o rted amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements, and the re p o rted amounts of re venues and expenses during the re p o rting peri- od. Actual results could differ from those estimates. S u m m a r y o f S i g n i f i c a n t A c c o u n t i n g P o l i c i e s Cash Equ i va l e n ts Cash equivalents consist of highly liquid investments with original maturities of three months or less. In v e n to r i e s In ventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Pro pe rt y and Equ i p m e n t Pro p e rty and equipment is stated at cost, net of accumulated depreciation. De p reciation is computed utilizing the straight-line method at rates based upon the estimated useful lives of the various classes of assets. Additions, re n ewals and improvements are cap- i t a l i zed, while maintenance and repairs are expensed. Upon the sale or re t i rement of an asset, the related cost and accumulated d e p reciation are re m oved from the accounts and any gain or loss is re c o g n i ze d . In Ma rch 1995, the Financial Accounting St a n d a rds Board (the “FASB”) issued Statement of Financial Accounting St a n d a rd s No. 121, Accounting for the Im p a i rment of Long-Li ved Assets and for Long-Li ved Assets to Be Disposed Of ( “ S FAS 121”). SFAS 121 re q u i res that long-lived assets and certain identifiable intangibles be re v i ewed for impairment whenever events or changes in cir- cumstances indicate that the carrying amount of an asset may not be re c overable. 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. Go o dwill an d Ot her In tan g ib le As s e t s Goodwill and other intangible assets re p resents the excess of the purchase price for an acquired business over the allocated value of the related net assets (see Note 2). Goodwill is amort i zed on a straight-line basis over a twenty year life. Other intangible assets (prin- cipally the value of existing site rental contracts at Crown Communications) are amort i zed on a straight-line basis over a ten ye a r life. The carrying value of goodwill and other intangible assets will be re v i ewed for impairment whenever events or changes in cir- 42 cumstances indicate that the carrying amount of the acquired assets may not be re c overable. If the sum of the estimated future cash f l ows (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 re c o g n i zed. Me a s u rement of an impairment loss is based on the fair value of the asset. Def err ed Finan cin g Co s ts Costs incurred to obtain financing are deferred and amort i zed 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 105⁄8% Senior Discount No t e s . Rev enue Re co g n i t i o n Site rental re venues are re c o g n i zed on a monthly basis under lease or management agreements with terms ranging from 12 months to 25 years. Broadcast transmission re venues are re c o g n i zed on a monthly basis under transmission contracts with terms ranging f rom 8 years to 12 ye a r s . Ne t w o rk services re venues from site development, construction and antennae installation activities are re c o g n i zed 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 va ry significantly from those which would result fro m use of the percentage-of-completion method. These services are considered complete when the terms and conditions of the con- tract or agreement have been substantially completed. Costs and re venues associated with installations not complete at the end of a period are deferred and re c o g n i zed when the installation becomes operational. Any losses on contracts are re c o g n i zed at such time as they become know n . Ne t w o rk services re venues from design, engineering, site acquisition, and network management and maintenance activities are re c o g n i zed 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. Re venues are re c o g n i zed as services are performed with respect to the time and materials contracts. Re venues are re c o g n i zed using the percentage-of-completion method for cost plus pro f- it 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. Co r p o r ate Dev e lop men t Ex pe n s e s Corporate development expenses re p resent costs incurred in connection with acquisitions and development of new business initiative s . In come Ta x e s The Company accounts for income taxes using an asset and liability approach, which re q u i res the recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been re c o g n i zed in the Company’s financial statements or tax returns. De f e r red 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. P er Sha re In f o r m at i o n Per share information is based on the we i g h t e d - a verage number of common shares outstanding during each period for the basic computation and, if dilutive, the we i g h t e d - a verage number of potential common shares resulting from the assumed conversion of outstanding stock options, warrants and conve rtible pre f e r red stock for the diluted computation. 43 N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s ( c o n t i n u e d ) A reconciliation of the numerators and denominators of the basic and diluted per share computations is as follow s : Years Ended December 31, 1 9 9 6 1 9 9 7 1 9 9 8 ( In thousands of dollars, except per share amounts) Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Dividends on pre f e r red stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net loss applicable to common stock for basic and diluted computations . . . . $ ( 9 5 7 ) — ( 9 5 7 ) We i g h t e d - a verage number of common shares outstanding during the period for basic and diluted computations (in thousands) . . . . . . . . . . . . . . 3 , 5 0 3 Loss per common share — basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . $ ( 0 . 2 7 ) $ $ $ ( 1 1 , 9 4 2 ) ( 2 , 1 9 9 ) ( 1 4 , 1 4 1 ) 6 , 2 3 8 ( 2 . 2 7 ) $ $ $ ( 3 7 , 7 7 5 ) ( 5 , 4 1 1 ) ( 4 3 , 1 8 6 ) 4 2 , 5 1 8 ( 1 . 0 2 ) The calculations of common shares outstanding for the diluted computations exclude the following potential common share s as of December 31, 1998: (i) options to purchase 16,585,197 shares of common stock at exe rcise prices ranging from $-0- to $17.625 per share; (ii) warrants to purchase 1,314,990 shares of common stock at an exe rcise price of $7.50 per share; and (iii) s h a res of Castle Transmission Se rvices (Holdings) Ltd (“CTI”) stock which are conve rtible into 17,443,500 shares of common stock. The inclusion of such potential common shares in the diluted per share computations would be antidilutive since the Company incurred net losses for each of the three years in the period ended December 31, 1998. Foreig n Curr ency Tr a n s l at i o n CTI uses the British pound sterling as the functional currency for its operations. The Company translates CTI’s results of opera- tions using the average exchange rate for the period, and translates CTI’s assets and liabilities using the exchange rate at the end of the period. The cumulative effect of changes in the exchange rate is re c o rded as a translation adjustment in stockholders’ equity. F ina ncial In s t ru m e n ts The carrying amount of cash and cash equivalents approximates fair value for these instruments. The estimated fair value of the 1 05⁄8% Senior Discount Notes and the 9% Guaranteed Bonds is based on quoted market prices, and the estimated fair value of the other long-term debt is determined based on the current rates offered for similar borrowings. The estimated fair value of the inter- est rate swap agreement is based on the amount that the Company would re c e i ve 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 follow s : December 31, 1997 December 31, 1998 C a r rying A m o u n t Fair Va l u e C a r rying A m o u n t Fa i r Va l u e ( In thousands of dollars) Cash and cash equiva l e n t s . . . . . . . . . . . . . . . . . . . . . . . . $ 5 5 , 0 7 8 $ 5 5 , 0 7 8 $ 2 9 6 , 4 5 0 $ 2 9 6 , 4 5 0 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 1 5 6 , 2 9 3 ) ( 1 6 1 , 5 7 5 ) ( 4 2 9 , 7 1 0 ) ( 4 4 3 , 3 7 9 ) In t e rest rate swap agre e m e n t . . . . . . . . . . . . . . . . . . . . . . — ( 9 7 ) — ( 4 7 ) The Company’s interest rate swap agreement is used to manage interest rate risk. The net settlement amount resulting from this a g reement is re c o g n i zed as an adjustment to interest expense. The Company does not hold or issue deriva t i ve financial instru m e n t s for trading purposes. 44 S tock Op t i o n s In October 1995, the FASB issued Statement of Financial Accounting St a n d a rds No. 123, Accounting for St o c k - Based Compensation ( “ S FAS 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 employe e stock option plans (see Note 9). This method does not result in the recognition of compensation expense when employee stock options are granted if the exe rcise price of the options equals or exceeds the fair market value of the stock at the date of grant. Se e Note 9 for the disclosures re q u i red by SFAS 123. Recent Accou nt ing Pro n o u n c e m e n ts In June 1997, the FASB issued Statement of Financial Accounting St a n d a rds No. 130, Re p o rting Compre h e n s i ve Income ( “ S FA S 130”). SFAS 130 establishes standards for the re p o rting and display of compre h e n s i ve income in a company’s financial statements. C o m p re h e n s i ve 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 compre h e n s i ve income (other than net income or loss) include foreign currency translation adjustments, minimum pension liability adjustments and unre a l i zed gains and losses on cer- tain investments in debt and equity securities. The components of compre h e n s i ve income must be re p o rted in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 is effective for fiscal years beginning after December 15, 1997. The Company has adopted the re q u i rements of SFAS 130 in its financial statements for 1998. In June 1997, the FASB issued Statement of Financial Accounting St a n d a rds No. 131, D i s c l o s u res about Segments of an En t e r p r i s e and Related In f o rmation ( “ S FAS 131”). SFAS 131 establishes standards for the way that public companies re p o rt, 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 re q u i res that certain information about operating segments be re p o rted in interim financial statements. SFAS 131 is effective for periods beginning after December 15, 1997. The Company has adopted the re q u i rements of SFAS 131 in its financial statements for the year ended December 31, 1998 (see Note 13). In April 1998, the Accounting St a n d a rds Exe c u t i ve Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-5, Re p o rting on the Costs of St a rt - Up Activities (“SOP 98-5”). SOP 98-5 re q u i res that costs of start - u p activities be charged to expense as incurred and broadly defines such costs. The Company has deferred certain costs incurred in con- nection with potential business initiatives and new geographic markets, and SOP 98-5 will re q u i re that such deferred costs be charged to results of operations upon its adoption. SOP 98-5 is effective for fiscal years beginning after December 15, 1998. T h e Company will adopt the re q u i rements of SOP 98-5 as of Ja n u a ry 1, 1999. The cumulative effect of the change in accounting prin- ciple for the adoption of SOP 98-5 will result in a charge to results of operations in the Company’s financial statements for the thre e months ending Ma rch 31, 1999; it is currently estimated that such charge will amount to approximately $2,300,000. In June 1998, the FASB issued Statement of Financial Accounting St a n d a rds No. 133, Accounting for De r i va t i ve In s t ruments and Hedging Activities ( “ S FAS 133”). SFAS 133 re q u i res that deriva t i ve instruments be re c o g n i zed as either assets or liabilities in the con- solidated balance sheet based on their fair values. Changes in the fair values of such deriva t i ve instruments will be re c o rded either in results of operations or in other compre h e n s i ve income, depending on the intended use of the deriva t i ve instrument. The initial application of SFAS 133 will be re p o rted as the effect of a change in accounting principle. SFAS 133 is effective for all fiscal quar- ters of fiscal years beginning after June 15, 1999. The Company will adopt the re q u i rements of SFAS 133 in its financial statements for the three months ending Ma rch 31, 2000. The Company has not yet determined the effect that the adoption of SFAS 133 will h a ve on its consolidated financial statements. 45 N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s ( c o n t i n u e d ) 2 . A c q u i s i t i o n s During the three years in the period ended December 31, 1998, the Company consummated a number of business acquisitions which we re 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 re s p e c t i ve dates of acquisition. Moto ro l a, I nc . ( “ Moto ro l a” ) On June 28, 1996, the Company acquired 15 telecommunications towers and related assets, and assets related to specialized mobile radio and microw a ve services, from Mo t o rola in Pu e rto Rico. The purchase price consisted of $9,919,000 in cash. Mo t o rola pro- vided certain management services related to these assets for a period of 90 days after the closing date. Management fees for such s e rvices amounted to $57,000 for the year ended December 31, 1996. Ot her Acqu i s i t i o n s During 1996, the Company acquired a number of other telecommunications towers and related equipment from various sellers. The aggregate total purchase price for these acquisitions of $1,039,000 consisted of $1,006,000 in cash and a $33,000 payable to a seller. TE A Group I n co r p o r ated a nd T e l eSt ructur es, Inc. (co l l e c t i v e ly, “ T E A ” ) 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), pro m i s s o ry notes payable to the former stockholders of TEA totaling $1,872,000, the assumption of $1,973,000 in outstanding debt and 535,710 shares of the Company’s Class B Common Stock va l- ued at $2,250,000 (the estimated fair value of such common stock on that date). The Company re c o g n i zed goodwill of $9,568,000 in connection with this acquisition. The Company repaid the pro m i s s o ry notes with a portion of the proceeds from the issuance of its 105⁄8% Senior Discount Notes (see Note 5). C row n Co m m u n i c atio ns ( “ C C M ” ), C row n N e twor k S yst ems, Inc. ( “ C N S ” ) a nd Crow n Mo b i l e Sys tems , I nc. ( “ C M S ” ) (co l l e c t i v e ly, “ Crow n” ) On July 11, 1997, the Company entered into an asset purchase and merger agreement with the owners of Crown. On August 15, 1997, such agreement was amended and restated, and the Company acquired (i) substantially all of the assets, net of outstanding liabilities, of CCM and (ii) all of the outstanding common stock of CNS and CMS. Crown provides network services, which includes site selection and acquisition, antenna installation, site development and construction, network design and site mainte- nance, 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 pro m i s s o ry note payable to the former owners of Crown for $76,230,000, the assumption of $26,009,000 in outstanding debt and 7,325,000 shares of the Company’s Class B Common Stock valued at $54,939,000 (the esti- mated fair value of such common stock on that date). The Company re c o g n i zed 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 pro c e e d s f rom the issuance of redeemable pre f e r red stock (see Note 8), and repaid the pro m i s s o ry note with proceeds from the issuance of additional redeemable pre f e r red stock and borrowings under the Senior Credit Facility (see Note 5). In 1997, the Company organized Crown Communication Inc. (“CCI,” a De l a w a re corporation) as a wholly owned subsidiary to own the net assets acquired from CCM and the common stock of CNS and CMS. In Ja n u a ry 1998, the Company merged Castle Tower Corporation (“CTC,” a wholly owned operating subsidiary) with and into CCI, establishing CCI as the principal domestic operating subsidiary of the Company. 46 C T I On April 24, 1998, the Company entered into a share exchange agreement with certain shareholders of CTI pursuant to which cer- tain of CTI’s shareholders agreed to exchange their shares of CTI for shares of the Company. On August 18, 1998, the exc h a n g e was consummated and the Company’s ownership of CTI increased from approximately 34.3% to 80%. The Company issued 20,867,700 shares of its Common Stock and 11,340,000 shares of its Class A Common Stock, with such shares valued at an aggre- gate of $418,700,000 (based on the price per share to the public in the Company’s initial public offering as discussed in Note 9). The Company re c o g n i zed goodwill of $344,204,000 in connection with this transaction, which was accounted for as an acquisi- tion using the purchase method. CTI’s results of operations and cash flows are included in the consolidated financial statements for the period subsequent to the date the exchange was consummated. Pro For ma Re s u lts of O pe r atio ns ( Un au d i t e d) The following unaudited pro forma summary presents consolidated results of operations for the Company as if (i) the TEA and Crown acquisitions had been consummated as of Ja n u a ry 1, 1997 and (ii) the share exchange with CTI’s shareholders had been con- summated as of Ja n u a ry 1 for both 1997 and 1998. Ap p ropriate adjustments have been reflected for depreciation and amort i z a- tion, interest expense, amortization of deferred financing costs, income taxes and certain nonrecurring income and expenses re c o rded by the Company in connection with the investment in CTI in 1997 (see Note 4). The pro forma information does not necessarily reflect the actual results that would have been achieved, nor is it necessarily indicative of future consolidated results for the Company. Years Ended December 31, 1 9 9 7 1 9 9 8 ( In thousands of dollars, e xcept per share amounts) Net re ve n u e s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1 8 0 , 9 3 6 $ 2 1 0 , 0 4 1 Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 3 4 , 6 0 1 ) Loss per common share — basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 0 . 6 0 ) ( 4 6 , 5 1 7 ) ( 0 . 7 2 ) Agr eement wit h N extel Co m m u n i c atio ns, I nc. ( “ Ne x t e l ” ) On July 11, 1997, the Company entered into an agreement with Nextel (the “Nextel Agre e m e n t”) where by the Company has the option to purchase up to 50 of Ne x t e l’s existing towers which are located in Texas, Florida and the metropolitan areas of De n ve r, Colorado and Philadelphia, Pe n n s y l vania. As of Fe b ru a ry 24, 1999, the Company had purchased 49 of such towers for an aggre- gate price of $11,019,000 in cash. Mil lenni um Co m m u n i c ation s L imit ed ( “ Mi l l e n n i u m ” ) On October 8, 1998, the Company acquired all of the outstanding shares of Millennium. Millennium develops, owns and oper- ates telecommunications towers and related assets in the United Kingdom. On the date of acquisition, Millennium owned 102 t ower sites. Millennium is being operated as a subsidiary of CTI. The purchase price of $14,473,000 consisted of $9,813,000 in cash, the repayment of $2,396,000 in outstanding debt and 358,678 shares of the Company’s common stock valued at $2,264,000 (the market value of such common stock on that date). Agr eement wit h Bell At l ant ic Mobil e ( “ B A M ” ) On December 8, 1998, the Company entered into an agreement with BAM to form a joint ve n t u re (“Crown At l a n t i c”) to own and operate a significant majority of BAM’s towers. Upon formation of Crown Atlantic (which is currently expected to occur in Ma rch 1999), (i) the Company will contribute to Crown Atlantic $250,000,000 in cash and approximately 15.6 million share s of its Common Stock in exchange for a 62.3% ownership interest in Crown Atlantic, (ii) Crown Atlantic will borrow $180,000,000 under a committed $250,000,000 re volving credit facility, and (iii) BAM will contribute to Crown Atlantic approximately 1,427 47 N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s ( c o n t i n u e d ) t owers in exchange for a cash distribution of $380,000,000 from Crown Atlantic and a 37.7% ownership interest in Crow n Atlantic. Upon dissolution of Crown Atlantic, BAM would re c e i ve (i) the shares of the Company’s Common Stock contributed to Crown Atlantic and (ii) a payment (either in cash or in shares of the Company’s Common Stock, at the Company’s election) equal to 14.0% of the fair market value of Crown At l a n t i c’s other net assets; the Company would then re c e i ve the remaining assets and liabilities of Crown Atlantic. The Company will account for its investment in Crown Atlantic as an acquisition using the purc h a s e method, and will include Crown At l a n t i c’s results of operations and cash flows in the Company’s consolidated financial statements for periods subsequent to formation. 3 . P r o p e r t y a n d E q u i p m e n t The major classes of pro p e rty and equipment are as follow s : Estimated Useful Live s December 31, 1 9 9 7 1 9 9 8 Land and buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0-50 ye a r s $ Telecommunications towers and broadcast transmission equipment . . . . . . . . 5-20 ye a r s Tr a n s p o rtation and other equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-10 ye a r s Office furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-7 ye a r s Less: accumulated depre c i a t i o n . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( In thousands of dollars) 1 , 9 3 0 7 6 , 8 4 7 4 , 3 7 9 3 , 6 6 4 8 6 , 8 2 0 ( 4 , 8 5 2 ) $ 5 8 , 7 6 7 5 3 2 , 9 0 7 1 1 , 4 5 2 1 2 , 2 4 8 6 1 5 , 3 7 4 ( 2 2 , 7 8 0 ) $ 8 1 , 9 6 8 $ 5 9 2 , 5 9 4 De p reciation expense for the years ended December 31, 1997 and 1998 was $2,886,000 and $20,638,000, re s p e c t i ve l y. Accumulated depreciation on telecommunications towers and broadcast transmission equipment was $4,136,000 and $15,995,000 at December 31, 1997 and 1998, re s p e c t i ve l y. At December 31, 1998, minimum rentals re c e i vable under existing operating leases for towers are as follows: years ending December 31, 1999 — $183,244,000; 2000 — $187,311,000; 2001 — $185,097,000; 2002 — $179,641,000; 2003 — $171,329,000; thereafter — $667,731,000. 4 . I n v e s t m e n t s i n A f f i l i a t e s On Fe b ru a ry 28, 1997, the Company used a portion of the net proceeds from the sale of the Series C Conve rtible Pre f e r red St o c k (see Note 8) to purchase an ownership interest of approximately 34.3% in CTI (a company incorporated under the laws of En g l a n d and Wales). The Company led a consortium of investors which provided the equity financing for CTI. The funds invested by the c o n s o rtium we re used by CTI to purchase, through a wholly owned subsidiary, the domestic broadcast transmission division of the British Broadcasting Corporation (the “BBC”). The cost of the Company’s investment in CTI amounted to approx i m a t e l y $57,542,000. The Company accounted for its investment in CTI utilizing the equity method of accounting prior to the consum- mation of the share exchange agreement with CTI’s shareholders in August 1998 (see Note 2). In Ma rch 1997, as compensation for leading the investment consortium, the Company re c e i ved a fee from CTI amounting to a p p roximately $1,165,000. This fee was re c o rded as other income by the Company when re c e i ved. In addition, the Company re c e i ved approximately $1,679,000 from CTI as reimbursement for costs incurred prior to the closing of the purchase from the BBC. In June 1997, as compensation for the successful completion of the investment in CTI and certain other acquisitions and inve s t- ments, the Company paid bonuses to two of its exe c u t i ve officers totaling $913,000. These bonuses are included in corporate deve l- opment expenses on the Company’s consolidated statement of operations. 48 Su m m a r i zed financial information for CTI is as follows (for periods in which the Company accounted for CTI utilizing the equity method): December 31, 1 9 9 7 ( In thousands of dollars) Cu r rent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3 7 , 5 1 0 Pro p e rty and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 4 1 , 7 3 7 Goodwill, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 6 , 0 2 9 $ 4 5 5 , 2 7 6 Cu r rent liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4 8 , 1 0 3 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3 7 , 2 9 9 Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 , 4 5 3 Redeemable pre f e r red stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 7 4 , 9 4 4 St o c k h o l d e r s’ equity (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 8 , 5 2 3 ) $ 4 5 5 , 2 7 6 Ten Months Ended December 31, 1 9 9 7 Eight Mo n t h s En d e d August 31, 1 9 9 8 ( In thousands of dollars) Net re ve n u e s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1 0 3 , 5 3 1 $ Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 6 , 9 9 9 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 6 , 5 3 2 In t e rest and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 5 3 In t e rest expense and amortization of deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 2 0 , 4 0 4 ) Provision for income taxe s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 9 7 , 2 2 8 7 8 , 6 0 5 1 8 , 6 2 3 7 2 5 ( 1 3 , 3 7 8 ) — Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ ( 3 , 3 1 9 ) $ 5 , 9 7 0 5 . L o n g - t e r m D e b t Long-term debt consists of the follow i n g : Senior Credit Fa c i l i t y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4 , 7 0 0 $ 5 , 5 0 0 10 5⁄8% Senior Discount Notes due 2007, net of discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 5 1 , 5 9 3 CTI Credit Fa c i l i t y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9% Guaranteed Bonds due 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 1 6 8 , 0 9 9 5 5 , 1 7 7 2 0 0 , 9 3 4 $ 1 5 6 , 2 9 3 $ 4 2 9 , 7 1 0 December 31, 1 9 9 7 1 9 9 8 ( In thousands of dollars) 49 N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s ( c o n t i n u e d ) S enio r Cr ed i t Fac i l i ty C TC had a credit agreement with a bank (as amended, the “Bank Credit Agre e m e n t”) which consisted of secured re volving lines of credit (the “Re volving Credit Fa c i l i t y”) and a $2,300,000 term note (the “Term No t e”). On Ja n u a ry 17, 1997, the Bank Cre d i t A g reement was amended to: (i) increase the available borrowings under the Re volving Credit Facility to $50,000,000; (ii) repay the Term Note, along with accrued interest thereon, with borrowings under the Re volving Credit Facility; and (iii) extend the termi- nation date for the Bank Credit Agreement to December 31, 2003. Available borrowings under the Re volving Credit Facility we re 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 Re volving Cre d i t Facility could be used for letters of cre d i t . 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 Crow n’s bank credit agreement as a participating lender; and (iii) extend the maturity date to December 31, 2004 (as amended, the “Senior Credit Fa c i l i t y”). On October 31, 1997, additional borrowings under the Se n i o r Credit Fa c i l i t y, along with the proceeds from the October issuance of Senior Pre f e r red Stock (see Note 8), we re used to repay (i) the p ro m i s s o ry note payable to the former stockholders of Crown and (ii) the outstanding borrowings under Crow n’s bank credit agre e- ment (see Note 2). In November 1997, the Company repaid all of the outstanding borrowings under the Senior Credit Facility with a portion of the proceeds from the issuance of its 105⁄8% Senior Discount Notes (as discussed below). Upon the merger of CTC into CCI in Ja n u a ry 1998, CCI became the primary borrower under the Senior Credit Fa c i l i t y. In December 1998, the Company again repaid all of the outstanding borrowings under the Senior Credit Facility with a portion of the proceeds from the issuance of its 1 23⁄4% Senior Exchangeable Pre f e r red Stock (see Note 8). As of December 31, 1998, approximately $77,570,000 of borrowings was a vailable under the Senior Credit Fa c i l i t y, of which $5,000,000 was available for letters of credit. T h e re we re no letters of credit out- standing as of December 31, 1998. The amount of available borrowings under the Senior Credit Facility will decrease by $5,000,000 at the end of each calendar q u a rter beginning on Ma rch 31, 2001 until December 31, 2004, at which time any remaining borrowings must be repaid. Un d e r c e rtain circumstances, CCI may be re q u i red to make principal prepayments under the Senior Credit Facility in an amount equal to 50% of excess cash flow (as defined), the net cash proceeds from certain asset sales or the net cash proceeds from certain sales of equity or debt securities by the Company. The Senior Credit Facility is secured by substantially all of the assets of CCI and the Company’s pledge of the capital stock of CCI and its subsidiaries. In addition, the Senior Credit Facility is guaranteed by the Company. Borrowings under the Senior Cre d i t 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 Eu rodollar inter- bank offered rate (LIBOR) plus 3.25% (9.25% and 8.32%, re s p e c t i ve l y, at December 31, 1998). The interest rate margins may be reduced by up to 2.25% (non-cumulatively) based on a financial test, determined quart e r l y. As of December 31, 1998, the finan- cial 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. In t e rest on prime rate loans is due quart e r l y, while interest on LIBOR loans is due at the end of the period ( f rom one to three months) for which such LIBOR rate is in effect. The Senior Credit Facility re q u i res CCI to maintain cert a i n financial covenants and places restrictions on CCI’s ability to, among other things, incur debt and liens, pay dividends, make cap- ital expenditures, dispose of assets, undertake transactions with affiliates and make inve s t m e n t s . 1 0 5⁄8% Seni or Di s cou nt Notes d ue 2 0 0 7 (t he “ N ot e s ” ) 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 pro m- i s s o ry notes payable, including accrued interest thereon, to the former stockholders of TEA (see Note 2); (iii) repay certain indebt- edness, including accrued interest thereon, from a prior acquisition; and (iv) repay outstanding installment debt assumed in connection with the Crown acquisition (see Note 2). 50 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 there a f t e r. The maturity date of the Notes is November 15, 2007. The Notes are net of unamort i zed discount of $99,407,000 and $82,901,000 at December 31, 1997 and 1998, re s p e c t i ve l y. 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 35.0% of the aggre- gate principal amount of the Notes, at a price of 110.625% of the accreted value there o f, with the net cash proceeds from a public offering of the Company’s common stock. The Notes are senior indebtedness of the Company; howe ve r, they are unsecured and effectively subordinate to the liabilities of the Company’s subsidiaries, which include outstanding borrowings under the Senior Credit Fa c i l i t y, the CTI Credit Facility and the CTI Bonds. The indenture governing the Notes (the “In d e n t u re”) 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 pre f e r re d stock, dispose of assets and undertake transactions with affiliates. As of December 31, 1998, the Company was effectively pre- cluded from paying dividends on its capital stock under the terms of the In d e n t u re . Re p o rt ing Re qu i r e m e n ts Und e r th e Ind ent ure ( U n au d i t e d) The following information (as such capitalized terms are defined in the In d e n t u re) is presented solely as a re q u i rement of the In d e n t u re; such information is not intended as an alternative measure of financial position, operating results or cash flow fro m operations (as determined in accordance with generally accepted accounting principles). Fu rt h e r m o re, the Company’s measure of the following information may not be comparable to similarly titled measures of other companies. Upon consummation of the share exchange with CTI’s shareholders (see Note 2), which increased the Company’s ow n e r s h i p i n t e rest in CTI to 80%, the Company designated CTI as an Un restricted Su b s i d i a ry. In addition, the net proceeds from the C o m p a n y’s initial public offering of common stock (see Note 9) we re placed into a newly formed subsidiary that was also desig- nated as an Un restricted Su b s i d i a ry. Prior to these transactions, the Company did not have any Un restricted Su b s i d i a r i e s . Su m m a r i zed financial information for (i) the Company and its Restricted Subsidiaries and (ii) the Company’s Un re s t r i c t e d Subsidiaries is as follow s : December 31, 1998 Company and Restricted Su b s i d i a r i e s Un restricted Subsidiaries Consolidation Eliminations C o n s o l i d a t e d To t a l Cash and cash equiva l e n t s . . . . . . . . . . . . . . . . . . . . . . . . $ Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pro p e rty and equipment, net . . . . . . . . . . . . . . . . . . . . . . In vestments in Un restricted Su b s i d i a r i e s . . . . . . . . . . . . . Goodwill and other intangible assets, net . . . . . . . . . . . . . Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1 , 7 8 5 1 9 , 5 8 5 1 6 5 , 2 0 5 7 4 4 , 9 4 1 1 4 3 , 7 2 9 1 5 , 4 4 0 ( In thousands of dollars) $ 2 5 4 , 6 6 5 $ 2 6 , 0 8 1 4 2 7 , 3 8 9 — 4 2 6 , 0 1 1 3 , 3 4 0 — — — ( 7 4 4 , 9 4 1 ) — — $ 2 9 6 , 4 5 0 4 5 , 6 6 6 5 9 2 , 5 9 4 — 5 6 9 , 7 4 0 1 8 , 7 8 0 $ 1 , 1 3 0 , 6 8 5 $ 1 , 1 3 7 , 4 8 6 $ ( 7 4 4 , 9 4 1 ) $ 1 , 5 2 3 , 2 3 0 Cu r rent liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1 7 , 6 5 3 $ 7 5 , 2 3 4 $ Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 7 3 , 5 9 9 Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority intere s t s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Redeemable pre f e r red stock . . . . . . . . . . . . . . . . . . . . . . . St o c k h o l d e r s’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 0 8 — 2 0 1 , 0 6 3 7 3 7 , 5 6 2 2 5 6 , 1 1 1 2 2 , 0 1 5 3 9 , 1 8 5 — 7 4 4 , 9 4 1 — — — — — ( 7 4 4 , 9 4 1 ) $ 9 2 , 8 8 7 4 2 9 , 7 1 0 2 2 , 8 2 3 3 9 , 1 8 5 2 0 1 , 0 6 3 7 3 7 , 5 6 2 $ 1 , 1 3 0 , 6 8 5 $ 1 , 1 3 7 , 4 8 6 $ ( 7 4 4 , 9 4 1 ) $ 1 , 5 2 3 , 2 3 0 51 N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s ( c o n t i n u e d ) T h ree Months Ended December 31, 1998 Year Ended December 31, 1998 Company and Re s t r i c t e d Su b s i d i a r i e s Un re s t r i c t e d C o n s o l i d a t e d Su b s i d i a r i e s To t a l Company and Re s t r i c t e d Su b s i d i a r i e s Un re s t r i c t e d C o n s o l i d a t e d Su b s i d i a r i e s To t a l ( In thousands of dollars) Net re ve n u e s . . . . . . . . . . . . . . . . . . . . . . . . . $ 1 7 , 0 3 0 $ 4 3 , 7 8 7 $ 6 0 , 8 1 7 $ 5 5 , 0 2 3 $ 5 8 , 0 5 5 $ 1 1 3 , 0 7 8 Costs of operations (exc l u s i ve of depreciation and amort i z a t i o n ) . . . . . . . . General and administrative . . . . . . . . . . . . . . . Corporate deve l o p m e n t . . . . . . . . . . . . . . . . . Non-cash compensation charges . . . . . . . . . . . De p reciation and amort i z a t i o n . . . . . . . . . . . . 7 , 0 6 9 6 , 8 8 3 1 , 7 8 7 5 2 3 4 , 8 7 9 1 8 , 1 1 7 1 , 6 6 6 — 8 7 4 2 5 , 1 8 6 8 , 5 4 9 1 , 7 8 7 1 , 3 9 7 1 5 , 2 5 5 2 0 , 1 3 4 Operating income (loss) . . . . . . . . . . . . . . . . . ( 4 , 1 1 1 ) Equity in earnings of unconsolidated affiliate . In t e rest and other income (expense) . . . . . . . . — ( 2 8 5 ) 7 , 8 7 5 — 2 , 2 1 2 3 , 7 6 4 — 1 , 9 2 7 In t e rest expense and amortization of 2 3 , 4 4 6 2 1 , 1 5 3 4 , 6 2 5 9 , 9 0 7 1 6 , 9 2 1 ( 2 1 , 0 2 9 ) 2 , 0 5 5 1 , 1 0 1 2 4 , 3 7 2 2 , 4 1 8 — 2 , 8 5 1 2 0 , 3 1 8 8 , 0 9 6 — 3 , 1 1 9 4 7 , 8 1 8 2 3 , 5 7 1 4 , 6 2 5 1 2 , 7 5 8 3 7 , 2 3 9 ( 1 2 , 9 3 3 ) 2 , 0 5 5 4 , 2 2 0 d e f e r red financing costs . . . . . . . . . . . . . . . ( 5 , 8 2 3 ) ( 5 , 6 8 5 ) ( 1 1 , 5 0 8 ) ( 2 1 , 7 2 7 ) ( 7 , 3 6 2 ) ( 2 9 , 0 8 9 ) Provision for income taxe s . . . . . . . . . . . . . . . Minority intere s t s . . . . . . . . . . . . . . . . . . . . . . ( 1 5 6 ) — — ( 1 , 3 2 6 ) ( 1 5 6 ) ( 1 , 3 2 6 ) ( 3 7 4 ) — — ( 1 , 6 5 4 ) ( 3 7 4 ) ( 1 , 6 5 4 ) Net income (loss) . . . . . . . . . . . . . . . . . . . . . . $ ( 1 0 , 3 7 5 ) $ 3 , 0 7 6 $ ( 7 , 2 9 9 ) $ ( 3 9 , 9 7 4 ) $ 2 , 1 9 9 $ ( 3 7 , 7 7 5 ) Tower Cash Fl ow and Adjusted Consolidated Cash Fl ow for the Company and its Restricted Subsidiaries is as follow s : Tower Cash Fl ow, for the three months ended December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3 , 8 6 8 ( In thousands of dollars) Consolidated Cash Fl ow, for the twe l ve months ended December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6 , 0 0 1 Less: Tower Cash Fl ow, for the twe l ve months ended December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 1 4 , 8 1 1 ) Plus: four times Tower Cash Fl ow, for the three months ended December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 5 , 4 7 2 Adjusted Consolidated Cash Fl ow, for the twe l ve months ended December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6 , 6 6 2 CTI Credi t Fac i l i ty CTI has a credit agreement with a syndicate of banks (as amended, the “CTI Credit Fa c i l i t y”) which consists of a £64,000,000 ( a p p roximately $106,419,000) secured re volving line of credit. Available borrowings under the CTI Credit Facility are generally to be used to finance capital expenditures and for working capital and general corporate purposes. As of December 31, 1998, approx- imately $51,243,000 of borrowings was available under the CTI Credit Fa c i l i t y. The loan commitment under the CTI Credit Facility will be automatically reduced to ze ro in three equal semi-annual install- ments beginning on May 31, 2001 until May 31, 2002, when the CTI Credit Facility matures. Under certain circumstances, CTI may be re q u i red to make principal prepayments from the proceeds of certain asset sales. 52 The CTI Credit Facility is secured by substantially all of CTI’s assets. Borrowings under the CTI Credit Facility bear interest at a rate per annum equal to a Eu rodollar interbank offered rate (LIBOR) plus 0.85% (approximately 6.99% at December 31, 1998). In t e rest is due at the end of the period (from one to six months) for which such LIBOR rate is in effect. The CTI Credit Fa c i l i t y re q u i res CTI to maintain certain financial covenants and places restrictions on CTI’s ability to, among other things, incur debt and liens, pay dividends, make capital expenditures, dispose of assets, undertake transactions with affiliates and make inve s t m e n t s . 9% Gua ran te e d Bond s due 2 00 7 (“ CTI Bo n d s” ) CTI has issued £125,000,000 (approximately $207,850,000) aggregate principal amount of the CTI Bonds. In t e rest payments on the CTI Bonds are due annually on each Ma rch 30. The maturity date of the CTI Bonds is Ma rch 30, 2007. The CTI Bonds are stated net of unamort i zed discount. The CTI Bonds are redeemable, at the option of CTI, in whole or in part at any time, at the greater of their principal amount and such a price as will provide a gross redemption yield 0.5% per annum above the gross redemption yield on the benchmark gilt plus, in either case, accrued and unpaid interest. Under certain circumstances, each holder of the CTI Bonds has the right to re q u i re CTI to re p u rchase all or a portion of such holder’s CTI Bonds at a price equal to 101.0% of their aggregate principal amount plus a c c rued and unpaid intere s t . The CTI Bonds are guaranteed by CTI; howe ve r, they are unsecured and effectively subordinate to the outstanding borrow i n g s under the CTI Credit Fa c i l i t y. The trust deed governing the CTI Bonds places restrictions on CTI’s ability to, among other things, pay dividends and make capital distributions, make investments, incur additional debt and liens, dispose of assets and undert a k e transactions with affiliates. Rest ri cted Net As s e ts o f Su b s i d i a r i e s Under the terms of the Senior Credit Fa c i l i t y, the CTI Credit Facility and the CTI Bonds, the Company’s subsidiaries are limited in the amount of dividends which can be paid to the Company. For CCI, the amount of such dividends is limited to (i) $6,000,000 per year until October 31, 2002, and $33,000,000 per year there a f t e r, and (ii) an amount to pay income taxes attributable to the C o m p a n y’s Restricted Subsidiaries. CTI is effectively precluded from paying dividends. The restricted net assets of the Company’s subsidiaries totaled approximately $826,321,000 at December 31, 1998. I nteres t Rate Swap Ag r e e m e n t The interest rate swap agreement had an outstanding notional amount of $17,925,000 at Ja n u a ry 29, 1997 (inception) and ter- minated on Fe b ru a ry 24, 1999. The Company paid a fixed rate of 6.28% on the notional amount and re c e i ved a floating rate based on LIBOR. This agreement effectively changed the interest rate on $17,925,000 of borrowings under the Senior Credit Fa c i l i t y f rom a floating rate to a fixed rate of 6.28% plus the applicable margin. The Company does not believe there is any significant expo- s u re to credit risk due to the cre d i t w o rthiness of the counterpart y. In the event of nonperformance by the counterpart y, the C o m p a n y’s loss would be limited to any unfavorable interest rate differe n t i a l . 6 . I n c o m e T a x e s The provision for income taxes consists of the follow i n g : Years Ended December 31, 1 9 9 6 1 9 9 7 1 9 9 8 ( In thousands of dollars) — 1 0 1 0 $ $ — 4 9 4 9 $ $ 3 6 5 9 3 7 4 Cu r re n t : St a t e . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Pu e rto Rico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 53 N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s ( c o n t i n u e d ) 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 follow s : Years Ended December 31, 1 9 9 6 1 9 9 7 1 9 9 8 ( In thousands of dollars) Benefit for income taxes at statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ ( 3 2 2 ) $ ( 4 , 0 4 4 ) $ ( 1 2 , 1 5 4 ) Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A m o rtization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State and foreign taxes, net of federal tax benefit . . . . . . . . . . . . . . . . . . . . . . Expenses for which no federal tax benefit was re c o g n i ze d . . . . . . . . . . . . . . . . Pu e rto Rico taxe s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fo reign earnings not subject to tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in valuation allow a n c e s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ot h e r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — 5 1 0 — — 3 1 5 2 1 0 $ — 4 7 8 — 2 8 4 9 — — 3 , 6 5 0 ( 1 1 2 ) $ 4 9 $ 2 , 8 4 4 6 0 4 2 4 7 1 5 1 9 ( 6 7 5 ) ( 5 8 4 ) 9 , 9 4 4 ( 1 2 ) 3 7 4 The components of the net deferred income tax assets and liabilities are as follow s : December 31, 1 9 9 7 1 9 9 8 ( In thousands of dollars) De f e r red income tax liabilities: Pro p e rty and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2 , 4 8 7 $ 6 , 0 4 5 Pu e rto Rico earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ot h e r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 5 2 7 6 3 8 8 4 — — Total deferred income tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 , 8 7 6 6 , 1 2 9 De f e r red income tax assets: Net operating loss carry f o rw a rd s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 , 8 0 0 1 9 , 0 7 1 Noncompete agre e m e n t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ac c rued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ot h e r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Re c e i vables allow a n c e . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 7 — — — 6 4 6 4 3 5 1 6 8 4 5 4 1 Valuation allow a n c e s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 3 , 9 6 7 ) ( 1 3 , 9 1 1 ) Total deferred income tax assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 , 8 7 6 6 , 1 2 9 Net deferred income tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — Valuation allowances of $3,967,000 and $13,911,000 we re re c o g n i zed to offset net deferred income tax assets as of De c e m b e r 31, 1997 and 1998, re s p e c t i ve l y. At December 31, 1998, the Company has net operating loss carryforwards of approximately $56,000,000 which are available to offset future federal taxable income. These loss carry f o rw a rds will expire in 2010 through 2018. The utilization of the loss c a r ry f o rw a rds is subject to certain limitations. 54 7 . M i n o r i t y I n t e r e s t s Minority interests re p resent the minority stockholder’s interest in CTI. 8 . R e d e e m a b l e P r e f e r r e d S t o c k Redeemable pre f e r red stock ($.01 par value, 10,000,000 shares authorized) consists of the follow i n g : December 31, 1 9 9 7 1 9 9 8 ( In thousands of dollars) 12 3⁄4% Senior Exchangeable Pre f e r red Stock; shares issued: December 31, 1997 — none and December 31, 1998 — 200,000 (stated at mandatory redemption and aggregate liquidation va l u e ) . . . . . . . . . . . . . . . . . . . . . . . $ — $ 2 0 1 , 0 6 3 Senior Conve rtible Pre f e r red Stock; shares issued: December 31, 1997 — 657,495 and December 31, 1998 — none (stated at redemption value; aggregate liquidation value of $68,916) . . . . . . . . . . . . . . . . . . . . . 6 7 , 9 4 8 Series A Conve rtible Pre f e r red Stock; shares issued: December 31, 1997 — 1,383,333 and December 31, 1998 — none (stated at redemption and aggregate liquidation va l u e ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 , 3 0 0 Series B Conve rtible Pre f e r red Stock; shares issued: December 31, 1997 — 864,568 and December 31, 1998 — none (stated at redemption and aggregate liquidation va l u e ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 0 , 3 7 5 Series C Conve rtible Pre f e r red Stock; shares issued: December 31, 1997 — 3,529,832 and December 31, 1998 — none (stated at redemption and aggregate liquidation va l u e ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4 , 1 2 6 — — — — $ 1 6 0 , 7 4 9 $ 2 0 1 , 0 6 3 Exchan gea ble Pref e rre d S to c k On December 16, 1998, the Company issued 200,000 shares of its 123⁄4% Senior Exchangeable Pre f e r red Stock due 2010 (the “ Exchangeable Pre f e r red St o c k”) at a price of $1,000 per share (the liquidation pre f e rence per share). The net proceeds re c e i ved by the Company from the sale of such shares amounted to approximately $193,000,000 (after underwriting discounts of $7,000,000 but before other expenses of the offering, which amounted to approximately $8,059,000). A portion of the net proceeds was used to repay outstanding borrowings under the Senior Credit Facility of $73,750,000, and the remaining net proceeds are curre n t l y i n vested in short-term inve s t m e n t s . The holders of the Exchangeable Pre f e r red Stock are entitled to re c e i ve cumulative dividends at the rate of 123⁄4% per share, com- pounded quarterly on each Ma rch 15, June 15, September 15 and December 15 of each ye a r, beginning on Ma rch 15, 1999. On or before December 15, 2003, the Company has the option to pay dividends in cash or in additional shares of Exc h a n g e a b l e Pre f e r red Stock. After December 15, 2003, dividends are payable only in cash. The Company is re q u i red to redeem all outstanding shares of Exchangeable Pre f e r red Stock on December 15, 2010 at a price equal to the liquidation pre f e rence plus accumulated and unpaid dividends. On or after December 15, 2003, the shares are redeemable at the option of the Company, in whole or in part, at a price of 106.375% of the liquidation pre f e rence. The re d e m p- tion price is reduced on an annual basis until December 15, 2007, at which time the shares are redeemable at the liquidation pre f- e rence. Prior to December 15, 2001, the Company may redeem up to 35.0% of the Exchangeable Pre f e r red Stock, at a price of 112.75% of the liquidation pre f e rence, with the net proceeds from certain public equity offerings. The shares of Exc h a n g e a b l e Pre f e r red Stock are exchangeable, at the option of the Company, in whole but not in part, for 123⁄4% Senior Su b o rdinated Exc h a n g e De b e n t u res due 2010. 55 N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s ( c o n t i n u e d ) The Company’s obligations with respect to the Exchangeable Pre f e r red Stock are subordinate to all indebtedness of the Company (including the Notes), and are effectively subordinate to all debt and liabilities of the Company’s subsidiaries (including the Senior Credit Fa c i l i t y, the CTI Credit Facility and the CTI Bonds). The certificate of designations gove r n i n g the Exchangeable Pre f e r red Stock places restrictions on the Company’s ability to, among other things, pay dividends and make capital distributions, make investments, incur additional debt and liens, issue additional pre f e r red stock, dispose of assets and u n d e rtake transactions with affiliates. Senio r Pref erred Sto c k In August 1997, the Company issued 292,995 shares of its Senior Conve rtible Pre f e r red Stock (the “Senior Pre f e r red St o c k”) at a price of $100 per share. The net proceeds re c e i ved by the Company from the sale of such shares amounted to approx i m a t e l y $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 Pre f e r red Stock at a price of $100.00 per share. The net proceeds re c e i ve d by the Company from the sale of such shares amounted to $36,450,000. This amount, along with borrowings under the Se n i o r Credit Fa c i l i t y, was used to repay the pro m i s s o ry note from the Crown acquisition (see Note 2). The holders of the Senior Pre f e r red Stock we re entitled to re c e i ve cumulative dividends at the rate of 12.5% per share, com- pounded annually. At the option of the holder, each share of Senior Pre f e r red Stock (plus any accrued and unpaid dividends) was c o n ve rtible, at any time, into shares of the Company’s common stock at a conversion price of $7.50 (subject to adjustment in the e vent of an underwritten public offering of the Company’s common stock). At the date of issuance of the Senior Pre f e r red St o c k , the Company believes that its conversion price re p resented the estimated fair value of the common stock on that date. In July 1998, all of the shares of Senior Pre f e r red Stock we re conve rted into shares of common stock (see Note 9). The purchasers of the Senior Pre f e r red Stock we re also issued warrants to purchase an aggregate 1,314,990 shares of the C o m p a n y’s common stock at an exe rcise price of $7.50 per share (subject to adjustment in the event of an underw r i t t e n public offering of the Company’s common stock). The warrants are exe rcisable, in whole or in part, at any time until Au g u s t and October of 2007. At the date of issuance of the warrants, the Company believes that the exe rcise price re p resented the estimated fair value of the common stock on that date. As such, the Company has not assigned any value to the warrants in its consolidated financial statements. Series P ref err e d Sto c k The holders of the Company’s Series A Conve rtible Pre f e r red Stock (the “Series A Pre f e r red St o c k”), the Series B Conve rt i b l e Pre f e r red Stock (the “Series B Pre f e r red St o c k”) and the Series C Conve rtible Pre f e r red Stock (the “Series C Pre f e r red St o c k” ) ( c o l l e c t i ve l y, the “Series Pre f e r red St o c k”) we re entitled to re c e i ve dividends, if and when declared, at the same rate as dividends we re declared and paid with respect to the Company’s common stock. Each of the outstanding shares of Series Pre f e r red St o c k was automatically conve rted into five shares of common stock upon consummation of the Company’s initial public offering (see Note 9). In Fe b ru a ry and April of 1997, the Company issued 3,529,832 shares of its Series C Pre f e r red Stock at a price of $21.00 per s h a re. The net proceeds re c e i ved by the Company from the sale of the Series C Pre f e r red Stock amounted to approx i m a t e l y $74,024,000. A portion of this amount was used to purchase the ownership interest in CTI (see Note 4). 56 9 . S t o c k h o l d e r s ’ E q u i t y St o c k h o l d e r s’ equity consists of the follow i n g : December 31, 1 9 9 7 1 9 9 8 ( In thousands of dollars) Common stock, $.01 par value; 690,000,000 shares authorize d : Class A Common Stock; shares issued: December 31, 1997 — 1,041,565 and December 31, 1998 — none . . . . . . . . . . . . . . . . . . . $ Class B Common Stock; shares issued: December 31, 1997 — 9,367,165 and December 31, 1998 — none . . . . . . . . . . . . . . . . . . . Common Stock; shares issued: December 31, 1997 — none and December 31, 1998 — 83,123,873 . . . . . . . . . . . . . . . . . . Class A Common Stock; shares issued: December 31, 1997 — none and December 31, 1998 — 11,340,000 . . . . . . . . . . . . . . . . . . 2 1 9 — — Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 8 , 2 4 8 Cu m u l a t i ve foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 6 2 Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 1 7 , 0 3 9 ) $ — — 8 3 1 1 1 3 7 9 5 , 1 5 3 1 , 6 9 0 ( 6 0 , 2 2 5 ) $ 4 1 , 7 9 2 $ 7 3 7 , 5 6 2 Commo n Sto c k On August 18, 1998, the Company consummated its initial public offering of common stock at a price to the public of $13.00 per s h a re (the “IPO”). The Company sold 12,320,000 shares of its common stock and re c e i ved proceeds of $151,043,000 (after under- writing discounts of $9,117,000 but before other expenses of the IPO, which amounted to approximately $4,116,000). The net p roceeds from the IPO are currently invested in short-term inve s t m e n t s . In anticipation of the IPO, the Company (i) amended and restated the 1995 Stock Option Plan to, among other things, author- i ze the issuance of up to 18,000,000 shares of common stock pursuant to awards made thereunder and (ii) approved an amendment to its certificate of incorporation to increase the number of authorized shares of common and pre f e r red stock to 690,000,000 share s and 10,000,000 shares, re s p e c t i ve l y, and to effect a five-for-one stock split for the shares of common stock then outstanding. The effect of the stock split has been presented re t ro a c t i vely in the Company’s consolidated financial statements for all periods pre s e n t e d . In July 1998, all of the holders of the Company’s Senior Conve rtible Pre f e r red Stock conve rted such shares into an aggregate of 9,629,200 shares of the Company’s common stock. Upon consummation of the IPO, all of the holders of the Company’s then-exist- ing shares of Class A Common Stock, Class B Common Stock, Series A Conve rtible Pre f e r red Stock, Series B Conve rtible Pre f e r re d Stock and Series C Conve rtible Pre f e r red Stock conve rted such shares into an aggregate of 39,842,290 shares of the Company’s common stock. In Ma rch 1997, the Company re p u rchased, and subsequently re t i red, 814,790 shares of its common stock from a member of the Company’s Board of Di rectors at a cost of approximately $3,422,000. Of this amount, $1,311,000 was re c o rded as compen- sation cost and is included in corporate development expense on the Company’s consolidated statement of operations. In Au g u s t 1998, the Company re p u rchased, and subsequently re t i red, 141,070 shares of its common stock from a former employee at a cost of approximately $883,000. Cla s s A C ommon S to c k Upon consummation of the share exchange agreement with CTI’s shareholders (see Note 2), an affiliate of CTI’s re m a i n i n g minority shareholder re c e i ved all of the currently outstanding shares of the Company’s Class A Common Stock. Each share of Class A Common Stock is conve rtible, at the option of its holder at any time, into one share of Common Stock. The holder 57 N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s ( c o n t i n u e d ) of the Class A Common Stock is entitled to one vote per share on all matters presented to a vote of the Company’s shareholde r s , e xcept with respect to the election of directors. The holder of the Class A Common Stock, voting as a separate class, has the r i g h t to elect up to two members of the Company’s Board of Di rectors. The shares of Class A Common Stock also provide cert a i n g overnance and anti-dilutive rights. Co m pe n s ati on Ch a rg e s Re lated to Stoc k Option Gr a n ts During the period from April 24, 1998 through July 15, 1998, the Company granted options to employees and exe c u t i ves for the p u rchase of 3,236,980 shares of its common stock at an exe rcise price of $7.50 per share. Of such options, options for 1,810,730 s h a res vested upon consummation of the IPO and the remaining options for 1,426,250 shares will vest at 20% per year over five years, beginning one year from the date of grant. In addition, the Company has assigned its right to re p u rchase shares of its com- mon stock from a stockholder (at a price of $6.26 per share) to two individuals (including a newly elected director) with respect to 100,000 of such shares. Since the granting of these options and the assignment of these rights to re p u rchase shares occurred subse- quent to the date of the share exchange agreement with CTI’s shareholders and at prices substantially below the price to the public in the IPO, the Company has re c o rded a non-cash compensation charge related to these options and shares based upon the differ- ence between the re s p e c t i ve exe rcise and purchase prices and the price to the public in the IPO. Such compensation charge will total a p p roximately $18,400,000, of which approximately $10,600,000 was re c o g n i zed upon consummation of the IPO (for such options and shares which vested upon consummation of the IPO), and the remaining $7,800,000 is being re c o g n i zed over five ye a r s ( a p p roximately $1,600,000 per year) through the second quarter of 2003. An additional $1,600,000 in non-cash compensation charges will be re c o g n i zed through the third quarter of 2001 for stock options issued to certain members of CTI’s management prior to the consummation of the share exc h a n g e . Stock Op t i o n s In 1995, the Company adopted the Crown Castle International Corp. 1995 Stock Option Plan (as amended, the “1995 Stock Op t i o n Pl a n”). Up to 18,000,000 shares of the Company’s common stock we re re s e rved for awards granted to certain employees, consultants and n o n - e m p l oyee directors of the Company and its subsidiaries or affiliates. These options generally vest over periods of up to five years fro m the date of grant (as determined by the Company’s Board of Di rectors) and have a maximum term of 10 years from the date of grant. Upon consummation of the share exchange agreement with CTI’s shareholders (see Note 2), the Company adopted each of the various CTI stock option plans. All outstanding options to purchase shares of CTI under such plans have been conve rted into options to purchase shares of the Company’s common stock. Up to 4,392,451 shares of the Company’s common stock we re re s e rved for award s granted under the CTI plans, and these options generally vest over periods of up to three years from the date of grant. A summary of awards granted under the various stock option plans is as follows for the years ended December 31, 1996, 1997 and 1998: 1 9 9 6 1 9 9 7 1 9 9 8 We i g h t e d - Ave r a g e Exe rcise Pr i c e We i g h t e d - Ave r a g e Exe rcise Pr i c e Number of Sh a re s Number of Sh a re s We i g h t e d - Ave r a g e Exe rc i s e Pr i c e Number of Sh a re s Options outstanding at beginning of ye a r . . . . 8 2 5 , 0 0 0 $ Options granted . . . . . . . . . . . . . . . . . . . . . . . 2 2 5 , 0 0 0 Options outstanding under CTI stock option plans . . . . . . . . . . . . . . . Options exe rc i s e d . . . . . . . . . . . . . . . . . . . . . . Options forf e i t e d . . . . . . . . . . . . . . . . . . . . . . — — — Options outstanding at end of ye a r . . . . . . . . . 1 , 0 5 0 , 0 0 0 Options exe rcisable at end of ye a r . . . . . . . . . . 7 2 1 , 2 5 0 0 . 5 3 2 . 2 2 — — — 0 . 8 9 0 . 4 3 58 1 , 0 5 0 , 0 0 0 $ 3 , 0 4 2 , 5 0 0 — ( 3 6 3 , 1 2 5 ) ( 3 5 , 0 0 0 ) 0 . 8 9 5 . 4 6 — 0 . 5 3 1 . 2 0 3 , 6 9 4 , 3 7 5 $ 4 . 6 9 9 , 0 2 4 , 7 2 0 1 0 . 0 2 4 , 3 6 7 , 2 0 2 ( 2 1 6 , 6 5 0 ) ( 2 8 4 , 4 5 0 ) 3 , 6 9 4 , 3 7 5 4 . 6 9 1 6 , 5 8 5 , 1 9 7 7 2 8 , 8 7 5 2 . 4 9 7 , 6 1 5 , 6 4 9 2 . 7 4 4 . 8 9 5 . 7 2 7 . 0 6 4 . 7 5 In November 1996, options which we re granted in 1995 for the purchase of 690,000 shares we re modified such that those options became fully vested. In August 1998, certain outstanding options became fully or partially vested upon consummation of the IPO. A summary of options outstanding as of December 31, 1998 is as follow s : Exe rc i s e Pr i c e s $ $ - 0 - 1 . 2 0 2 . 3 7 4 . 0 1 7 . 5 0 1 0 . 0 4 t o t o t o t o t o t o 0 . 4 0 1 . 6 0 3 . 0 9 6 . 0 0 7 . 7 7 1 2 . 5 0 1 3 . 0 0 1 7 . 6 3 Number of Op t i o n s Ou t s t a n d i n g 6 7 7 , 1 0 8 1 2 3 , 7 5 0 3 , 3 1 6 , 6 0 0 2 , 6 0 7 , 6 2 1 5 , 6 9 4 , 6 9 2 4 5 0 , 4 2 6 3 , 5 9 0 , 0 0 0 1 2 5 , 0 0 0 We i g h t e d - Ave r a g e Re m a i n i n g C o n t r a c t u a l L i f e 7.0 ye a r s 7.1 ye a r s 7.8 ye a r s 8.2 ye a r s 9.3 ye a r s 9.9 ye a r s 9.6 ye a r s 10.0 ye a r s Number of Op t i o n s Exe rc i s a b l e 4 9 4 , 7 0 9 1 2 3 , 7 5 0 2 , 2 6 6 , 6 0 0 1 , 8 3 3 , 9 6 0 2 , 8 2 1 , 6 3 0 — 7 5 , 0 0 0 — 1 6 , 5 8 5 , 1 9 7 9.1 ye a r s 7 , 6 1 5 , 6 4 9 The weighted-average fair value of options granted during the years ended December 31, 1996, 1997 and 1998 was $0.50, $1.30 and $4.54, respectively. The fair value of each option was estimated on the date of grant using the Black-Scholes option- pricing model and the following weighted-average assumptions about the options (the minimum value method was used prior to the IPO): R i s k - f ree interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 . 4% 1 9 9 6 Years Ended December 31, 1 9 9 7 6 . 1% Expected life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.0 ye a r s 4.5 ye a r s Expected vo l a t i l i t y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0% 0% 0% 0% 1 9 9 8 5 . 3 8% 3.6 ye a r s 0% to 30% 0% The exe rcise prices for options granted during the years ended December 31, 1996 and 1997 we re equal to or in excess of the estimated fair value of the Company’s common stock at the date of grant. As such, no compensation cost was re c o g n i zed for stock options during those years (see Note 1 and “Compensation Charges Related to Stock Option Gr a n t s”). If compensation cost had been re c o g n i zed for stock options based on their fair value at the date of grant, the Company’s pro forma net loss for the years ended December 31, 1996, 1997 and 1998 would have been $973,000 ($0.28 per share), $12,586,000 ($2.37 per share) and $75,660,000 ($1.91 per share), re s p e c t i ve l y. The pro forma effect of stock options on the Company’s net loss for those years may not be re p re s e n t a t i ve of the pro forma effect for future years due to the impact of vesting and potential future award s . 59 N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s ( c o n t i n u e d ) S hare s Re s e rv ed For Is s ua n c e At December 31, 1998, the Company had the following shares re s e rved for future issuance: Common St o c k : Class A Common St o c k . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1 , 3 4 0 , 0 0 0 Sh a res of CTI stock which are conve rtible into common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 7 , 4 4 3 , 5 0 0 Stock option plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1 , 8 1 2 , 6 7 6 Wa r r a n t s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 , 3 1 4 , 9 9 0 5 1 , 9 1 1 , 1 6 6 10 . E m p l o y e e B e n e f i t P l a n s The Company and its subsidiaries have various defined contribution savings plans covering substantially all employees. De p e n d i n g on the plan, employees may elect to contribute up to 20% of their eligible compensation. Certain of the plans provide for part i a l matching of such contributions. The cost to the Company for these plans amounted to $98,000 and $197,000 for the years ended December 31, 1997 and 1998, re s p e c t i ve l y. CTI has a defined benefit plan which covers all of its employees hired on or before Ma rch 1, 1997. Em p l oyees hired after that date are not eligible to participate in this plan. The net periodic pension cost attributable to this plan for the four months ended December 31, 1998 was $1,115,000. As of December 31, 1998, (i) the accumulated benefit obligation under this plan amounted to $13,635,000 (all of which was vested); (ii) the projected benefit obligation amounted to $15,298,000; (iii) the fair value of the p l a n’s assets amounted to $15,848,000; and (iv) the prepaid pension cost attributable to this plan amounted to $1,704,000. 11 . R e l a t e d P a r t y T r a n s a c t i o n s The Company leases office space in a building formerly owned by its Chief Exe c u t i ve Of f i c e r. Lease payments for such office space amounted to $50,000 and $130,000 for the years ended December 31, 1996 and 1997, re s p e c t i ve l y. Included in other re c e i vables at December 31, 1997 and 1998 are amounts due from employees of the Company totaling $499,000 and $368,000, re s p e c t i ve l y. 12 . C o m m i t m e n t s a n d C o n t i n g e n c i e s At December 31, 1998, minimum rental commitments under operating leases are as follows: years ending December 31, 1999 — $19,721,000; 2000 — $19,456,000; 2001 — $19,298,000; 2002 — $19,293,000; 2003 — $18,996,000; thereafter — $112,848,000. Rental expense for operating leases was $277,000, $1,712,000 and $9,620,000 for the years ended December 31, 1996, 1997 and 1998, re s p e c t i ve l y. The Company is invo l ved in various claims, lawsuits and proceedings arising in the ord i n a ry course of business. While there are u n c e rtainties 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 mate- rial adverse effect on the Company’s consolidated financial position or results of operations. 13 . O p e r a t i n g S e g m e n t s a n d C o n c e n t r a t i o n s o f C r e d i t R i s k Ope r ating Se g m e n ts The Company’s re p o rtable operating segments for 1998 are (i) the domestic operations of CCI and (ii) the United Kingdom oper- ations of CTI. Financial results for the Company are re p o rted to management and the Board of Di rectors in this manner, and much of the Company’s current debt financing is stru c t u red along these geographic lines. In addition, the Company’s financial perf o r m- ance is evaluated by outside securities analysts based on these operating segments. See Note 1 for a description of the primary re v- enue sources from these two segments. 60 As discussed in Note 2, CTI’s results of operations are included in the Company’s consolidated financial statements beginning in 1998. Prior to that time, the domestic operations of CCI re p resented the Company’s only re p o rtable segment. The measurement of profit or loss currently used to evaluate the results of operations for the Company and its operating segments is earnings before interest, taxes, depreciation and amortization (“EBITDA”). The Company defines EBITDA as operating income (loss) plus depreciation and amortization and non-cash compensation charges. EBITDA is not intended as an a l t e r n a t i ve measure of operating results or cash flow from operations (as determined in accordance with generally accepted accounting principles), and the Company’s measure of EBITDA may not be comparable to similarly titled measures of other companies. T h e re are no significant re venues resulting from transactions between the Company’s operating segments. Total assets for the Company’s operating segments are determined based on the separate consolidated balance sheets for CCI and CTI. The results of operations and financial position for CTI reflect appropriate adjustments for their presentation in accordance with generally accepted accounting principles in the United States. The financial results for the Company’s operating segments are as follows: Year Ended December 31, 1998 C C I C T I C o r p o r a t e Of f i c e and Ot h e r C o n s o l i d a t e d To t a l Net re ve n u e s : Site rental and broadcast transmission . . . . . . . . . . . . . $ Ne t w o rk services and other . . . . . . . . . . . . . . . . . . . . . Costs of operations (exc l u s i ve of d e p reciation and amort i z a t i o n ) . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . . . Corporate deve l o p m e n t . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2 , 5 4 1 3 1 , 4 7 1 5 4 , 0 1 2 2 3 , 0 7 6 1 7 , 9 2 9 — E B I T D A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 3 , 0 0 7 Non-cash compensation charges . . . . . . . . . . . . . . . . . . . . 1 3 2 De p reciation and amort i z a t i o n . . . . . . . . . . . . . . . . . . . . . 1 6 , 2 0 2 Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . ( 3 , 3 2 7 ) Equity in earnings of unconsolidated affiliate . . . . . . . . . . In t e rest and other income (expense) . . . . . . . . . . . . . . . . . In t e rest expense and amortization of d e f e r red financing costs . . . . . . . . . . . . . . . . . . . . . . . . Provision for income taxe s . . . . . . . . . . . . . . . . . . . . . . . . Minority intere s t s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — ( 2 5 3 ) ( 4 , 4 7 6 ) ( 3 7 4 ) — Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ ( 8 , 4 3 0 ) Capital expenditure s . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8 4 , 9 1 1 Total assets (at year end) . . . . . . . . . . . . . . . . . . . . . . . . . $ 3 3 2 , 5 5 5 In vestments in affiliates (at year end) . . . . . . . . . . . . . . . . $ — 61 ( In thousands of dollars) $ 5 2 , 4 8 7 $ 5 , 5 6 8 5 8 , 0 5 5 2 4 , 3 7 2 2 , 4 1 8 — 3 1 , 2 6 5 2 , 8 5 1 2 0 , 3 1 8 8 , 0 9 6 — 2 9 4 ( 7 , 3 6 2 ) — ( 1 , 6 5 4 ) ( 6 2 6 ) 5 0 , 2 2 4 8 8 7 , 9 3 8 — $ $ $ $ — 1 , 0 1 1 1 , 0 1 1 3 7 0 3 , 2 2 4 4 , 6 2 5 ( 7 , 2 0 8 ) 9 , 7 7 5 7 1 9 $ 7 5 , 0 2 8 3 8 , 0 5 0 1 1 3 , 0 7 8 4 7 , 8 1 8 2 3 , 5 7 1 4 , 6 2 5 3 7 , 0 6 4 1 2 , 7 5 8 3 7 , 2 3 9 ( 1 7 , 7 0 2 ) ( 1 2 , 9 3 3 ) 2 , 0 5 5 4 , 1 7 9 ( 1 7 , 2 5 1 ) — — ( 2 8 , 7 1 9 ) 3 , 6 2 4 2 , 0 5 5 4 , 2 2 0 ( 2 9 , 0 8 9 ) ( 3 7 4 ) ( 1 , 6 5 4 ) ( 3 7 , 7 7 5 ) 1 3 8 , 7 5 9 $ $ 3 0 2 , 7 3 7 $ 1 , 5 2 3 , 2 3 0 2 , 2 5 8 $ 2 , 2 5 8 $ $ $ $ N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s ( c o n t i n u e d ) 1 9 9 6 C o r p o r a t e Of f i c e and Ot h e r C C I Years Ended December 31, C o n s o l i d a t e d To t a l C C I ( In thousands of dollars) 1 9 9 7 C o r p o r a t e Of f i c e and Ot h e r C o n s o l i d a t e d To t a l Net re ve n u e s : Site rental and broadcast transmission . . . . . $ 5 , 6 1 5 $ Ne t w o rk services and other . . . . . . . . . . . . . 5 9 2 Costs of operations (exc l u s i ve of d e p reciation and amort i z a t i o n ) . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . Corporate deve l o p m e n t . . . . . . . . . . . . . . . . . E B I T D A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . De p reciation and amort i z a t i o n . . . . . . . . . . . . 6 , 2 0 7 1 , 3 0 0 1 , 6 7 8 7 5 3 , 1 5 4 1 , 2 4 2 — — — — — 1 , 2 4 9 ( 1 , 2 4 9 ) — Operating income (loss) . . . . . . . . . . . . . . . . . 1 , 9 1 2 ( 1 , 2 4 9 ) Equity in earnings (losses) of unconsolidated affiliate . . . . . . . . . . . . . . . . In t e rest and other income (expense) . . . . . . . . — 2 2 In t e rest expense and amortization of d e f e r red financing costs . . . . . . . . . . . . . . . . ( 1 , 8 0 3 ) Credit (provision) for income taxe s . . . . . . . . . ( 5 9 ) — 1 7 1 — 4 9 Net income (loss) . . . . . . . . . . . . . . . . . . . . . . $ 7 2 $ ( 1 , 0 2 9 ) Capital expenditure s . . . . . . . . . . . . . . . . . . . . $ 8 9 0 $ — $ 5 , 6 1 5 $ 1 1 , 0 1 0 $ 5 9 2 2 0 , 0 6 6 6 , 2 0 7 3 1 , 0 7 6 — 3 2 9 3 2 9 $ 1 1 , 0 1 0 2 0 , 3 9 5 3 1 , 4 0 5 1 5 , 3 5 0 6 , 6 7 5 1 , 8 6 4 7 , 1 8 7 6 , 9 2 5 — 1 4 9 3 , 8 6 7 ( 3 , 6 8 7 ) 2 7 1 5 , 3 5 0 6 , 8 2 4 5 , 7 3 1 3 , 5 0 0 6 , 9 5 2 2 6 2 ( 3 , 7 1 4 ) ( 3 , 4 5 2 ) 1 , 3 0 0 1 , 6 7 8 1 , 3 2 4 1 , 9 0 5 1 , 2 4 2 6 6 3 — 1 9 3 — ( 7 7 ) ( 1 , 1 3 8 ) 2 , 0 2 8 ( 4 , 5 9 4 ) ( 4 9 ) ( 1 , 1 3 8 ) 1 , 9 5 1 ( 9 , 2 5 4 ) ( 4 9 ) ( 1 , 8 0 3 ) ( 1 0 ) ( 4 , 6 6 0 ) — $ $ ( 9 5 7 ) $ ( 4 , 4 7 5 ) $ ( 7 , 4 6 7 ) $ ( 1 1 , 9 4 2 ) 8 9 0 $ 1 7 , 2 0 0 $ 8 3 5 $ 1 8 , 0 3 5 Total assets (at year end) . . . . . . . . . . . . . . . . . $ 2 5 0 , 9 1 1 $ 1 2 0 , 4 8 0 $ 3 7 1 , 3 9 1 In vestments in affiliates (at year end) . . . . . . . $ — $ 5 9 , 0 8 2 $ 5 9 , 0 8 2 62 Ge o g r a ph ic I n f o r m at i o n A summary of net re venues by country, based on the location of the Company’s subsidiary, is as follow s : Years Ended December 31, 1 9 9 6 1 9 9 7 1 9 9 8 United St a t e s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Pu e rto Rico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total domestic operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other foreign countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total for all foreign countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 , 0 5 0 1 , 1 5 7 6 , 2 0 7 — — — ( In thousands of dollars) $ 2 9 , 0 7 6 $ 5 1 , 8 0 7 2 , 3 2 9 3 1 , 4 0 5 — — — 2 , 4 7 0 5 4 , 2 7 7 5 8 , 0 5 5 7 4 6 5 8 , 8 0 1 $ 6 , 2 0 7 $ 3 1 , 4 0 5 $ 1 1 3 , 0 7 8 A summary of long-lived assets by country of location is as follow s : December 31, 1 9 9 7 1 9 9 8 ( In thousands of dollars) United St a t e s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2 3 7 , 1 2 5 $ 3 1 0 , 9 5 3 Pu e rto Rico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 0 , 1 4 5 Total domestic operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 4 7 , 2 7 0 United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 6 , 9 6 5 Other foreign countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1 4 , 4 7 3 3 2 5 , 4 2 6 8 5 5 , 5 6 0 1 2 8 Total for all foreign countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 6 , 9 6 5 8 5 5 , 6 8 8 $ 3 0 4 , 2 3 5 $ 1 , 1 8 1 , 1 1 4 Major Cu s to m e r s For the years ended December 31, 1996, 1997 and 1998, CCI had re venues from a single customer amounting to $2,634,000, $5,998,000 and $14,168,000, re s p e c t i ve l y. For the year ended December 31, 1998, consolidated net re venues includes $33,044,000 from a single customer of CTI. Co n c e n t r ati on s o f Cr edit Ri s k Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash and cash equiva l e n t s and trade re c e i vables. The Company mitigates its risk with respect to cash and cash equivalents by maintaining such deposits at high c redit quality financial institutions and monitoring the credit ratings of those institutions. The Company derives the largest portion of its re venues from customers in the wireless telecommunications industry. In addition, the Company has concentrations of operations in certain geographic areas (primarily the United Kingdom, Pe n n s y l vania, Texas, New Mexico, Arizona and Pu e rto Rico). The Company mitigates its concentrations of credit risk with respect to trade re c e i vables by actively monitoring the cre d i t w o rthiness of its customers. Hi s t o r i c a l l y, the Company has not i n c u r red any significant cre d i t - related losses. 63 N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s ( c o n t i n u e d ) 14 . Q u a r t e r l y F i n a n c i a l I n f o r m a t i o n ( U n a u d i t e d ) Su m m a ry quarterly financial information for the years ended December 31, 1997 and 1998 is as follow s : T h ree Months En d e d Ma rch 31 June 30 September 30 December 31 ( In thousands of dollars, except per share amounts) 1 9 9 7 : Net re ve n u e s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1 , 9 9 4 $ 4 , 7 7 1 $ 1 1 , 4 8 1 $ 1 3 , 1 5 9 Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . ( 1 , 2 9 3 ) Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss per common share — basic and diluted . . . . . . . . . ( 4 4 3 ) ( 0 . 1 3 ) ( 9 2 1 ) ( 1 , 7 0 6 ) ( 0 . 5 1 ) 6 1 ( 4 , 0 0 1 ) ( 0 . 6 2 ) ( 1 , 2 9 9 ) ( 5 , 7 9 2 ) ( 0 . 6 9 ) 1 9 9 8 : Net re ve n u e s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1 1 , 8 3 7 $ 1 1 , 5 3 0 $ 2 8 , 8 9 4 $ 6 0 , 8 1 7 Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss per common share — basic and diluted . . . . . . . . . ( 2 , 4 9 4 ) ( 6 , 6 0 6 ) ( 0 . 7 9 ) ( 2 , 1 9 7 ) ( 6 , 4 2 6 ) ( 0 . 7 8 ) ( 1 2 , 0 0 6 ) ( 1 7 , 4 4 4 ) ( 0 . 3 3 ) 3 , 7 6 4 ( 7 , 2 9 9 ) ( 0 . 0 9 ) 15 . S u b s e q u e n t E v e n t s ( U n a u d i t e d ) Be l lS outh Mo b i l i t y I nc . and Be l lS outh Te l e co m m u n i c at ion s Inc . ( “ Be l lSo u t h” ) In Ma rch 1999, the Company entered into an agreement with Be l l South to acquire the operating rights for approximately 1,850 of their towers. The transaction is stru c t u red as a lease agreement and will be treated as a sale of the towers for tax purposes. T h e Company will pay Be l l South consideration of $610,000,000, consisting of $430,000,000 in cash and $180,000,000 in shares of its common stock. The Company will account for this transaction as a purchase of tower assets. The transaction is expected to close over a period of up to eight months beginning in the second quarter of 1999. Upon entering into the agreement, the Company placed $50,000,000 into an escrow account. In order to fund this escrow deposit, the Company borrowed $45,000,000 under the Senior Credit Fa c i l i t y. Pow e rtel, I nc . ( “ Pow e rt e l” ) In Ma rch 1999, the Company entered into an agreement with Powe rtel to purchase approximately 650 of their towers and re l a t e d assets. The purchase price for these towers will be $275,000,000 in cash. The Company will account for this transaction as an acquisition using the purchase method. Upon entering into the agreement, the Company placed $50,000,000 into an escrow account. The Company funded this escrow deposit with borrowings under a $100,000,000 loan agreement provided by a syndi- cate of investment banks. The remaining $50,000,000 of borrowings under this loan agreement we re used to repay the amount drawn under the Senior Credit Facility in connection with the Be l l South escrow deposit. Prop os ed Sec uriti es Of f e r i n g s The Company intends to offer shares of its common stock and debt securities in concurrent underwritten public offerings. The pro- ceeds from such offerings would be used to repay amounts drawn under the loan agreement in connection with the Be l l South and Powe rtel transactions, and to pay the remaining purchase price for such transactions. Any securities will only be offered by means of a prospectus forming a part of a registration statement filed with the Securities and Exchange Commission. T h e re can be no assur- ance that such securities offerings can be successfully completed. 64 M a r k e t f o r t h e C o m p a n y ’ s C o m m o n E q u i t y a n d R e l a t e d S t o c k h o l d e r M a t t e r s The Company’s Common Stock was initially offered to the public on August 18, 1998 at a price of $13.00 per share. The Common Stock is listed and traded on The Nasdaq Stock Ma rk e t’s National Ma rk e tS M ( “ Na s d a q”) under the symbol “TWRS.” The follow- ing table sets forth for the calendar periods indicated the high and low sales prices per share of the Company’s Common Stock as re p o rted by Na s d a q . 1 9 9 8 T h i rd Qu a rt e r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Fo u rth Qu a rt e r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hi g h L ow 1 3 . 3 1 2 3 . 5 0 $ 6 . 0 0 9 . 8 7 On Ma rch 15, 1999, the last re p o rted sale price of the Common Stock as re p o rted by Nasdaq was $19.94. As of Ma rch 15, 1999, there we re approximately 256 holders of re c o rd of the Company’s Common St o c k . The Company has never declared or paid any cash dividends on its capital stock and does not anticipate paying cash dividends on its capital stock in the foreseeable future. It is the Company’s current policy to retain earnings to finance the expansion of its oper- ations. Fu t u re declaration and payment of cash dividends, if any, will be determined in light of the then-current conditions, includ- ing the Company’s earnings, operations, capital re q u i rements, financial condition and other factors deemed re l e vant by the Board of Di rectors. In addition, the Company’s ability to pay cash dividends is limited by the terms of its debt instruments and the terms of the certificate of designations in respect of its Exchangeable Pre f e r red St o c k . 65 C r o w n C a s t l e I n t e r n at i o n a l C o r p . a n d S u b s i d i a r i e s C o r p o r a t e I n f o r m a t i o n The C o m pa n y could not have arrived at this point in its history without the support, guidance and dedication of its C r o w n C a s t l e I n t e r n a t i o n a l C o r p . B o a r d o f D i r e c t o r s Board of Directors. We especially would like to thank Edward C. Hutcheson, Jr. and J. Landis Martin, who have left our Board in recent months to fulfill other obligations. Both have given generously of their time to help guide our Company. “Chap” Hutcheson was a co-founder of the Company in 1994, served as our CEO until 1996 and served as Chairman of the Board until March 1997. Carl Fe re n b a c h C h a i rm a n Managing Dire c t o r Be rk s h i re Pa rtners LLC Ted B. Mi l l e r, Jr. Vice Chairman, Chief Exe c u t i ve Of f i c e r Michel Az i b e rt Chief Exe c u t i ve Of f i c e r TéléDiffusion de France In t e rnational S.A. Bruno Chetaille C h a i rman and Chief Exe c u t i ve Of f i c e r TéléDiffusion de France S.A. Ro b e rt A. Crow n C h a i rm a n Crown Communication In c . Randall A. Ha c k Me m b e r Nassau Capital L.L.C. David L. Iv y Pre s i d e n t Ro b e rt F. Mc Ke n z i e En t re p re n e u r William A. Mu r p h y, IV D i rector of Mergers & Ac q u i s i t i o n s Salomon Smith Ba rn e y Je f f rey H. Schutz Ge n e ral Pa rt n e r The Centennial Fu n d s 66 C r o w n C a s t l e I n t e r n a t i o n a l C o r p . S e n i o r O f f i c e r s C a s t l e T r a n s m i s s i o n S e r v i c e s ( H o l d i n g s ) L t d B o a r d o f D i r e c to r s Ted B. Mi l l e r, Jr. Chief Exe c u t i ve Of f i c e r David L. Iv y Pre s i d e n t Charles C. Green, III Exe c u t i ve Vice President, Chief Financial Officer and Tre a s u re r John L. Gwyn Exe c u t i ve Vice Pre s i d e n t E. Blake Ha w k Exe c u t i ve Vice President and Ge n e ral Counsel Wesley D. Cu n n i n g h a m Senior Vice President, Chief Accounting Officer and C o r p o rate Contro l l e r Ed w a rd W. Wa l l a n d e r Senior Vice President and Chief In f o rmation Of f i c e r Alan Re e s Chief Op e rating Of f i c e r Castle Transmission In t e rnational Ltd John P. Ke l l y President and Chief Op e rating Of f i c e r Crown Communication In c . George E. Re e s e Chief Financial Officer and Corporate Se c re t a ry Castle Transmission In t e rnational Ltd Ted B. Mi l l e r, Jr. C h a i rm a n Michel Az i b e rt Chief Exe c u t i ve Of f i c e r TéléDiffusion de France In t e rnational S.A. Michel Combs Deputy Ge n e ral Ma n a g e r TéléDiffusion de France In t e rnational S.A. Charles C. Green, III Exe c u t i ve Vice President, Chief Financial Officer and Tre a s u re r Crown Castle In t e rnational Corp. Alan Re e s Chief Op e rating Of f i c e r George E. Re e s e Chief Financial Officer and Corporate Se c re t a ry C r o w n C o m m u n i c a t i o n I n c . B o a r d o f D i r e c to r s Ro b e rt A. Crow n C h a i rm a n Carl Fe re n b a c h Managing Dire c t o r Be rk s h i re Pa rtners LLC David L. Iv y President Crown Castle In t e rnational Corp. Ted B. Mi l l e r, Jr. Vice Chairman and Chief Exe c u t i ve Of f i c e r Crown Castle In t e rnational Corp. St u a rt A. Wi l l i a m s Pa rt n e r Ec k e rt, Seamans, Cherin & Me l l o t t 67 C r o w n C a s t l e I n t e r n at i o n a l C o r p . a n d S u b s i d i a r i e s C o r p o r a t e I n f o r m a t i o n ( c o n t i n u e d ) The Company’s Annual Re p o rt on Form 10-K as filed with the Securities and Exchange Commission is available, without charge, on written request. In addition, a copy of any exhibit to the Form 10-K is available upon payment of a specified fee, which fee shall be limited to the Company’s expenses in fur- nishing such exhibit(s). All requests should be directed to: Crown Castle International Corp. Corporate Se c re t a ry 510 Bering, Suite 500 Houston, Texas 77057 A n n u a l m e e t i n g Stockholders are invited to attend the 1999 Crown Castle International Corp. Annual Meeting of Stockholders, which will be held Tu e s d a y, May 25, 1999, at 8:30 a.m. at the Om n i Hotel, Four Rive rw a y, Houston, Texas 77056. Formal notice of the meeting, along with the proxy statement and proxy materials, will be mailed or otherwise made ava i l- able on or about April 28, 1999, to stockholders of re c o rd as of April 16, 1999. W e b s i t e w w w. c row n c a s t l e . c o m C o m m o n S t o c k I n f o r m at i o n Crown Castle International Corp.’s common stock is traded on N A S D AQ (stock symbol: TW R S). Statements made by Crown Castle International Corp. in this annual re p o rt that are not historical facts, including those re g a rding future performance, are forw a rd-looking statements under the Pr i vate Securities Litigation Reform Act of 1995. These statements are based on current expectations and assumptions and invo l ve risks and uncertainties that could cause actual results to differ from expectations. C o r p o r a t e H e a d q u a r t e r s 510 Bering, Suite 500 Houston, Texas 77057 1 - 7 1 3 - 5 7 0 - 3 0 0 0 A g e n t s a n d T r u s t e e s C h a s e Mellon Sh a reholder Se rv i c e s 2323 Bryan St re e t Suite 2300 Dallas, Texas 75201 1 - 2 1 4 - 9 6 5 - 2 2 2 0 Transfer Agent for Common Stock and 12¾% Senior Exchangeable Pre f e r red Stock due 2010 United States Trust Company of New Yo rk 114 West 47th St reet, 25th Fl o o r New Yo rk, New Yo rk 10036 1 - 2 1 2 - 8 5 2 - 1 6 4 9 Trustee for 10⅝% Senior Discount No t e s due 2007 The Law De b e n t u re Trust Corporation p. l . c . Princes House, 95 Gresham St re e t London EC2V 7LY Trustee for Castle Transmission (Finance) PLC £125 million 9%. Gu a ranteed Bonds due 2007 I n d e p e n d e n t A u d i t o r s KPMG LLP 700 Louisiana, 30th Fl o o r Houston, Texas 77002 1 - 7 1 3 - 3 1 9 - 2 0 0 0 G e n e r a l i n v e s t o r i n q u i r i e s a n d c o r r e s p o n d e n c e In vestors with general questions about the Company are invit- ed to call Easterly In vestor Relations at 1-713-529-6600. In vestor correspondence should be directed to: Kenneth S. De n n a rd Easterly In vestor Re l a t i o n s 2001 Kirby Dr i ve, Suite 500 Houston, Texas 77019 68
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