SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Sections 13 or 15(d) of the Securities Exchange Act
of 1934
Date of Report (Date of Earliest Event Reported) March 31, 1997
Vanguard Cellular Systems, Inc.
(Exact Name of Registrant as Specified on its Charter)
North Carolina 0-16560 56-1549590
(State or Other Jurisdiction (Commission File (IRS Employer
of Incorporation) Number) Identification No.)
2002 Pisgah Church Road, Suite 300 Greensboro, North Carolina 27455
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (910) 282-3690
N/A
(Former Name or Former Address, if Changed Since Last Report)
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Item 5. Other Events.
This Form 8-K is being filed by Vanguard Cellular Systems,
Inc. (the "Company") as a "safe harbor" statement under Section
27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. The Company's
filings with the Securities and Exchange Commission, press
releases and other disclosures may contain forward-looking
statements. These statements represent the Company's judgment on
the future and are subject to risks and uncertainties that could
cause actual results to differ materially. Such risks and
uncertainties include, among other things, the following:
Substantial Leverage; Ability to Service Debt
The Company has substantial leverage. As of December 31,
1996, the Company's total indebtedness was approximately 95% of its
total capitalization. Its indebtedness as of December 31, 1996
consisted of $430 million borrowed under the Company's $675 million
credit facility (the "Credit Facility"), $200 million aggregate
principal amount of 9 % Senior Debentures due 2006 (the
"Debentures") and $137,000 of other indebtedness. The degree to
which the Company is leveraged may adversely affect the Company's
ability to finance its future operations, to compete effectively
against better capitalized competitors and to withstand downturns
in its business or the economy generally, and could limit its
ability to pursue business opportunities that may be in the
interests of the Company and its security holders. As of December
31, 1996, the Company had approximately $245 million of available
borrowings under the Credit Facility, subject to certain
limitations, and it expects to continue to borrow funds under this
facility. The Company would use such additional borrowings for
general corporate purposes, including continuing improvement of its
systems, targeted cellular acquisitions and other investments in
wireless and multimedia businesses. The Credit Facility is secured
by substantially all of the assets of the Company, and under the
financial covenants of the facility, borrowing availability is
dependent on continued improvement in the Company's operating
performance. The Company's interest payments under the Credit
Facility and Debentures have been $22.6 million, $34.0 million and
$43.5 million in 1994, 1995 and 1996, respectively. The Credit
Facility consists of a term loan and a revolving loan. The
outstanding amount of the term loan as of March 31, 1998 is to be
repaid in increasing quarterly installments commencing on March 31,
1998 and terminating at its maturity date of December 23, 2003.
The quarterly installment payments begin at 1.875% of the
outstanding principal amount at March 30, 1998 and gradually
increase to 5.625% of the principal amount at March 31, 2003. The
available borrowings under the revolving loan will be reduced on a
quarterly basis also commencing on March 31, 1998 and terminating
on December 23, 2003. The quarterly reductions begin at 1.875% of
the revolving loan commitment at March 31, 1998 and gradually
increase to 5.625% of the commitment on March 31, 2003.
The Debentures mature in 2006 and are redeemable at the
Company's option, in whole or in part, at any time on or after
April 15, 2001. There are no mandatory sinking fund payments for
the Debentures. Interest is payable semi-annually. Upon a Change
of Control Triggering
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Event (as defined in the Indenture for the Debentures), the Company
will be required to make an offer to purchase the Debentures at a
purchase price equal to 101% of the principal amount thereof plus
accrued and unpaid interest, if any, to the date of purchase.
The Company's ability to meet its working capital and
operational needs and to provide funds for debt service, capital
expenditures, acquisitions and other cash requirements will require
continued growth in the Company's earnings before interest, taxes,
depreciation and amortization ("EBITDA"). In the past, EBITDA has
been insufficient to meet these needs and cash has been generated
through the Company's bank credit facilities and the sale of its
securities. In 1994, 1995 and 1996, EBITDA was $35.9 million,
$68.0 million and $102.6 million, respectively. However, there can
be no assurance that the Company will be successful in continuing
to grow its EBITDA by a sufficient magnitude or in a timely manner
or in raising additional equity or debt financing to enable it to
meet its cash requirements. The Credit Facility and the Debentures
impose restrictions on the operations and activities of the
Company. Generally, the most significant restrictions relate to
debt incurrence, investments, capital expenditures, sales of assets
and the use of proceeds therefrom and cash distributions from the
Company and require the Company to comply with certain financial
covenants including financial ratios. The ability of the Company
to comply with the foregoing restrictions and covenants will be
dependent upon its future performance and various other factors,
including factors beyond the Company's control. The Company does
not anticipate paying any cash dividend or other distribution on
its Class A Common Stock in the foreseeable future.
Possible Effects of General Economic Conditions
Demand for wireless services in general and the Company's
cellular services in particular can be influenced by general
economic conditions in the markets served. The Company has
benefitted from a general economic recovery in its markets in the
past and may be adversely affected by any economic downturn that
may occur in the future.
History of Net Losses
The Company sustained net losses in each fiscal year of its
operations prior to 1996. As of December 31, 1996, the Company had
an accumulated deficit of $190.0 million. Although the Company had
a net profit of $6.4 million in 1996, there can be no assurance
that the Company will remain profitable.
Control of the Company; Certain Provisions of the Articles of
Incorporation and Bylaws.
Existing management of the Company and members and affiliates
of the "Richardson Family" own approximately 23.43% of the
Company's outstanding Class A Common Stock and consequently, if
they act in concert, are probably in a position to control the
management and the affairs of the Company. The articles of
incorporation and bylaws of the Company contain certain provisions
that may render more difficult a hostile takeover, make it more
difficult to remove or
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change the composition of the Company's incumbent Board of
Directors and its officers, adversely affect shareholders who
desire to participate in a tender offer and deprive shareholders of
possible opportunities to sell their shares at prices higher than
prevailing market prices.
Competition
The FCC currently authorizes only two licensees to operate
cellular communications systems in each cellular market. The
Company competes primarily against the other facilities-based
cellular carrier in each metropolitan statistical area ("MSA") and
rural service area ("RSA") market that it serves and expects
competition to remain vigorous. Competition for customers between
cellular licensees is based principally upon the services and
enhancements offered, the quality of the cellular system, customer
service, system coverage and capacity and price. The Company
expects such competition to continue and anticipates continued
downward pressure on the prices charged for its cellular equipment
and services.
The wireless marketplace is expected to become increasingly
competitive as a result of the commencement of operations by new
wireless service providers and due to competition from resellers.
Personal communications services ("PCS") and enhanced specialized
mobile radio ("ESMR") operators will compete directly with the
Company and may have access to substantial capital resources. PCS
is a digital, wireless communications system supported by high-density
call transmitters. PCS involves a network of small, low-powered
transceivers placed throughout a neighborhood, business
complex, community or metropolitan area to provide customers with
mobile and portable voice and data communications. ESMR is a
wireless communications service created by converting analog
specialized mobile radio ("SMR") services into an integrated,
digital wireless communications system. PCS and ESMR provide
services and features in addition to those currently provided by
cellular companies, and there can be no assurance that the Company
will be able to provide such services and features or that it will
be able to do so on a timely or profitable basis.
The FCC has divided licensing for PCS into 51 Major Trading
Areas ("MTAs") and 493 Basic Trading Areas ("BTAs") based on
geographic boundaries. There may be as many as six PCS providers
in each area. As of December 31, 1996, the FCC has awarded
licenses for three providers in nearly all MTA's and three
providers in nearly all BTA's. As of March 27, 1997, the Company
was competing with a PCS operator in its Myrtle Beach RSA and
system construction was underway by PCS operators in many of its
other markets.
The FCC has licensed ESMR operators to construct their systems
in many metropolitan areas throughout the United States and one
ESMR operator, NEXTEL, has announced the initiation of nationwide
service in over 200 cities. It is uncertain when ESMR operators
will offer services in the Company's markets and in adjacent areas.
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Adoption of New Technologies; Technological Obsolescence
The Company's commercial networks currently utilize analog
technology. The Company has chosen Time Division Multiple Access
("TDMA") as its digital technology. However, other digital
technologies, including Code Division Multiple Access ("CDMA"), may
ultimately provide substantial advantages over TDMA or analog
technology and as these advantages become more established, the
Company may be at a competitive disadvantage and competitive
pressures may force the Company to implement CDMA or another
digital technology at substantially increased cost. In addition,
other wireless communications companies may implement digital
technology before the Company, and consequently such companies may
be able to provide enhanced services and superior quality compared
with that which the Company is able to provide through its existing
analog technologies. There can be no assurance that the Company
could respond to such competitive pressures and implement digital
technology on a timely basis or at an acceptable cost, although it
is the Company's present plan to do so. One or more of the
technologies currently utilized by the Company or implemented in
the future may not be preferred by its customers or may become
obsolete at some time in the future, which in either case could
have a material adverse effect on the Company's financial condition
and results of operations. There can be no assurance that the
Company's ongoing network improvements will be sufficient to meet
or exceed the capabilities and quality of competing networks.
Regulation of the Cellular Industry
The licensing, construction, operation, acquisition,
assignment and transfer of cellular communications systems, as well
as the number of licensees permitted in each market, are regulated
by the FCC. Changes in the regulation of cellular activities could
have a material adverse effect on the Company's operations and
financial performance. In addition, initial operating licenses are
generally granted for terms of up to 10 years, renewable upon
application to the FCC. Licenses may be revoked and license
renewal applications denied for cause after appropriate notice and
hearing. In addition, the Company's renewal applications also may
be subject to petitions to deny or competing applications. The
Company has 10 licenses scheduled to expire in 1997 and 15 licenses
have their initial expiration dates thereafter. Although three of
the Company's licenses have been renewed over the past two years,
there can be no assurance that any of the Company's licenses will
not be revoked or will be renewed on expiration.
Operating Costs Due to Fraud
Like most companies in the cellular industry, the Company
incurs costs associated with unauthorized use its network. Fraud
impacts interconnection costs, capacity costs, administrative
costs, costs incurred for fraud prevention and payments to other
carriers for unbillable fraudulent roaming. During the last
quarter of 1995, the Company experienced for the first time
significant costs associated with unauthorized use. Although the
Company had continued to develop and invest in anti-fraud
measures to prevent cellular fraud and charges associated with
fraud declined as a percentage of service revenue in 1996, there
can be no
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assurance that the Company will not incur substantial costs due
to fraud. In addition, while the costs of the Company's anti-fraud
measures have not been significant in the past, there can
be no assurance that these costs will not become substantial in
the future.
Value of FCC Licenses
The underlying value of the Company's assets relates primarily
to its intangible assets, principally interests in entities holding
FCC construction permits and licenses, the value of which depends
significantly upon the success of the Company's business and the
growth of the industry in general. While the Company believes that
there is presently a market for such assets, such market may not
exist in the future or the values obtainable may be lower than at
present. As a consequence, in the event of default on indebtedness
of the Company or any other event which would result in the
liquidation of the Company's assets, there can be no assurance that
the proceeds would be sufficient to pay its obligations.
Dependence on Key Personnel
The Company's businesses are managed by a small number of key
executive officers. The loss of certain of these key executive
officers could have a material adverse effect on the Company.
Under the terms of the Credit Facility, if the Richardson Family
(as defined) at any time owns less than the amount of voting stock
necessary to give them the power to exercise voting rights with
respect to at least 15% of the total votes of all shareholders of
the Company on a fully-diluted basis or any two of Stuart S.
Richardson, Haynes G. Griffin, Stephen R. Leeolou and L. Richardson
Preyer, Jr. at any time for any period of six consecutive months
cease to be active in the direct management and the operations of
the Company, it would constitute an event of default. If the
Richardson Family and the executive officers and directors of the
Company at any time own less than the amount of voting stock
necessary to give them the power to exercise voting rights with
respect to at least 20% of the total votes of all shareholders of
the Company on a fully-diluted basis, it would constitute an event
of default.
Radio Frequency Emission Concerns
Media reports have suggested that certain radio frequency
("RF") emissions from cellular telephones may be linked to cancer.
Although unsuccessful to date, various lawsuits, none of which
involving the Company, have been filed alleging that the death of
a cellular subscriber was related to emissions. If such a lawsuit
were successful, it could have a material adverse effect on the
Company's business or results of operations. The FCC has adopted
guidelines for wireless antennas from the 1992 America National
Standards Institute/Institute of Electrical and Electronic
Engineers ("ANSI/IEEE") standard and the 1987 National Council for
Radiation Protection and Measurements ("NCRP") standard that set
safe human exposure limits. The new FCC standard has been endorsed
by other Federal agencies responsible for health and safety, such
as the EPA, FDA and OSHA.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
VANGUARD CELLULAR SYSTEMS, INC.
(Registrant)
Date: March 31, 1997 By: /s/ Stephen L. Holcombe
Stephen L. Holcombe,
Executive Vice President
and Chief Financial Officer
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