UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION A3 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 For the transition period from______________________ to
__________________
COMMISSION FILE NUMBER 0-16560
VANGUARD CELLULAR SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1549590
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2002 Pisgah Church Road, Suite 300
Greensboro, North Carolina 27455-3314
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (336) 282-3690.
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the issuer's common stock as of September
30, 1998 was 36,780,009.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - I-1
September 30, 1998 and December 31, 1997.
Condensed Consolidated Statements of Operations - I-2
Three months and nine months ended September 30, 1998 and 1997.
Condensed Consolidated Statements of Cash Flows - I-3
Nine months ended September 30, 1998 and 1997.
Notes to Condensed Consolidated Financial Statements I-4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations I-15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K II-1
SIGNATURES II-2
ITEM 1. FINANCIAL STATEMENTS
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
SEPTEMBER 30, December 31,
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ASSETS 1998 1997
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(UNAUDITED) (See note)
CURRENT ASSETS:
Cash, including escrowed funds of $16,672 and $0 $ 33,179 $ 2,487
Accounts receivable, net of allowances for doubtful accounts of $10,531 and $8,184 52,981 54,340
Cellular telephone inventories 18,627 18,826
Deferred income taxes, current 9,077 43,139
Prepaid expenses 2,746 3,620
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Total current assets 116,610 122,412
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INVESTMENTS 294,577 307,718
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $181,606
and $166,230 330,591 371,343
NON-CURRENT DEFERRED INCOME TAXES - 9,447
Other Assets, net of accumulated amortization of $14,181 and $10,701 11,561 17,041
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Total assetsassets $ 753,339 $827,961
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LIABILITIES AND SHAREHOLDERS' EQUITY
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CURRENT LIABILITIES: Accounts payable and accrued expenses $ 67,921 58,084
NON-CURRENT DEFERRED INCOME TAX LIABILITY 14,785 -
LONG-TERM DEBT 532,851 768,967
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COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock - $.01 par value, 1,000 shares authorized, no shares issued - -
Common stock, Class A - $.01 par value, 250,000 shares authorized,
and 36,780 and 38,308 shares outstanding 368 383
Common stock, Class B - $.01 par value, 30,000 shares authorized, no shares issued - -
Additional capital in excess of par value 244,880 221,624
Accumulated deficit (107,466) (221,097)
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Total shareholders' equity 137,782 910
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Total liabilities and shareholders' equity $ 753,339 $827,961
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THE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE BALANCE SHEETS.
NOTE: THE BALANCE SHEET AT DECEMBER 31, 1997 HAS BEEN DERIVED FROM THE AUDITED
FINANCIAL STATEMENTS AT THAT DATE.
I-1
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
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1998 1997 1998 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
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Revenues:
Service revenue $ 99,612 $ 94,704 $ 290,976 $ 258,161
Cellular telephone equipment revenue 9,393 6,320 27,681 16,421
Other 223 293 723 1,198
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109,228 101,317 319,380 275,780
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Costs and Expenses:
Cost of service 7,636 9,118 23,867 24,987
Cost of cellular telephone equipment 13,344 10,201 37,064 28,100
General and administrative 27,759 26,638 83,961 75,142
Marketing and selling 19,672 18,355 58,100 53,034
Depreciation and amortization 21,999 18,224 65,511 51,807
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90,410 82,536 268,503 233,070
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Income From Operations 18,818 18,781 50,877 42,710
Net Gain on Dispositions 149,140 106 265,881 116
Interest Expense (13,933) (15,227) (45,739) (41,852)
Unrealized Holding Loss - - (9,979) -
Net Losses from Unconsolidated Investments (4,033) (3,014) (23,099) (8,371}
Other, net 235 422 776 767
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Net Income (Loss) Before Income Taxes and Extraordinary Item 150,227 1,068 238,717 (6,630)
Income Tax Benefit (Expense) (60,491) - (101,930) 8,000
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Net Income Before Extraordinary Item 89,736 1,068 136,787 1,370
Extraordinary Loss on Extinguishment of Debt, net of
Income Tax Benefit of $2,645 - - (3,971) -
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Net Income $ 89,736 $ 1,068 $ 132,816 $ 1,370
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Net Income Per Common Share:
Basic $ 2.44 $ 0.03 $ 3.57 $ 0.03
Diluted $ 2.31 $ 0.03 $ 3.44 $ 0.03
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Common Shares Used in Computing Per Share Amounts:
Basic 36,742 40,280 37,232 40,466
Diluted 38,781 40,814 38,634 40,872
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THE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE STATEMENTS.
I-2
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------------------------------------
1998 1997
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(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income $ 132,816 $ 1,370
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 65,511 48,223
Amortization of deferred debt issuance costs 1,252 1,448
Net losses from unconsolidated investments 23,099 8,372
Net gain on dispositions (265,881) 3,468
Deferred income tax provision (benefit) 91,392 (8,000)
Extraordinary loss on extinguishment of debt 6,618 -
Unrealized holding loss 9,979 -
Changes in current items:
Accounts receivable, net (5,784) (31,774)
Cellular telephone inventories (123) (1,135)
Accounts payable and accrued expenses 9,054 6,257
Other, net 306 (1,632)
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Net cash provided by operating activities 68,239 26,597
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Cash flows from investing activities:
Purchases of property and equipment (71,469) (116,807)
Proceeds from dispositions 372,690 78
Payments for acquisition of investments (63,537) (13,542)
Capital contributions to unconsolidated entities (7,771) (538)
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Net cash provided (used) by investing activities 229,913 (130,809)
- --------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Principal payments of long-term debt (955,130) (11,006)
Repurchases of common stock (28,566) (10,257)
Net proceeds from issuance of common stock 1,184 54
Proceeds of long-term debt 719,000 118,000
Debt issuance costs (4,106) -
Decrease (increase) in other assets 158 (242)
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Net cash provided (used) by financing activities (267,460) 96,549
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Net increase (decrease) in cash 30,692 (7,663)
Cash, beginning of period 2,487 11,180
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Cash, end of period $ 33,179 $ 3,517
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SUPPLEMENTAL DISCLOSURE OF INTEREST PAID $ 43,038 $ 34,694
SUPPLEMENTAL DISCLOSURE OF INCOME TAXES PAID 5,300 20
- --------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE STATEMENTS.
I-3
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Vanguard
Cellular Systems, Inc. and Subsidiaries (the "Company") have been prepared
without audit pursuant to Rule 10-01 of Regulation S-X of the Securities and
Exchange Commission ("SEC"). Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine month period
ended September 30, 1998 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1998. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company's 1997 annual report on Form 10-K and Form 10-K/A.
The consolidated financial statements include the accounts of the
Company, its wholly owned subsidiaries and entities in which the Company holds a
majority ownership interest. Investments in entities in which the Company
exercises significant influence but does not exercise control through majority
ownership have been accounted for using the equity method of accounting.
Ownership interests in entities in which the Company does not exercise
significant influence and does not control through majority ownership and for
which there is no readily determinable fair value have been accounted for using
the cost method of accounting. Ownership interests in entities in which the
Company does not control through majority ownership and does not exercise
significant influence and for which there is a readily determinable fair value
have been accounted for as available for sale pursuant to the requirements of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". All significant intercompany
accounts and transactions have been eliminated.
NOTE 2 -- PROPOSED AT&T MERGER
As of October 2, 1998, the Company entered into a definitive merger
agreement with AT&T Corp. ("AT&T"). Under the terms of the agreement, the
Company will be merged into a wholly owned subsidiary of AT&T and each of the
Company's outstanding shares of Class A Common Stock, par value $.01 per share
(other than dissenting shares), will, at each shareholder's option, be converted
into the right to receive either $23.00 cash or 0.3987 of a share of AT&T common
stock, subject to the limitation that the overall consideration for such shares
will consist of 50% cash and 50% AT&T common stock.
The Company's Board of Directors and the Board of Directors of AT&T have
approved the transaction. The transaction is subject to the approval of the
Company's shareholders and the Federal Communications Commission, to compliance
with the Hart-Scott-Rodino Antitrust
I-4
Improvements Act of 1976, and to certain other conditions.
The agreement contains certain restrictions on the conduct of the Company's
business prior to the consummation of the merger. Pursuant to the agreement, the
Company has agreed for the period prior to the merger to operate its business in
the ordinary course, to refrain from taking various corporate actions without
the consent of AT&T, and not to solicit or enter into negotiations or agreements
relating to a competing business.
Reference is made to the copy of the merger agreement filed with the SEC as
Exhibit 2(a) to the Company's Report on Form 8-K dated October 2, 1998.
NOTE 3 -- INVESTMENTS
Investments consist of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
1998 1997
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INVESTMENTS IN DOMESTIC WIRELESS ENTITIES:
Consolidated entities:
License cost $ 303,452 $ 297,142
Accumulated amortization (44,464) (43,696)
--------- ---------
258,988 253,446
========= =========
Entities carried on the equity method:
Cost 0 10,193
Accumulated share of earnings 0 1,960
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0 12,153
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Entities carried on the cost method 4,532 9,592
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263,520 275,191
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INVESTMENTS IN OTHER ENTITIES:
Entities carried on the equity method:
Investment in equity securities 74,002 40,794
Debentures, net of discount of $4,737 and $6,449 13,263 11,551
Loans 4,045 4,045
Accumulated share of losses (60,253) (33,842)
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31,057 22,548
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Investments carried as "available for sale", at cost 0 4,979
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Other investments, at cost 0 5,000
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31,057 32,527
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$ 294,577 $ 307,718
========= =========
I-5
INVESTMENTS IN DOMESTIC WIRELESS ENTITIES
In September, 1998, the Company sold for approximately $177 million in cash
its Pensacola, FL MSA and its Fort Walton Beach, FL RSA markets (the "Florida
Markets") as well as various minority interests in regional cellular licenses.
The purchaser required the Company to place $8.6 million of the purchase price
into an escrow fund for one year. These escrowed funds are to be held for
certain purchase price adjustments, if any, that may be identified by the
purchaser and agreed to by the Company. Currently, management does not
anticipate such adjustments to the purchase price, if any, to be material.
In August, 1998 the Company sold its 50% investment in a joint venture
known as Eastern North Carolina Cellular Joint Venture ("ENCCJV"), for $30
million in cash. The underlying net assets of the joint venture consisted
principally of its investment in the FCC licenses in the Wilmington, NC and
Jacksonville, NC MSA cellular markets. The Company recognized a third quarter
net gain of $147.9 million on the above two transactions.
In June, 1998, the Company sold for approximately $162 million in cash its
Myrtle Beach, SC RSA market and related operations, and recognized a $117
million gain on this sale in the second quarter of 1998. The purchaser required
the Company to place $8.0 million of the purchase price into an escrow fund for
one year. These escrowed funds are to be held for certain purchase price
adjustments, if any, that may be identified by the purchaser and agreed to by
the Company. Currently, management does not anticipate such adjustments to the
purchase price, if any, to be material.
In July, 1998, the Company purchased NationPage, a leading regional paging
provider in Pennsylvania and New York, for approximately $28.5 million in cash.
In the first quarter of 1998, the Company participated in the Federal
Communications Commission's ("FCC") Local Multipoint Distribution Service
("LMDS") auction, which concluded on March 25, 1998. The Company was the high
bidder for 22 LMDS Basic Trading Area ("BTA") licenses, with an aggregate bid of
$8.9 million. The majority of these licenses are in the same markets as the
Company's existing cellular operations. As of March 31, 1998, the Company had
$5.3 million on deposit with the FCC. In June 1998, the licenses were issued and
the Company completed payment of the $8.9 million to the FCC. LMDS frequencies
may be used for a variety of technologies, including traditional wireless
telephony, competitive local exchange service, and broadband data transmissions
including Internet, video and others.
I-6
NONCELLULAR INVESTMENTS
INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND FOREIGN INVESTMENTS
At September 30, 1998, the Company owned approximately 29% of the
outstanding stock of International Wireless Communications Holdings, Inc.
("IWCH") and has invested an aggregate of $26.4 million. IWCH is a development
stage company specializing in securing, building and operating wireless
businesses, primarily in Asia and Latin America. International Wireless
Communications Holdings, Inc., International Wireless Communications, Inc. Radio
Movil Digital Americas, Inc., International Wireless Communications Latin
America Holdings, Ltd. and Pakistan Wireless Holdings Limited (collectively,
"IWC") filed separate petitions for relief under chapter 11 of the United States
Bankruptcy Code on September 3, 1998. Pursuant to Bankruptcy Court approval on
October 28, 1998, the Company has provided IWC with post-petition debtor in
possession financing in the amount of $4.6 million on a senior secured and
administrative priority basis (the "Financing"). The Financing will mature upon
the earlier of (i) October 20, 1999, (ii) the date of declaration of events of
default by the Company (as described in the Financing documents) and (iii) the
effective date of an order of the Bankruptcy Court confirming a plan or
reorganization for any of the above-referenced debtors. At IWC's option, the
Financing, along with interest and fees earned under the Financing, may be
converted into equity of the reorganized debtors under a plan of reorganization.
The Financing was fully funded by the Company in November, 1998. The Company has
also entered into an Interim Operating Agreement with IWC ("Interim Operating
Agreement") which provides, among other things, that IWC is granted authority to
exercise day-to-day control over the Company's investment in Pakistan Mobile
Communications (Pvt) Ltd. ("PMCL") during the course of the Chapter 11 cases and
the Company is granted authority to exercise day-to-day control over IWC's
interests in Star Digitel Limited ("SDL") during the course of the Chapter 11
cases. The Bankruptcy Court approved the Interim Operating Agreement at a
hearing on October 28, 1998.
During the third quarter of 1998 the Company funded a $1.8 million capital
call of SDL, a Hong Kong company whose principal business activities relate to
the provision and development of wireless telecommunications services in the
People's Republic of China. The July 2, 1998 capital call reflected the
Company's shareholding of approximately 9% of the shares of SDL. On September
11, 1998 the Company provided a $4.6 million shareholder loan to SDL. On
September 22, 1998, the Company amended and restated a guarantee previously
issued to The Toronto-Dominion Bank and guaranteeing repayment of $490,000 of
the principal amount of certain SDL debt to that bank, to, among other things,
increase the amount of principal for which repayment was guaranteed from
$490,000 to $2.8 million.
During the third quarter of 1998 the Company caused certain letters of
credit to be issued in favor of ABN AMRO Bank N.V. and Motorola, Inc. as
security for certain obligations owed to those letter of credit beneficiaries by
PMCL, a Pakistan company that owns and operates a nationwide cellular license in
Pakistan. The Company's total obligations under the letter of
I-7
credits are $3.1 million. Vanguard Pakistan Inc., an indirect subsidiary of the
Company, has also entered into a Contribution and Indemnity Agreement with other
shareholders of PMCL. Under that agreement, Vanguard Pakistan, Inc. agreed to
pay a percentage, equal to its percentage shareholding in PMCL, of no more than
25% of certain increased costs that may be incurred by one of the letter of
credit beneficiaries. Vanguard Pakistan, Inc. holds an approximate 8%
shareholding interest in PMCL. The Company's maximum potential liability under
the Contribution and Indemnity Agreement is approximately $418,000.
Additionally, upon approval of the plan of reorganization for IWC by the
Bankruptcy Court, the Company will cause to be issued approximately $7.4 million
in letters of credit to the same beneficiaries noted above.
INTER*ACT SYSTEMS, INCORPORATED.
As of September 30, 1998, the Company had invested $10.0 million in
Inter*Act Systems, Inc. ("Inter*Act") common stock and $8.0 million in preferred
stock for an ownership interest of approximately 24%. Inter*Act is a development
stage company that provides consumer product manufacturers and retailers
(currently supermarkets) the ability to offer targeted promotions to retail
customers at the point of entry of a retail outlet through an interactive
multi-media system utilizing ATM-like terminals.
During 1996, Inter*Act completed the sale of 142,000 units ("Units") of 14%
Senior Discount Notes due 2003, which have been exchanged for identical notes
registered with the SEC and warrants to purchase shares of common stock at $.01
per share. The Company purchased for $12.0 million a total of 18,000 Units
consisting of $18.0 million principal amount at maturity of these 14% Senior
Discount Notes and warrants to purchase 132,012 shares of common stock. At
issuance, the Company allocated, based upon the estimated fair values, $8.9
million and $3.1 million to the debentures and warrants purchased by the
Company, respectively. Effective September 30, 1997 and in accordance with the
warrant agreement, the shares of common stock eligible to be purchased with the
warrants held by the Company increased from 132,012 to 169,722. The shares
issuable upon the exercise of these warrants currently represent approximately
2% of Inter*Act's outstanding common stock. In addition, an existing warrant
held by the Company was restructured whereby the Company has the right to
acquire at any time prior to May 5, 2005 an aggregate of 900,113 shares of
common stock for $23.50 per share, which shares presently represent
approximately 12% of the outstanding common stock of Inter*Act.
Inter*Act has incurred net losses since its inception. The net losses are
expected to grow significantly in future years as Inter*Act accelerates the
rollout of its systems in retail supermarkets. The Company records its
proportionate share of these losses under the equity method of accounting. As of
June 30, 1998, the Company's total investment in Inter*Act was reduced to zero
through the recognition of equity method losses. As a result, the Company
suspended the recognition of losses attributable to Inter*Act until such time
that equity method income became available to offset the Company's share of
Inter*Act's future losses or the Company made further investments in Inter*Act.
In the third quarter of 1998, the Company invested an additional $8.0 million in
Inter*Act. Accordingly, during the third quarter of 1998 the
I-8
Company recognized $4.2 million in equity method losses and will recognize the
balance of the additional $8.0 million investment as appropriate under the
equity method of accounting.
In addition to the current ownership held by the Company, certain officers,
directors and entities affiliated with certain directors of the Company maintain
an additional 27% ownership interest in Inter*Act.
GEOTEK COMMUNICATIONS, INC.
In 1994, the Company purchased from Geotek Communications, Inc. ("Geotek")
2.5 million shares of Geotek common stock for $30 million. In September 1995,
the Company purchased, for $5.0 million in cash, 531,463 shares of convertible
preferred stock of Geotek with a stated value of $9.408 per share. Geotek is a
telecommunications company that is developing a wireless communications network
using its FHMA(R) digital technology. Under a management agreement, the Company
earned and recorded as revenue approximately 201,370 shares with an aggregate
value of $2.1 million in 1996, and approximately 300,000 shares with an
aggregate value of $2.4 million in 1995. The Company currently owns less than 5%
of Geotek's outstanding common stock.
During 1997, the Geotek common stock price, as quoted on the NASDAQ
National Market System, declined from $7.13 per share at December 31, 1996 to
$1.53 per share at December 31, 1997. Based on Geotek's historical performance,
including the significant decline in the market value of Geotek's common stock,
the Company's management made the determination that the decline in Geotek's
common stock price during 1997 was other than temporary and, accordingly,
recognized an impairment loss of $32.7 million in the fourth quarter of 1997 to
adjust the Company's investment in Geotek common stock to its market value at
December 31, 1997. On June 29, 1998, Geotek announced the filing of voluntary
petitions seeking protection under Chapter 11 of the Bankruptcy Code.
Accordingly, the Company recognized an impairment loss of approximately $10.0
million in the second quarter to reduce its entire investment in Geotek to zero.
Geotek's common stock price as of June 30, 1998 was $0.16 per share, and Geotek
was delisted from NASDAQ with the close of business on that date.
FINANCIAL INFORMATION OF EQUITY METHOD INVESTEES
Combined financial position and operating results of the Company's equity
method investees, ENCCJV, IWC, and Inter*Act, for the first nine months of 1998
and 1997 are as follows (in thousands):
1998 1997
-------------- -----------
Revenues. ..................................$ 44,120 $ 15,181
Gross profit ............................... 18,161 5.090
Loss from operations. ...................... (124,741) (71,506)
Net loss. .................................. (171,526) (94,210)
I-9
NOTE 4 -- LONG-TERM FINANCING ARRANGEMENTS
In February 1998, the Company completed the closing of an amendment to the
1994 Credit Facility, increasing the facility to $1.0 billion pursuant to the
Third Amended and Restated Facility A Loan Agreement ("Facility A Loan") and the
Facility B Loan Agreement ("Facility B Loan") (collectively, the "1998 Loan
Agreements"), with various lenders led by The Bank of New York, The
Toronto-Dominion Bank, and NationsBank of Texas, N.A. In addition, the Company
has $200 million of Senior Debentures due 2006. The credit facility is senior to
the Senior Debentures through the use of structured subordination whereby
Vanguard Cellular Systems, Inc. ("Vanguard") is the borrower on the Senior
Debentures and Vanguard Cellular Financial Corp. ("VCFC"), Vanguard's only
direct subsidiary, is the primary obligor on the credit facility.
Long-term debt consists of the following as of September 30, 1998 and
December 31, 1997 (in thousands):
September 30, December 31,
1998 1997
---------------- -----------------
Debt of VCFC:
Borrowings under the 1998 Loan Agreements:
Facility A Loan ....................................... $ 333,000 $ --
Facility B Loan........................................ -- --
Borrowings under the 1994 Credit Facility:
Term Loan ............................................ -- 325,000
Revolving Loan ....................................... -- 244,000
Other Long-Term Debt .................................... -- 130
----------- ------------
$ 333,000 $ 569,130
Debt of Vanguard:
9 3/8% Senior Debentures due 2006, net of unamortized
discount of $149 and $163 ............................ 199,851 199,837
---------- ------------
$ 532,851 $ 768,967
=========== ============
CREDIT FACILITY OF VCFC
The Facility A and Facility B Loans are available to provide the Company
with additional financial and operating flexibility and enable it to pursue
business opportunities that may arise in the future. The Facility A Loan
consists of a $750 million senior secured reducing revolving credit facility
which allows for the issuance of up to $25 million of standby letters of credit.
The Facility B Loan consists of a $250 million 364-day revolving credit facility
which may be extended for an additional 364-day period upon the approval of the
lenders or converted to a term
I-10
loan according to the terms and subject to certain conditions of the Facility B
Loan. On June 30, 1998, the Company permanently reduced funds available for
borrowing under its Facility A Loan by paying down debt with $150 million of the
proceeds from the sale of its Myrtle Beach, SC RSA market. The Company further
reduced debt, although not permanently, with $165 million of the proceeds from
the sale of its Florida Markets.
Borrowings under the 1998 Loan Agreements bear interest at a rate equal to
the Company's choice of the Prime Rate or Eurodollar Rate plus an applicable
margin based upon a leverage ratio for the most recent fiscal quarter. The
ranges for this applicable margin are 0.0% to 0.25% for the Prime Rate and 0.5%
to 1.5% for the Eurodollar Rate. Based on the leverage ratio, computed as the
ratio of Total Debt (as defined) to Adjusted Cash Flow (as defined), the
Company's applicable margins on borrowings under the 1998 Loan Agreements are
0.0% and 0.75% per annum for the third quarter of 1998 for the Prime Rate and
Eurodollar Rate, respectively. Upon the occurrence of an event of default as
defined in the 1998 Loan Agreements, the applicable margin added to both the
Eurodollar Rate and the Prime Rate becomes 2.0%.
Upon closing of the 1998 Loan Agreements, the Company paid fees of
approximately $4 million to the lenders. These fees and other costs incurred in
the refinancing have been recorded as a long-term asset in the first quarter of
1998 and will be amortized over the lives of the agreements. Remaining
unamortized deferred financing costs of $6.6 million related to the 1994 Credit
Facility were expensed in the first quarter of 1998 and are reported on the
statement of operations as an extraordinary item. The extraordinary item
recorded in the first quarter of 1998, net of a related income tax benefit of
$2.6 million, totaled $4.0 million or 0.11 per share on a basic and diluted
basis.
SENIOR DEBENTURES
On November 4, 1998 the Company commenced a cash tender offer and consent
solicitation relating to its $200 million outstanding principal amount of 9-3/8%
Senior Debentures (the "Debentures") due April 15, 2006 (the "Offer").
The purchase price to be paid for each validly tendered Debenture will be
based upon a fixed spread of 50 basis points (0.50%) over the yield on the
6-3/8% U.S. Treasury Note due March 31, 2001, less an amount equal to the
consent payment ($30.00 per $1,000 principal amount of the Debentures). The
purchase price for the Debentures will be fixed on the second business day prior
to the expiration date. The purchase price and consent payments for the
Debentures will be paid with borrowings under the 1998 Loan Agreements.
In conjunction with the Offer, consents to certain proposed amendments to
the Indenture governing the Debentures are being solicited. These amendments
would eliminate substantially all of the restrictive covenants and would amend
certain other provisions contained in the Indenture governing the Debentures.
Adoption of the proposed amendments requires the consent of holders of at least
a majority in aggregate principal amount of the outstanding Debentures.
I-11
A valid tender of Debentures will require a consent to the proposed amendments
with respect to the related Debentures, and a valid consent will require a valid
tender of the related Debentures.
Holders who tender their Debentures prior to the consent deadline and whose
Debentures are accepted for payment will receive the purchase price referred to
above, plus a consent payment of $30.00 per $1,000 principal amount of
Debentures. The consent deadline is November 18, 1998, unless extended and the
Offer expires on December 3, 1998, unless extended.
INTEREST RATE PROTECTION AGREEMENTS
The Company maintains interest rate swaps and interest rate caps which
provide protection against interest rate risk. At September 30, 1998 the Company
had interest rate cap agreements in place covering a notional amount of $300
million. The interest rate cap agreements provide protection to the extent that
LIBOR exceeds the strike level through the expiration date as follows (in
thousands):
----------------------------------------------------------
Strike Level Notional Amount Expiration Date
----------------------------------------------------------
7.5% $ 50,000 February, 1999
7.5 50,000 February, 1999
8.0 25,000 August, 1999
8.5 100,000 November, 2002
7.5 75,000 November, 2002
------------
$ 300,000
============
The total cost of the interest rate cap agreements in place at September
30, 1998 of $1.2 million has been recorded in other assets in the accompanying
consolidated balance sheet and is being amortized over the lives of the
agreements as a component of interest expense.
Additionally, at September 30, 1998 the Company maintained interest rate
swap agreements that fix the LIBOR interest rate at 6.10% on a notional amount
of $50 million through October 2002 and at 5.62% on a notional amount of $100
million through January 2003. Under these swap agreements, the Company benefits
if LIBOR interest rates increase above the fixed rates and incurs additional
interest expense if rates remain below the fixed rates. Any amounts received or
paid under these agreements are reflected as interest expense over the period
covered.
On December 9, 1996, the Company entered into two 10-year reverse interest
rate swaps with notional amounts totaling $75 million. The reverse swaps
effectively convert $75 million of the Debentures into floating rate debt with
interest payable at the six month LIBOR rate plus 3.1%. Simultaneous with this
transaction, the Company purchased an interest rate cap that limits the total
interest on the $75 million to 10% for the first three years should interest
rates rise. The Company's average effective interest rate under these agreements
during the third quarter of 1998 was 8.8%, or .58% below the coupon rate for the
Debentures. Additionally, during the first quarter of 1997, the Company entered
into two nine-year reverse interest rate swaps with notional
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amounts totaling $25 million. The reverse swaps effectively convert $25 million
of the Debentures into floating rate debt with interest payable at the six-month
LIBOR rate plus 2.61%. Simultaneously with this transaction, the Company
purchased an interest rate cap that limits the total interest rate on the $25
million to 10% for the first three years of the nine-year agreement. The
Company's average effective interest rate under those agreements during the
third quarter of 1998 was 8.3%, which is 1.075% below the coupon rate for the
Debentures.
The effect of interest rate protection agreements on the operating results
of the Company was to decrease interest expense by $20,000 in the third quarter
of 1998 and decrease interest expense by $7,000 in the same period last year. In
the nine month periods ended September 30, 1998 and 1997, interest expense
decreased $2,000 and $5,000, respectively.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. Statement 133 establishes accounting and reporting
standards requiring that every derivative instrument be recorded in the balance
sheet as either an asset or liability measured at its fair value and requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Application of Statement 133
is required for fiscal years beginning after June 15, 1999, and may be
implemented as early as fiscal quarters beginning June 16, 1998, but cannot be
applied retroactively.
The Company has not applied Statement 133 in the financial statements
contained herein. The estimated fair value of interest rate cap and swap
agreements presented below is based on quoted market prices as if the agreements
were entered into on the measurement date (in thousands):
SEPTEMBER 30, 1998 DECEMBER 31, 1997
-------------------------------- ---------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ----------- ------ ----------
$ 902 $ 1,954 $ 1,464 $ (868)
NOTE 5 -- CAPITAL STOCK AND COMPREHENSIVE INCOME
The Company's Board of Directors has authorized the repurchase of up to
7,500,000 shares of its Class A Common Stock from time to time in open market or
other transactions. As of December 31, 1997, the Company had repurchased
3,065,000 shares of its Class A Common Stock at an average price of
approximately $13.00 per share. During the six months ended June 30, 1998, the
Company repurchased an additional 1,612,000 shares at an average price of
approximately $17.70 per share. No shares were purchased in the third quarter of
1998.
During the second quarter of 1998, the Company entered into a total return
equity swap (the "Equity Swap") with a financial institution counterparty (the
"Counterparty"). Pursuant to the
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swap the Company has the right to purchase from the Counterparty on or prior to
June 30, 2000, shares of Vanguard Cellular Systems, Inc.'s Class A common stock
("Equity Swap Shares") at a price based upon the Counterparty purchase price for
said shares at initiation of the Equity Swap. At each quarter end during the
term of the Equity Swap, the Company is required to settle any decrease in the
market value of the Equity Swap Shares below the Counterparty's cost with shares
of Vanguard Cellular Systems, Inc.'s Class A stock, or with cash or a letter of
credit in the amount of the decrease. In addition, the Company is required to
pay the Counterparty a quarterly fee equal to a LIBOR-based rate on the
Counterparty's adjusted cost to acquire the Equity Swap Shares. Due to the
Company's ability to issue shares to settle periodic price fluctuations under
the Equity Swap, the Company records all amounts received (paid) under this
arrangement as increases (decreases) to equity.
The purpose of the total return equity swap is to allow the Company to lock
in the current price of Vanguard Stock in anticipation of, or in lieu of, a
future buyback, without the necessity of a present cash outlay. As of September
30, 1998, the Counterparty had acquired 112,800 shares of Vanguard Cellular
Systems, Inc. Class A Common Stock at an approximate cost of $2.1 million. Based
on the closing stock price of $19 at September 30, 1998, the market value of the
Equity Swap Shares was less than the Counterparty's cost of such shares by
$2,600.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. The Company adopted SFAS No. 130 on
January 1, 1998. For the three months ended September 30 , 1998 and 1997, total
comprehensive income (loss) of the Company was $89.7 million and ($2.8)
million, respectively. For the nine months ended September 30, 1998 and 1997,
total comprehensive income (loss) of the Company was $132.8 million and ($4.1)
million, respectively. The differences between net income and total
comprehensive income consist of the changes in net unrealized holding loss on
the Company's investment in Geotek.
I-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a summary of the Company's ownership interests in cellular
markets in which the Company's ownership interests exceeded 20% at September 30,
1998 and 1997.
SEPTEMBER 30,
-------------
CELLULAR MARKETS 1998 1997
- ---------------- ---- ----
MID-ATLANTIC SUPERSYSTEM:
Allentown, PA/NJ 100.0% 100.0%
Wilkes-Barre/Scranton, PA 100.0 100.0
Harrisburg, PA 100.0 100.0
Lancaster, PA 100.0 100.0
York, PA 100.0 100.0
Reading, PA 100.0 100.0
Altoona, PA 100.0 100.0
State College, PA 100.0 100.0
Williamsport, PA 100.0 100.0
Union, PA (PA-8 RSA) 100.0 100.0
Chambersburg, PA (PA-10 East RSA) 100.0 100.0
Lebanon, PA (PA-12 RSA) 100.0 100.0
Mifflin, PA (PA-11 RSA) 100.0 100.0
Wayne, PA (PA-5 RSA) 100.0 100.0
Binghamton, NY 100.0 100.0
Elmira, NY 100.0 100.0
NEW ENGLAND METRO-CLUSTER:
Portland, ME 100.0 100.0
Portsmouth, NH/ME 100.0 100.0
Bar Harbor, ME (ME-4 RSA) 100.0 100.0
FLORIDA METRO-CLUSTER:
Pensacola, FL -- 100.0
Fort Walton Beach, FL -- 100.0
WEST VIRGINIA METRO-CLUSTER:
Huntington, WV/KY/OH 100.0 100.0
Charleston, WV 100.0 100.0
Mason, WV (WV-1 RSA) 100.0 100.0
Logan, WV (WV-6 RSA) 100.0 100.0
Parkersburg-Marietta, WV/OH 100.0 100.0
Ross, OH (OH-9 RSA) 100.0 100.0
Perry, OH (OH-10 South RSA) 100.0 100.0
CAROLINAS METRO-CLUSTER:
Myrtle Beach, SC (SC-5 RSA) -- 100.0
Wilmington, NC -- 48.0
Jacksonville, NC -- 47.8
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RESULTS OF OPERATIONS
The following is a discussion and analysis of the historical financial
condition and results of operations of the Company and factors affecting the
Company's financial resources. This discussion should be read in conjunction
with the Company's consolidated financial statements, including the notes
thereto.
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
On September 30, 1998, the Company completed the sale of its Pensacola, FL
MSA and Fort Walton Beach, FL RSA markets (the "Florida Markets") and recognized
a gain on this sale in the third quarter of 1998. See "Liquidity and Capital
Resources". Since these markets were owned and operated by the Company through
the end of the third quarter of 1998, the results of operations presented below
include the revenues, expenses, and subscribers generated by the Florida
Markets. The Florida Markets' subscriber base at September 30, 1998 was
approximately 55,000.
On June 30, 1998, the Company completed the sale of its Myrtle Beach, SC
RSA market. Operating results for the third quarter of 1997 contain revenues and
expenses generated by the operation of this market; however, operating results
for the third quarter of 1998 do not. Consequently, the comparison of the
results of operations for the third quarters of 1997 and 1998 as presented is
not a comparison of like operations. To provide a more meaningful comparison of
operating results, additional analysis is presented below comparing the
Company's operating results for third quarter of 1997 and 1998 excluding from
both periods the revenues and expenses of the Myrtle Beach market ("Like
Operations").
Service revenue in the third quarter of 1998 rose 5% to $99.6 million from
$94.7 million in the third quarter of 1997, and rose 13% in a comparison of Like
Operations for the same periods. This increase was primarily the result of a
63,000 or 10% increase in the number of subscribers in majority-owned markets
(15% for Like Operations) to approximately 678,000 at the end of the third
quarter of 1998, as compared to approximately 615,000 in the same period in
1997. Penetration, computed as a percentage of the Company's subscribers to
total POPs in majority owned cellular markets, increased to 9.2% in the third
quarter of 1998 from 8.1% in the same period last year. The increase in
subscribers is the result of the growing acceptance of cellular communications
and the Company's efforts to capitalize on this increasing acceptance through an
expanded sales and distribution network. Churn, the monthly rate of customer
deactivations expressed as a percentage of the subscriber base, increased to
2.1% in the third quarter of 1998 from 1.9% in the third quarter of 1997.
Service revenue attributable to the Company's own subscribers (local
revenue) increased 2% during the third quarter of 1998 (7% for Like Operations)
to $79.3 million as compared to $78.0 million in the third quarter of 1997.
Average monthly local revenue per subscriber declined 9% to $40 in the third
quarter of 1998 compared to $44 in the same period last year. This decline was
I-16
primarily due to the continued pattern of increased incremental penetration into
the segment of consumers who generally use their cellular phones less
frequently. Service revenue generated by nonsubscribers roaming into the
Company's markets increased 22% to $20.3 million in the third quarter of 1998
(42% for Like Operations) as compared to $16.7 million in the prior year. This
increase was the result of increased usage partially offset by continued
reductions in daily access and usage rates. The reduced rates affect the Company
as both a provider and a purchaser of roaming services. Local revenue combined
with roaming revenue resulted in overall average monthly revenue per subscriber
for the quarter of $46, a decline of 4% from $48 in the prior year period.
Cost of service as a percentage of service revenue decreased to 8% during
the third quarter of 1998 from 10% in the 1997 period primarily as the result of
a large increase in roaming revenue with little incremental associated costs.
The Company expects cost of service as a percentage of service revenue to remain
in the 8% to 10% range.
General and administrative expenses increased 4% or $1.1 million during the
third quarter of 1998 (11% for Like Operations) as compared to the same period
in 1997, primarily as a result of increased costs associated with higher levels
of staffing in the customer operations and technical service areas, and from
increased bad debt expense associated with the larger subscriber base. General
and administrative expense as a percentage of service revenue remained constant
at 28% in the third quarter of both periods and is expected to remain stable.
Marketing and selling expenses increased 7% to $19.7 million during the
third quarter of 1998 (12% for Like Operations), compared to $18.4 million in
the same period in 1997, primarily as a result of increased compensation
expense. Marketing and selling expense as a percentage of service revenue
increased from 19% in the third quarter of 1997 to 20% in the third quarter of
1998. During the third quarter of 1998, marketing and selling expenses including
the net loss on cellular equipment ("Combined Marketing and Selling Expenses")
increased to $23.6 million from $22.2 million in the third quarter of 1997.
Combined Marketing and Selling Expenses per gross subscriber addition increased
to $375 in the third quarter of 1998 from $321 in the same period last year.
Depreciation and amortization expense increased $3.8 million or 21% during
the third quarter of 1998 as compared to the same period in 1997. Contributing
to this increase is the Company's decision to change the depreciable lives of
its rental phone assets from 3 years to 1.5 years, which better reflects the
useful life of this equipment. In the third quarter of 1998, this change
increased depreciation expense by approximately $2.2 million. Property and
equipment placed in service since October 1, 1997 of approximately $98.4 million
also contributed to this increase.
Interest expense decreased $1.3 million or 9% during the third quarter of
1998. This decrease primarily resulted from a decrease in average borrowings of
approximately $55.6 million, and, to a lesser extent, a decrease in the interest
rates charged.
I-17
Net losses from unconsolidated investments increased by $1.0 million. The
increase resulted primarily from continued losses incurred by Inter*Act Systems,
Incorporated ("Inter*Act"). See "Liquidity and Capital Resources."
During the third quarter of 1998, the Company recorded income tax expense
of $60.5 million related to the pre-tax net income of $150.2 million generated
in the quarter. This expense is primarily the result of the generation of
taxable income on the sale of the Florida Markets and the Eastern North Carolina
Cellular Joint Venture ("ENCCJV") during the third quarter of 1998.
In the third quarter of 1998, the Company reported net income of $89.7
million or $2.44 per share as compared to net income of $1.1 million or $0.03
per share in the third quarter of 1997. This $88.6 million increase in net
income is primarily attributable to the gain on the sale of the Florida Markets
and ENCCJV offset by income tax expense, and increased equity method losses as
discussed above.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
On September 30, 1998, the Company completed the sale of its Florida
Markets and recognized a gain on this sale in the third quarter of 1998. See
"Liquidity and Capital Resources". Since these markets were owned and operated
by the Company through the end of the third quarter of 1998, the results of
operations presented below include the revenues, expenses, and subscribers
generated by the Florida Markets. The Florida Markets' subscriber base at
September 30, 1998 was approximately 55,000.
On June 30, 1998, the Company completed the sale of its Myrtle Beach, SC
RSA market. Operating results for the first nine months of 1997 contain revenues
and expenses generated by the operation of this market; however, operating
results for the first nine months of 1998 contain only six months of Myrtle
Beach operations. Consequently, the comparison of the results of operations for
the nine months ending September 30, 1997 and 1998 as presented is not a
comparison of like operations. To provide a more meaningful comparison of
operating results, additional analysis is presented below comparing the
Company's operating results for nine months ending September 30, 1997 and 1998
excluding from both periods the revenues and expenses of the Myrtle Beach market
("Like Operations").
Service revenue in the first nine months of 1998 rose 13% to $291.0 million
from $258.2 million in the first nine months of 1997, and rose 15% in a
comparison of Like Operations for the same periods. This increase was primarily
the result of a 10% increase in the number of subscribers served in the 1998
period (15% for Like Operations). Local revenue increased 11% during the first
nine months of 1998 (13% for Like Operations) to $242.1 million as compared to
$218.4 million in the same period last year. Average monthly local revenue per
subscriber declined 7% to $40 in the first nine months of 1998 compared to $43
in the same period last year. Average monthly revenue per subscriber for the
first nine months of 1998 declined 4% to $44 from $46 in the prior year period.
I-18
Cost of service as a percentage of service revenue decreased to 8% in the
first nine months of 1998 from 10% in the 1997 period.
General and administrative expenses increased 12% or 8.8 million during the
first nine months of 1998 (14% for Like Operations) as compared to the same
period in 1997, but remained constant as a percentage of service revenue at 29%
in both periods.
Marketing and selling expenses increased 10% to $58.1 million during the
first nine months of 1998 (also 10% for Like Operations), compared to $53.0
million in the same period in 1997, primarily as a result of increased
advertising expense associated with the rollout of the digital product in a
significant portion of markets. As a percentage of service revenue, these
expenses increased slightly from 19% in the 1997 period to 20% in the 1998
period. During the 1998 period, Combined Marketing and Selling Expenses
increased to $67.5 million from $64.7 million in 1997. Combined Marketing and
Selling Expenses per gross subscriber addition increased to $364 in the 1998
period from $329 in the same period last year.
Depreciation and amortization expense increased $13.7 million or 26% during
the first nine months of 1998 as compared to the same period in 1997. Property
and equipment placed in service since October 1, 1997 of approximately $98.4
million accounted for more than half of this increase. Also contributing to the
increase is the Company's decision to change the depreciable lives of its rental
phone assets as discussed above. This change increased depreciation expense in
the first nine months of 1998 by approximately $6.5 million, and is expected to
increase depreciation expense in the fourth quarter of 1998 by approximately
$2.2 million.
Interest expense increased $3.9 million or 9.3% during the first nine
months of 1998. Substantially all of this increase resulted from an increase in
average borrowings of approximately $65.8 million.
On June 29, 1998, Geotek announced the filing of voluntary petitions
seeking protection under Chapter 11 of the Bankruptcy Code. Accordingly, the
Company recognized an impairment loss of approximately $10.0 million in the 1998
period to reduce its investment in Geotek to zero. See "Liquidity and Capital
Resources".
Net losses from unconsolidated investments increased by $14.7 million for
the first nine months of 1998. The increase resulted primarily from an
additional $10.0 million equity investment the Company made in IWC in the first
quarter of 1998, and from an additional $8.0 million invested in Inter*Act in
the third quarter of 1998. The Company continues to recognize its share of the
income and losses of its equity method investees. See "Liquidity and Capital
Resources."
For the nine months ended September 30, 1998, the Company recorded income
tax expense of $101.9 million as a result of generating pre-tax net income of
$232.1 million. This represents
I-19
income taxes associated with the generation of taxable income on the sale of the
Florida Markets and ENCCJV during the third quarter of 1998 and the sale of the
Myrtle Beach market during the second quarter of 1998, offset by an income tax
benefit of $4.1 million recorded on the Company's first quarter pre-tax loss of
$24.8 million.
In the first nine months of 1998, the Company reported net income before
extraordinary item of $136.8 million or $3.67 per share as compared to net
income of $ 1.4 million or $0.03 per share in the 1997 period. This $135.4
million increase in net income before extraordinary item is primarily
attributable to the gain on the sale of the Florida and Myrtle Beach Markets and
the ENCCJV offset by related income tax expense, and increases in losses from
unconsolidated investments, depreciation expense and interest expense.
LIQUIDITY AND CAPITAL RESOURCES
As of October 2, 1998, the Company entered into a definitive merger
agreement with AT&T Corp. ("AT&T"). Under the terms of the agreement, the
Company will be merged into a wholly owned subsidiary of AT&T and each of the
Company's outstanding shares of Class A Common Stock, par value $.01 per share
(other than dissenting shares), will, at each shareholder's option, be converted
into the right to receive either $23.00 cash or 0.3987 of a share of AT&T common
stock, subject to the limitation that the overall consideration for such shares
will consist of 50% cash and 50% AT&T common stock.
The Company's Board of Directors and the Board of Directors of AT&T have
approved the transaction. The transaction is subject to the approval of the
Company's shareholders and the Federal Communications Commission, to compliance
with the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and to certain
other conditions.
The agreement contains certain restrictions on the conduct of the Company's
business prior to the consummation of the merger. Pursuant to the agreement, the
Company has agreed for the period prior to the merger to operate its business in
the ordinary course, to refrain from taking various corporate actions without
the consent of AT&T, and not to solicit or enter into negotiations or agreements
relating to a competing business.
Reference is made to the copy of the merger agreement filed with the SEC as
Exhibit 2(a) to the Company's Report on Form 8-K dated October 2, 1998.
The Company requires capital to acquire, construct, operate and expand its
cellular systems. Although the initial buildout of its cellular systems is
complete, the Company will continue to construct additional cell sites and
purchase cellular equipment to increase capacity as subscribers are added and
usage increases, to expand geographic coverage, to provide for increased
portable usage and to upgrade its cellular system for digital conversion and the
implementation of new services. During the nine months ended September 30, 1998
the Company incurred approximately $69.2 million in capital expenditures as
compared to $98.1 million in the same period last year.
I-20
The specific capital requirements of the Company will depend primarily on
the timing of its property and equipment needs. EBITDA has been a growing source
of internal funding in recent years, and although the Company anticipates that
in 1999 EBITDA will be sufficient to cover property and equipment and debt
service requirements, the Company does not expect EBITDA to grow sufficiently to
meet both its property and equipment and debt service requirements during 1998.
The Company used approximately $315 million of the cash proceeds from the sale
of its Myrtle Beach and Florida markets to reduce its debt. For the immediate
future, the Company will rely on borrowings under its existing credit facility
to meet any liquidity needs.
EBITDA does not represent and should not be considered as an alternative to
net income or operating income as determined by generally accepted accounting
principles. It should not be considered in isolation from other measures of
performance according to such principles, including operating results and cash
flows. EBITDA increased to $116.4 million in the first nine months of 1998 from
$94.5 million in the 1997 period and net cash provided by operating activities
as shown on the Statement of Cash Flows increased to $68.2 million in the first
nine months of 1998 from $26.6 million in the 1997 period. Net cash provided by
operating activities in the first nine months of 1998 reflects an $8.3 million
increase in interest expense and a change in working capital items of $3.5
million. Investing activities provided net cash of $229.9 million in the first
nine months of 1998 and used net cash of $130.8 million in the first nine months
of 1997. Financing activities used net cash of $267.5 million and provided net
cash of $96.5 million in the first nine months of 1998 and 1997, respectively.
FINANCING AGREEMENTS. At December 31, 1997 the Company's long-term debt
consisted primarily of a $675 million credit facility (the "Credit Facility")
and $200 million of 9 3/8% Senior Debentures due 2006 (the "Debentures"). In
February 1998, the Company completed the closing of an amendment to the Credit
Facility, increasing the facility to $1.0 billion pursuant to the Third Amended
and Restated Facility A Loan Agreement ("Facility A Loan") and the Facility B
Loan Agreement ("Facility B Loan") (collectively, the "1998 Loan Agreements")
with various lenders led by The Bank of New York, The Toronto-Dominion Bank, and
NationsBank of Texas, N.A.
The Facility A and Facility B Loans are available to provide the Company
with additional financial and operating flexibility and to enable it to pursue
business opportunities that may arise in the future. The Facility A Loan,
consists of a $750 million senior secured reducing revolving credit facility
which allows for the issuance of up to $25 million of standby letters of credit.
The Facility B Loan consists of a $250 million 364-day revolving credit facility
which may be extended for an additional 364-day period upon the approval of the
lenders or converted to a term loan according to the terms and subject to
certain conditions of the Facility B Loan Agreement. On June 30, 1998, the
Company permanently reduced funds available for borrowing under its Facility A
Loan by paying down debt with $150 million of the proceeds from the sale of its
Myrtle Beach, SC RSA market.
I-21
Borrowings under the 1998 Loan Agreements bear interest at a rate equal to
the Company's choice of the Prime Rate or Eurodollar Rate plus an applicable
margin based upon a leverage ratio for the most recent fiscal quarter. The
ranges for this applicable margin are 0.0% to 0.25% for the Prime Rate and 0.0%
to 0.75% for the Eurodollar Rate. Based upon the leverage ratio at the end of
the third quarter, the applicable margins for the fourth quarter of 1998 are
0.0% and 0.625% for the Prime Rate and Eurodollar Rate, respectively.
The outstanding amount of the Facility A Loan as of September 30, 2000 is
to be repaid in increasing quarterly installments commencing on September 30,
2000 and terminating at the maturity date of December 31, 2005. The quarterly
installment payments begin at 2.5% of the outstanding principal amount at
September 30, 2000 and gradually increase to 6.875% of the outstanding principal
amount. The maturity date for borrowings under the Facility B Loan is February
18, 1999. However, at the Borrower's request and the Lenders' approval, as set
forth in the Facility B Loan Agreement, the maturity date of the Facility B Loan
may be extended to February 16, 2000. Under the terms and subject to certain
conditions of the Facility B Loan Agreement, the Company has the option to
convert the borrowings outstanding under the Facility B Loan as of the Facility
B maturity date to a term loan maturing on December 31, 2005. Upon conversion to
a term loan, the principal balance of the Facility B Loan outstanding on
September 30, 2000 shall be repaid in quarterly installments commencing on
September 30, 2000 and terminating at the maturity date of December 31, 2005.
The quarterly repayments begin at 2.5% of the outstanding principal amount at
September 30, 2000 and gradually increase to 6.875% of the outstanding principal
amount.
On November 4, 1998 the Company commenced a cash tender offer and consent
solicitation relating to its $200 million outstanding principal amount of 9-3/8%
Senior Debentures due April 15, 2006 (the "Offer"). The purchase price to be
paid for each validly tendered Debenture will be based upon a fixed spread of 50
basis points (0.50%) over the yield on the 6-3/8% U.S. Treasury Note due March
31, 2001, less an amount equal to the consent payment ($30.00 per $1,000
principal amount of the Debentures). The purchase price for the Debentures will
be fixed on the second business day prior to the expiration date. The purchase
price and the consent payments for the Debentures will be paid with borrowings
under the 1998 Loan Agreements.
In conjunction with the Offer, consents to certain proposed amendments to
the Indenture governing the Debentures are being solicited. These amendments
would eliminate substantially all of the restrictive covenants and would amend
certain other provisions contained in the Indenture governing the Debentures.
Adoption of the proposed amendments requires the consent of holders of at least
a majority in aggregate principal amount of the outstanding Debentures. A valid
tender of Debentures will require a consent to the proposed amendments with
respect to the related Debentures, and a valid consent will require a valid
tender of the related Debentures.
Holders who tender their Debentures prior to the consent deadline and whose
Debentures are accepted for payment will receive the purchase price referred to
above, plus a consent payment of
I-22
$30.00 per $1,000 principal amount of Debentures. The consent deadline is
November 18, 1998, unless extended and the Offer expires on December 3, 1998,
unless extended.
Among other restrictions, the 1998 Loan Agreements limit the payment of
cash dividends, limit the use of borrowings and the creation of additional
long-term indebtedness and require the maintenance of certain financial ratios.
The provisions of the 1998 Loan Agreements were established in relation to the
Company's projected capital needs, projected results of operations and cash
flow. These provisions were generally designed to require continued improvement
in the Company's operating performance such that EBITDA would be sufficient to
continue servicing the debt as repayments are required. The Indenture for the
Debentures contains limitations on, among other things, (i) the incurrence of
additional indebtedness, (ii) the payment of dividends and other distributions
with respect to the capital stock of the Company, (iii) the incurrence of
certain liens, (iv) the ability of the Company to allow restrictions on
distributions by subsidiaries, (v) asset sales, (vi) transactions with
affiliates and (vii) certain consolidations, mergers and transfers of assets. On
November 6, 1998, the 1998 Loan Agreements were modified to permit the Offer.
The Company is in compliance with all requirements of the 1998 Loan Agreements
and the Indenture.
Borrowings under the 1998 Loan Agreements are secured by the stock of
Vanguard Cellular Financial Corp. and Vanguard Cellular Operating Corp., direct
or indirect wholly owned subsidiaries of the Company. The Debentures are
unsecured obligations of the Company.
INVESTMENTS IN WIRELESS ENTITIES
In July, 1998, the Company purchased NationPage, a leading regional paging
provider in Pennsylvania and New York, for approximately $28.5 million. The
NationPage acquisition will minimize future paging service capacity constraints
and was financed through borrowings under the 1998 Loan Agreements.
In the first quarter of 1998, the Company participated in the FCC's Local
Multipoint Distribution Service ("LMDS") auction, which concluded on March 25,
1998. The Company was the high bidder for 22 LMDS Basic Trading Area ("BTA")
licenses, with an aggregate bid of $8.9 million. The majority of these licenses
are in the same markets as the Company's existing cellular operations. As of
March 31, 1998, the Company had $5.3 million on deposit with the FCC. In June
1998, the licenses were issued and the Company completed payment of the $8.9
million to the FCC. LMDS frequencies may be used for a variety of technologies,
including traditional wireless telephony, competitive local exchange service,
and broadband data transmissions including Internet, video and others.
OTHER INVESTMENTS. At September 30, 1998, the Company owned approximately
29% of the outstanding stock of International Wireless Communications Holdings,
Inc. ("IWCH") and has invested an aggregate of $26.4 million. IWCH is a
development stage company specializing in securing, building and operating
wireless businesses, primarily in Asia and Latin America.
I-23
International Wireless Communications Holdings, Inc., International Wireless
Communications, Inc. Radio Movil Digital Americas, Inc., International Wireless
Communications Latin America Holdings, Ltd. and Pakistan Wireless Holdings
Limited (collectively, "IWC") filed separate petitions for relief under chapter
11 of the United States Bankruptcy Code on September 3, 1998. Pursuant to
Bankruptcy Court approval on October 28, 1998, the Company has provided IWC with
post-petition debtor in possession financing in the amount of $4.6 million on a
senior secured and administrative priority basis (the "Financing"). The
Financing will mature upon the earlier of (i) October 20, 1999, (ii) the date of
declaration of events of default by the Company (as described in the Financing
documents) and (iii) the effective date of an order of the Bankruptcy Court
confirming a plan or reorganization for any of the above-referenced debtors. At
IWC's option, the Financing, along with interest and fees earned under the
Financing, may be converted into equity of the reorganized debtors under a plan
of reorganization. The Financing was fully funded by the Company in November,
1998. The Company has also entered into an Interim Operating Agreement with IWC
("Interim Operating Agreement") which provides, among other things, that IWC is
granted authority to exercise day-to-day control over the Company's investment
in Pakistan Mobile Communications (Pvt) Ltd. ("PMCL") during the course of the
Chapter 11 cases and the Company is granted authority to exercise day-to-day
control over IWC's interests in Star Digitel Limited ("SDL") during the course
of the Chapter 11 cases. The Bankruptcy Court approved the Interim Operating
Agreement at a hearing on October 28, 1998.
During the third quarter of 1998 the Company funded a $1.8 million capital
call of SDL, a Hong Kong company whose principal business activities relate to
the provision and development of wireless telecommunications services in the
People's Republic of China. The July 2, 1998 capital call reflected the
Company's shareholding of approximately 9% of the shares of SDL. On September
11, 1998 the Company provided a $4.6 million shareholder loan to SDL. On
September 22, 1998, the Company amended and restated a guarantee previously
issued to The Toronto-Dominion Bank and guaranteeing repayment of $490,000 of
the principal amount of certain SDL debt to that bank, to, among other things,
increase the amount of principal for which repayment was guaranteed from
$490,000 to $2.8 million.
During the third quarter of 1998 the Company caused certain letters of
credit to be issued in favor of ABN AMRO Bank N.V. and Motorola, Inc. as
security for certain obligations owed to those letter of credit beneficiaries by
PMCL, a Pakistan company that owns and operates a nationwide cellular license in
Pakistan. The Company's total obligations under the letter of credits are $3.1
million. Vanguard Pakistan Inc., an indirect subsidiary of the Company, has also
entered into a Contribution and Indemnity Agreement with other shareholders of
PMCL. Under that agreement, Vanguard Pakistan, Inc. agreed to pay a percentage,
equal to its percentage shareholding in PMCL, of no more than 25% of certain
increased costs that may be incurred by one of the letter of credit
beneficiaries. Vanguard Pakistan, Inc. holds an approximate 8% shareholding
interest in PMCL. The Company's maximum potential liability under the
Contribution and Indemnity Agreement is approximately $418,000. Additionally,
upon approval of the plan of reorganization for IWC by the Bankruptcy Court, the
Company will cause to be issued approximately $7.4 million in letters of credit
to the same beneficiaries noted above.
I-24
As of September 30, 1998, the Company had invested $10.0 million in
Inter*Act common stock and $8.0 million in preferred stock for an ownership
interest of approximately 24%. Inter*Act is a development stage company that
provides consumer product manufacturers and retailers (currently supermarkets)
the ability to offer targeted promotions to retail customers at the point of
entry of a retail outlet through an interactive multi-media system utilizing
ATM-like terminals.
During 1996, Inter*Act completed the sale of 142,000 units ("Units") of 14%
Senior Discount Notes due 2003, which have been exchanged for identical notes
registered with the SEC and warrants to purchase shares of common stock at $.01
per share. The Company purchased for $12.0 million a total of 18,000 Units
consisting of $18.0 million principal amount at maturity of these 14% Senior
Discount Notes and warrants to purchase 132,012 shares (subsequently increased
to 169,722) of common stock. At issuance, the Company allocated, based upon the
estimated fair values, $8.9 million and $3.1 million to the debentures and
warrants purchased by the Company, respectively. The shares issuable upon the
exercise of these warrants currently represent approximately 2% of Inter*Act's
outstanding common stock. In addition, under a stock warrant agreement, the
Company has the right to acquire at any time prior to May 5, 2005 an aggregate
of 900,113 shares of common stock for $23.50 per share, which shares presently
represent approximately 12% of the outstanding common stock of Inter*Act.
Inter*Act has incurred net losses since its inception. The net losses are
expected to grow significantly in future years as Inter*Act accelerates the
rollout of its systems in retail supermarkets. The Company records its
proportionate share of these losses under the equity method of accounting. The
Company's equity and warrant investment was reduced to zero through the
recognition of equity method losses during 1997. As of June 30, 1998, the
Company's total investment in Inter*Act was reduced to zero through the
recognition of equity method losses. As a result, the Company suspended the
recognition of losses attributable to Inter*Act until such time that equity
method income became available to offset the Company's share of Inter*Act's
future losses or the Company made further investments in Inter*Act. In the third
quarter of 1998, the Company invested an additional $8.0 million in Inter*Act.
Accordingly, during the third quarter of 1998 the Company recognized $4.2
million in equity method losses and will recognize the balance of the additional
$8.0 million investment as appropriate under the equity method of accounting.
In addition to the current ownership held by the Company, certain officers,
directors and entities affiliated with certain directors of the Company maintain
an additional 27% ownership interest in Inter*Act.
In 1994, the Company purchased from Geotek Communications, Inc. ("Geotek")
2.5 million shares of Geotek common stock for $30 million. Geotek is a
telecommunications Company that is developing a wireless communications network
using its FHMA (R) digital technology Under a management agreement, the Company
earned and recorded as revenue approximately 201,370
I-25
shares with an aggregate value of $2.1 million in 1996, and approximately
300,000 shares with an aggregate value of $2.4 million in 1995. In September
1995, the Company purchased, for $5.0 million in cash, 531,463 shares of
convertible preferred stock of Geotek with a stated value of $9.408 per share.
The Company currently owns less than 5% of Geotek's outstanding common stock.
During 1997, the Geotek common stock price, as quoted on the NASDAQ
National Market System, declined from $7.13 per share at December 31, 1996 to
$1.53 per share at December 31, 1997. Based on Geotek's historical performance,
including the significant decline in the market value of Geotek's common stock,
the Company's management made the determination that the decline in Geotek's
common stock price during 1997 was other than temporary and, accordingly,
recognized an impairment loss of $32.7 million in the fourth quarter of 1997 to
adjust the Company's investment in Geotek common stock to its market value at
December 31, 1997. On June 29, 1998, Geotek announced the filing of voluntary
petitions seeking protection under Chapter 11 of the Bankruptcy Code.
Accordingly, the Company recognized an impairment loss of approximately $10.0
million in the second quarter to reduce its entire investment in Geotek to zero.
Geotek's common stock price as of June 30, 1998 was $0.16 per share, and Geotek
was delisted from NASDAQ with the close of business on that date.
CAPITAL EXPENDITURES. As of September 30, 1998, the Company had $471.8
million of property and equipment in service. The Company historically has
incurred capital expenditures primarily based upon capacity needs in its
existing markets resulting from continued subscriber growth. To increase
geographic coverage and provide for additional portable usage the Company
intends to increase the number of sites and add additional capacity to existing
sites as it has done over the past few years. During the fourth quarter of 1998,
the Company will continue the expansion of its network. Capital expenditures for
1998 are estimated to be approximately $95 to $100 million and are expected to
be funded primarily through internally generated funds and borrowing under the
1998 Loan Agreements. Approximately $75.0 million of those capital expenditures
will be for cellular and paging network equipment, and the remainder will be
primarily for rental telephones and computer equipment. During the nine months
end September 30, 1998, the Company incurred approximately $69.2 million in
capital expenditures.
STOCK REPURCHASES. The Company's Board of Directors has authorized the
repurchase of up to 7,500,000 shares of its Class A Common Stock from time to
time in open market or other transactions. As of December 31, 1997, the Company
had repurchased 3,065,000 shares of its Class A Common Stock at an average price
of approximately $13.00 per share. During the six months ended June 30, 1998,
the Company repurchased an additional 1,612,000 shares at an average price of
approximately $17.70 per share. No shares were purchased in the third quarter of
1998.
During the second quarter of 1998, the Company entered into a total return
equity swap (the "Equity Swap") with a financial institution counterparty (the
"Counterparty"). Pursuant to the swap the Company has the right to purchase from
the Counterparty on or prior to June 30, 2000,
I-26
shares of Vanguard Cellular Systems, Inc.'s Class A common stock ("Equity Swap
Shares") at a price based upon the Counterparty purchase price for said shares
at initiation of the Equity Swap. At each quarter end during the term of the
Equity Swap, the Company is required to settle any decrease in the market value
of the Equity Swap Shares below the Counterparty's cost with shares of Vanguard
Cellular Systems, Inc.'s Class A stock, or with cash or a letter of credit in
the amount of the decrease. In addition, the Company is required to pay the
Counterparty a quarterly fee equal to a LIBOR-based rate on the Counterparty's
adjusted cost to acquire the Equity Swap Shares. Due to the Company's ability to
issue shares to settle periodic price fluctuations under the Equity Swap, the
Company records all amounts received (paid) under this arrangement as increases
(decreases) to equity.
The purpose of the total return equity swap is to allow the Company to lock
in the current price of Vanguard Stock in anticipation of, or in lieu of, a
future buyback, without the necessity of a present cash outlay. As of September
30, 1998, the Counterparty had acquired 112,800 shares of Vanguard Cellular
Systems, Inc. Class A Common Stock at an approximate cost of $2.1 million. Based
on the closing stock price of $19 at September 30, 1998, the market value of the
Equity Swap Shares was less than the Counterparty's cost of such shares by
$2,600.
INCOME TAXES. The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109--"Accounting for Income
Taxes." This standard requires, among other things, the recognition of future
tax benefits, measured by enacted tax rates, attributable to deductible
temporary differences between financial statement and income tax bases of assets
and liabilities and to tax NOLs, to the extent that realization of such benefits
is more likely than not.
During the fourth quarter of 1997, based on anticipated transactions which
would generate significant gains in 1998, the Company recognized approximately
$30 million of deferred income tax assets. These transactions, the sale of the
Company's Myrtle Beach RSA, the sale of the ENCCJV and the sale of the Company's
Western Florida markets, were consummated during 1998 generating proceeds to the
Company of $369 million and utilizing significant net operating loss
carryforwards. As a result of these transactions, the Company reversed an
additional $31.4 million of valuation allowances during 1998. This reversal
increased shareholders' equity as the related assets were originally generated
by additional income tax deductions arising from restricted stock bonuses, stock
options and stock purchase warrants. As of September 30, 1998, the Company had
recorded a net deferred income tax asset of $21 million. A valuation allowance
of $8.1 million remains on certain deferred income tax assets due to
uncertainties as to when and whether these assets will be realized in the
future.
The primary differences between the accumulated deficit for financial
reporting purposes and the income tax loss carryforwards relate to the
differences in the treatment of certain deferred cellular license acquisition
costs, certain gains on dispositions of cellular interests, partnership losses,
depreciation methods, estimated useful lives and compensation earned under stock
compensation plans. These carryforwards may be subject to annual limitation in
the future in
I-27
accordance with the Tax Reform Act of 1986 and the ability to use these
carryforwards could be significantly impacted by a future "change in control" of
the Company. The limitations, if any, arising from such future "change in
control" cannot be known at this time. See Note 6 to the Company's Consolidated
Financial Statements for further information regarding the Company's income tax
status.
GENERAL. Although no assurance can be given that such will be the case, the
Company believes that its internally generated funds and available borrowing
capacity under the 1998 Loan Agreements will be sufficient during the next
several years to complete its planned network expansion, to fund debt service,
to provide flexibility, to repurchase shares, to pursue acquisitions and other
business opportunities that might arise in the future, and to meet working
capital and general corporate needs.
THE YEAR 2000 ISSUES
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the Year
2000. The Year 2000 issue affects virtually all companies and organizations.
The Company currently has ongoing efforts to modify its existing computer
systems and expects to have all essential systems Year 2000 compliant before the
end of 1999. Management believes the effort and cost that will be required to
bring the Company's computer systems into compliance will not be material.
In May of 1997, the Company created a cross-functional team to examine the
Year 2000 issue, create a plan to make the Company compliant and to oversee the
process of becoming compliant. The plan created by this team is in process and
is scheduled for completion well before December 31, 1999. This plan takes
information technology and embedded technology into consideration and also
emphasizes relationships with significant third-parties.
The Company has focused on two critical systems, its' cellular network and
internally developed billing system. The cellular network is provided by one
vendor who has worked closely with the Company for many years. The Company is
closely monitoring the work of the vendor in its process of providing and
testing a Year 2000 compliant product. The bulk of the work in becoming Year
2000 compliant is related to making the internally developed billing system
compliant. Both critical systems are scheduled to be compliant before December
31, 1998. The plan also includes less critical systems, such as, the Company's
data center, internal voice and data networks, and business operations systems.
I-28
The Company has completed the awareness, assessment and solution design
phases and is currently in the remediation phase of the project. Once
remediation is completed the only phase remaining is testing and validation. The
Company estimates that the plan is 68% complete.
The Company has incurred costs of approximately $644,000 and estimates an
additional cost of $279,000 for a total project cost of $923,000. Based on these
figures the Company has incurred approximately 70% of its Year 2000 costs.
The costs incurred to date are approximately 3% of the Company's
Information Technology ("IT") 1998 budget and the estimated total Year 2000
costs to be incurred this year is approximately 4% of the IT budget. These
figures do not address the opportunity costs incurred by taking these resources
away from other projects. The Company's IT Department's general policy is to
only accept projects where the cost of implementation is less than the return on
investment. The return on investment could be anywhere from 2% to 10% depending
on the project. The Company estimates that the cost of lost opportunity due to
resources allocated to the Year 2000 project is between $1.5 million and $3.0
million.
In the event that the cellular network fails to perform as intended because
of a Year 2000 issue, even though the Year 2000 compliance plan has been
executed, the Company's estimate of the worst case scenario is that certain
types of calls may not be completed and certain types of services may not
function properly. These calls and services would be related to either a
Vanguard customer roaming in another company's market or a non-Vanguard customer
roaming in a Vanguard market. A Vanguard customer making a local call in a
Vanguard market would not fit this scenario and would likely have no problem
making a call.
If the internally developed billing system, as well as, any other internal
system does not work as intended due to the Year 2000 issue after the plan has
been executed, the worst case scenario is likely to be a minor loss of
functionality. The major subsystems in the billing system will be tested
extensively and it is more likely that a minor subsystem or report may have a
problem. In the same way, due to our verification processes, it is unlikely that
a critical application will have a problem and more likely that a minor
application will have an issue.
In the event that a Year 2000 problem does occur, the Company has manual
procedures that will allow it to continue operations until the problem can be
resolved. The Company will have a process for addressing any issues that arise
and the resources on hand to resolve problems in a timely manner.
INFLATION
The Company believes that inflation affects its business no more than it
generally affects other similar businesses.
I-29
"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:
Except for the historical information presented, the matters disclosed in
this report, including the discussion of the Company's Year 2000 compliance
program, 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 factors include, without
limitation: (i) the substantial leverage of the Company which 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; (ii) a change in economic conditions in
the markets served by the Company which could effect demand for cellular
services; (iii) greater than anticipated competition from PCS and ESMR companies
that provide services and features in addition to those currently provided by
cellular companies, and the risk that the Company will not be able to provide
such services and features or that it will not be able to do so on a timely or
profitable basis; (iv) technological developments that make the Company's
existing analog networks and planned digital networks uncompetitive or obsolete
such as the risk that the Company's choice of Time Division Multiple Access
("TDMA") as its digital technology leaves it at a competitive disadvantage if
other digital technologies, including Code Division Multiple Access ("CDMA"),
ultimately provide substantial advantages over TDMA or analog technology and
competitive pressures force the Company to implement CDMA or another digital
technology at substantially increased cost; (v) higher than anticipated costs
due to unauthorized use of its networks and the development and implementation
of measures to curtail such fraudulent use; (vi) necessary technological changes
(including changes to address Year 2000 remediation efforts) may be more
difficult or expensive to make than expected; (vii) greater than anticipated
losses attributable to its equity interests in other companies, (viii) general
economic or business conditions may be less favorable than expected, resulting
in, among other things, lower than expected revenues; (ix) legislative or
regulatory changes may adversely affect the businesses in which the Company is
engaged; (x) the rate of customer bankruptcies and other defaults may increase.
I-30
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits to this Form 10-Q are listed in the accompanying Index
to Exhibits.
(b) On November 9, 1998, the Registrant filed a Current Report on Form
8-K dated November 4, 1998. The Form 8-K reported the Registrant's
cash tender offer for its $200 million outstanding principal amount
9-3/8% Senior Debentures due April 15, 2006, and filed Amendment No.
1 to the Agreement and Plan of Merger dated as of October 2, 1998
among AT&T Corp., Winston, Inc. and Vanguard Cellular Systems, Inc.
(c) On October 15, 1998, the Registrant filed a Current Report on Form
8-K dated September 30, 1998. The Form 8-K reported the closing of
the sale of its Pensacola, FL MSA and Fort Walton Beach, FL RSA
markets pursuant to an Asset Purchase Agreement dated May 22, 1998.
(d) On October 13, 1998, the Registrant filed a Current Report on Form
8-K dated October 2, 1998. The Form 8-K reported the signing of a
definitive merger agreement with AT&T Corp., and filed related
exhibits.
(e) On July 13, 1998, the Registrant filed a Current Report on Form 8-K,
dated June 30, 1998. The Form 8-K reported the closing of the sale of
its Myrtle Beach, SC RSA market pursuant to an Asset Purchase
Agreement dated March 10, 1998, and filed related exhibits.
II-1
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has fully caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VANGUARD CELLULAR SYSTEMS, INC.
Date: November 16, 1998 By: /s/ Stephen R. Leeolou
-----------------------------------------------
Stephen R. Leeolou
President
and
Chief Executive Officer
Date: November 16, 1998 By: /s/ Stephen L. Holcombe
-------------------------------------------
Stephen L. Holcombe
Executive Vice President
and
Chief Financial Officer
(principal accounting and
principal financial officer)
II-2
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
*2(a) Asset Purchase Agreement dated March 10, 1998 by and between
Triton PCS, Inc. and Vanguard Cellular Systems of South
Carolina, Inc., filed as Exhibit 2(a) to the Registrant's Form
8K dated June 30, 1998.
*2(b) Asset Purchase Agreement dated May 22, 1998 by and among
Wireless One Network, L.P., Western Florida Cellular Telephone
Corp., and Vanguard Cellular Financial Corp., filed as Exhibit
2(b) to the Registrant's Form 10-Q dated June 30, 1998.
*2(c) Agreement and Plan of Merger dated as of October 2, 1998 among
AT&T Corp., Winston, Inc. and Vanguard Cellular Systems, Inc.,
filed as Exhibit 2(a) to the Registrant's Form 8K dated
October 2, 1998.
*2(d) Amendment No. 1 to the Agreement and Plan of Merger dated as
of October 2, 1998 among AT&T Corp., Winston, Inc. and
Vanguard Cellular Systems, Inc., filed as Exhibit 2(a) to the
Registrant's Form 8-K dated November 4, 1998.
*3(a) Articles of Incorporation of Registrant as amended through
July 25,1995, filed as Exhibit 1 to the Registrant's Form
8-A/A dated July 25, 1995.
*3(b) Bylaws of Registrant (compilation of July 25, 1995), filed as
Exhibit 2 to the Registrant's Form 8-A/A dated July 25, 1995.
*4(a) Specimen Common Stock Certificate, filed as Exhibit 2 to the
Registrant's Form 8-A/A dated July 25, 1995.
*4(b)(8) Third Amended and Restated Facility A Loan Agreement between
Vanguard Cellular Financial Corp. and various lenders led by
the Bank of New York, and The Toronto-Dominion Bank, and
NationsBank of Texas, N.A. as agents, dated February 20, 1998,
filed as Exhibit 4(b)(8) to the Registrant's Form 10-Q dated
March 31, 1998.
*4(b)(9) Facility B Loan Agreement between Vanguard Cellular Financial
Corp. and various lenders led by The Bank of New York, and The
Toronto-Dominion Bank, and NationsBank of Texas, N.A. as
agents, dated February 20, 1998, filed as Exhibit 4(b)( 9) to
the Registrant's Form 10-Q dated March 31, 1998.
*4(b)(10) Borrower Pledge Agreement between Vanguard Cellular Financial
Corp. and Toronto-Dominion (Texas), Inc. as collateral agent,
dated February 20, 1998, filed as Exhibit 4(b)( 10) to the
Registrant's Form 10-Q dated March 31, 1998.
*4(b)(11) VCOC Guaranty between Vanguard Cellular Operating Corp. and
various lenders led by The Bank of New York, and The
Toronto-Dominion Bank, and NationsBank of Texas, N.A. as
Secured Parties, dated February 20, 1998, filed as Exhibit
4(b)(11) to the Registrant's Form 10-Q dated March 31, 1998.
*4(b)(12) Vanguard Guaranty between Vanguard Cellular Operating Corp.
and various lenders led by the Bank of New York, and the
Toronto-Dominion Bank, and NationsBank of Texas, N.A. as
Secured Parties, dated February 20, 1998, filed as Exhibit
4(b)(12) to the Registrant's Form 10-Q dated March 31, 1998.
*4(b)(13) Vanguard Pledge Agreement between Registrant and
Toronto-Dominion (Texas), Inc. as collateral agent, dated
February 20, 1998, filed as Exhibit 4(b)(13) to the
Registrant's Form 10-Q dated March 31, 1998.
4(b)(14) First Amendment to Third Amended and Restated Facility A Loan
Agreement dated as of November 6, 1998 between Vanguard
Cellular Financial Corp. and various lenders led by The Bank
of New York, and The Toronto-Dominion Bank, and NationsBank,
N.A. as agents.
4(b)(15) First Amendment to Facility B Loan Agreement dated as of
November 6, 1998 between Vanguard Cellular Financial Corp. and
various lenders led by The Bank of New York, and The
Toronto-Dominion Bank, and NationsBank, N.A. as agents.
*4(c)(1) Indenture dated as of April 1, 1996 between Registrant and The
Bank of New York as Trustee, filed as Exhibit 4(e)(1) to the
Registrant's Form 10-Q/A dated March 31, 1996.
*4(c)(2) First Supplemental Indenture, dated as of April 1, 1996
between Registrant and The Bank of New York as Trustee, filed
as Exhibit 4(e)(2) to the Registrant's Form 10-Q/A dated March
31, 1996.
10(a)(1) Amendment To Employment Agreement dated September 21, 1998 by
and between the Registrant and Haynes G. Griffin.
10(a)(2) Amendment To Employment Agreement dated September 21, 1998 by
and between the Registrant and Stephen R. Leeolou.
10(a)(3) Amendment To Employment Agreement dated September 21, 1998 by
and between the Registrant and L. Richardson Preyer, Jr.
10(a)(4) Form of First Amendment To Executive Officer Long-Term
Incentive Compensation Plan dated as of July 22, 1998 between
the Registrant and Haynes
G. Griffin, Stuart S. Richardson, Stephen R. Leeolou, and L.
Richardson Preyer, Jr.
10(a)(5) Form of Tax Reimbursement Agreement dated as of July 22, 1998
by and between the Registrant and Haynes G. Griffin, Stuart S.
Richardson, Stephen R. Leeolou, L. Richardson Preyer, Jr., and
Stephen L. Holcombe.
11 Calculation of fully diluted earnings per share for the three
months and nine months ended September 30, 1998 and 1997.
27 Financial Data Schedule.
- -------------
* Incorporated by reference to the statement or report indicated.