<PAGE>
424b3
33-61295
SUBJECT TO COMPLETION
MARCH 20, 1996
PROSPECTUS SUPPLEMENT
(To Prospectus Dated October 4, 1995) (Vanguard Logo appears here)
$200,000,000
VANGUARD CELLULAR SYSTEMS, INC.
% SENIOR DEBENTURES DUE 2006
The % Senior Debentures Due 2006 (the "Debentures") are being offered by
Vanguard Cellular Systems, Inc. (the "Company") and will mature on
, 2006. Interest on the Debentures will be payable semiannually on
and of each year, commencing , 1996. The
Debentures will be redeemable at the option of the Company, in whole or in part,
at any time on or after , 2001 at the redemption prices set forth
herein, plus accrued and unpaid interest, if any, to the date of redemption. See
"Description of Debentures -- Optional Redemption." Upon a Change of Control
Triggering Event (as defined), holders of the Debentures will have the right to
require the Company to purchase all or any part of the Debentures at a purchase
price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the date of purchase. See "Description of
Debentures -- Purchase at the Option of Holders Upon a Change of Control."
The Debentures will be senior unsecured obligations of the Company and will rank
PARI PASSU with all unsubordinated, unsecured indebtedness of the Company. The
Debentures will be structurally subordinated to the indebtedness and all other
liabilities of the Company's subsidiaries. As of December 31, 1995, after giving
effect to this offering of the Debentures (the "Offering"), the application of
the net proceeds therefrom and actions to be taken pursuant to the proposed
amendment to the Company's Credit Facility (as defined), the total consolidated
indebtedness of the Company would have been $527.4 million, and the total
balance sheet liabilities of the Company's subsidiaries (including trade
payables and accrued liabilities), would have been approximately $372.2 million,
of which $327.4 million would have been indebtedness. The Company's subsidiaries
expect to incur significant additional indebtedness and other liabilities in the
future. Although the Debentures are entitled "senior," the Company had no
indebtedness as of December 31, 1995 that would have been subordinated to the
Debentures and has no current plans to incur such indebtedness.
The Debentures will be represented by Global Securities registered in the name
of the nominee of The Depository Trust Company, which will act as the depositary
(the "Depositary"). Beneficial interests in the Debentures represented by the
Global Securities will be shown on, and transfers thereof will be effected only
through, records maintained by the Depositary and its participants. Except as
described herein, Debentures in definitive form will not be issued. See
"Description of Debentures -- Book-Entry System."
SEE "CERTAIN RISK FACTORS" BEGINNING ON PAGE S-10 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE DEBENTURES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC (1) DISCOUNT COMPANY (1)(2)
Per Debenture............................................................ % % %
Total.................................................................... $ $ $
</TABLE>
(1) Plus accrued interest, if any, from , 1996, to the date of
delivery.
(2) Before deduction of expenses payable by the Company, estimated to be
$ .
The Debentures are offered subject to receipt and acceptance by the
Underwriters, to prior sale and to the Underwriters' right to reject any order
in whole or in part and to withdraw, cancel or modify the offer without notice.
It is expected that delivery of the Debentures will be made through the
facilities of The Depository Trust Company on or about , 1996.
SALOMON BROTHERS INC
GOLDMAN, SACHS & CO.
NATIONSBANC CAPITAL MARKETS, INC.
SMITH BARNEY INC.
TORONTO DOMINION SECURITIES
(USA) INC.
The date of this Prospectus Supplement is , 1996.
<PAGE>
FOR CALIFORNIA RESIDENTS: WITH RESPECT TO SALES OF THE DEBENTURES BEING
OFFERED HEREBY TO CALIFORNIA RESIDENTS, AS OF THE DATE OF THIS PROSPECTUS
SUPPLEMENT, SUCH DEBENTURES MAY BE SOLD ONLY TO: (1) "ACCREDITED INVESTORS"
WITHIN THE MEANING OF REGULATION D UNDER THE SECURITIES ACT OF 1933, (2) BANKS,
SAVINGS AND LOAN ASSOCIATIONS, TRUST COMPANIES, INSURANCE COMPANIES, INVESTMENT
COMPANIES REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940, PENSION AND
PROFIT-SHARING TRUSTS, CORPORATIONS OR OTHER ENTITIES WHICH, TOGETHER WITH THE
CORPORATION'S OR OTHER ENTITY'S AFFILIATES WHICH ARE UNDER COMMON CONTROL, HAVE
A NET WORTH ON A CONSOLIDATED BASIS ACCORDING TO THEIR MOST RECENT REGULARLY
PREPARED FINANCIAL STATEMENTS (WHICH SHALL HAVE BEEN REVIEWED, BUT NOT
NECESSARILY AUDITED, BY OUTSIDE ACCOUNTANTS) OF NOT LESS THAN $14 MILLION AND
SUBSIDIARIES OF THE FOREGOING OR (3) ANY PERSON (OTHER THAN A PERSON FORMED FOR
THE SOLE PURPOSE OF PURCHASING THE DEBENTURES BEING OFFERED HEREBY) WHO
PURCHASES AT LEAST $1 MILLION AGGREGATE AMOUNT OF THE DEBENTURES OFFERED HEREBY.
EACH CALIFORNIA RESIDENT PURCHASING DEBENTURES OFFERED HEREBY WILL BE DEEMED TO
REPRESENT BY SUCH PURCHASE THAT IT COMES WITHIN ONE OF THE AFOREMENTIONED
CATEGORIES, THAT IT WILL NOT SELL OR OTHERWISE TRANSFER ANY OF SUCH DEBENTURES
TO A CALIFORNIA RESIDENT UNLESS THE TRANSFEREE COMES WITHIN ONE OF THE
AFOREMENTIONED CATEGORIES AND THAT IT WILL ADVISE THE TRANSFEREE OF THIS
CONDITION, WHICH TRANSFEREE, BY BECOMING SUCH, WILL BE DEEMED TO BE BOUND BY THE
SAME RESTRICTIONS ON RESALE.
S-3
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
S-4
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO)
APPEARING EITHER ELSEWHERE IN, OR INCORPORATED BY REFERENCE INTO, THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS. AS USED IN THIS PROSPECTUS
SUPPLEMENT, REFERENCES TO THE "OFFERING" SHALL MEAN THE OFFERING OF THE
DEBENTURES. SEE "GLOSSARY" FOR DEFINITIONS OF CERTAIN OTHER TERMS USED IN THIS
PROSPECTUS SUPPLEMENT. OPERATING INCOME PLUS DEPRECIATION AND AMORTIZATION
("EBITDA") AS USED IN THIS PROSPECTUS SUPPLEMENT IS NOT THE DEFINED TERM UNDER
THE INDENTURE AND IS INCLUDED AS SUPPLEMENTAL DISCLOSURE BECAUSE IT IS GENERALLY
CONSIDERED USEFUL INFORMATION REGARDING A COMPANY'S ABILITY TO SERVICE DEBT.
EBITDA, HOWEVER, IS NOT A MEASURE DETERMINED IN ACCORDANCE WITH GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES ("GAAP") AND SHOULD NOT BE CONSIDERED IN
ISOLATION OR AS A SUBSTITUTE FOR OR AN ALTERNATIVE TO NET INCOME (LOSS), CASH
FLOW PROVIDED BY OPERATING ACTIVITIES OR OTHER INCOME OR CASH FLOW DATA PREPARED
IN ACCORDANCE WITH GAAP OR AS A MEASURE OF A COMPANY'S OPERATING PERFORMANCE OR
LIQUIDITY.
THE COMPANY
Vanguard Cellular Systems, Inc. (the "Company") is one of the largest
independent operators of cellular telephone systems in the United States based
on its 7.5 million aggregate POPs as of December 31, 1995. The Company serves
over 380,000 subscribers located in five "metro-clusters," or contiguous groups
of cellular markets, consisting of 28 markets in the Eastern United States,
including the Mid-Atlantic SuperSystem and the Florida, Carolinas, New England,
and West Virginia metro-clusters. The Mid-Atlantic SuperSystem, which is
contiguous to the New York, Philadelphia and Baltimore/Washington MSAs, and the
New England metro-cluster, which is contiguous to the Boston MSA, (four of the
nation's seven largest MSAs) collectively represent approximately 80% of the
Company's operating POPs. The Company's wireless products and services are
distributed under the CellularONE(Register mark) brand name, one of the most
recognized brand names in the wireless industry. For the year ended December 31,
1995, the Company had consolidated service revenues of $217 million and EBITDA
of $68 million.
The Company's markets are located in predominantly suburban and rural areas
proximate to major urban areas, which the Company believes affords it several
advantages over traditional urban wireless operations, including (i) greater
network capacity, (ii) greater roaming revenue opportunities, (iii) lower
distribution costs and (iv) higher barriers to entry. Because there are limits
to the number of signals that can be transmitted simultaneously in a given area,
the Company's less densely populated suburban and rural locations allow for
greater frequency reuse, resulting in greater overall network capacity than in
high density urban markets. The Company is able to provide high quality voice
transmission with reduced instances of blocked or dropped calls. In addition to
these network advantages, the Company's metro-clusters enjoy greater roaming
revenue opportunities by virtue of their proximity to large urban centers. This
benefit is best exemplified in the Mid-Atlantic SuperSystem, which is located in
the heavily traveled corridor between New York, Philadelphia and
Baltimore/Washington D.C. Roaming revenue requires minimal incremental
administrative and marketing expenditures, and the Company believes that it is
well positioned to benefit from both cellular roaming and eventual roaming by
users of personal communications services ("PCS"). The Company also believes
that it experiences lower distribution costs due to its enhanced ability to
market its products and services through Company-owned distribution channels,
because direct sales, retail stores and kiosks are more economical outside of
urban areas. Finally, the Company believes that the lower population density and
greater geographic coverage of its suburban and rural metro-clusters act as
barriers to entry given the relatively higher per-subscriber costs of building
competing wireless systems.
The Company's annual service revenue and subscriber growth over the last
three years has outpaced average industry growth over the three year period
ending June 30, 1995 according to the most recently published data by the
Cellular Telephone Industry Association. The number of subscribers in the
Company's majority-owned markets grew from 92,300 to 381,000 over the last three
years, a compound annual growth rate of approximately 60%, compared to an
industry growth rate of 47%. Service revenue grew from $73 million in 1992 to
$217 million in 1995, a compound annual growth rate of 44%, compared to an
industry growth rate of 35%. In addition, the Company's EBITDA grew from $14
million in 1992 to $68 million in 1995. See "Selected Consolidated Financial and
Operating Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
S-5
<PAGE>
BUSINESS STRATEGY
The Company's overall goal is to continue to pursue strong growth of
subscribers, revenues and EBITDA. The Company intends to achieve this goal
through its operating strategy of providing a broad range of high quality
integrated wireless communications products and services. Key elements of the
Company's strategy include:
(Bullet) DEVELOPMENT OF THE METRO-CLUSTER SERVICE AREAS. The Company has
pursued a strategy of developing and supplementing its regional
metro-clusters to enable it to better serve its customers and to
achieve cost efficiencies through economies of scale. By operating
in contiguous markets, the Company can provide broad areas of
seamless service and achieve economies of scale in marketing and
operations as well as cost efficiencies in deploying its network
infrastructure. The Company continually evaluates opportunities
for acquisitions of new cellular properties in proximate suburban
and rural markets that will expand its metro-clusters.
(Bullet) CONTINUOUS CELLULAR NETWORK BUILDOUT. The Company continuously
improves its systems. In 1994, the Company began a cellular
network expansion and upgrade program in order to increase
geographic coverage and provide for additional portable usage in
the Company's cellular markets. In 1995, the Company added 110 new
cell sites and replaced or upgraded 65 others, bringing its total
number of cell sites to 270 as of December 31, 1995. The Company
plans to add 80 cell sites in 1996 as it continues to enhance its
network.
The Company believes that its networks have sufficient capacity in
its spectrum to serve the Company's growing subscriber base in the
near future but plans to implement a gradual transition to digital
technology before analog capacity constraints become a significant
concern. The Company's networks are currently digital-ready, with
dual mode analog/Time Division Multiple Access ("TDMA") digital
radio technology already built-in such that individual
transmitters may be converted to digital mode with minimal
additional investment. See "Business -- Expansion of Product
Offerings."
(Bullet) INVESTMENT IN BRAND IDENTITY. The Company's wireless products and
services are distributed under the CellularONE(Register mark)
brand name, one of the most recognized brand names in the wireless
industry. The CellularONE(Register mark) brand name currently is
used by cellular systems covering more than 11,000 cities and
towns, representing total POPs of over 129 million. The Company
has a minority ownership interest in the partnership that owns the
CellularONE(Register mark) brand name and that controls the
promotion and management of the brand. In addition to benefitting
from local advertising by licensees, the
CellularONE(Register mark) brand name is advertised on a national
basis by the partnership that owns the brand with funding provided
by licensing fees.
(Bullet) EMPHASIS ON CUSTOMER SERVICE AND ADVANCED BILLING SYSTEMS. The
Company provides on-line customer support, 24 hours a day, seven
days a week. The Company's internally developed, proprietary
Flexcell(Register mark) billing and management information system
enables the Company to provide quality services to its expanding
customer base and affords it access to customer data, which it
uses to facilitate its marketing efforts. One such service is
Rapid Activation, which enables the Company to execute credit
checks, order entry, and subscriber activation within five
minutes. See "Business -- Customer Service."
(Bullet) GROWTH OF INTERNAL DISTRIBUTION CHANNELS. The Company distributes
its products and services through both its internal distribution
network (direct salesforce, sales and service centers, and retail
stores) and external distribution channels (national retailers,
local agents and automotive dealers). The Company is continuing
its long-term emphasis on internal distribution channels,
particularly its own retail outlets, which the Company believes
offer substantial benefits. These benefits include lower cost,
higher effectiveness in selling to high margin customers, and a
consistent point of customer contact, resulting in greater ongoing
satisfaction for both internally and externally generated
customers. The Company is therefore building additional retail
outlets, as well as upgrading existing outlets. See
"Business -- Marketing and Distribution."
(Bullet) EXPANSION OF PRODUCT OFFERINGS. The Company continues to offer new
and innovative products and services in order to increase the
value of the basic voice product to the customer and to increase
airtime revenues. In addition to enhanced cellular voice service
packages, the Company has begun to offer digital data
transmission, and field trials are underway for Cellular Digital
Packet Data protocol ("CDPD"). With the integration of digital
technology, the Company will be able to offer a variety of
additional services such as caller identification, short messaging
and call encryption.
S-6
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered........................ $200,000,000 principal amount of % Senior Debentures due 2006 (the
"Debentures").
Maturity.................................. The Debentures will mature on , 2006.
Interest Payment Dates.................... Interest on the Debentures is payable semiannually on each and
, commencing , 1996.
Optional Redemption....................... The Debentures will be redeemable at the option of the Company, in whole or in
part, at any time on or after , 2001, at the redemption prices set
forth herein, plus accrued and unpaid interest, if any, to the date of
redemption. See "Description of Debentures -- Optional Redemption."
Sinking Fund.............................. None.
Change of Control......................... Upon a Change of Control Triggering Event, the Company will be required to make
an offer to purchase the Debentures at a purchase price equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date of
purchase. See "Description of Debentures -- Change of Control Offer."
Ranking................................... The Debentures are senior unsecured obligations of the Company, ranking PARI
PASSU with other unsubordinated, unsecured indebtedness of the Company, and
ranking senior in right of payment to any future subordinated indebtedness of the
Company. The Debentures will be structurally subordinated to all liabilities of
the Company's subsidiaries, including the Credit Facility (as defined). See
"Description of Credit Facility." As of December 31, 1995, after giving effect to
the Offering and the application of the net proceeds thereof, the total
indebtedness and other balance sheet liabilities (including trade payables and
accrued liabilities) of such subsidiaries, on an aggregate basis, would have been
approximately $372.2 million, of which $327.4 million would have been
indebtedness. At such date, the Company had no indebtedness that would have been
subordinated to the Debentures. See "Risk Factors -- Holding Company Structure"
and "Description of Debentures."
Certain Covenants......................... The Indenture, as supplemented by the Indenture Supplement (the "Indenture"), for
the Debentures will contain limitations on, among other things, (a) the ability
of the Company and its Restricted Subsidiaries to Incur additional Indebtedness,
(b) the payment of dividends and other distributions with respect to the Capital
Stock of the Company and the purchase, redemption or retirement of Capital Stock
of the Company, (c) the Incurrence of certain Liens, (d) the ability of the
Company to allow restrictions on distributions by Restricted Subsidiaries, (e)
Asset Sales, (f) transactions with Affiliates and (g) certain consolidations,
mergers and transfers of assets. All of these limitations are subject to a number
of important qualifications. See "Description of Debentures -- Certain
Covenants."
Use of Proceeds........................... The net proceeds of the offering (approximately $194.7 million) will be used to
refinance amounts outstanding under the revolving portion of the Credit Facility.
The Company expects to make additional borrowings in the future to fund capital
expenditures and for other general corporate purposes, including possible
acquisitions and other investments. See "Use of Proceeds."
Risk Factors.............................. See "Risk Factors" for a discussion of certain factors that should be considered
by prospective purchasers of the Debentures.
</TABLE>
S-7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table presents a summary of consolidated financial and
operating data of the Company and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated historical financial information of the Company
and related notes thereto included elsewhere or incorporated by reference in
this Prospectus Supplement or the accompanying Prospectus. The summary
historical consolidated financial data for fiscal years 1991 through 1995 are
derived from the consolidated financial statements of the Company, which have
been audited by Arthur Andersen LLP.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SUBSCRIBER
AND PER NET ACTIVATION DATA)
STATEMENT OF OPERATIONS DATA:
Revenue:
Service revenue (a)..................................... $217,440 $146,417 $ 98,960 $ 72,791 $ 56,347
Cellular telephone equipment revenue.................... 15,647 18,529 9,929 5,999 4,837
Other................................................... 2,984 3,055 175 -- --
236,071 168,001 109,064 78,790 61,184
Costs and expenses:
Cost of service......................................... 27,043 21,008 14,461 11,044 6,992
Cost of cellular telephone equipment.................... 25,605 29,933 13,410 7,579 6,314
General and administrative.............................. 60,489 44,019 34,218 29,334 29,578
Marketing and selling................................... 54,906 37,102 21,693 16,877 13,867
Depreciation and amortization (b)....................... 36,170 24,073 25,160 22,100 19,112
204,213 156,135 108,942 86,934 75,863
Income (loss) from operations.............................. 31,858 11,866 122 (8,144) (14,679)
Interest expense........................................... (38,293) (22,126) (15,389) (16,177) (19,292)
Other, net................................................. (575) (3,532) 138 (2,642) 949
Minority interests......................................... (3) (153) (154) 304 309
Net loss before extraordinary item......................... (7,013) (13,945) (15,283) (26,659) (32,713)
Extraordinary charge (c)................................... -- (8,402) (3,715) -- --
Net loss................................................... $ (7,013) $(22,347) $(18,998) $(26,659) $(32,713)
OTHER DATA:
Capital expenditures (d)................................... $129,894 $ 62,632 $ 21,009 $ 18,243 $ 16,542
EBITDA (e)................................................. $ 68,028 $ 35,939 $ 25,282 $ 13,956 $ 4,433
EBITDA margin on service revenue........................... 31.3% 24.5% 25.5% 19.2% 7.9%
EBITDA before sales and marketing (f)...................... $132,892 $ 84,445 $ 50,456 $ 32,413 $ 19,777
Total subscribers in majority owned markets
at year end (000s)...................................... 381.0 245.0 132.3 92.3 69.2
Penetration (g)............................................ 5.3% 3.7% 2.2% 1.6% 1.2%
Average monthly service revenue per subscriber............. $ 58 $ 70 $ 76 $ 77 $ 77
Sales and marketing cost per net activation (h)............ $ 511 $ 493 $ 629 $ 799 $ 1,066
Net POPs (000s)............................................ 7,523 7,480 6,455 6,193 6,101
BALANCE SHEET DATA (end of period):
Working capital (deficiency)............................... $ 4,997 $ (1,778) $ 4,696 $ (1,185) $ 7,854
Property and equipment, net................................ 225,206 120,325 71,716 72,026 74,581
Total assets............................................... 596,577 431,711 284,429 251,820 255,810
Long-term debt (including current portion)................. 522,143 348,649 238,153 199,712 184,827
Shareholders' equity....................................... 29,048 39,207 21,898 30,265 51,669
</TABLE>
S-8
<PAGE>
(a) In 1994, in order to conform to industry practice, the Company
reclassified certain pass-through items previously recognized as
service revenue to offset the related cost of service expenses. These
reclassified items relate to charges associated with the Company's
subscribers roaming into adjacent cellular markets. Appropriate
reclassifications have been made in each period presented.
(b) Effective January 1, 1994, the Company changed its depreciation period
for approximately 30% of its property and equipment from seven years to
a 10 to 20 year schedule. The effect of this change was to reduce
depreciation expense for the year ended December 31, 1994 by $4.5
million.
(c) The extraordinary charges for the years ended December 31, 1994 and
1993 of $8.4 million and $3.7 million, respectively, reflect the
write-off of deferred financing costs associated with the Company's
credit facilities that were replaced during 1994 and 1993.
(d) Capital expenditures excludes acquisitions.
(e) EBITDA consists of income (loss) from operations before depreciation
and amortization. Although EBITDA is not a measure of performance
calculated in accordance with GAAP, management believes that it is
useful to a prospective investor because it is a measure widely used in
the cellular industry to evaluate a company's operating performance.
EBITDA, however, should not be considered in isolation or as a
substitute for net income, cash flows from operating activities and
other income or cash flow statement data prepared in accordance with
GAAP or as a measure of liquidity or profitability. EBITDA as used here
is not the same term as defined in the Indenture.
(f) EBITDA before sales and marketing represents EBITDA plus sales,
marketing and advertising costs and net losses on cellular equipment.
(g) Penetration represents total year-end subscribers divided by the
year-end total POPs in the Company's majority-owned markets.
(h) Sales and marketing cost per net activation represents sales, marketing
and advertising costs plus net losses on cellular equipment divided by
net subscriber additions, excluding subscribers added through
acquisitions.
S-9
<PAGE>
CERTAIN RISK FACTORS
THE FOLLOWING RISK FACTORS, IN ADDITION TO THE OTHER INFORMATION CONTAINED
ELSEWHERE IN, OR INCORPORATED BY REFERENCE INTO, THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS, SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE
COMPANY AND ITS BUSINESS AND AN INVESTMENT IN THE DEBENTURES.
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT
The Company has substantial leverage. As of December 31, 1995, the
Company's total indebtedness, on a pro forma basis, would have been
approximately 95% of its total capitalization. See "Use of Proceeds" and
"Capitalization." The degree to which the Company is leveraged may adversely
affect the Company's ability to finance its future operations, to compete
effectively against better capitalized competitors and to withstand downturns in
its business or the economy generally, and could limit its ability to pursue
business opportunities that may be in the interests of the Company and its
security holders. Following the Offering, the Company will have approximately
$350 million of available borrowings under the Credit Facility, subject to
certain limitations, and it expects to continue to borrow funds under this
facility. The Company would use such additional borrowings for general corporate
purposes, including continuing improvement of its systems, targeted cellular
acquisitions and other investment opportunities in wireless and multimedia
businesses. The Credit Facility is structurally senior to the Debentures and is
secured by substantially all of the assets of the Company, and under the
financial covenants of the facility, borrowing availability is dependent on
continued improvement in the Company's operating performance. Prior to the
completion of the Offering, the Company expects to make a wholly owned
subsidiary the primary obligor with respect to the Credit Facility. The obligor
under the Credit Facility will also assume all of the Company's liabilities
(other than the Debentures). The terms of the Credit Facility, following the
proposed amendment, will limit the ability of the subsidiary to pay dividends
and make other distributions to the Company. See " -- Holding Company
Structure." The Company's interest payments under the Credit Facility have been
$13.8 million, $22.6 million and $34.0 million in 1993, 1994 and 1995,
respectively. The Credit Facility consists of a term loan and a revolving loan.
The outstanding amount of the term loan as of March 31, 1998 is to be repaid in
increasing quarterly installments commencing on March 31, 1998 and terminating
at its maturity date of December 31, 2003. The quarterly installment payments
begin at 1.875% of the outstanding principal amount at March 30, 1998 and
gradually increase to 5.625% of the principal amount at March 31, 2003. The
available borrowings under the revolving loan will be reduced on a quarterly
basis also commencing on March 31, 1998 and terminating on December 31, 2003.
The quarterly reductions begin at 1.875% of the revolving loan commitment at
March 31, 1998 and gradually increase to 5.525% of the commitment on March 31,
2003. See "Description of Credit Facility."
The Company's ability to meet its working capital and operational needs and
to provide funds for debt service, capital expenditures, acquisitions and other
cash requirements will require continued growth in the Company's EBITDA. In the
past, EBITDA has been insufficient to meet these needs and cash has been
generated through the Company's bank credit facilities and the sale of its
common stock. In 1993, 1994 and 1995, EBITDA was $25.3 million, $35.9 million
and $68.0 million, respectively. However, there can be no assurance that the
Company will be successful in continuing to grow its EBITDA by a sufficient
magnitude or in a timely manner or in raising additional equity or debt
financing to enable it to meet its cash requirements. The Credit Facility and
the Debentures impose or will impose restrictions on the operations and
activities of the Company. Generally, the most significant restrictions relate
to debt incurrence, investments, capital expenditures, sales of assets and the
use of proceeds therefrom and cash distributions from the Company and require
the Company to comply with certain financial covenants including financial
ratios. The ability of the Company to comply with the foregoing restrictions and
covenants will be dependent upon its future performance and various other
factors, including factors beyond the Company's control. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," "Description of Credit Facility"
and "Description of Debentures -- Certain Covenants."
HISTORY OF NET LOSSES; DEFICIENCY OF EARNINGS AVAILABLE TO COVER FIXED CHARGES
The Company has sustained net losses in each fiscal year of its operations.
As of December 31, 1995, the Company had an accumulated deficit of $193.6
million. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources." There can be no
assurance that the Company will be profitable in 1996 or thereafter. In
addition, the Company's earnings have been insufficient to cover its fixed
charges in each fiscal year since its formation in 1984. For the year ended
December 31, 1995, the Company's earnings were insufficient to cover fixed
charges by approximately $5.8 million.
S-10
<PAGE>
HOLDING COMPANY STRUCTURE
The Debentures will be obligations exclusively of the Company. The
Company's subsidiaries hold substantially all of the Company's assets and
conduct substantially all of its operations. The Company must rely on dividends,
loan repayments and other intercompany cash flows from its subsidiaries to
generate the funds necessary to meet the Company's debt service obligations,
including the Debentures. In addition, prior to sale of the Debentures, pursuant
to a proposed amendment to the Credit Facility, a holding company subsidiary
will become the primary obligor of the Credit Facility and the Company and
substantially all of the subsidiaries of the holding company subsidiary will
have guaranteed the Credit Facility, with such guarantees being secured by the
assets of the guarantors. The proposed amendment will limit the ability of the
new subsidiary to pay dividends and make other distributions to the Company. See
"Description of Credit Facility." The Debentures will be effectively
subordinated to all indebtedness and other liabilities and commitments of the
subsidiaries, including trade payables and lease obligations and the guarantees
of the Credit Facility. Any right of the Company to receive assets of any such
subsidiary upon the liquidation or reorganization of such subsidiary will be
effectively subordinated to the claims of that subsidiary's creditors (including
the claims of the creditors under the Credit Facility), except to the extent the
Company is itself recognized as a creditor of such subsidiary, in which case the
claims of the Company would still be subject to any security interests in the
assets of such subsidiary and subordinate to any claims of such subsidiary
senior to that held by the Company. As of December 31, 1995, on a pro forma
basis, the Company's subsidiaries would have had approximately $372.2 million of
total balance sheet liabilities, of which $327.4 million was indebtedness. Under
the Indenture for the Debentures, the Company's subsidiaries are permitted to
incur substantial additional liabilities.
COMPETITION
The FCC currently authorizes only two licensees to operate cellular
communications systems in each cellular market. The Company competes primarily
against the other facilities-based cellular carrier in each metropolitan
statistical area ("MSA") and rural service area ("RSA") market that it serves
and expects competition to remain vigorous. Competition for customers between
cellular licensees is based principally upon the services and enhancements
offered, the quality of the cellular system, customer service, system coverage
and capacity and price. The Company expects such competition to continue and
anticipates continued downward pressure on the prices charged for its cellular
equipment and services.
Competition is expected to increase as a result of recent regulatory and
legislative initiatives. The FCC has promulgated rules for the licensing of
operators to provide personal communications services ("PCS") and enhanced
specialized mobile radio ("ESMR") services. The FCC has decided to offer over
2,000 licenses for PCS use. The FCC has completed the initial round of its
spectrum auction process which resulted in the award of two PCS licenses in each
Major Trading Area ("MTA").
The wireless marketplace is expected to become increasingly competitive as
a result of the commencement of operations by new wireless service providers and
due to competition from resellers. PCS and ESMR operators will compete directly
with the Company and may have access to substantial capital resources. ESMR is a
wireless communications service created by converting analog specialized mobile
radio ("SMR") services into an integrated, digital wireless communications
system. PCS is expected to be a digital, wireless communications system
supported by high-density call transmitters. It is expected that PCS will
involve a network of small, low-powered transceivers placed throughout a
neighborhood, business complex, community or metropolitan area to provide
customers with mobile and portable voice and data communications. Two PCS
systems are currently in commercial service in the United States. It is expected
that PCS and ESMR will provide services and features in addition to those
currently provided by cellular companies, and there can be no assurance that the
Company will be able to provide such services and features or that it will be
able to do so on a timely or profitable basis.
ADOPTION OF NEW TECHNOLOGIES; TECHNOLOGICAL OBSOLESCENCE
The Company's commercial networks currently utilize analog technology. The
Company has chosen Time Division Multiple Access ("TDMA") as its digital
technology. However, other digital technologies, including Code Division
Multiple Access ("CDMA"), may ultimately provide substantial advantages over
TDMA or analog technology and as these advantages become more established, the
Company may be at a competitive disadvantage and competitive pressures may force
the Company to implement CDMA or another digital technology at substantially
increased cost. In addition, other wireless communications companies may
implement digital technology before
S-11
<PAGE>
the Company, and consequently such companies may be able to provide enhanced
services and superior quality compared with that which the Company is able to
provide through its existing analog technologies. There can be no assurance that
the Company could respond to such competitive pressures and implement digital
technology on a timely basis or at an acceptable cost. One or more of the
technologies currently utilized by the Company or implemented in the future may
not be preferred by its customers or may become obsolete at some time in the
future, which in either case could have a material adverse effect on the
Company's financial condition and results of operations. There can be no
assurance that the Company's ongoing network improvements will be sufficient to
meet or exceed the capabilities and quality of competing networks. See
"Business -- Competition."
The Company is studying the possibility of participating in an FCC auction
for 10 MHz of spectrum in the 1850 to 1990 MHz PCS band. There can be no
assurance that the Company will decide to bid or if it does, that it will submit
a successful bid. If the Company were to submit a winning bid and be granted a
license, the Company would be required to make substantial capital expenditures
to plan, construct and operate a PCS system. There can be no assurance that the
Company could implement successfully the technology needed to construct and
operate a PCS system, or that the Company could operate such a system
profitably.
REGULATION OF THE CELLULAR INDUSTRY
The licensing, construction, operation, acquisition, assignment and
transfer of cellular communications systems, as well as the number of licensees
permitted in each market, are regulated by the FCC. Changes in the regulation of
cellular activities could have a material adverse effect on the Company's
operations and financial performance. In addition, initial operating licenses
are generally granted for terms of up to 10 years, renewable upon application to
the FCC. Licenses may be revoked and license renewal applications denied for
cause after appropriate notice and hearing. In addition, the Company's renewal
applications also may be subject to petitions to deny or competing applications.
The Company has 10 licenses scheduled to expire in 1997 and 15 licenses have
their initial expiration dates thereafter. Although three of the Company's
licenses have been renewed recently, there can be no assurance that any of the
Company's licenses will not be revoked or will be renewed on expiration. See
"Business -- Governmental Regulation -- Regulation of Cellular Systems."
OPERATING COSTS DUE TO FRAUD
Like most companies in the cellular industry, the Company incurs costs
associated with unauthorized use of its network. Fraud impacts interconnection
costs, capacity costs, administrative costs, costs incurred for fraud prevention
and payments to other carriers for unbillable fraudulent roaming. During the
last quarter of 1995, the Company experienced for the first time significant
costs associated with unauthorized use. The Company intends to continue to
develop and invest in anti-fraud measures to prevent cellular fraud. Even so,
there can be no assurance that the Company will not incur substantial costs due
to fraud. In addition, while the costs of the Company's anti-fraud measures have
not been significant in the past, there can be no assurance that these costs
will not become substantial in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
VALUE OF FCC LICENSES.
The underlying value of the Company's assets relates primarily to its
intangible assets, principally interests in entities holding FCC construction
permits and licenses, the value of which depends significantly upon the success
of the Company's business and the growth of the industry in general. While the
Company believes that there is presently a market for such assets, such market
may not exist in the future or the values obtainable may be lower than at
present. As a consequence, in the event of default on indebtedness of the
Company or any other event which would result in the liquidation of the
Company's assets, there can be no assurance that the proceeds would be
sufficient to pay its obligations, including obligations pursuant to the
Debentures.
DEPENDENCE ON KEY PERSONNEL
The Company's businesses are managed by a small number of key executive
officers. The loss of certain of these key executive officers could have a
material adverse effect on the Company.
S-12
<PAGE>
RADIO FREQUENCY EMISSION CONCERNS
Media reports have suggested that certain radio frequency ("RF") emissions
from cellular telephones may be linked to cancer. Although unsuccessful to date,
various lawsuits, none of which involve the Company, have been filed alleging
that the death of a cellular subscriber was related to emissions. If such a
lawsuit were successful, it could have a material adverse effect on the
Company's business or results of operations. The FCC has a rulemaking proceeding
to update the guidelines and methods it uses for evaluation of RF emissions from
radio equipment, including cellular telephones. As a result, more restrictive
standards with respect to RF emissions from low powered devices such as cellular
telephones may be imposed. The Company is unable to predict the nature or extent
of these potential restrictions at the present time and therefore cannot
determine whether these potential restrictions or the basis for them would have
a material adverse effect on its business or results of operations.
LACK OF PUBLIC MARKET FOR DEBENTURES
Because the Debentures are a new issue of securities, there is currently no
active trading market for the Debentures. In addition, the Debentures will not
be listed on any national securities exchange or over-the-counter market system.
The Underwriters have advised the Company that they presently intend to make a
market in the Debentures, although none of them is obligated to do so, and each
of them may discontinue any market-making activities with respect to the
Debentures at any time without notice. There can be no assurance that an active
public market for the Debentures will develop or be maintained. If an active
trading market for the Debentures does not develop, the market price and
liquidity of the Debentures may be adversely affected.
S-13
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the Debentures offered hereby are
estimated to be $194.7 million. The net proceeds will be used to reduce
borrowings outstanding under the revolving loan portion of the Credit Facility.
At February 29, 1996, approximately $214 million of borrowings were outstanding
under the revolving loan portion of the Credit Facility. Approximately $115
million of such revolving indebtedness was incurred to fund capital expenditures
and acquisitions during the twelve months prior to February 29, 1996. The
Company expects to make additional borrowings in the future to fund capital
expenditures and for other general corporate purposes, including possible
acquisitions and other investments. For information relating to interest rates
and maturity dates of indebtedness under the Credit Facility and the Company's
future financing needs, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Description of Credit Facility." Certain affiliates of Toronto Dominion
Securities (USA) Inc. and NationsBanc Capital Markets, Inc., underwriters for
the Offering, that are lenders under the Credit Facility will receive
approximately $27.4 million of the repayment of borrowings under the revolving
loan portion of such facility. See "Underwriting."
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1995, giving pro forma effect to the consummation of the Offering
and the application of the net proceeds therefrom. This table should be read in
conjunction with the Company's consolidated financial statements and notes
thereto appearing in, or incorporated by reference into, this Prospectus
Supplement and the accompanying Prospectus.
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1995
ACTUAL AS ADJUSTED
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Long-term debt:
Borrowings under the Credit Facility:
Term loan................................................................................... $ 325,000 $ 325,000
Revolving loan (a).......................................................................... 197,000 2,300
Other long-term debt........................................................................... 143 143
Debentures offered hereby...................................................................... -- 200,000
Total long-term debt........................................................................ 522,143 527,443
Minority interests............................................................................... 573 573
Shareholders' equity:
Preferred stock -- $.01 par value, 1,000,000 shares authorized,
no shares issued............................................................................ -- --
Common stock, Class A -- $.01 par value, 250,000,000 shares authorized, 41,312,053 shares
issued and outstanding...................................................................... 413 413
Common stock, Class B -- $.01 par value, 30,000,000 shares authorized, no shares issued........ -- --
Additional capital in excess of par value...................................................... 238,662 238,662
Net unrealized holding losses.................................................................. (16,395) (16,395)
Accumulated deficit............................................................................ (193,632) (193,632)
Total shareholders' equity.................................................................. 29,048 29,048
Total capitalization...................................................................... $ 551,764 $ 557,064
</TABLE>
(a) Commitments under the Credit Facility will not be reduced so that following
the Offering, the Company will have approximately $347.7 million of
available borrowings under the revolving loan portion of the Credit
Facility, subject to certain limitations.
S-14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table presents a summary of financial and operating data of
the Company and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
historical financial information of the Company and related notes thereto
included in, or incorporated by reference into, this Prospectus Supplement and
the accompanying Prospectus. The summary historical consolidated financial data
for fiscal years 1991 through 1995 are derived from the consolidated financial
statements of the Company, which have been audited by Arthur Andersen LLP.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SUBSCRIBER AND
PER NET ACTIVATION DATA)
STATEMENT OF OPERATIONS DATA:
Revenue:
Service revenue (a)..................................... $217,440 $146,417 $ 98,960 $ 72,791 $ 56,347
Cellular telephone equipment revenue.................... 15,647 18,529 9,929 5,999 4,837
Other................................................... 2,984 3,055 175 -- --
236,071 168,001 109,064 78,790 61,184
Costs and expenses:
Cost of service......................................... 27,043 21,008 14,461 11,044 6,992
Cost of cellular telephone equipment.................... 25,605 29,933 13,410 7,579 6,314
General and administrative.............................. 60,489 44,019 34,218 29,334 29,578
Marketing and selling................................... 54,906 37,102 21,693 16,877 13,867
Depreciation and amortization (b)....................... 36,170 24,073 25,160 22,100 19,112
204,213 156,135 108,942 86,934 75,863
Income (loss) from operations.............................. 31,858 11,866 122 (8,144) (14,679)
Interest expense........................................... (38,293) (22,126) (15,389) (16,177) (19,292)
Other, net................................................. (575) (3,532) 138 (2,642) 949
Minority interests......................................... (3) (153) (154) 304 309
Net loss before extraordinary item......................... (7,013) (13,945) (15,283) (26,659) (32,713)
Extraordinary charge (c)................................... -- (8,402) (3,715) -- --
Net loss................................................... $ (7,013) $(22,347) $(18,998) $(26,659) $(32,713)
Deficiency of earnings available to cover fixed charges
(d)..................................................... $ 5,765 $ 14,476 $ 15,317 $ 27,151 $ 33,738
OTHER DATA:
Capital expenditures (e)................................... $129,894 $ 62,632 $ 21,009 $ 18,243 $ 16,542
EBITDA (f)................................................. $ 68,028 $ 35,939 $ 25,282 $ 13,956 $ 4,433
EBITDA margin on service revenue........................... 31.3% 24.5% 25.5% 19.2% 7.9%
EBITDA before sales and marketing (g)...................... $132,892 $ 84,445 $ 50,456 $ 32,413 $ 19,777
Total subscribers in majority owned markets
at year end (000s)...................................... 381.0 245.0 132.3 92.3 69.2
Penetration (h)............................................ 5.3% 3.7% 2.2% 1.6% 1.2%
Average monthly service revenue per........................ $ 58 $ 70 $ 76 $ 77 $ 77
Sales and marketing cost per net activation (i)............ $ 511 $ 493 $ 629 $ 799 $ 1,066
Net POPs (000s)............................................ 7,523 7,480 6,455 6,193 6,101
BALANCE SHEET DATA (end of period):
Working capital (deficiency)............................... $ 4,997 $ (1,778) $ 4,696 $ (1,185) $ 7,854
Property and equipment, net................................ 225,206 120,325 71,716 72,026 74,581
Total assets............................................... 596,577 431,711 284,429 251,820 255,810
Long-term debt (including current portion)................. 522,143 348,649 238,153 199,712 184,827
Shareholders' equity....................................... 29,048 39,207 21,898 30,265 51,669
</TABLE>
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<PAGE>
(a) In 1994, in order to conform to industry practice, the Company reclassified
certain pass-through items previously recognized as service revenue to
offset the related cost of service expenses. These reclassified items
relate to charges associated with the Company's subscribers roaming into
adjacent cellular markets. Appropriate reclassifications have been made in
each period presented.
(b) Effective January 1, 1994, the Company changed its depreciation expense
period for approximately 30% of its property and equipment from seven years
to a 10 to 20 year schedule. The effect of this change was to reduce
depreciation for the year ended December 31, 1994 by $4.5 million.
(c) The extraordinary charges for the years ended December 31, 1994 and 1993
of $8.4 million and $3.7 million, respectively, reflect the write-off of
deferred financing costs associated with the Company's credit facilities
that were replaced during 1994 and 1993.
(d) Fixed charges represent interest expense plus capitalized interest and such
portion of rental expense which is representative of interest in each
period. Earnings represent net loss plus extraordinary items, minority
interest, equity method losses of investees that are less than fifty
percent owned and such portion of rental expense which is representative of
interest expense in each period.
(e) Capital expenditures excludes acquisitions.
(f) EBITDA consists of income (loss) from operations before depreciation and
amortization. Although EBITDA is not a measure of performance calculated
in accordance with GAAP, management believes that it is useful to a
prospective investor because it is a measure widely used in the cellular
industry to evaluate a company's operating performance. EBITDA, however,
should not be considered in isolation or as a substitute for net income,
cash flows from operating activities and other income or cash flow
statement data prepared in accordance with GAAP or as a measure of
liquidity or profitability. EBITDA as used here is not the same term as
defined in the Indenture.
(g) EBITDA before sales and marketing represents EBITDA plus sales, marketing
and advertising costs and net losses on cellular equipment.
(h) Penetration represents total year-end subscribers divided by the year-end
total POPs in the Company's majority-owned markets.
(i) Sales and marketing cost per net activation represents sales, marketing
and advertising costs plus net losses on cellular equipment divided by net
subscriber additions, excluding subscribers added through acquisitions.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND 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, appearing elsewhere, or incorporated by reference into, this Prospectus
Supplement or the accompanying Prospectus.
YEARS ENDED DECEMBER 31, 1995 AND 1994
Service revenue rose 49% to $217.4 million from $146.4 million in 1994
primarily as a result of a 56% increase in the number of subscribers in
majority-owned markets to approximately 381,000 as of December 31, 1995, as
compared to approximately 245,000 subscribers at the end of 1994. Approximately
88% of the increase in the number of subscribers was due to subscriber growth in
markets controlled by the Company at the end of both years, and the remainder
was due to the acquisition of new markets and subsequent subscriber additions in
those markets.
Total net subscribers in the Company's majority-owned markets increased by
136,000 during 1995 as compared to an increase of 112,700 in 1994. Of the total
1995 increase, 14,400 and 9,000 net activations were attributable to subscribers
in markets acquired by the Company during 1995 and 1994, respectively.
Penetration increased from 3.65% at December 31, 1994 to 5.34% at December 31,
1995. The increase in subscribers and incremental penetration is the result of
the growing acceptance of cellular communications and the Company's efforts to
capitalize on this increasing acceptance through a more highly-trained sales
force and an expanded distribution network.
Service revenue attributable to the Company's own subscribers (local
revenue) increased 60% during 1995 to $175.9 million as compared to $110.1
million in 1994. Average monthly local revenue per subscriber declined 11% to
$47 in 1995 compared to $53 in the prior year. This decline was primarily due to
increased incremental penetration into the segment of consumers who generally
use their cellular phones less frequently and, to a lesser extent, to the
acquisition of markets with subscribers who produce lower local revenue. Service
revenue generated by nonsubscribers roaming into the Company's markets increased
14% to $41.5 million as compared to $36.3 million in the prior year period. This
increase was the result of increased usage and was partially offset by
reductions in daily access and usage rates of approximately 30% initiated by the
Company and agreed to by certain other cellular providers in the mid-Atlantic
region in 1995. The reduced rates affect the Company both as a provider and
purchaser of roaming services. The revenue from the Company's customers combined
with roaming revenue resulted in overall average monthly revenue per subscriber
for the year of $58, a decline of 17% from $70 in the prior year period.
Cellular telephone equipment revenue decreased $2.9 million or 16% to $15.6
million for 1995 as compared to 1994. This decrease was primarily due to the
continuing decline in the retail price of cellular telephone equipment charged
to the Company's subscribers. Cost of cellular telephone equipment decreased 14%
to $25.6 million during 1995 due to increased activity in the Company's rental
phone program and a corresponding reduction in sales. Net loss on cellular
equipment was $10.0 million, a decrease of 12% from the $11.4 million net loss
on cellular equipment experienced in the prior year period. The Company
continues to sell telephones at or below cost for marketing purposes in response
to competitive pressures and also continues the availability of its rental
program.
Cost of service as a percentage of service revenue improved from 14% during
1994 to 12% during 1995, primarily as a result of the intercarrier roaming rate
reductions described above. The balance of the decrease was due to the continued
negotiation of more favorable long distance and interconnection agreements with
service providers and, to a lesser extent, the higher utilization of the
Company's cellular systems. Cost of service would have shown greater improvement
as a percentage of service revenues were it not for the effects of roaming fraud
experienced by the Company in the last three months of 1995. The Company
estimates the retail value of fraudulent usage to have been approximately $9.3
million in 1995, although the Company's actual costs with respect to fraudulent
usage to be significantly lower. The Company has responded by increasing its
fraud detection efforts through the use of computerized systems which trigger
alarms when cellular usage conflicts with subscriber profiles and by dedicating
additional resources to the effort. The costs of these efforts are expected to
be approximately $1.0 million in 1996. Cellular fraud is expected to be a
significant industry issue for the foreseeable future. See "Risk
Factors -- Operating Costs Due to Fraud."
S-17
<PAGE>
General and administrative expenses increased 37% or $16.5 million during
1995, but decreased as a percentage of service revenue to 28% from 30% in 1994.
These expenses declined as a percentage of service revenue primarily as a result
of limited increases in many overhead expenses resulting in higher utilization
of the Company's existing personnel and systems. General and administrative
expenses are expected to continue to decline as a percentage of service revenue
as the Company adds more subscribers without commensurate increases in general
and administrative overhead.
Marketing and selling expenses increased 48% to $54.9 million during 1995,
compared to $37.1 million in 1994. As a percentage of service revenue, these
expenses remained at 25%. During 1995, marketing and selling expenses, including
the net loss on subscriber equipment, increased to $64.9 million from $48.5
million in 1994. This increase was primarily attributable to sales commissions
associated with the growth in subscribers for the 1995 period as compared to the
1994 period and an increase in salesperson salaries. Marketing and selling
expenses, including the loss on cellular equipment but excluding the number of
subscribers in acquired markets at the time of acquisition, per net subscriber
addition increased 4% to $511 in 1995 from $493 in 1994. This increase was
primarily due to increases in the proportion of total subscriber activations
effected through independent agents and in subscriber churn.
Depreciation and amortization expenses increased $12.1 million or 50%
during 1995 as compared to 1994. Capital expenditures of approximately $129.9
million during 1995 accounted for substantially all of the $8.4 million increase
in depreciation expense. The balance of the increase is the result of the
amortization of licenses and customer base acquired through acquisitions during
the same period.
Interest expense increased $16.2 million or 73% during 1995. This increase
primarily resulted from an increase in average borrowings of approximately
$162.0 million.
The Company reported a net loss of $7.0 million or $0.17 per share as
compared to a net loss before extraordinary item of $13.9 million or $0.36 per
share for 1994. This reduction in net loss before extraordinary item is due to
the rate of revenue growth exceeding the rate of growth in related operating
expenses as discussed above.
YEARS ENDED DECEMBER 31, 1994 AND 1993
In 1994, the Company reclassified certain pass-through items previously
recognized as service revenue in its statements of operations to offset the
related cost of service expenses. These reclassified items relate to charges
associated with roaming by the Company's subscribers into adjacent cellular
markets. Appropriate reclassifications have been made in each period presented
in the financial statements and other financial information included and
incorporated by reference elsewhere herein. These reclassifications were made to
conform the treatment in the Company's financial statements to the accounting
treatment common in the industry.
Service revenue increased by $47.5 million or 48% primarily as a result of
an 85% increase in the number of subscribers in majority-owned markets to
approximately 245,000 as of December 31, 1994 as compared to approximately
132,300 as of the end of 1993. Total subscribers in the Company's majority owned
markets increased by 112,700 during 1994 as compared to an increase of 40,000 in
1993. Of the total increase during 1994, 98,300 net activations occurred in
markets operated by the Company in both periods while 14,400 of the additional
subscribers were attributable to markets acquired by the Company during the
year. The 146% growth rate of net subscriber additions in markets operated in
both periods is attributable to the growing acceptance of cellular and the
Company's sales and marketing efforts. Service revenue attributable to the
Company's own subscribers increased 52% during 1994 to $110.1 million as
compared to $72.4 million in 1993, while service revenue from roaming increased
37% to $36.3 million. The combination of revenue from the Company's subscribers
with roaming revenue resulted in overall average monthly revenue per subscriber
of $70 for 1994, a decline of 8% from $76 in 1993.
Cellular telephone equipment revenue increased 87% to $18.5 million and the
cost of cellular telephone equipment increased 123% to $29.9 million, resulting
in a net loss on cellular telephone equipment of $11.4 million as compared to a
net loss of $3.5 million in 1993.
Cost of service expenses decreased as a percentage of service revenue to
14% in 1994 from 15% in 1993. In certain markets, during these periods, the
Company charged customers who roam into adjacent markets rates
S-18
<PAGE>
consistent with its local rates rather than passing through higher roaming rates
customarily charged by many cellular carriers. The Company estimates that this
billing practice increased net costs related to the provision of these services
by approximately $7.5 million in 1994 as compared to an approximately $4.7
million increase during 1993.
General and administrative expenses increased 29% or $9.8 million during
1994 from $34.2 million to $44.0 million but decreased as a percentage of
service revenue to 30% from 35% in 1993. Increases in the overall amount of
expenses were primarily attributable to the same factors resulting in the
increase for 1995.
Marketing and selling expenses increased 71% to $37.1 million during 1994
as compared to 1993 and as a percentage of service revenue these expenses
increased to 25% from 22%. The increase was primarily attributable to the
commissions associated with the growth in subscribers for 1994 as compared to
1993 and the resulting increase in salesperson salaries. Marketing and selling
expenses per net subscriber addition, including the loss on cellular equipment
but excluding the number of subscribers in acquired markets at the time of
acquisition, declined 22% to $493 in 1994 from $629 during 1993.
Depreciation and amortization decreased $1.1 million or 4% during 1994. The
primary reason for this decrease was that the Company changed the depreciable
lives of certain of its property and equipment to more closely approximate its
historical experience and the estimated useful lives of these assets. These
changes in useful life affected assets representing approximately 30% of the
cost of the Company's depreciable assets. These changes reduced depreciation
expense and net loss for 1994 by approximately $4.5 million or $0.12 per share.
The effect of the depreciable life changes was offset in part by an increase in
depreciation expense attributable to approximately $62.6 million of capital
expenditures during 1994.
Interest expense increased $6.7 million or 44% during 1994 to $22.1 million
from $15.4 million as a result of increased average borrowings of approximately
$65.0 million and, to a lesser extent, an increase in average interest rates.
Net loss before extraordinary item decreased from $15.3 million or $0.40
per share in 1993 to $13.9 million or $0.36 per share in 1994. The decrease in
net loss per share was primarily attributable to an increase in EBITDA.
In December 1994, the Company completed the closing of its $675 million
Credit Facility which refinanced its existing $390 million facility. In
connection with this refinancing, the Company recorded an extraordinary loss of
$8.4 million ($0.22 per share), which represented the write-off of all
unamortized deferred financing costs related to the refinanced facility. The
increase in net loss was primarily attributable to the extraordinary item and
increased interest expense described above as well as $3.5 million of other
expense in connection with accumulated legal fees and costs associated with the
resolution of pending litigation.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital to acquire, construct, operate and expand its
cellular systems. The Company also explores, on an ongoing basis, possible
acquisitions of cellular systems and properties as well as other investment
opportunities, some of which may involve significant expenditures or
commitments. In addition, although the initial buildout of its cellular system
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 and to provide for increased
portable usage. The Company spent approximately $69.9 million and exchanged
certain cellular assets in connection with acquisitions in 1995 and spent $129.9
million on total capital expenditures in 1995. The Company spent approximately
$54.8 million, issued approximately 1.9 million shares of the Company's Class A
Common Stock and exchanged certain cellular assets in connection with
acquisitions in 1994 and spent approximately $62.6 million on total capital
expenditures in 1994.
The specific capital requirements of the Company will depend primarily on
the timing and size of any additional acquisitions and other investments as well
as property and equipment needs. EBITDA has been a growing source of internal
funding in recent years, but the Company does not expect EBITDA to grow
sufficiently to meet both its property and equipment and debt service
requirements for at least the next two years. In recent years, the Company has
met its capital requirements primarily through bank financing, private issuances
of its Class A Common Stock and internally generated funds and the Company
intends to continue to use these sources in the future.
EBITDA increased to $68.0 million in 1995 from $35.9 million in 1994 and
net cash provided by operating activities as shown on the Statement of Cash
Flows increased to $30.0 million in 1995 from $2.3 million in 1994.
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<PAGE>
Net cash provided by operating activities in 1995 reflects a $16.2 million
increase in interest expense, attributable primarily to increased borrowings and
a decrease in working capital items of $1.4 million. Investing activities,
primarily purchases of property and equipment and acquisitions, used net cash of
$204.6 million and $105.9 million in 1995 and 1994, respectively. Financing
activities provided net cash of $177.0 million in 1995, primarily by proceeds
from long-term debt of $173.5 million. In 1994, the proceeds from issuances of
long-term debt net of repayments represented substantially all of the cash
provided by financing activities.
THE CREDIT FACILITY. On December 23, 1994, the Company completed the
closing of its $675 million Credit Facility, pursuant to an Amended and Restated
Loan Agreement, with various lenders led by The Toronto-Dominion Bank and The
Bank of New York. The Credit Facility, which refinanced the Company's $390
million 1993 Loan Agreement, consists of a $325 million term loan and a $350
million revolving loan. The revolving loan is available for capital
expenditures, acquisitions of and investments in cellular and other wireless
communication interests, and for other general corporate purposes.
As security for borrowings under the Credit Facility, the Company and its
subsidiaries have pledged substantially all of their tangible and intangible
assets and future cash flows. Prior to the completion of the Offering, the
Company must obtain the consent of its lenders under the Credit Facility and
make a wholly owned subsidiary the primary obligor with respect to the Credit
Facility. The obligor under the Credit Facility will also assume all of the
Company's liabilities (other than the Debentures). The terms of the Credit
Facility, following the proposed amendment, will limit the ability of the
subsidiary to pay dividends and make other distributions to the Company. See
"Risk Factors -- Holding Company Structure" and "Description of Credit
Facility." Among other restrictions, the Credit Facility restricts the payment
of cash dividends, limits the use of borrowings, limits the incurrence of
additional long-term indebtedness and requires the maintenance of certain
financial ratios. The requirements of the Credit Facility were established in
relation to the Company's projected capital needs and projected results of
operations and cash flow. These requirements generally were designed to require
continued improvement in the Company's operating performance such that its
EBITDA would be sufficient to continue servicing the debt as repayments are
required. See "Risk Factors -- Leverage" and "Description of Credit Facility."
The Company is in compliance with all loan covenants.
As of December 31, 1995, $522.0 million had been borrowed under the Credit
Facility. Under the restrictive covenants of the Credit Facility, future
borrowing availability under the revolving loan generally increases as the
Company's operating performance improves. The Company does not expect these
covenants to curtail planned borrowings. After giving effect to the repayment of
approximately $194.7 million of indebtedness with the net proceeds of the
Offering, the Company will have the ability to borrow up to an aggregate of
$347.7 million under the revolving loan portion of the Credit Facility, subject
to certain borrowing limitations.
According to the terms of the Credit Facility, the outstanding amount of
the term loan as of March 30, 1998 is to be repaid in increasing quarterly
installments commencing on March 31, 1998 and terminating at maturity on
December 31, 2003. The quarterly installment payments begin at 1.875% of the
outstanding principal amount at March 30, 1998 and gradually increase to 5.625%
of the principal amount at March 31, 2003, at which time the loan will be
repaid. The available borrowings under the revolving loan will also be reduced
on a quarterly basis commencing on March 31, 1998 and terminating on December
31, 2003. The quarterly reduction begins at 1.875% of the revolving loan
commitment at March 30, 1998 and gradually increases to 5.625% of the commitment
on March 31, 2003 at which time the loan will be repaid.
The term loan and the revolving loan bear interest at a rate equal to the
Company's choice of the Prime Rate (as defined) or Eurodollar Rate (as defined)
plus an applicable margin based upon a leverage ratio for the most recent fiscal
quarter. As of December 31, 1995, the applicable margins on the borrowings were
0.375% and 1.625% per annum for the Prime Rate and Eurodollar Rate,
respectively.
ACQUISITIONS. The Company completed several acquisitions in 1994 and 1995.
On April 26, 1994, the Company completed the acquisition of the Altoona, PA MSA
and the Chambersburg, PA (PA-10) RSA, which are contiguous to its Mid-Atlantic
SuperSystem in exchange for $4.4 million in cash, the exchange of the
Hagerstown, MD cellular market and the Company's minority ownership interest in
an additional cellular market.
The Company purchased in October 1994, for $6.9 million in cash and
approximately 125,000 shares of the Company's Class A Common Stock, the
Washington, Maine (ME-4) RSA and three of the four counties of the Mason, West
Virginia (WV-1) RSA. The Maine RSA is approximately 40 miles north of the
Portland, Maine MSA,
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<PAGE>
which is already operated by the Company. The West Virginia RSA is contiguous to
the Company's Charleston, West Virginia MSA.
On December 14, 1994, the Company purchased the Binghamton, New York MSA
and the Elmira, New York MSA for a purchase price of approximately 1.8 million
shares of the Company's Class A Common Stock and $6.1 million in cash. These
markets are contiguous to the Company's Mid-Atlantic SuperSystem.
In January 1995, the Company purchased the Union, Pennsylvania (PA-8) RSA
for a cash price of $51.3 million. The PA-8 RSA lies in the center of the
Company's Mid-Atlantic SuperSystem. Condensed pro forma financial information
for the acquisition of PA-8 as of December 31, 1995 and 1994 is contained in
Note 3 to the consolidated financial statements.
On December 1, 1995, the Company completed the acquisition of an additional
ownership interest in the Harrisburg, PA MSA. In exchange for ownership
interests in certain minority owned cellular markets outside its regional
metro-clusters and $2.9 million in cash, the Company received the final 13.24%
ownership interest in the Harrisburg, PA MSA, and now is the sole owner of such
market, which is in the Mid-Atlantic SuperSystem.
All markets that were acquired during 1994 and 1995 were operational
cellular systems.
The Company explores, on an ongoing basis, possible acquisitions of
additional cellular systems and licenses. The Company currently has no
agreements in principle regarding any such acquisition. However, the Company is
currently negotiating the possible acquisition of an RSA cellular market
contiguous to one of its existing metro-clusters for a price of approximately
$15 million. There can be no assurance that an agreement will be reached in
connection with the possible acquisition or, even if an agreement is reached,
that the acquisition will be consummated.
GEOTEK COMMUNICATIONS, INC. In February 1994, the Company purchased from
Geotek Communications, Inc. ("Geotek") 2.5 million shares of Geotek common stock
for $30 million and received a series of options to purchase additional shares
in Geotek in three separately linked transactions. In addition, the Company
entered into a five-year management consulting agreement to provide operational
and marketing support in exchange for 300,000 shares of Geotek common stock per
year. On September 1, 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 "Geotek Preferred Stock"). In connection with the purchase
of Geotek Preferred Stock, the stock options previously granted to the Company
by Geotek in 1994 were amended to extend their expiration dates and reduce the
number of shares subject to the options such that the Company will have the
right to purchase 1,000,000 shares of Geotek Common Stock at $15 per share
("Series A Option") and 1,714,200 additional shares at $16 per share ("Series B
Option") until September 1, 1996 and 2,571,400 additional shares at $17 per
share until 12 months from the expiration date of the Series B Option ("Series C
Option"). The Company may extend the Series B and Series C Options by six months
and the Series C Option by an additional six months and, if any portion of any
series of options expires, all unexercised options will expire immediately.
INTERNATIONAL WIRELESS COMMUNICATIONS, INC. As of December 31, 1995, the
Company had invested $13.5 million in International Wireless Communications,
Inc. ("IWC") and owns approximately 35% of the outstanding common and preferred
stock of IWC. During 1995, the Company invested $6.9 million in IWC, including
the merger of a subsidiary of the Company into IWC in exchange for shares of IWC
preferred stock. IWC is a development stage company specializing in securing,
building and operating wireless businesses generally other than cellular
telephone systems primarily in Latin America and Asia. The Company's investment
in IWC is recorded using the equity method of accounting.
INTER(BULLET)ACT SYSTEMS, INC. As of December 31, 1995, the Company had
invested $3.8 million in Inter(Bullet)Act Systems, Inc. ("Inter(Bullet)Act") for
an ownership interest of approximately 10%. Additionally, subsequent to
year-end, the Company invested an additional $6.2 million to bring its total
ownership interest to approximately 26% as of March 19, 1996. Inter(Bullet)Act
is a development stage company that provides targeted promotions to retail
customers at the point of entry at a retail outlet, primarily supermarkets,
through a computer-equipped kiosk. The Company's investment is recorded using
the equity method of accounting.
CAPITAL EXPENDITURES. As of December 1995, the Company had $287.9 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. During 1994, the Company initiated a
plan to double
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<PAGE>
the number of cell sites in order to increase geographic coverage and provide
for additional portable usage in the Company's cellular markets. As a result of
this accelerated network buildout and the continued growth of the Company's
subscriber base, capital expenditures were $129.9 million during 1995. During
1996, the Company plans to continue this accelerated buildout. Capital
expenditures for 1996 are estimated to be approximately $127 million and are
expected to be funded primarily through internally generated funds.
Approximately $100 million of those capital expenditures will be for cellular
network equipment, and the remainder will be primarily for rental telephones and
computer equipment.
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 Credit Facility will be sufficient during the next several years to
complete its planned network expansion, to fund debt service, to provide
flexibility to pursue acquisitions and other business opportunities that might
arise in the future and to meet working capital and general corporate needs. The
Company also may issue additional shares of Class A Common Stock.
INFLATION
The Company believes that inflation affects its business no more than it
generally affects other similar businesses.
S-22
<PAGE>
BUSINESS
OVERVIEW
The Company is one of the largest independent operators of cellular
telephone systems in the United States based on its 7.5 million aggregate POPs
as of December 31, 1995. The Company serves over 380,000 subscribers located in
five "metro-clusters," or contiguous groups of cellular markets, comprised of 28
markets in the Eastern United States, including the Mid-Atlantic SuperSystem and
the Florida, Carolinas, New England, and West Virginia metro-clusters. The
Mid-Atlantic SuperSystem, which is contiguous to the New York, Philadelphia and
Baltimore/Washington MSAs and the New England metro-cluster, which is contiguous
to the Boston MSA, (four of the nation's seven largest MSAs) collectively
represent approximately 80% of the Company's operating POPs. The Company's
wireless products and services are distributed under the
CellularONE(Register mark) brand name, one of the most recognized brand names in
the wireless industry. For the year ended December 31, 1995, the Company had
consolidated service revenues of $217 million and EBITDA of $68 million.
The Company's markets are located in predominantly suburban and rural areas
proximate to major urban areas, which the Company believes affords it several
advantages over traditional urban wireless operations, including (i) greater
network capacity, (ii) greater roaming revenue opportunities, (iii) lower
distribution costs and (iv) higher barriers to entry. Because there are limits
to the number of signals that can be transmitted simultaneously in a given area,
the Company's less densely populated suburban and rural locations allow for
greater frequency reuse, resulting in greater overall network capacity than in
high density urban markets. The Company is able to provide high quality voice
transmission with reduced instances of blocked or dropped calls. In addition to
these network advantages, the Company's metro-clusters enjoy greater roaming
revenue opportunities by virtue of their proximity to large urban centers. This
benefit is best exemplified in the Mid-Atlantic SuperSystem, which is located in
the heavily traveled corridor between New York, Philadelphia and
Baltimore/Washington D.C. Roaming revenue requires minimal incremental
administrative and marketing expenditures, and the Company believes that it is
well positioned to benefit from both cellular roaming and eventual roaming by
users of personal communication services ("PCS"). The Company also believes that
it experiences lower distribution costs due to its internal distribution
channels such as direct sales, retail stores and kiosks, which are more
economical outside of urban areas. Finally, the Company believes that the lower
population density and greater geographic coverage of its suburban and rural
metro-clusters act as barriers to entry given the relatively higher
per-subscriber costs of building competing wireless systems.
The Company's annual service revenue and subscriber growth over the last
three years has outpaced average industry growth over the three year period
ending June 30, 1995 according to the most recently published data by the
Cellular Telephone Industry Association. The number of subscribers in the
Company's majority-owned markets grew from 92,300 to 381,000 over the last three
years, a compound annual growth rate of approximately 60%, compared to an
industry growth rate of 47%. Service revenue grew from $73 million in 1992 to
$217 million in 1995, a compound annual growth rate of 44%, compared to an
industry growth rate of 35%. In addition, the Company's EBITDA grew from $14
million in 1992 to $68 million in 1995. See "Selected Consolidated Financial and
Operating Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
BUSINESS STRATEGY
The Company's overall goal is to continue to pursue strong growth of
subscribers, revenues and EBITDA. The Company intends to achieve this goal
through its operating strategy of providing a broad range of high quality
integrated wireless communications products and services. Key elements of the
Company's strategy include:
(Bullet) DEVELOPMENT OF THE METRO-CLUSTER SERVICE AREAS. The Company has
pursued a strategy of developing and supplementing its regional
metro-clusters to enable it to better serve its customers and to
achieve cost efficiencies through economies of scale. By operating
in contiguous markets, the Company can provide broad areas of
seamless service and achieve economies of scale in marketing and
operations as well as cost efficiencies in deploying its network
infrastructure. The Company continually evaluates opportunities
for acquisitions of new cellular properties in proximate suburban
and rural markets that will expand its metro-clusters.
(Bullet) CONTINUOUS CELLULAR NETWORK BUILDOUT. The Company continuously
improves its systems. In 1994, the Company began a cellular
network expansion and upgrade program in order to increase
geographic coverage and provide for additional portable usage in
the Company's cellular markets. In 1995, the Company added
S-23
<PAGE>
110 new cell sites and replaced or upgraded 65 others, bringing
its total number of cell sites to 270 as of December 31, 1995. The
Company plans to add 80 cell sites in 1996 as it continues to
enhance its network.
The Company believes that its networks have sufficient capacity in
its spectrum to serve the Company's growing subscriber base in the
near future but plans to implement a gradual transition to digital
technology before analog capacity constraints become a significant
concern. The Company's networks are currently digital-ready, with
dual mode analog/Time Division Multiple Access ("TDMA") digital
radio technology already built-in such that individual
transmitters may be converted to digital mode with minimal
additional investment. See " -- Expansion of Product Offerings."
(Bullet) INVESTMENT IN BRAND IDENTITY. The Company's wireless products and
services are distributed under the CellularONE(Register mark)
brand name, one of the most recognized brand names in the wireless
industry. The CellularONE(Register mark) brand name currently is
used by cellular systems covering more than 11,000 cities and
towns, representing total POPs of over 129 million. The Company
has a minority ownership interest in the partnership that owns the
CellularONE(Register mark) brand name and that controls the
promotion and management of the brand. In addition to benefitting
from local advertising by licensees, the
CellularONE(Register mark) brand name is advertised on a national
basis by the partnership that owns the brand with funding provided
by licensing fees.
(Bullet) EMPHASIS ON CUSTOMER SERVICE AND ADVANCED BILLING SYSTEMS. The
Company provides on-line customer support, 24 hours a day, seven
days a week. The Company's internally developed, proprietary
Flexcell(Register mark) billing and management information system
enables the Company to provide quality services to its expanding
customer base and affords it access to customer data, which it
uses to facilitate its marketing efforts. One such service is
Rapid Activation, which enables the Company to execute credit
checks, order entry, and subscriber activation within five
minutes. See " -- Customer Service."
(Bullet) GROWTH OF INTERNAL DISTRIBUTION CHANNELS. The Company distributes
its products and services through both its internal distribution
network (direct salesforce, sales and service centers, and retail
stores) and external distribution channels (national retailers,
local agents and automotive dealers). The Company is continuing
its long-term emphasis on internal distribution channels,
particularly its own retail outlets, which the Company believes
offer substantial benefits. These benefits include lower cost,
higher effectiveness in selling to high margin customers, and a
consistent point of customer contact, resulting in greater ongoing
satisfaction for both internally and externally generated
customers. The Company is therefore building additional retail
outlets, as well as upgrading existing outlets. See " -- Marketing
and Distribution."
(Bullet) EXPANSION OF PRODUCT OFFERINGS. The Company continues to offer new
and innovative products and services in order to increase the
value of the basic voice product to the customer and to increase
airtime revenues. In addition to enhanced cellular voice service
packages, the Company has begun to offer digital data
transmission, and field trials are underway for Cellular Digital
Packet Data protocol ("CDPD"). With the integration of digital
technology, the Company will be able to offer a variety of
additional services such as caller identification, short messaging
and call encryption.
S-24
<PAGE>
MARKETS AND CLUSTERS
The following table sets forth as of December 31, 1995, (i) the markets in
which the Company owns an interest in a cellular system by region and by
cluster, (ii) the Company's ownership percentage of the system, the total
population of the market (as derived from 1995 population estimates) and (iii)
the Company's POPs based on its ownership percentage.
<TABLE>
<CAPTION>
COMPANY 1995 NET
OWNERSHIP POPULATION POPS
<S> <C> <C> <C>
Mid-Atlantic SuperSystem:
Allentown, PA/NJ............................................................... 100.00% 712,049 712,049
Wilkes-Barre/Scranton, PA...................................................... 100.00 660,089 660,089
Harrisburg, PA................................................................. 100.00 496,511 496,511
Lancaster, PA.................................................................. 100.00 447,498 447,498
York, PA....................................................................... 100.00 446,753 446,753
Reading, PA.................................................................... 100.00 349,909 349,909
Williamsport, PA............................................................... 93.32 121,194 113,094
State College, PA.............................................................. 96.99 129,835 125,927
Orange County, NY.............................................................. 100.00 324,343 324,343
Wayne, PA (PA-5 RSA)........................................................... 100.00 81,417 81,417
Chambersburg, PA (PA-10 East RSA).............................................. 92.09 141,778 130,566
Mifflin, PA (PA-11 RSA)........................................................ 100.00 113,542 113,542
Lebanon, PA (PA-12 RSA)........................................................ 100.00 117,169 117,169
Union, PA (PA-8 RSA)........................................................... 100.00 406,665 406,665
Altoona, PA.................................................................... 100.00 132,385 132,385
Binghamton, NY/PA.............................................................. 100.00 303,426 303,426
Elmira, NY..................................................................... 100.00 94,642 94,642
Poughkeepsie, NY............................................................... 11.14 262,663 29,249
Subtotal.................................................................... 5,085,234
West Virginia Metro-cluster:
Huntington, WV/KY/OH........................................................... 100.00 317,193 317,193
Charleston, WV................................................................. 100.00 255,548 255,548
Ripley, WV (WV-1 East RSA)..................................................... 100.00 50,055 50,055
Other.......................................................................... 1,150
Subtotal.................................................................... 623,946
Florida Metro-cluster:
Pensacola, FL.................................................................. 100.00 379,069 379,069
Fort Walton Beach, FL.......................................................... 100.00 165,277 165,277
Panama City, FL................................................................ 18.28 143,194 26,169
Columbus, GA................................................................... 13.69 257,521 35,264
Albany, GA..................................................................... 10.29 118,201 12,160
Pascagoula, MS................................................................. 6.55 126,963 8,322
Other.......................................................................... 17,761
Subtotal.................................................................... 644,022
Carolinas Metro-cluster:
Myrtle Beach, SC (SC-5 RSA).................................................... 100.00 241,941 241,941
+Wilmington, NC................................................................. 47.97 198,532 95,231
+Jacksonville, NC............................................................... 47.79 147,695 70,585
Petersburg, VA................................................................. 17.58 129,405 22,747
Subtotal.................................................................... 430,504
New England Metro-cluster:
Portland, ME................................................................... 100.00 283,033 283,033
Portsmouth, NH/ME.............................................................. 100.00 276,749 276,749
Bar Harbor, ME (ME-4 RSA)...................................................... 100.00 85,481 85,481
Bangor, ME..................................................................... 5.31 147,766 7,840
Other.......................................................................... 15,512
Subtotal.................................................................... 668,615
Other Minority Interests......................................................... 70,445
TOTAL POPs....................................................................... 7,522,766
</TABLE>
+ Jointly controlled through the Company's 50% ownership of a joint venture with
GTE/Mobilnet.
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<PAGE>
SUBSCRIBERS
Management believes that the Company's subscribers are primarily business
users who utilize cellular telephone service to improve productivity.
Historically, the Company's business users were individuals who worked
extensively from their cars, in such professions as construction and real
estate. As a result of the growing acceptance of cellular communications and the
declining cost of portable and transportable phones, as well as the Company's
marketing efforts, the Company's business users now are drawn from a wider range
of occupations. Business users normally generate more revenue than nonbusiness
consumers. While the Company anticipates increasing nonbusiness consumer
acceptance of cellular telephone service, business users are expected to
generate the majority of the Company's revenue for the foreseeable future.
The following table sets forth the aggregate number of subscribers in the
Company's majority-owned markets at the end of the periods indicated.
<TABLE>
<CAPTION>
QUARTER 1993 1994 1995
<S> <C> <C> <C>
First............................................................. 99,500 150,000 280,000
Second............................................................ 107,500 169,000 314,000
Third............................................................. 116,200 190,000 340,000
Fourth............................................................ 132,300 245,000 381,000
</TABLE>
The incremental subscriber growth and the rate of incremental subscriber
growth in the Company's majority-owned markets is set forth in the following
table for the periods indicated.
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Incremental Subscriber Growth..................................... 40,000 112,700 136,000
Rate of Incremental Subscriber Growth............................. 43% 85% 56%
</TABLE>
The following table sets forth the number of subscribers and the
penetration percentages in majority-owned markets as of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
1993 1994 1995
SUBSCRIBERS PENETRATION* SUBSCRIBERS PENETRATION* SUBSCRIBERS PENETRATION*
<S> <C> <C> <C> <C> <C> <C>
Mid-Atlantic SuperSystem.............. 88,500 2.15% 163,600 3.50% 254,500 5.01%
New England........................... 13,000 2.37 23,500 3.71 35,500 5.50
Florida............................... 12,100 2.32 18,900 3.54 29,000 5.33
West Virginia......................... 11,900 2.09 26,400 4.24 45,500 7.31
Carolinas............................. 6,800 2.82 12,600 5.17 16,500 6.82
Total............................... 132,300 2.21 245,000 3.65 381,000 5.34
</TABLE>
* Penetration represents total year-end subscribers divided by year-end total
POPs in the Company's majority-owned markets.
The Company believes subscriber growth and increased penetration in 1993,
1994 and 1995 were a product of the growing acceptance of cellular
communications and the Company's efforts to capitalize on this increasing
acceptance through a more highly trained salesforce and an expanded distribution
network. In addition, 1994 and 1995 subscriber growth was augmented by
approximately 14,000 and 9,000 subscribers, respectively, associated with the
acquisition of certain cellular markets.
PRODUCTS AND SERVICES
The Company's primary line of business is the provision of cellular
telephone services. Customers are offered several pricing options combining
different monthly access and usage charges and charges for related services.
The Company provides regional service among its contiguous markets, such as
those within the Mid-Atlantic SuperSystem. A customer in these regions can place
and receive calls throughout the network without any additional daily fee and
often at the same incremental rate per minute as in the customer's home market.
In certain adjacent cellular markets not owned by the Company, the Company
offers similar regional pricing options to its subscribers. The Company has
entered into agreements with other cellular companies that allow its subscribers
to roam in all 306 MSAs and a large majority of the 428 RSAs throughout the
country. These agreements allow the
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<PAGE>
Company's subscribers to be preregistered in cellular systems outside the
Company's operating regions and to receive service while they are outside their
home systems, typically for a usage charge and an additional daily fee.
In certain markets, the Company charges its customers who roam into
adjacent markets only the rates it
charges in its own markets rather than passing through higher roaming rates
customarily charged by many cellular carriers. This billing practice creates a
marketing advantage by providing the customer with an apparently broader service
area, but it results in increased costs for the Company. The Company has been
reducing these costs through the continued negotiation of more favorable roaming
agreements with both wireline and nonwireline cellular service providers in
relevant areas. In addition to lowering its costs for delivering these services,
the Company also has been able to reduce the costs associated with certain other
markets which traditionally it had passed through to its customers at cost
without a commensurate reduction in the rates it charges its customers. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company has offered and will continue to offer new and innovative
products and services in order to increase the value of the basic voice product
to the customer and to increase airtime revenues. Recent service additions
include enhanced voice mail, which alerts the customer when a message has been
left, and single number service, which allows a customer to use the same phone
number in several locations. Other recent service additions include call
management, which directs incoming calls to a succession of locations until the
customer is reached, and voice dialing, which lets the customer make calls by
spoken command without having to touch the keypad.
The Company now offers digital data transmission over its existing cellular
network, which allows the rapid transfer of data to and from personal computers,
personal digital assistants ("PDAs"), and other devices. Trials are underway for
use of the Cellular Digital Packet Data protocol ("CDPD"), an advanced data
transmission method which the Company expects to offer in 1996. The Company also
is field testing the TDMA digital protocol. Digital technology will allow the
Company to offer Integrated Services Digital Network ("ISDN") standard services
such as caller identification, short messaging, and call encryption. See
" -- Cellular Technology."
In 1995, the Company began marketing and installing cellular mini-networks,
which allow mobile communications across a business complex, building, or
facility. These mini-networks connect seamlessly into conventional cellular
networks. The Company is one of the first vendors to offer the mini-network
systems, which are profitable both in terms of service and equipment sales.
During 1996 and 1997, other new product offerings are expected to include
extensive voice-mail and call-tracking options. The Company is also exploring
the possibility of offering paging and long distance telephone service on a
reselling basis.
MARKETING AND DISTRIBUTION
The Company markets its services under the CellularONE(Register mark) brand
name, one of the most recognized brand names in the wireless communications
industry. In addition to benefitting from local advertising by licensees, the
CellularONE(Register mark) brand name is advertised on a national basis by the
partnership that owns the brand using the proceeds of licensing fees. The
CellularONE(Register mark) brand name currently is used by cellular systems
covering more than 11,000 cities and towns with total POPs of more than 129
million. The Company is one of three owners of the CellularONE(Register mark)
brand name. During the first half of 1996, the Company expects to exercise an
option to increase its ownership interest in the partnership that owns the brand
name, at a cost of approximately $6.1 million, to one-third from the 2.5%
interest it currently owns. As an owner of the CellularONE(Register mark) name,
the Company exercises influence over the promotion and future services offered
under the brand. As part of an ongoing strategy to enhance the value of the
CellularONE(Register mark) brand, the owners of the brand currently plan to
continue to license new carriers to operate under the CellularONE(Register mark)
name, both for cellular, as well as for paging, PCS, long distance and for
resellers of these services. Where CellularONE(Register mark) is licensed,
existing licensees currently have the exclusive right to use the brand name for
cellular and other services.
The Company uses multiple distribution channels in each of its service
areas to provide effective and extensive marketing of its products and services
and to reduce its reliance on any single distribution source. These distribution
channels fall into two broad categories: internally developed and controlled
channels, and external channels.
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<PAGE>
The Company is continuing its long-term focus on internal distribution
channels as a means to reduce the cost and improve the quality of new
subscribers. The Company's retail stores have been a historically low-cost
distribution channel, a benefit that is enhanced for the Company as a result of
relatively low facilities and other costs in the Company's suburban and rural
markets as compared to urban areas. Also, Company sales representatives are most
effective in selling to the high-end customers and businesses, which tend to
provide the Company with the highest profit margins. The Company believes that
cellular customers prefer to deal directly with sales representatives employed
by the Company. In addition, Company stores provide an ongoing point of contact
for service to subscribers regardless of whether the point of purchase was
internal or external. The Company plans to expand its base of retail stores and
kiosks and upgrade its existing retail outlets. The Company had a total of 60
retail locations as of December 31, 1995 and intends to add 26 locations in
1996.
The Company's direct sales force consists of approximately 400 sales and
administrative employees, who target small-to-medium sized companies, a
high-margin area of business. In order to maintain a knowledgeable,
customer-oriented sales force, the Company developed and administers its own
sales training program designed to educate sales representatives for its
markets. The program offers a curriculum that highlights mobile technologies,
cellular equipment prospecting, sales techniques, and the customer service
process, and the Company believes that, following the program, sales
representatives are better able to address existing and potential customers'
needs in a professional, knowledgeable and productive manner.
The Company sells and rents cellular telephone equipment to its customers
in order to encourage use of its services. The Company continues its practice,
typical in the industry, of selling telephones at or below cost in response to
competitive pressures, and the magnitude of the losses experienced in connection
with providing cellular telephone equipment reflects the Company's increased
subscriber growth. The Company also offers an equipment rental program that many
subscribers have found to be an economical means of acquiring the use of
cellular equipment. Under the terms of the rental program, subscribers obtain
the use of a cellular telephone for a monthly charge. Although the Company
retains ownership of this equipment, subscribers have the option to purchase
their cellular telephones at any time during the rental period. The Company
often utilizes a promotion under which the first year's rental charge is waived
when the subscriber agrees to a one-year service contract.
The Company is extending its control of the distribution process into
certain external channels by offering the prepackaged MIO phone, a cellular
telephone sold "off the shelf" at retail establishments. Company retail stores
and kiosks also offer the MIO phone. MIO offers consumers attractive service
options such as free weekend usage and remote activation, and delivers
substantially higher profit margins to the Company than do phones activated by
retailers through more conventional methods because of the lower associated
commission costs.
The Company also utilizes a telemarketing program as part of its sales and
customer service efforts. This program is intended to aid the customer by
providing sales follow-up and support, and helps the Company in securing
additional and better sales referrals, upgrading existing subscribers to higher
rate plans and promoting new custom-calling features.
External distribution channels include national retailers such as WalMart,
automobile dealers, and local agents and resellers. The Company enters into
exclusive short-term contracts with each of its external distribution channels.
Rapid growth in the wireless communications business, especially from customers
contracted through external channels, reduced the percentage of
internally-generated customers from 70% in 1992 to 52% in 1995. While the
Company has benefitted from the increased success of external distribution
channels, the Company continues to emphasize internal distribution channels,
which it believes result in higher long-term profit margins.
CUSTOMER SERVICE
The Company places a high priority on providing consistently high quality
customer service. The central customer service department located in Greensboro,
North Carolina, is open 24 hours daily, including weekends and holidays, and
handles all customer service inquiries. Recently, the Company opened a regional
call center in one of its markets and, depending on the success of this center,
may open additional regional centers in the future. Potential benefits of
regional call centers include having service delivery as close to the customer
as possible to cover specific regional circumstances, being a more significant
local employer and reducing the risk of encountering a lack of experienced
customer service employees in the Greensboro, North Carolina area. All customer
service personnel are trained in certain key areas such as general mobile
telephone technology, available cellular equipment, cellular billing and
roaming. The Company believes that this training provides these employees with
the
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requisite knowledge to handle customer inquiries quickly and competently,
resulting in greater customer satisfaction. The Company's training program,
which was developed and is administered internally, requires employees to
demonstrate competency through testing.
The Company has developed a proprietary billing and management information
system, Flexcell(Register mark), which it believes provides several service
advantages to its customers. Using Flexcell(Register mark), customer service
representatives are able to access current billing information quickly in order
to respond promptly to customer inquiries. In addition, this system has the
ability to integrate customer-related data from various operations within the
Company into a single database. Using this database, service calls are
systematically analyzed each month to highlight key customer issues. The
customer database also provides the basis for customer satisfaction information.
The Company has entered into a contract to provide Flexcell(Register mark)
software and support to American Mobile Satellite Corporation, but is not
currently marketing Flexcell(Register mark) to third parties in order to assure
that it can meet the needs of the Company and American Mobile Satellite
Corporation.
To supplement the Company's customer service operations, Company
telemarketers contact customers periodically to determine their satisfaction
with the Company's service and to identify problems that can lead to subscriber
cancellations. The Company also recently developed an integrated feature called
"Rapid Activation," designed to reduce the time required to activate service for
a new customer. Rapid Activation now allows the Company to perform a credit
check, complete order entry and activate a cellular subscriber in approximately
five minutes. Previously, this process required approximately one hour.
To ensure quality installation for automotive customers and overall
customer satisfaction, the Company has established its own installation and
repair centers in most of its markets. These CellularONE(Register mark)
installation and repair centers provide one-stop shopping for the Company's
customers and enable the Company to control installation quality and scheduling
and inventory levels. These centers are also authorized to perform warranty
repair work for certain cellular telephone manufacturers.
CELLULAR TELEPHONE TECHNOLOGY
Cellular telephone service is a form of telecommunications capable of
delivering high quality, high capacity mobile and portable telephone services.
Cellular systems are engineered so that a service area is divided into multiple
cells approximately four to 10 miles in radius. Each cell contains a relatively
low power transmitter, a receiver and signaling equipment (the base station).
The base station in each cell is connected by microwave or telephone line to the
mobile telephone switching office ("MTSO"). The MTSO controls the automatic
transfer of calls from cell to cell as a subscriber travels, coordinates calls
to and from a mobile unit, allocates calls among the cells within the system,
and connects calls to the local landline telephone system or to a long-distance
telephone network. Each conversation in a cellular system involves a radio
transmission between a subscriber unit and a base station and the transmission
of the call between the base station and the MTSO.
The MTSO and base stations periodically monitor the signal strength of
calls in progress. The signal strength of the transmission between a subscriber
unit and the base station in any cell declines as the unit moves away from the
base station. When the signal strength of a call declines to a predetermined
level, the MTSO hands off the call in a fraction of a second to the base station
of another cell where the transmission strength is greater. If the subscriber
unit leaves the service area of the cellular system, the call is disconnected
unless an appropriate technical interface has been established with an adjacent
system.
The FCC has allocated the cellular telephone systems frequencies in the 800
MHz band of the radio spectrum. Each of the two licenses in a cellular market is
assigned 416 frequency pairs. Each conversation on a cellular system occurs on a
pair of radio talking paths, thus providing full duplex (i.e., simultaneous
two-way) service. Two significant features of cellular telephone systems are:
(i) frequency reuse, enabling the simultaneous use of the same frequency in two
adequately separated cells, and (ii) call hand-off. A cellular telephone
system's frequency reuse and call hand-off features result in highly efficient
use of available frequencies and enable cellular telephone systems to process
more simultaneous calls and service more users over a greater area than
conventional mobile telephone systems.
A cellular telephone system's capacity can be increased in various ways.
Within certain limitations, increasing demand may be met by simply adding
available frequency capacity to cells as required or, by using directional
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antennas, dividing a cell into discrete multiple sectors or coverage areas,
thereby facilitating frequency reuse. Furthermore, an area within a system may
be served by more than one cell through procedures that utilize available
channels in adjacent cells. When all possible channels are in use, further
growth can be accomplished through a process known as "cell splitting." Cell
splitting entails dividing a single cell into a number of smaller cells serviced
by lower-power transmitters, thereby increasing the reuse factor and the number
of calls that can be handled in a given area. Digital transmission technologies
are expected to provide cellular licensees with additional capacity to handle
calls on cellular frequencies.
There are limits to the number of signals that can be transmitted
simultaneously in a given area. In highly populated MSAs, the level of demand
for mobile and portable service is often large in relation to the existing
capacity of most systems. Based on the demographics of its markets, the Company
does not anticipate that the provision of mobile and portable service within its
networks will require as large a proportion of the systems' capacities as is
required in higher density MSAs. Therefore, the Company's systems are expected
to have more capacity with which to pursue data applications and other expanded
cellular services, which the Company believes may enhance its revenue potential
and limit market opportunities for competitive mobile data systems.
All cellular telephones are designed to be compatible with cellular systems
in all market areas within the United States so that a cellular telephone may be
used wherever a subscriber is located. Changes of cellular telephone numbers or
other technical adjustments to mobile units by the manufacturer or local
cellular telephone service businesses are generally required to enable the
subscriber to change from one cellular service provider to another within a
service area. Cellular system operators may provide service to roamers
temporarily located in, or traveling through, their service area. The cellular
system providing service to the roamer generally receives 100% of the revenues
from such service and such roaming charges are billed to the roamer's local
service provider.
The cellular mobile telephone services available to customers and the
sources of revenue available to a system operator are similar to those available
with standard home and office telephones. For example, cellular systems can
offer a variety of features, including call forwarding, call waiting, conference
calling, voice message and retrieval, and data transmission. Because cellular
systems are fully interconnected with the landline telephone network,
subscribers can receive and originate both local and long distance calls from
their cellular telephones. The subscribers generally are charged separately for
monthly access, air time, toll calls and custom calling features.
Cellular telephone systems operate under interconnection agreements with
various local exchange carriers ("LECs") and interexchange (long distance)
carriers ("IXCs"). The interconnection agreements establish the manner in which
the cellular telephone system integrates with other telecommunications systems.
The cellular operator and the local landline telephone company must cooperate in
the interconnection between the cellular and landline telephone systems to
permit cellular subscribers to call landline subscribers and vice versa. The
technical and financial details of such interconnection arrangements are subject
to negotiation and vary from system to system.
There are a number of recent technical developments in the cellular
industry. Currently, while most of the MTSOs process information digitally, the
radio transmission of cellular telephone calls is done predominantly on an
analog basis. Digital technology is expected to offer advantages, including
improved voice quality, larger system capacity, and perhaps lower incremental
costs for additional subscribers. The conversion from analog to digital radio
technology is expected to be an industry-wide process that will take a number of
years. There are two digital technologies that currently are being considered by
cellular companies: TDMA, presently in commercial service, and CDMA, which
remains untested on a commercial basis. In addition, at least one cellular
company offers an enhanced analog technology as an intermediate step which is
designed to increase capacity and thereby enable such company to delay
implementing digital technology.
The Company has chosen TDMA as its digital technology. Rather than
immediately converting to digital technology, however, the Company has adopted a
strategy of deferring implementation until its capacity needs require it, or
there is a demonstrable demand for services that can only be provided with
digital technology, and the use of the requisite technology becomes more
widespread. The substantial majority of the cellular equipment currently
employed by the Company in its systems is "TDMA ready" and can work in either an
analog or digital mode. As a result, the Company should be able to transition
from analog to digital mode with minimal expense. However, one or more of the
technologies currently utilized by the Company or implemented in the future may
not be preferred by
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its customers or may become obsolete. If either event occurs, it could result in
the Company undergoing a conversion which could involve significant expense.
Pending such a conversion, the Company could be at a competitive disadvantage.
See "Risk Factors -- Adoption of New Technologies; Technological Obsolescence."
COMPETITION
OTHER CELLULAR COMPETITION. The cellular telephone business is a regulated
duopoly. Until 1994, the FCC provided for only two licenses in each market
(although certain markets have been subdivided as a result of voluntary
settlements), one to a nonwireline company and one to a wireline company, which
is usually the local telephone company or its affiliate. Each licensee has the
exclusive grant of a defined frequency band within each market. The Company
holds exclusively nonwireline licenses. The primary competition, therefore, for
the Company's cellular service in any market has traditionally come from the
wireline licensee in that market. Competition is principally on the basis of
services and enhancements offered (including the provision of cellular equipment
at or below cost), the technical quality of the system, price and the quality
and responsiveness of customer service.
In the Company's control markets, its competitors are affiliates of the
following companies:
<TABLE>
<CAPTION>
MARKET COMPETITOR
<S> <C>
Allentown, PA/NJ Bell Atlantic/NYNEX Mobile
Wilkes Barre/Scranton, PA Independent Cellular Network, Inc.
Harrisburg, PA 360(degree) Communications Company (2)
Lancaster, PA 360(degree) Communications Company (2)
York, PA 360(degree) Communications Company (2)
Reading, PA Bell Atlantic/NYNEX Mobile
Williamsport, PA Independent Cellular Network, Inc.
State College, PA Independent Cellular Network, Inc.
Wayne, PA (PA-5 RSA) Independent Cellular Network, Inc.
Mifflin, PA (PA-11 RSA) Bell Atlantic/NYNEX Mobile
Lebanon, PA (PA-12 RSA) 360(degree) Communications Company (2)
Chambersburg, PA (PA-10 East RSA) 360(degree) Communications Company (2)
Union, PA (PA-8 RSA) Independent Cellular Network, Inc.
Altoona, PA Independent Cellular Network, Inc.
Orange County, NY Bell Atlantic/NYNEX Mobile
Binghamton, NY/PA Frontier/Bell Atlantic/NYNEX Mobile
Elmira, NY Frontier/Bell Atlantic/NYNEX Mobile
Huntington, WV/OH/KY Independent Cellular Network, Inc.
Charleston, WV Independent Cellular Network, Inc.
Jackson, WV (WV-l East RSA) Bell Atlantic/NYNEX Mobile
Pensacola, FL GTE Mobilnet
Fort Walton Beach, FL 360(degree) Communications Company (2)
Myrtle Beach, SC (SC-5 RSA) ALLTEL/Palmetto MobileNet (3)
Wilmington, NC (1) 360(degree) Communications Company (2)
Jacksonville, NC (1) 360(degree) Communications Company (2)
Portland, ME Bell Atlantic/NYNEX Mobile
Portsmouth, NH/ME Saco River Cellular, Inc./U.S. Cellular Corp.
Washington, ME (ME-4 RSA) U.S. Cellular Corp.
</TABLE>
(1) Jointly controlled through the Company's 50% ownership of a joint venture
with a subsidiary of GTE Mobilnet.
(2) Formerly Sprint Cellular Company.
(3) 360(degree) Communications Company has agreed to acquire Palmetto
MobileNet's interest.
Many of the Company's wireline company competitors are affiliates of large
telecommunications corporations and may have access to greater capital resources
than the Company. In addition, many of the Company's competitors may have
greater marketing and technical resources than the Company.
COMPETITION FROM OTHER TECHNOLOGIES. In addition to competition from the
other cellular carrier in each of its markets, the Company faces or will face
competition from Enhanced Specialized Mobile Radio ("ESMR") system operators,
PCS and resellers of cellular and other facilities-based services.
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The FCC has licensed ESMR system operators to construct digital mobile
communications systems on existing ESMR frequencies in many metropolitan areas
throughout the United States. Several such operators have initiated service. At
this time, the Company is unable to predict the extent to which and when, if
ever, ESMR system operators will offer competitive services to cellular, either
in the Company's markets or in adjacent areas. See "Risk
Factors -- Competition."
Licensing for broadband PCS has been divided by the FCC into 51 Major
Trading Areas ("MTAs") and 493 Basic Trading Areas ("BTAs") based upon
geographic boundaries described in the 1992 Rand McNally COMMERCIAL ATLAS &
MARKETING GUIDE. There may be a minimum of two and as many as six broadband PCS
providers in each area once the FCC completes its licensing. Two licensees each
will hold 30 MHz of PCS spectrum in each MTA, one licensee will hold 30 MHz of
PCS spectrum in each BTA and three licensees will hold 10 MHz of PCS spectrum in
each BTA.
The FCC has awarded licenses for the two 30 MHz bands of PCS spectrum in
each MTA and many of these systems are under construction. Two such systems are
operating on a commercial basis. The FCC is in the process of auctioning 30 MHz
of PCS spectrum in each BTA and it is anticipated that the auctions will
conclude in early spring 1996. The FCC has announced plans to hold auctions for
the three 10 MHz bands of PCS spectrum in each BTA as soon as is feasible after
completion of the current auction (and in any event in 1996). No specific date
has been set for the next auction to begin.
The FCC's rules limit a cellular licensee until the year 2000 to one 10 MHz
PCS license in an area in which the cellular licensee provides cellular services
to 10% or more of the population. At present, cellular licensees may hold a
maximum of 25 MHz of spectrum in the cellular 800 MHz band. The FCC's imposed 35
MHz cap for combined PCS/cellular spectrum means that cellular carriers may
acquire a 10 MHz PCS license now, and after January 1, 2000, an additional five
MHz of PCS spectrum. Cellular licensees are not limited to the 10 MHz/15 MHz PCS
license limitations outside of the areas in which they operate cellular systems.
The Company is currently evaluating the opportunities that PCS might
provide in its markets that could not be presently pursued through existing
spectrum allocated to the Company through its cellular licenses, as well as PCS
opportunities outside of its markets. Based upon the results of these studies,
the Company may choose to participate in the upcoming auction process for some
of the remaining PCS licenses. See "Risk Factors -- Adoption of New
Technologies; Technological Obsolescence."
PCS services are anticipated to include wireless two-way telecommunications
for voice, data and other transmissions employing digital micro-cellular
technology. PCS will operate in the 1850 to 1990 MHz band. The Company
anticipates that PCS will involve a network of small, low-powered transceivers
placed throughout a neighborhood, business office or office complex, city or
metropolitan area. PCS customers will communicate using digital devices similar
to portable cellular telephones. The Company is studying currently-available
technology to offer similar services on the 800 MHz cellular frequencies. There
is no assurance that the Company will be able to implement such technology, or
if it decides to do so, that it can implement these service features profitably
and in a timely manner. See "Risk Factors -- Competition" and "Risk
Factors -- Adoption of New Technologies; Technological Obsolescence."
Many PCS license winners who will compete with the Company have access to
greater capital resources than the Company. Many of these companies or their
affiliates also own and operate cellular telephone networks of substantial size
and bring significant wireless communications experience to their PCS
operations. See "Risk Factors -- Competition."
The Company is preparing for the more competitive environment represented
by the introduction of PCS and other digitally-based communications technologies
by building out and enhancing its cellular telephone networks, increasing the
quality of coverage in its service areas, expanding its service areas by
selected acquisitions of adjacent and nearby cellular systems and by offering
new features, products and services to its customers that the Company believes
will be competitive with future communications providers that may utilize
digital technology. See " -- Products and Services." The Company believes that
it can effectively compete by utilizing its experience in developing and
operating cellular networks and by virtue of the barriers imposed by its
extensive existing system footprint. The Company believes that it has developed
strong distribution channels and customer service capabilities overseen by an
experienced management team. The Company's cellular systems are primarily
located in suburban and rural markets into which management believes new PCS
licensees are likely to enter only after
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initiation of PCS operations in higher density markets which may be more
economically attractive. The Company anticipates that it may offer roaming
services to PCS customers. See "Risk Factors -- Competition."
Cellular system licensees are required by FCC policy to provide wholesale
cellular service to resellers. A reseller provides cellular service to customers
but is not itself an FCC cellular license holder. A reseller typically buys
capacity on a cellular telephone network and is assigned a block of cellular
telephone numbers from a cellular carrier. The reseller markets the wireless
telephone service through its own distribution channels to the public. In this
way, a reseller is not only a customer of the cellular telephone licensee's
service, but also competes with the licensee for customers.
The Company intends to explore mutually advantageous relationships with
resellers to supplement its existing distribution channels. Recently, MCI
Communications, Inc. and other large communications companies have begun
negotiating resale agreements in certain larger markets throughout the country.
The Company believes that it will receive increasing interest from persons
interested in reselling the Company's cellular service but there can be no
assurance that this will occur or that pursuing any such opportunities will be
profitable.
REGULATION OF CELLULAR SYSTEMS
FEDERAL REGULATION. The Company is subject to extensive regulation by the
Federal government as a provider of cellular communications services. Pursuant
to the Communications Act, the licensing, construction, operation, acquisition
and transfer of cellular communications systems in the United States are
regulated by the FCC. The FCC has promulgated rules governing the construction
and operation of cellular communications systems and licensing and technical
standards for the provision of cellular telephone service ("FCC Rules"). For
licensing purposes, the United States is divided into 734 discrete
geographically defined market areas comprised of 306 MSAs and 428 RSAs.
In each market, the frequencies allocated for cellular telephone use are
divided into two equal 25 MHz blocks and designated as Block A and Block B.
Block A licenses were initially reserved for nonwireline entities, such as the
Company. Block B licensees were initially reserved for entities affiliated with
a wireline telephone company. Under current FCC Rules, a Block A or Block B
license may be transferred with FCC approval without restriction as to wireline
affiliation, but generally, no entity may own a substantial interest in both
Block A and Block B in any one MSA or RSA. The FCC may prohibit or impose
conditions on sales or transfers of licenses.
Cellular service providers must satisfy a variety of FCC requirements
relating to technical and reporting matters. One such requirement is the
coordination of proposed frequency usage with adjacent cellular users, permitees
and licensees in order to avoid interference between adjacent systems. In
addition, the height and power of base station transmitting facilities and the
type of signals they emit must fall within specified parameters. The FCC also
regulates cellular service resale practices and the terms under which certain
ancillary services may be provided through cellular facilities.
The Company also regularly applies for FCC authority to use additional
frequencies, to modify the technical parameters of existing licenses, to expand
its service territory and to provide new services. The Communications Act
requires prior FCC approval for transfers to or from the Company of a
controlling interest in any license or construction permit, or any rights
thereunder. Although there can be no assurance that any future requests for
approval of applications filed will be approved or acted upon in a timely manner
by the FCC, the Company has no reason to believe such requests or applications
would not be approved or granted in due course. See "Risk Factors -- Regulation
of The Cellular Industry."
Initial operating licenses are generally granted for terms of up to 10
years, beginning on the dates of the grant of the initial operating authority
and are renewable upon application to the FCC. Licenses may be revoked and
license renewal applications denied for cause after appropriate notice and
hearing. The FCC generally grants current licensees a license renewal if they
have complied with their obligations under the Communications Act during their
license terms. A potential challenger would bear a heavy burden to demonstrate
that a license should not be renewed if the licensee's performance merits a
renewal expectancy.
Near the conclusion of the license term, licensees must file applications
for renewal of licenses to obtain authority to operate for up to an additional
10-year term. Applications for license renewal may be denied if the FCC
determines that the grant of an application would not serve the public interest.
In addition, at license renewal time, other parties may file competing
applications for authorization. In the event that qualified competitors file,
the FCC
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may be required to hold a hearing to determine whether the incumbent or the
competitor will receive the license. In 1993, the FCC adopted specific standards
to apply to cellular renewals, concluding that it will award a renewal
expectancy to a cellular licensee that meets certain standards of past
performance. If the existing licensee receives a renewal expectancy, it is
likely that the existing licensee's cellular license will be renewed without a
full comparative hearing. To receive a renewal expectancy, a licensee must show
that it (i) has provided "substantial" service during its past license term, and
(ii) has substantially complied with applicable FCC Rules and policies and the
Communications Act. "Substantial" service is defined as service which is sound,
favorable and substantially above a level of mediocre service that might only
minimally warrant renewal.
In 1994, the Company filed for renewal of one expiring license (for the
Allentown-Bethlehem-Easton, PA/NJ MSA) which was originally granted by the FCC
in 1985. In 1995, the Company filed for renewal of two expiring licenses (for
the Northeast Pennsylvania, PA and Harrisburg, PA MSAs) which were originally
granted by the FCC in 1986. All three license renewals were granted without
challenge. The Company believes that it has met and will continue to meet all
requirements necessary to secure renewal of its remaining cellular licenses
which are scheduled to expire between 1997 and 2003. However, there can be no
assurances that any such licenses will be renewed. See "Risk
Factors -- Regulation of the Cellular Industry."
In July 1994, the FCC issued a notice proposing a requirement whereby all
cellular carriers would have to provide interexchange carriers with equal
access. Currently, only AT&T-affiliated cellular carriers and the cellular
affiliates of the Regional Bell Operating Companies ("RBOCs") are required to
provide equal access. The FCC also proposed requiring all commercial mobile
radio service providers to provide interconnection to other mobile service
providers. In April 1995, however, the FCC tentatively concluded that it would
be premature to adopt such a requirement. The Telecommunications Act of 1996
(the "Telecom Act") provides that a cellular carrier need not provide equal
access unless the cellular carrier denies equal access, and such denial is
contrary to the public interest, in which case the FCC may require the cellular
carrier to unblock equal access by "dial around" or some other method. The
Company currently provides "dial around" equal access to all of its customers.
THE TELECOM ACT. The Telecom Act makes changes to the Communications Act
and the antitrust consent decree applicable to the RBOCs affect the cellular
industry. This legislation, among other things, affects competition for local
telecommunications services, interconnection arrangements for carriers,
universal service funding and the provision of interexchange services by the
RBOCs' wireless systems.
The Telecom Act requires state public utilities commissions and/or the FCC
to implement policies that mandate cost-based reciprocal compensation between
cellular carriers and local exchange carriers for interconnection services. The
Company believes that implementation of these policies may result in a
substantial decrease in interconnection expenses incurred by the Company.
The Telecom Act requires the FCC to adopt rules to require communications
companies, including cellular carriers, to contribute to a universal fund that
reimburses communications carriers that provide basic communications services to
marginal users who need such services.
The Telecom Act also eases the restrictions on provision of interexchange
telephone services by wireless carriers affiliated with RBOCs. RBOC-related
wireless carriers have interpreted the legislation to permit immediate provision
of long distance call delivery for their cellular customers.
STATE AND LOCAL APPROVALS. Congress amended the Communications Act to
preempt, as of August 10, 1994, state or local regulation of the entry of, and
the rates charged by, any commercial mobile service or any private mobile
service, which includes cellular telephone service. Notwithstanding such
preemption, a state had until August 10, 1994 to petition the FCC for authority
to continue regulating the rates for any commercial mobile service. Eight states
filed petitions to continue their rate regulation authority: Arizona,
California, Connecticut, Hawaii, Louisiana, New York, Ohio and Wyoming. In May
1995, the FCC denied all eight petitions and precluded those states from
regulating the rates for commercial mobile service providers, including cellular
operators. The FCC's actions on those petitions remain subject to
reconsideration and judicial review. As a practical matter, the Company is free
to establish rates and offer new products and services with a minimum of
regulatory requirements. Several of the seven states in which the Company
operates still maintain nominal oversight jurisdiction, primarily focusing upon
resolution of customer complaints.
The location and construction of cellular transmitter towers and antennas
are subject to Federal Aviation Administration ("FAA") regulations and may be
subject to Federal, state and local environmental regulation as well
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as state or local zoning, land use and other regulation. Before a system can be
put into commercial operation, the grantee of a construction permit must obtain
all necessary zoning and building permit approvals for the cell sites and MTSO
locations and must secure state certification and tariff approvals, if required.
The time needed to obtain zoning approvals and requisite site permits varies
from market to market and state to state. Similarly, variations exist in local
zoning processes. There can be no assurance that any state or local regulatory
requirements currently applicable to the systems in which the Company's
affiliates have an interest will not be changed in the future or that regulatory
requirements will not be adopted in those states and localities which currently
have none. See "Risk Factors -- Regulation of the Cellular Industry."
Zoning and planning regulation may become more restrictive in the future
with the addition of PCS carriers which are expected to seek sites for network
construction as well. The industry is seeking relief from local laws which
arbitrarily restrict the expansion of cellular networks. The Telecom Act
provides potential limited relief by permitting the FCC to preempt states and
localities from applying regulations in a manner which has the effect of
prohibiting construction and operation of new cell sites.
The Communications Act prohibits the issuance of a license to, or the
holding of a license by, any corporation of which more than 20% of the capital
stock is owned of record or voted by non-U.S. citizens or their representatives
or by a foreign government or a representative thereof, or by any corporation
organized under the laws of a foreign country. The Communications Act also
prohibits the issuance of a license to, or the holding of a license by, any
corporation directly or indirectly controlled by any other corporation of which
more than 25% of the capital stock is owned of record or voted by non-U.S.
citizens or their representatives or by a foreign government or representative
thereof, or by any corporation organized under the laws of a foreign country.
The FCC does however have the power to waive these restrictions in appropriate
circumstances. The FCC has interpreted these restrictions to apply to
partnerships and other business entities as well as corporations, subject to
certain modifications. Failure to comply with these requirements may result in
denial or revocation of licenses.
OTHER INVESTMENTS
GEOTEK COMMUNICATIONS, INC. In February 1994, the Company purchased for $30
million from Geotek 2.5 million shares of Geotek common stock and options to
invest up to $167 million for an aggregate of 10 million additional shares.
Geotek is a telecommunications company that is developing a wireless
communications network in certain metropolitan markets in the United States
based on its FHMA digital technology. The original agreement was amended in May
1995 to reduce the number of options available for exercise and to lengthen
substantially the time during which the Company may exercise its remaining
options. In addition, pursuant to the May 1995 agreement, the Company agreed to
purchase for $5 million in cash 531,463 shares of convertible preferred stock of
Geotek with a stated value of $9.408 per share. Geotek's common stock is traded
on the Nasdaq National Market System.
As amended by the May 1995 agreement, the options held by the Company at
December 31, 1995 are in three series as follows: (i) Series A options
exercisable for 1,000,000 shares at $15 per share, (ii) Series B options
exercisable for 1,714,200 shares at $16 per share and (iii) Series C options
exercisable for 2,571,400 shares at $17 per share. All options are exercisable
immediately and expire at various dates over the next several years. The Company
has also entered into a five-year management consulting agreement to provide
operational and marketing support to Geotek in exchange for 300,000 shares of
Geotek common stock per year. However, should any portion of the Series A, B or
C options expire without exercise, the management consulting agreement
terminates. The Company currently owns less than 10% of Geotek's outstanding
common stock and, in the event the options were exercised, would continue to own
less than 10% of such stock.
INTERNATIONAL WIRELESS COMMUNICATIONS, INC. The Company believes that
foreign markets offer significant opportunities for wireless communications
providers because of the limited availability of traditional landline telephone
systems in many countries and the increasing demand for communications services.
The Company's strategy is to pursue opportunities in the international arena as
they arise without diverting the Company's financial and personnel resources
from its primary business. Accordingly, the Company has pursued such
opportunities through joint ventures with local entities and others and its
investment in IWC. As of December 31, 1995, the Company had
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invested approximately $13.5 million and owned a 35% equity interest in IWC.
While several wireless communications license applications are pending and
certain licenses have been granted in which the Company has an interest, through
joint ventures or through IWC, the Company currently does not have an ownership
in any significant international operations. There is no assurance that the
Company's international activities will prove successful.
INTER(BULLET)ACT SYSTEMS, INCORPORATED. The Company has invested
approximately $10 million in Inter(Bullet)Act Systems, Inc. ("Inter(Bullet)Act")
for an aggregate ownership interest of approximately 26%. Inter(Bullet)Act is a
development stage company that provides targeted promotions to retail customers
at the point of entry at a retail outlet, primarily supermarkets, through a
computer-equipped kiosk. Certain officers and directors of the Company, as well
as entities affiliated with certain directors of the Company, have made
investments in Inter(Bullet)Act. As a group, these persons and entities had an
ownership interest of approximately 19% as of March 19, 1996.
EMPLOYEES
As of December 31, 1995, the Company had approximately 1,400 full-time
employees, including approximately 400 employees associated with its direct
salesforce. None of those employees are represented by a labor organization.
Management considers its employee relations to be good.
PROPERTIES
The Company owns or leases certain properties in addition to the interests
in cellular licenses presently owned by the Company. The Company leases its
principal executive offices located in Greensboro, North Carolina, consisting of
approximately 66,000 square feet of office space. The rental payments at this
facility are fixed over five years except for escalations to cover certain
related costs such as property taxes and maintenance. The Company also currently
owns or leases an aggregate of approximately 120,000 square feet of office and
retail space in its operating cellular markets. In addition, the Company either
owns or leases under long-term contracts 300 cell site locations and eight
cellular switch locations.
LEGAL PROCEEDINGS
The only legal proceedings pending against the Company or any of its
subsidiaries are routine filings with the FCC and state regulatory authorities
and customary regulatory proceedings pending in connection with acquisitions and
interconnection rates and practices, proceedings concerning the
telecommunications industry generally and other proceedings arising in the
ordinary course of business which management believes, even if resolved
unfavorably to the Company, would not have a materially adverse effect on the
Company's business.
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<PAGE>
MANAGEMENT
The following table sets forth certain information about each of the
Company's directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Stuart S. Richardson 49 Chairman of the Board of Directors
Haynes G. Griffin 49 President, Chief Executive Officer, Director
L. Richardson Preyer, Jr. 48 Executive Vice President, Treasurer,
Vice Chairman of the Board of Directors
Stephen R. Leeolou 40 Executive Vice President, Chief Operating
Officer, Secretary, Director
Stephen L. Holcombe 39 Senior Vice President, Chief Financial Officer
Richard C. Rowlenson 46 Senior Vice President, General Counsel
Timothy G. Biltz 37 Senior Vice President -- Marketing and Customer
Service
S. Tony Gore, III 49 Senior Vice President -- Acquisitions and
Corporate Development
Dennis B. Francis 43 Senior Vice President -- Technical Services
F. Cooper Brantley 48 Director
Doris R. Bray 58 Director
Robert M. DeMichele 51 Director
L. Richardson Preyer, Sr. 77 Director
Robert A. Silverberg 61 Director
</TABLE>
The Board is divided into three classes with each class as equal in number
as possible. Messrs. Robert M. DeMichele, Stephen R. Leeolou and L. Richardson
Preyer, Jr. have been elected to serve until the 1996 annual meeting of
shareholders. Doris R. Bray, Stuart S. Richardson and Robert A. Silverberg have
been elected to serve until the 1997 annual meeting of shareholders. F. Cooper
Brantley, Haynes G. Griffin and L. Richardson Preyer, Sr. have been elected to
serve until the 1998 annual meeting of shareholders.
STUART S. RICHARDSON has been a director since 1985 and was elected
Chairman of the Board of Directors in 1986. Since 1995, Mr. Richardson has been
Chairman of the Board of Lexington Global Asset Managers, Inc., a diversified
financial services holding company. From 1985 to 1995, Mr. Richardson was an
executive of Piedmont Management Company, Inc., formerly the parent corporation
of Lexington Global Asset Managers, Inc., and served as its Vice Chairman from
1986 to 1995. Mr. Richardson also serves as a director of Chartwell Reinsurance
Co. and Inter(Bullet)Act Systems, Inc. and is the former Chairman of the Board
of Richardson-Vicks, Inc. Mr. Richardson's second cousin, L. Richardson Preyer,
Jr., and Mr. Preyer's father, L. Richardson Preyer, Sr., are also directors.
HAYNES G. GRIFFIN is President, Chief Executive Officer, a director and a
co-founder of the Company. Mr. Griffin is a member of the Boards of Directors of
Lexington Global Asset Managers, Inc., Inter(Bullet)Act Systems, Inc. and of
Geotek Communications, Inc. Mr. Griffin currently serves on the United States
Advisory Council on the National Information Infrastructure. He is a past
Chairman of the Cellular Telecommunications Industry Association.
L. RICHARDSON PREYER, JR. is Vice Chairman of the Board, Executive Vice
President, Treasurer and a co-founder of the Company. Mr. Preyer serves as
Administrative Trustee of Piedmont Associates and Southeastern Associates,
investment partnerships, and is a director of Inter(Bullet)Act Systems, Inc.
STEPHEN R. LEEOLOU is Executive Vice President, Chief Operating Officer,
Secretary, a director and a co-founder of the Company. Mr. Leeolou is the
Chairman of the Board of Inter(Bullet)Act Systems, Inc. and International
Wireless Communications, Inc. Prior to joining the Company, from 1983 to 1984,
Mr. Leeolou was President and Secretary of Caro-Cell Communications, Inc., and
from 1978 to 1983 was a television news anchorman with three successive
network-affiliated stations.
STEPHEN L. HOLCOMBE is Senior Vice President and Chief Financial Officer of
the Company. From 1978 to 1985, Mr. Holcombe served in various positions with
KPMG Peat Marwick and was a senior audit manager when he left to join the
Company in 1985. Mr. Holcombe is a member of the North Carolina Association of
Certified Public Accountants.
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<PAGE>
RICHARD C. ROWLENSON is Senior Vice President and General Counsel of the
Company. From 1975 until joining the Company in 1987, Mr. Rowlenson was engaged
in the practice of communications law in Washington, D.C. Mr. Rowlenson is a
member of the Federal Communications Bar Association.
TIMOTHY G. BILTZ joined the Company as Vice President -- Marketing and
Customer Service in August 1989 and was promoted to Senior Vice President in
November 1990. Prior to joining the Company, Mr. Biltz was Regional Manager for
Providence Journal Cellular Management Services, Inc. in Raleigh, N.C. from 1987
to 1989, and was responsible for the development of regional marketing and
operations programs for several markets.
S. TONY GORE, III is Senior Vice President of Acquisitions and Corporate
Development. He is presently a task force member of the North Carolina
International Commission on Economic Development. Prior to joining the Company
in 1985, Mr. Gore was Chief Executive Officer of Atlantic Coast Entertainment
Systems, Inc.
DENNIS B. FRANCIS joined the Company as Director of Technical Services in
September 1992 and was promoted to Vice President in 1993 and Senior Vice
President in 1995. Prior to joining the Company, Mr. Francis was with
Southwestern Bell Mobile Systems for nine years, most recently as Vice President
of Network Operations for the Washington/Baltimore cellular system.
F. COOPER BRANTLEY is a member of Adams, Kleemeier Hagan Hannah & Fouts
L.L.P., attorneys at law. Mr. Brantley is formerly President of Brantley
Communications, Inc., a cellular system owner and operator.
DORIS R. BRAY has been a partner with Schell Bray Aycock Abel & Livingston,
L.L.P., attorneys at law, since 1987. Mrs. Bray is also a director of Cone Mills
Corporation.
ROBERT M. DEMICHELE is President, Chief Executive Officer and Director of
Lexington Global Asset Managers, Inc. From 1981 to 1995, Mr. DeMichele was
President, Chief Executive Officer and Director of Piedmont Management Company,
Inc. Mr. DeMichele is also a director for The Navigators Group, Inc.,
Inter(Bullet)Act Systems, Inc. and Chartwell Reinsurance Co.
L. RICHARDSON PREYER, SR. is a former federal judge and a former member of
the U.S. Congress and was a distinguished Fellow in Public Policy at the
University of North Carolina at Greensboro from 1981 until 1986. Mr. Preyer, Sr.
is also a director of Lexington Global Asset Managers, Inc.
ROBERT A. SILVERBERG has been Executive Vice President and Director of
Vectra Bank since 1995. From 1981 to 1995, Mr. Silverberg was Chairman of the
Board and President of First Denver Corporation and Chairman of the Board of its
subsidiary, First National Bank of Denver. Mr. Silverberg has also been
President and Chairman of the Board of 181 Realty Company, a commercial real
estate holding company, since 1968.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth the ownership of the Company's Class A
Common Stock (the "Common Stock") by each person known by the Company to be the
owner of 5% or more of the Company's Common Stock, by each person who is a
director or named executive officer of the Company and by all directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
SHARES
NAME (1)(2) PERCENT (1)(2)
<S> <C> <C>
FMR Corp........................................................................................ 5,069,150(3) 12.27%
The Equitable Companies Incorporated............................................................ 4,148,306(4) 10.00%
The Capital Group Companies, Inc................................................................ 2,483,600(5) 6.00%
Stuart S. Richardson............................................................................ 2,129,609(6) 5.14%
Haynes G. Griffin............................................................................... 1,240,405(7) 2.98%
Stephen R. Leeolou.............................................................................. 1,352,351(8) 3.25%
L. Richardson Preyer, Jr........................................................................ 1,348,333(9) 3.24%
Stephen L. Holcombe............................................................................. 125,457(10) *
Richard C. Rowlenson............................................................................ 139,685(11) *
F. Cooper Brantley.............................................................................. 19,198 *
Doris R. Bray................................................................................... 4,800(12) *
Robert M. DeMichele............................................................................. 1,031,542(13) 2.50%
L. Richardson Preyer, Sr........................................................................ 93,337(14) *
Robert A. Silverberg............................................................................ 160,921(15) *
All Directors and Officers as a group (14 persons).............................................. 8,393,863(16) 19.60%
</TABLE>
* Owns less than 1% of the total outstanding Common Stock.
(1) The descendants of Lunsford Richardson, Sr., their spouses, trusts, and
corporations in which they have interests and charitable organizations
established by such descendants (collectively referred to as the
"Richardson Family") beneficially own approximately 9,707,853 shares or
23.25% of the Company's Common Stock and consequently may, if they act in
concert, be in a position to control the management and the affairs of the
Company. Such number of shares includes 438,250 shares which members of the
Richardson Family have the right to acquire under presently exercisable
options granted to them under Company stock option plans. The individuals
and institutions constituting the Richardson Family have differing
interests and may not necessarily vote their shares in the same manner.
Furthermore, trustees and directors have fiduciary obligations (either
individually or jointly with other fiduciaries) under which they must act
on the basis of fiduciary requirements which may dictate positions that
differ from their personal interests.
(2) Unless otherwise indicated, all share ownership is given as of March 15,
1996 and all shares are owned of record by the persons named and beneficial
ownership consists of sole voting power and sole investment power.
(3) Ownership as of December 31, 1995 as reported to the Company on a Schedule
13G dated February 14, 1996. Certain of these shares may be deemed to be
beneficially owned by Fidelity Management & Research Company and by
Fidelity Management Trust Company, both wholly-owned subsidiaries of FMR
Corp. ("FMR"), and by Edward C. Johnson 3d, Chairman of FMR. According to
FMR's Schedule 13G, Mr. Johnson, FMR and these subsidiaries may be deemed
to exercise sole investment power as to all such shares and sole voting
power as to 19,000 shares. The address of FMR is 82 Devonshire Street,
Boston, MA 02109.
(4) Ownership as of December 31, 1995 as reported to the Company on a Schedule
13G dated February 9, 1996. These shares may be deemed to be beneficially
owned by a group consisting of The Equitable Companies Incorporated
("Equitable"), AXA (a French holding company), and five French mutual
insurance companies consisting of AXA Assurances I.A.R.D. Mutuelle, AXA
Assurances Vie Mutuelle, Alpha Assurances I.A.R.D. Mutuelle, Alpha
Assurances Vie Mutuelle and Uni Europe Assurance Mutuelle. According to the
Schedule 13G, the group may be deemed to exercise sole voting power as to
4,106,581 shares, sole investment power as to 4,148,031 shares and shared
investment power as to 275 shares. The address of Equitable is 787 Seventh
Avenue, New York, New York 10019.
(5) Ownership as of December 29, 1995 as reported to the Company on a Schedule
13G dated February 9, 1996. These shares may be deemed to be beneficially
owned by Capital Guardian Trust Company and Capital Research and Management
Company, operating subsidiaries of The Capital Group Companies, Inc.
("Capital"). According to Capital's Schedule 13G, these subsidiaries of
Capital may be deemed to exercise sole voting power as to 791,000 shares
and sole investment power as to all such shares. The address of Capital is
333 South Hope Street, Los Angeles, CA 90071.
(6) Includes 88,750 shares that Mr. Richardson has the right to acquire under
presently exercisable stock options granted to him under Company stock
option plans; 1,350 shares owned by Mr. Richardson's spouse; 372,882 shares
held by the H. Smith Richardson Testamentary Trust; 1,020,292 shares held
by the Smith Richardson Foundation and 395,542 shares held by the Grace
Jones Richardson Testamentary Trust, of which Mr. Richardson is a trustee;
and 160,247 shares held by various other trusts of which Mr. Richardson is
also a trustee. The shares shown as beneficially owned do not include
61,076 shares held in trusts for the benefit of his children. Mr.
Richardson disclaims beneficial ownership of the shares held by such
trusts. The shares shown also do not include 130,665 shares held by trusts
of which Mr. Richardson may be deemed to share investment power, but
exercise no voting power, and 16,550 shares that may be
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<PAGE>
deemed beneficially owned by his spouse. Mr. Richardson disclaims
beneficial ownership of the shares owned by his spouse and the shares that
may be deemed beneficially owned by his spouse. Mr. Richardson's business
address is c/o Lexington Global Asset Managers, Inc., Park 80 West, Park
Two, Saddle Brook, New Jersey 07663.
(7) Includes 345,000 shares that Mr. Griffin has the right to acquire under
presently exercisable stock options granted to him under Company stock
option plans. Also includes 5,271 shares owned by Mr. Griffin's spouse as
to which he shares voting and investment power. Does not include 18,321
shares held by trusts, the sole beneficiaries of which are Mr. Griffin's
sons and the trustee of which is Mr. Griffin's brother. Mr. Griffin
disclaims beneficial ownership of the foregoing shares owned by his spouse
and held by such trusts. The shares shown also do not include 73,555 shares
held by a trust of which Mr. Griffin may be deemed to share investment
power, but exercises no voting power.
(8) Includes 345,000 shares that Mr. Leeolou has the right to acquire under
presently exercisable stock options granted to him under Company stock
option plans. Does not include 27,723 shares held by trusts, the sole
beneficiaries of which are Mr. Leeolou's children and the trustee of which
is Mr. Leeolou's brother. Mr. Leeolou disclaims beneficial ownership of the
shares held by these trusts. The shares shown also do not include 48,868
shares held by a trust of which Mr. Leeolou may be deemed to share
investment power, but exercise no voting power.
(9) Includes 345,000 shares that Mr. Preyer has the right to acquire under
presently exercisable stock options granted to him under Company stock
option plans. Also includes 12,061 shares owned by Mr. Preyer's spouse as
to which he shares voting and investment power. Does not include 56,193
shares held by trusts, the sole beneficiaries of which are Mr. Preyer's
children and the trustee of which is Mr. Preyer's sister. Mr. Preyer
disclaims beneficial ownership of the foregoing shares owned by his spouse
and held by such trusts. The shares shown also do not include 98,533 shares
held by a trust of which Mr. Preyer may be deemed to share investment
power, but exercise no voting power.
(10) Includes 112,454 shares that Mr. Holcombe has the right to acquire under
presently exercisable options granted to him under Company stock option
plans.
(11) Includes 90,000 shares that Mr. Rowlenson has the right to acquire under
presently exercisable options granted to him under Company stock option
plans. Also includes 24,417 shares owned by Mr. Rowlenson's spouse as to
which he shares voting and investment power. Does not include 7,370 shares
held by trusts, the sole beneficiaries of which are Mr. Rowlenson's
children and the trustee of which is Mr. Rowlenson's brother-in-law. Mr.
Rowlenson disclaims beneficial ownership of the foregoing shares owned by
his spouse and held by such trusts.
(12) Includes 4,500 shares that Mrs. Bray has the right to acquire under
presently exercisable options granted to her under Company stock option
plans.
(13) Includes 4,500 shares that Mr. DeMichele has the right to acquire under
presently exercisable options granted to him under Company stock option
plans and 1,020,292 shares held by the Smith Richardson Foundation, of
which Mr. DeMichele serves as one of eight trustees. The shares held by the
Smith Richardson Foundation are also reported as beneficially owned by
Stuart S. Richardson. Mr. DeMichele disclaims beneficial ownership of the
shares held by such foundation.
(14) Includes 4,500 shares that Mr. Preyer has the right to acquire under
presently exercisable options granted to him under Company stock option
plans and 30,545 shares held by Mr. Preyer's spouse. Mr. Preyer disclaims
beneficial ownership of the foregoing shares owned by his spouse.
(15) Includes 45,486 shares that represent Mr. Silverberg's pro rata ownership
of Common Stock owned by a corporation of which he is an officer, director
and principal shareholder. Of the shares shown as beneficially owned by Mr.
Silverberg, he exercises shared voting and investment power with respect to
45,486 shares and sole voting and investment power with respect to 115,435
shares.
(16) Includes 1,518,454 shares that directors and officers have the right to
purchase under presently exercisable options granted to them under Company
stock option plans.
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<PAGE>
DESCRIPTION OF CREDIT FACILITY
On December 23, 1994, the Company completed the closing of a $675 million
credit facility, pursuant to an Amended and Restated Loan Agreement (the "Credit
Facility"), with various lenders led by The Toronto-Dominion Bank and The Bank
of New York. The Credit Facility consists of a "term loan" and a "revolving
loan." The term loan, in the amount of $325 million, was used to repay the
Company's borrowings under its previous $390 million loan agreement. The
revolving loan, in the amount of up to $350 million, is available for capital
expenditures, to make acquisitions of and investments in cellular and other
wireless communication interests, and for other general corporate purposes.
As security for borrowings under the Credit Facility, the Company has
pledged substantially all of its tangible and intangible assets and future cash
flows. Among other restrictions, the Credit Facility restricts the payment of
cash dividends, limits the use of borrowings, limits the creation of additional
long-term indebtedness and requires the maintenance of certain financial ratios.
The requirements of the Credit Facility were established in relation to the
Company's projected capital needs, projected results of operations and cash
flow. These requirements generally were designed to require continued
improvement in the Company's operating performance such that its EBITDA would be
sufficient to continue servicing the debt as repayments are required. The
Company is in compliance with all loan covenants under the Credit Facility.
The outstanding amount of the term loan as of March 30, 1998 is to be
repaid in increasing quarterly installments commencing on March 31, 1998 and
terminating at its maturity date of December 31, 2003. The quarterly installment
payments begin at 1.875% of the outstanding principal amount at March 30, 1998
and gradually increase to 5.625% of the outstanding principal amount at March
31, 2003, at which time the loan is scheduled to be repaid in full. The
available borrowings under the revolving loan will be reduced on a quarterly
basis also commencing on March 31, 1998 and terminating on December 31, 2003.
The quarterly reduction begins at 1.875% of the revolving loan commitment at
March 30, 1998 and gradually increases to 5.625% of the commitment on March 31,
2003 at which time the loan is scheduled to be repaid in full.
The term loan and the revolving loan bear interest at a rate equal to the
Company's choice of the Prime Rate (as defined) or Eurodollar Rate (as defined)
plus an applicable margin based upon a leverage ratio for the most recent fiscal
quarter. As of December 31, 1995, the applicable margins on the borrowings were
0.375% and 1.625% per annum for the Prime Rate and Eurodollar Rate,
respectively.
The Credit Facility will be amended prior to closing of the Offering. The
proposed amendment, which must be approved by 100% of the lenders under the
Credit Facility, is expected to (1) permit issuance by the Company of the
Debentures, (2) revise several covenants relating to the purchase of property
and equipment as well as acquisitions of cellular and wireless communications
properties, (3) immediately make a subsidiary of the Company (the "Operating
Subsidiary") the primary obligor of the Credit Facility, (4) require the Company
to create a new subsidiary of the Company (the "Holding Subsidiary"), (5)
require, upon receipt of certain FCC approvals, which must occur within a
specific time from the closing of the Offering, that the Holding Subsidiary will
become the primary obligor of the Credit Facility and (6) require that the
Company and substantially all of the subsidiaries of the Operating Subsidiary
and/or the Holding Subsidiary, as applicable, will have guaranteed the Credit
Facility, with such guarantees being secured by the assets of the Company and
their respective subsidiaries. The Operating Subsidiary and the Holding
Subsidiary will hold all of the stock or partnership interests of the operating
subsidiaries during the respective time periods each is primary obligor and will
assume all of the other liabilities of the Company (other than the Debentures).
As of December 31, 1995, $522.0 million had been borrowed under the Credit
Facility. Under the restrictive covenants of the Credit Facility, future
borrowing availability generally increases as the Company's operating
performance improves. The Company does not expect these covenants to curtail
planned borrowings. The net proceeds of the Offering will be used to pay down
the revolving loan (on a non-permanent basis). After giving effect to the
proposed amendment of the Credit Facility, the closing of the Offering and the
application of the net proceeds therefrom, the Company will have the ability to
borrow up to an aggregate of $347.7 million under the revolving loan portion of
the Credit Facility, subject to certain borrowing limitations. See "Risk
Factors -- Substantial Leverage; Ability to Service Debt," "Use of Proceeds,"
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources".
S-41
<PAGE>
DESCRIPTION OF DEBENTURES
THE FOLLOWING DESCRIPTION OF THE PARTICULAR TERMS OF THE DEBENTURES
SUPPLEMENTS, AND TO THE EXTENT INCONSISTENT THEREWITH REPLACES, THE DESCRIPTION
OF THE GENERAL TERMS AND PROVISIONS OF THE SENIOR DEBENTURES SET FORTH IN THE
ACCOMPANYING PROSPECTUS UNDER "DESCRIPTION OF DEBENTURES" TO WHICH REFERENCE IS
HEREBY MADE.
The Debentures will be issued under an indenture to be dated as of
, 1996 (as supplemented by the indenture supplement dated as of
, 1996, the "Indenture"), between the Company and The Bank of New
York, as Trustee (the "Trustee"). A copy of the Indenture has been filed as an
exhibit to the Registration Statement of which the Prospectus Supplement is a
part. The Indenture is subject to and is governed by the Trust Indenture Act of
1939, as amended (the "1939 Act"). The following summaries of certain provisions
of the Indenture do not purport to be complete and are subject, and are
qualified in their entirety by reference, to the 1939 Act and to all the
provisions of the Debentures and the Indenture, including the definitions
therein of certain terms. Wherever particular Sections or defined terms of the
Indenture are referred to herein, such Sections or defined terms are
incorporated by reference herein. For purposes of this Section, references to
the "Company" shall mean Vanguard Cellular Systems, Inc. excluding its
subsidiaries. Certain terms used in this Section are defined under " -- Certain
Definitions."
GENERAL
The Debentures will mature on , 2006, and will be limited to an
aggregate principal amount of $ . The Debentures will bear interest
at the rate set forth on the cover page of this Prospectus Supplement from
, 1996, or from the most recent interest payment date to which
interest has been paid, payable semiannually on and of
each year, beginning on , 1996, to the persons who are registered
holders of the Debentures (or any predecessor Debentures) at the close of
business on the preceding or , as the case may be.
Principal of, premium, if any, and interest on the Debentures will be
payable in immediately available funds, and the Debentures will be exchangeable
and transferable, at an office or agency of the Company, one of which will be
maintained for such purpose in The City of New York (which initially will be the
corporate trust office of the Trustee) or such other office or agency permitted
under the Indenture; provided, however, that payment of interest may be made at
the option of the Company by check mailed to the person entitled thereto as
shown on the Security Register. The Debentures will be issued only in fully
registered form without coupons, in denominations of $1,000 or any integral
multiple thereof. No service charge will be made for any registration of
transfer or exchange of Debentures, except for any tax or other governmental
charge that may be imposed in connection therewith.
Settlement for the Debentures will be made by the Underwriters in
immediately available funds. All payments of principal to the Depositary will be
made by the Company in immediately available funds. The Debentures will trade in
The Depository Trust Company's Same-Day Funds Settlement System until maturity,
and secondary market trading activity in the Debentures will therefore settle in
immediately available funds on trading activity in the Debentures.
RANKING
The Debentures will be senior unsecured obligations of the Company, will
rank pari passu in right of payment with all existing and future senior
indebtedness of the Company and will be senior in right of payment to all future
subordinated indebtedness of the Company. As of December 31, 1995, after giving
effect to the Offering, the application of the net proceeds therefrom and
actions to be taken pursuant to the proposed amendment to the Credit Facility,
the total consolidated indebtedness of the Company would have been $527.4
million. At such date, the Company had no indebtedness subordinated to the
Debentures.
In addition, all existing and future indebtedness and other liabilities of
the Company's Subsidiaries, including borrowings under the Credit Facility, will
be effectively senior in right of payment to the Debentures. In addition, prior
to sale of the Debentures, pursuant to a proposed amendment to the Credit
Facility, a holding company Subsidiary will become the primary obligor of the
Credit Facility, the existing Subsidiaries of the Company will become
Subsidiaries of the new holding company, and the Company and substantially all
of the Subsidiaries of the holding company Subsidiary will have guaranteed the
Credit Facility, with such guarantees being secured by the Property of the
respective Subsidiaries. The total balance sheet liabilities of the Company's
Subsidiaries on a pro
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<PAGE>
forma basis as of December 31, 1995, would have been $372.2 million, of which
$327.4 million was indebtedness. The Company and its Subsidiaries have other
liabilities, including contingent liabilities, which may be significant.
Although the Indenture contains limitations on the amount of additional
Indebtedness which the Company and its Restricted Subsidiaries may Incur, the
amounts of such Indebtedness could be substantial and, in any case, much of such
Indebtedness may be Indebtedness of Subsidiaries (which will be effectively
senior in right of payment to the Debentures). See " -- Certain Covenants"
below. Moreover, claims of creditors of the Company's Subsidiaries, including
trade creditors, and holders of Preferred Stock of the Company's Subsidiaries
(if any), will generally have a priority as to the assets of such Subsidiaries
over the claims of the Company.
The Debentures are obligations exclusively of the Company. Since the
operations of the Company are conducted through Subsidiaries, the cash flow and
the consequent ability to service debt of the Company, including the Debentures,
are dependent upon the earnings of its Subsidiaries and the distribution of
those earnings to, or upon loans or other payments of funds by those
Subsidiaries to, the Company. The payment of dividends and the making of loans
and advances to the Company by its Subsidiaries may be subject to statutory or
contractual restrictions, are dependent upon the earnings of those Subsidiaries
and are subject to various business considerations.
OPTIONAL REDEMPTION
The Debentures are not redeemable prior to , 2001. At any time
on or after , 2001, the Debentures are redeemable at the option of
the Company, in whole or in part, on not less than 30 nor more than 60 days'
notice, at the following redemption prices (expressed as percentages of
principal amount), plus accrued and unpaid interest (if any) to the date of
redemption:
If redeemed during the 12-month period commencing of the year
indicated:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
<S> <C>
2001........................................................................ %
2002........................................................................ %
2003........................................................................ %
</TABLE>
and thereafter, beginning , 2004, at 100% of the principal
amount of the Debentures.
In the event of redemption of fewer than all the Debentures, the Trustee
shall select by lot or in such manner as it shall deem fair and equitable the
Debentures to be redeemed. On and after any redemption date, interest will cease
to accrue on the Debentures or portions thereof called for redemption unless the
Company shall fail to redeem any such Debentures.
SINKING FUND
There will be no mandatory sinking fund payments for the Debentures.
PURCHASE AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control Triggering Event, each holder of
Debentures shall have the right to require the Company to purchase all or any
part (equal to $1,000 or an integral multiple thereof) of such holder's
Debentures pursuant to the offer described below (the "Change of Control Offer")
at a purchase price equal to 101% of the principal amount thereof, plus accrued
and unpaid interest thereon, if any, to the purchase date (the "Change of
Control Payment").
Within 30 days following any Change of Control Triggering Event, the
Company shall (i) cause a notice of the Change of Control Offer to be sent at
least once to the Dow Jones News Service or similar business news service in the
United States and (ii) mail a notice to each holder of Debentures stating: (1)
that a Change of Control Triggering Event has occurred and a Change of Control
Offer is being made pursuant to the covenant entitled "Purchase at the Option of
Holders Upon a Change of Control" and that all Debentures timely tendered will
be accepted for payment; (2) the purchase price and the purchase date, which
shall be, subject to any contrary requirements of applicable law, no earlier
than 30 days nor later than 60 days from the date such notice is mailed (the
"Change of Control Payment Date"); (3) that any Debenture (or portion thereof)
accepted for payment (and duly paid on the Change of Control Payment Date)
pursuant to the Change of Control Offer shall cease to accrue interest after the
Change of Control Payment Date; (4) that any Debentures (or portions thereof)
not tendered will continue to accrue
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interest; (5) a description of the transaction or transactions constituting the
Change of Control Triggering Event; and (6) the procedures that holders of
Debentures must follow in order to tender their Debentures (or portions thereof)
for payment and the procedures that holders of Debentures must follow in order
to withdraw an election to tender Debentures (or portions thereof) for payment.
The Company will comply, to the extent applicable, with the requirements of
Rule 14e-1 under the Exchange Act, and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in connection
with the purchase of Debentures in connection with a Change of Control
Triggering Event. To the extent that the provisions of any securities laws or
regulations conflict with the provisions relating to the Change of Control
Offer, the Company will comply with the applicable securities laws and
regulations and will not be deemed to have breached its obligations described
above by virtue thereof.
Except as described above with respect to a Change of Control Triggering
Event, the Indenture does not contain any provisions that permit the holders of
the Debentures to require that the Company purchase or redeem the Debentures in
the event of a takeover, recapitalization or similar restructuring.
The Change of Control purchase feature is a result of negotiations between
the Company and the Underwriters. Management has no present intention to engage
in a transaction involving a Change of Control, although it is possible that the
Company would decide to do so in the future. Subject to the limitations
discussed below, the Company could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control under the Indenture, but that
could increase the amount of Indebtedness outstanding at such time or otherwise
affect the Company's capital structure or credit ratings. Restrictions on the
ability of the Company to Incur additional Indebtedness are contained in the
covenants described under " -- Certain Covenants -- Limitation on Indebtedness"
and " -- Certain Covenants -- Limitation on Liens." Such restrictions can only
be waived with the consent of the registered holders of a majority in principal
amount of the Debentures then outstanding. Except for the limitations contained
in such covenants, however, the Indenture will not contain any covenants or
provisions that may afford holders of the Debentures protection in the event of
a highly leveraged transaction.
The Credit Facility imposes restrictions on the ability of the Company's
Subsidiaries to pay dividends or make distributions to the Company. Such
restrictions may limit the ability of the Company to fund any purchase of the
Debentures upon a Change of Control Triggering Event. There can be no assurance
that the Company will be able to fund any purchase of the Debentures upon a
Change of Control Triggering Event.
BOOK-ENTRY SYSTEM
The Debentures will initially be issued in the form of one or more Global
Securities (as defined in the Indenture). Accordingly, The Depository Trust
Company ("DTC") or its nominee will initially be the sole registered holder of
the Debentures for all purposes under the Indenture.
Upon the issuance of a Global Security, DTC or its nominee will credit the
accounts of persons holding through it with the respective principal amounts of
the Debentures represented by such Global Security purchased by such persons in
the Offering. Such accounts shall be designated by the Underwriters with respect
to Debentures placed by the Underwriters for the Company. Ownership of
beneficial interests in a Global Security will be limited to persons that have
accounts with DTC ("participants") or persons that may hold interests through
participants. Ownership of beneficial interests by participants in a Global
Security will be shown on, and the transfer of that ownership interest will be
effected only through, records maintained by DTC for such Global Security.
Ownership of beneficial interests in such Global Security by persons that hold
through participants will be shown on, and the transfer of that ownership
interest within such participant will be effected only through, records
maintained by such participant. The laws of some jurisdictions require that
certain purchasers of securities take physical delivery of such securities in
definitive form. Such limits and such laws may impair the ability to transfer
beneficial interests in a Global Security.
Payment of principal and interest on Debentures represented by any such
Global Security will be made to DTC or its nominee, as the case may be, as the
sole registered owner and the sole holder of the Debentures represented thereby
for all purposes under the Indenture. None of the Company, the Trustee, any
agent of the Company, or the Underwriters will have any responsibility or
liability for any aspect of DTC's records relating to or
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payments made on account of beneficial ownership interests in a Global Security
representing any Debentures or for maintaining, supervising, or reviewing any of
DTC's records relating to such beneficial ownership interests.
The Company has been advised by DTC that upon receipt of any payment of
principal of, or interest on, any Global Security, DTC will immediately credit,
on its book-entry registration and transfer system, the accounts of participants
with payments in amounts proportionate to their respective beneficial interests
in the principal or face amount of such Global Security as shown on the records
of DTC. Payments by participants to owners of beneficial interests in a Global
Security held through such participants will be governed by standing
instructions and customary practices as is now the case with securities held for
customer accounts registered in "street name" and will be the sole
responsibility of such participants.
A Global Security may not be transferred except as a whole by DTC or a
nominee of DTC to a nominee of DTC. A Global Security is exchangeable for
certificated Debentures only if (i) DTC notifies the Company that it is
unwilling or unable to continue as a depositary for such Global Security or if
at any time DTC ceases to be a clearing agency registered under the Exchange
Act, (ii) the Company executes and delivers to the Trustee a notice that such
Global Security shall be so transferable, registrable, and exchangeable, and
such transfers shall be registrable or (iii) there shall have occurred and be
continuing a Default or an Event of Default with respect to the Debentures
represented by such Global Security. Any Global Security that is exchangeable
for certificated Debentures pursuant to the preceding sentence will be
transferred to, and registered and exchanged for, certificated Debentures in
authorized denominations and registered in such names as DTC or any successor
depositary holding such Global Security may direct. Subject to the foregoing, a
Global Security is not exchangeable, except for a Global Security of like
denomination to be registered in the name of DTC or any successor depositary or
its nominee. In the event that a Global Security becomes exchangeable for
certificated Debentures, (i) certificated Debentures will be issued only in
fully registered form in denominations of $1,000 or integral multiples thereof,
(ii) payment of principal, any repurchase price, and interest on the
certificated Debentures will be payable, and the transfer of the certificated
Debentures will be registerable, at the office or agency of the Company
maintained for such purposes and (iii) no service charge will be made for any
registration of transfer or exchange of the certificated Debentures, although
the Company may require payment of a sum sufficient to cover any tax or
governmental charge imposed in connection therewith.
So long as DTC or any successor depositary for a Global Security, or any
nominee, is the registered owner of such Global Security, DTC or such successor
depositary or nominee, as the case may be, will be considered the sole owner or
holder of the Debentures represented by such Global Security for the purposes of
receiving payment on the Debentures, receiving notices, and for all other
purposes under the Indenture and the Debentures. Beneficial interests in
Debentures will be evidenced only by, and transfers thereof will be effected
only through, records maintained by DTC or any successor depositary and its
participants. Cede & Co. has been appointed as the nominee of DTC. Except as
provided above, owners of beneficial interests in a Global Security will not be
entitled to and will not be considered the holders thereof for any purposes
under the Indenture. Accordingly, each person owning a beneficial interest in a
Global Security must rely on the procedures of DTC or any successor depositary,
and, if such person is not a participant, on the procedures of the participant
through which such person owns its interest, to exercise any rights of a holder
under the Indenture. The Company understands that under existing industry
practices, in the event that the Company requests any action of holders or that
an owner of a beneficial interest in a Global Security desires to give or take
any action which a holder is entitled to give or take under the Indenture, DTC
or any successor depositary would authorize the participants holding the
relevant beneficial interest to give or take such action and such participants
would authorize beneficial owners owning through such participants to give or
take such action or would otherwise act upon the instructions of beneficial
owners owning through them.
DTC has advised the Company that DTC is a limited-purpose trust company
organized under the Banking Law of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code, and a "clearing agency" registered under the
Exchange Act. DTC was created to hold the securities of its participants and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical movement
of securities certificates. DTC's participants include securities brokers and
dealers (including the Underwriters), banks, trust companies, clearing
corporations, and certain other organizations some of whom (and/or their
representatives) own DTC. Access to DTC's book-entry system is also available to
others, such as banks, brokers, dealers, and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly.
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<PAGE>
CERTAIN COVENANTS
LIMITATION ON INDEBTEDNESS. The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, Incur any Indebtedness unless
after giving pro forma effect to the application of the proceeds thereof, no
Default or Event of Default would occur as a consequence of such Incurrence or
be continuing following such Incurrence and either (a) after giving effect to
the Incurrence of such Indebtedness and the receipt and application of the
proceeds thereof, the Leverage Ratio of the Company and the Restricted
Subsidiaries (on a consolidated basis) would not exceed (i) 8.5 from the Issue
Date until March 31, 1998 and (ii) 7.5 after March 31, 1998 or (b) such
Indebtedness is Permitted Indebtedness.
Permitted Indebtedness is defined to include any and all of the following:
(i) Indebtedness pursuant to the revolving loan portion of the Credit Facility
in an aggregate amount outstanding at any time not to exceed $75 million; (ii)
Indebtedness in respect of Capital Lease Obligations and/or Capital Expenditure
Indebtedness, provided, that (a) the aggregate principal amount of such
Indebtedness does not exceed the Fair Market Value (on the date of such
Incurrence) of the property or asset acquired or constructed and (b) the
aggregate principal amount of all Indebtedness Incurred under this clause (ii)
during any calendar year does not exceed $25 million; (iii) Indebtedness of the
Company evidenced by the Debentures; (iv) Indebtedness of the Company owing to
and held by a Restricted Subsidiary and Indebtedness of a Restricted Subsidiary
owing to and held by the Company or any Restricted Subsidiary; provided,
however, that any event that results in any such Restricted Subsidiary ceasing
to be a Restricted Subsidiary or any subsequent transfer of any such
Indebtedness (except to the Company or a Restricted Subsidiary) shall be deemed,
in each case, to constitute the Incurrence of such Indebtedness by the issuer
thereof; (v) Indebtedness (other than Indebtedness permitted by the immediately
preceding paragraph or elsewhere in this paragraph) in an aggregate principal
amount outstanding at any time not to exceed $25 million; (vi) Indebtedness
under Interest Rate Agreements entered into for the purpose of limiting interest
rate risks, provided, that the obligations under such agreements are related to
payment obligations on Indebtedness otherwise permitted by the terms of this
covenant; (vii) Indebtedness in connection with one or more standby letters of
credit or performance bonds issued in the ordinary course of business or
pursuant to self-insurance obligations and not in connection with the borrowing
of money or the obtaining of advances or credit; (viii) Indebtedness outstanding
on the Issue Date not otherwise described in clauses (i) through (vii) above;
and (ix) Permitted Refinancing Indebtedness Incurred in respect of Indebtedness
Incurred pursuant to clause (a) of the immediately preceding paragraph and
clauses (ii), (iii) and (viii) above.
LIMITATION ON RESTRICTED PAYMENTS. The Company shall not make, and shall
not permit any Restricted Subsidiary to make, any Restricted Payment if at the
time of, and after giving effect to, such proposed Restricted Payment, (a) a
Default or Event of Default shall have occurred and be continuing, (b) the
Company could not Incur at least $1.00 of additional Indebtedness pursuant to
clause (a) of the first paragraph of " -- Limitation on Indebtedness" or (c) the
aggregate amount of such Restricted Payment and all other Restricted Payments
made since the Issue Date (the amount of any Restricted Payment, if made other
than in cash, to be based upon Fair Market Value) would exceed an amount equal
to the sum of (i) the excess of (A) Cumulative EBITDA over (B) the product of
1.5 and Cumulative Interest Expense, (ii) Capital Stock Sale Proceeds, (iii) the
amount by which Indebtedness of the Company or any Restricted Subsidiary is
reduced on the Company's balance sheet upon the conversion or exchange (other
than by a Subsidiary) subsequent to the Issue Date of any Indebtedness of the
Company or any Restricted Subsidiary convertible or exchangeable for Capital
Stock (other than Redeemable Stock) of the Company (less the amount of any cash
or other Property distributed by the Company or any Restricted Subsidiary upon
conversion or exchange) and (iv) an amount equal to the net reduction in
Investments made by the Company and its Restricted Subsidiaries subsequent to
the Issue Date in any Person resulting from (A) dividends, repayment of loans or
advances, or other transfers or distributions of Property (but only to the
extent the Company excludes such transfers or distributions from the calculation
of EBITDA for purposes of clause (c)(i)(A) above), in each case to the Company
or any Restricted Subsidiary from any Person or (B) the redesignation of any
Unrestricted Subsidiary as a Restricted Subsidiary, not to exceed, in the case
of (A) or (B), the amount of such Investments previously made by the Company and
its Restricted Subsidiaries in such Person or such Unrestricted Subsidiary, as
the case may be, which were treated as Restricted Payments.
Notwithstanding the foregoing limitation, the Company may (a) pay dividends
on its Capital Stock within 60 days of the declaration thereof if, on the
declaration date, such dividends could have been paid in compliance with the
Indenture, (b) redeem, repurchase, defease, acquire or retire for value, any
Indebtedness subordinate (whether pursuant to its terms or by operation of law)
in right of payment to the Debentures with the proceeds of
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any Permitted Refinancing Indebtedness, (c) acquire, redeem or retire Capital
Stock of the Company or Indebtedness subordinate (whether pursuant to its terms
or by operation of law) in right of payment to the Debentures in exchange for,
or in connection with a substantially concurrent issuance of, Capital Stock of
the Company (other than Redeemable Stock and other than Capital Stock issued or
sold to a Subsidiary or an employee stock ownership plan or other trust
established by the Company or any Subsidiary), (d) consummate an exchange of
Investments in Persons, the primary businesses of which are Related Businesses,
but only if such exchange complies with clauses (i) and (ii)(B) of the first
paragraph of " -- Limitation on Asset Sales", (e) receive Capital Stock of
Geotek Communications, Inc. pursuant to the Geotek Management Consulting
Agreement and (f) make Investments in Persons the primary businesses of which
are Related Businesses (other than Investments in the Capital Stock of the
Company) in an amount at any time outstanding not to exceed in the aggregate for
all such Investments made in reliance upon this clause (f), the sum of (i) $50
million and (ii) an amount equal to the net reduction in Investments made by the
Company and its Restricted Subsidiaries subsequent to the Issue Date in any
Person resulting from payments of dividends, repayment of loans or advances, or
other transfers or distributions of Property to the Company or any Restricted
Subsidiary from any Person (but only to the extent such net reduction in
Investments has not been utilized to permit a Restricted Payment pursuant to
clause (c)(i) or (c)(iv) in the immediately preceding paragraph) not to exceed,
in the case of clause (f)(ii), the amount of such Investments previously made by
the Company and its Restricted Subsidiaries in such Person which were treated as
Restricted Payments; provided, however, that no more than $25 million of the
aggregate Investments permitted to be made pursuant to this clause (f) may be
utilized to make Investments in Inter(Bullet)Act Systems, Inc.
Any payments made pursuant to clauses (b), (c), (d) and (e) of the
immediately preceding paragraph shall be excluded from the calculation of the
aggregate amount of Restricted Payments made after the Issue Date; provided,
however, that the proceeds from the issuance of Capital Stock pursuant to clause
(c) of the immediately preceding paragraph shall not constitute Capital Stock
Sale Proceeds for purposes of clause (c)(ii) of the first paragraph of this
covenant.
LIMITATION ON LIENS. The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, Incur or suffer to exist, any
Lien (other than Permitted Liens) upon any of its Property, whether now owned or
hereafter acquired, including any Lien on any interest in, or any income or
profits from, its Property, unless (a) with respect to any Restricted
Subsidiary, such Lien secures Indebtedness other than Guarantees of Indebtedness
of the Company or (b) effective provision has been or will be made whereby the
Debentures will be secured by such Lien; PROVIDED, HOWEVER, that no Lien may be
granted with respect to Indebtedness of the Company that is subordinated to the
Debentures.
LIMITATION ON ASSET SALES. The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, consummate any Asset Sale
after the Issue Date unless (i) the Company or such Restricted Subsidiary, as
the case may be, receives consideration at the time of such Asset Sale at least
equal to the Fair Market Value of the Property subject to such Asset Sale and
(ii) (A) at least 80% of the consideration paid to the Company or such
Restricted Subsidiary in connection with such Asset Sale is in the form of cash
or cash equivalents or (B) the consideration paid to the Company or such
Restricted Subsidiary is determined in good faith by the Board of Directors of
the Company, as evidenced by a Board Resolution, to be substantially comparable
in type to the assets being sold.
The Net Available Cash (or any portion thereof) from Asset Sales may be
applied by the Company or a Restricted Subsidiary, to the extent the Company or
such Restricted Subsidiary elects, (A) to prepay, repay or purchase Indebtedness
under the Credit Facility or Indebtedness of a Restricted Subsidiary (excluding
Indebtedness owed to the Company or an Affiliate of the Company); or (B) to
reinvest in Additional Assets (including by means of an Investment in Additional
Assets by a Restricted Subsidiary with Net Available Cash received by the
Company or another Restricted Subsidiary).
Any Net Available Cash from an Asset Sale not applied in accordance with
the preceding paragraph within one year from the date of such Asset Sale or the
receipt of such Net Available Cash shall constitute "Excess Proceeds". When the
aggregate amount of Excess Proceeds exceeds $15 million (taking into account
income earned on such Excess Proceeds), the Company will be required to make an
offer to purchase (the "Prepayment Offer") the Debentures, on a pro rata basis
according to principal amount, at a purchase price equal to 100% of the
principal amount thereof plus accrued and unpaid interest thereon (if any) to
the date of purchase in accordance with the procedures (including prorating in
the event of oversubscription) set forth in the Indenture. If the aggregate
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principal amount of Debentures surrendered for purchase by holders thereof
exceeds the amount of Excess Proceeds, then the Trustee shall select the
Debentures to be purchased pro rata according to principal amount or by lot with
such adjustments as may be deemed appropriate by the Company so that only
Debentures in denominations of $1,000, or integral multiples thereof, shall be
purchased. To the extent that any portion of the amount of Net Available Cash
remains after compliance with the preceding sentence and provided that all
holders of Debentures have been given the opportunity to tender their Debentures
for purchase as described in the following paragraph in accordance with the
Indenture, the Company or such Restricted Subsidiary may use such remaining
amount for general corporate purposes and the amount of Excess Proceeds will be
reset to zero.
Within five Business Days after one year from the date of an Asset Sale or
the receipt of Net Available Cash therefrom, the Company shall, if it is
obligated to make a Prepayment Offer, send a written notice, by first-class
mail, to the holders of the Debentures (the "Prepayment Offer Notice"),
accompanied by such information regarding the Company and its Subsidiaries as
the Company in good faith believes will enable such holders of the Debentures to
make an informed decision with respect to the Prepayment Offer. The Prepayment
Offer Notice will state, among other things, (a) that the Company is offering to
purchase Debentures pursuant to the provisions of the Indenture described herein
under " -- Limitation on Asset Sales," (b) that any Debenture (or any portion
thereof) accepted for payment (and duly paid on the Purchase Date) pursuant to
the Prepayment Offer shall cease to accrue interest after the Purchase Date, (c)
the purchase price and purchase date, which shall be, subject to any contrary
requirements of applicable law, no less than 30 days nor more than 60 days from
the date the Prepayment Offer Notice is mailed (the "Purchase Date"), (d) the
aggregate principal amount of Debentures (or portions thereof) to be purchased
and (e) a description of the procedure which holders of Debentures must follow
in order to tender their Debentures (or portions thereof) and the procedures
that holders of Debentures must follow in order to withdraw an election to
tender their Debentures (or portions thereof) for payment.
The Company will comply, to the extent applicable, with the requirements of
Rule 14e-1 under the Exchange Act and any other securities laws or regulations
thereunder to the extent such laws and regulations are applicable in connection
with the purchase of Debentures as described above. To the extent that the
provisions of any securities laws or regulations conflict with the provisions
relating to the Prepayment Offer, the Company will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations described above by virtue thereof.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES.
The Company shall not, and shall not permit any of its Restricted Subsidiaries
to, directly or indirectly, create or otherwise cause or suffer to exist or
become effective, or enter into any agreement with any Person that would cause
to become effective, any consensual encumbrance or restriction on the ability of
any Restricted Subsidiary to (a) pay dividends, in cash or otherwise, or make
any other distributions on or in respect of its Capital Stock, or pay any
Indebtedness or other obligation owed, to the Company or any other Restricted
Subsidiary, (b) make any loans or advances to the Company or any other
Restricted Subsidiary or (c) transfer any of its Property to the Company or any
other Restricted Subsidiary. Such limitation will not apply (1) with respect to
clauses (a), (b) and (c), to encumbrances and restrictions (i) in existence
under or by reason of any agreements (not otherwise described in clause (iii))
in effect on the Issue Date, (ii) relating to Indebtedness of a Restricted
Subsidiary and existing at such Restricted Subsidiary at the time it became a
Restricted Subsidiary if such encumbrance or restriction was not created in
connection with or in anticipation of the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a Restricted
Subsidiary or was acquired by the Company, (iii)(a) any encumbrance or
restriction pursuant to the Credit Facility as in effect on the date of the
Indenture or (b) any encumbrance or restriction existing under any agreement
that amends, extends, revises, refinances or replaces the Credit Facility,
provided that in the case of any encumbrances or restrictions permitted by this
clause (iii)(b), such restrictions or encumbrances are no less favorable to the
holders of the Debentures than those restrictions or encumbrances pursuant to
the Credit Facility as in effect on the date of the Indenture, provided further,
however, that the provisions of the Credit Facility and any agreement that
amends, extends, revises, refinances or replaces the Credit Facility permit
distributions to the Company for the purpose of, and in an amount sufficient to
fund, the payment of principal due at maturity and interest in respect of the
Debentures (provided, in either case, that such payment is due or to become due
within 30 days from the date of such distribution) at a time when there does not
exist a default or event which after notice or passage of time or both would
permit the lenders under the Credit Facility and any agreement that amends,
extends, revises, refinances or replaces the Credit Facility to declare all
amounts thereunder due and payable or
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(iv) which result from the renewal, refinancing, extension or amendment of an
agreement referred to in the immediately preceding clauses (1)(i) and (ii) above
and in clauses (2)(i) and (ii) below, provided, such encumbrance or restriction
is no more restrictive to such Restricted Subsidiary and is not materially less
favorable to the holders of Debentures than those under or pursuant to the
agreement evidencing the Indebtedness so extended, renewed, refinanced or
replaced, and (2) with respect to clause (c) only, to (i) any encumbrance or
restriction relating to Indebtedness that is permitted to be Incurred and
secured pursuant to the provisions under " -- Limitation on Indebtedness" and
" -- Limitation on Liens" that limits the right of the debtor to dispose of the
assets or Property securing such debt, (ii) any encumbrance or restriction in
connection with an acquisition of Property, so long as such encumbrance or
restriction relates solely to the Property so acquired and was not created in
connection with or in anticipation of such acquisition, (iii) customary
provisions restricting subletting or assignment of leases and customary
provisions in other agreements that restrict assignment of such agreements or
rights thereunder or (iv) customary restrictions contained in asset sale
agreements limiting the transfer of such assets pending the closing of such
sale.
LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Company shall not, and
shall not permit any Restricted Subsidiary to, directly or indirectly, conduct
any business or enter into or suffer to exist any transaction or series of
transactions (including the purchase, sale, transfer, lease or exchange of any
Property or the rendering of any service) with, or for the benefit of, any
Affiliate of the Company (an "Affiliate Transaction") unless (a) the terms of
such Affiliate Transaction are (i) set forth in writing, (ii) in the best
interest of the Company or such Restricted Subsidiary, as the case may be, and
(iii) no less favorable to the Company or such Restricted Subsidiary, as the
case may be, than those that could be obtained in a comparable arm's-length
transaction with a Person that is not an Affiliate of the Company or such
Restricted Subsidiary, (b) with respect to an Affiliate Transaction involving
aggregate payments or value in excess of $15 million, the Board of Directors of
the Company (including a majority of the disinterested members of the Board of
Directors of the Company) approves such Affiliate Transaction and, in its good
faith judgment, believes that such Affiliate Transaction complies with clauses
(a) (ii) and (iii) of this paragraph as evidenced by a Board Resolution and (c)
with respect to an Affiliate Transaction involving aggregate payments or value
in excess of $25 million, the Company obtains a written opinion from an
independent appraisal firm to the effect that such Affiliate Transaction is
fair, from a financial point of view.
Notwithstanding the foregoing limitation, the Company may enter into or
suffer to exist the following: (i) any transaction pursuant to any contract in
existence on the Issue Date; (ii) any transaction or series of transactions
between the Company and one or more of its Restricted Subsidiaries or between
two or more of its Restricted Subsidiaries; (iii) any Restricted Payment
permitted to be made pursuant to " -- Limitation on Restricted Payments;" (iv)
the payment of compensation (including, amounts paid pursuant to employee
benefit plans) for the personal services of officers, directors and employees of
the Company or any of its Restricted Subsidiaries, so long as the Board of
Directors of the Company in good faith shall have approved the terms thereof and
deemed the services theretofore or thereafter to be performed for such
compensation or fees to be fair consideration therefor; and (v) loans and
advances to employees made in the ordinary course of business and consistent
with past practice of the Company or such Restricted Subsidiary, as the case may
be, provided, that such loans and advances do not exceed $15 million at any one
time outstanding.
OWNERSHIP OF VANGUARD CELLULAR FINANCIAL CORP. The Company will at all
times maintain its direct 100% ownership of the Capital Stock of Vanguard
Cellular Financial Corp., the primary obligor with respect to the Credit
Facility.
MERGER, CONSOLIDATION AND SALE OF ASSETS
The Company will not merge or consolidate with or into any other entity
(other than a merger of a Restricted Subsidiary into the Company) or sell,
transfer, assign, lease, convey or otherwise dispose of all or substantially all
of its Property in any one transaction or series of transactions unless: (a) the
entity formed by or surviving any such consolidation or merger (if the Company
is not the surviving entity) or the Person to which such sale, transfer,
assignment, lease or conveyance is made (the "Surviving Entity") shall be a
corporation organized and existing under the laws of the United States of
America or a State thereof or the District of Columbia and such corporation
expressly assumes, by supplemental indenture in form satisfactory to the
Trustee, executed and delivered to the Trustee by such corporation, the due and
punctual payment of the principal of, premium, if any, and interest on all
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the Debentures, according to their tenor, and the due and punctual performance
and observance of all the covenants and conditions of the Indenture to be
performed by the Company; (b) in the case of a sale, transfer, assignment,
lease, conveyance or other disposition of all or substantially all of the
Company's Property, such Property shall have been transferred as an entirety or
virtually as an entirety to one Person; (c) immediately before and after giving
effect to such transaction or series of transactions, no Default or Event of
Default shall have occurred and be continuing; and (d) immediately after giving
effect to such transaction or series of transactions on a pro forma basis
(including, without limitation, any Indebtedness Incurred or anticipated to be
Incurred in connection with such transaction or series of transactions), the
Company or the Surviving Entity, as the case may be, would be able to Incur at
least $1.00 of additional Indebtedness under clause (a) of the first paragraph
of " -- Certain Covenants -- Limitation on Indebtedness."
In connection with any consolidation, merger or transfer contemplated by
this provision, the Company shall deliver, or cause to be delivered, to the
Trustee, in form and substance reasonably satisfactory to the Trustee, an
Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and the supplemental indenture in respect
thereto comply with this provision and that all conditions precedent herein
provided for relating to such transaction or transactions have been complied
with.
SEC REPORTS
Notwithstanding that the Company may not be required to remain subject to
the reporting requirements of Section 13 or 15(d) of the Exchange Act, the
Company shall file with the Commission and provide the Trustee and holders of
the Debentures with such annual reports and such information, documents and
other reports as are specified in Sections 13 and 15(d) of the Exchange Act and
applicable to a U.S. corporation subject to such Sections, such information,
documents and other reports to be so filed and provided at the times specified
for the filing of such information, documents and reports under such Sections.
EVENTS OF DEFAULT
Events of Default in respect of the Debentures as set forth in the
Indenture include: (i) failure to make the payment of any principal of, or
premium, if any, on any of the Debentures when the same becomes due and payable
at maturity, upon acceleration, redemption, optional redemption, required
purchase or otherwise; (ii) failure to make the payment of any interest on the
Debentures when the same becomes due and payable, and such failure continues for
a period of 30 days; (iii) failure to comply with any other covenant in the
Debentures or in the Indenture and such failure continues for 30 days after
written notice from the Trustee or the registered holders of not less than 25%
in aggregate principal amount of the Debentures then outstanding; (iv) a default
under any Indebtedness for borrowed money by the Company or any Restricted
Subsidiary which results in acceleration of the maturity of such Indebtedness,
or failure to pay any such Indebtedness at maturity, in an amount greater than
$15 million (the "cross acceleration provisions"); (v) any judgment or judgments
for the payment of money in an uninsured aggregate amount in excess of $15
million shall be rendered against the Company or any Restricted Subsidiary and
shall not be waived, satisfied or discharged for any period of 30 consecutive
days during which a stay of enforcement shall not be in effect (the "judgment
default provisions"); and (vi) certain events involving bankruptcy, insolvency
or reorganization of the Company or any Restricted Subsidiary (the "bankruptcy
provisions"). The Indenture provides that the Trustee may withhold notice to the
holders of the Debentures of any default (except in payment of principal or
premium, if any, or interest) if the Trustee considers it to be in the best
interest of the holders of the Debentures to do so.
The Indenture provides that if an Event of Default with respect to the
Debentures (other than an Event of Default resulting from certain events of
bankruptcy, insolvency or reorganization with respect to the Company or any
Restricted Subsidiary) shall have occurred and be continuing, the Trustee or the
registered holders of not less than 25% in aggregate principal amount of the
Debentures then outstanding may declare to be immediately due and payable the
principal amount of all the Debentures then outstanding, plus accrued but unpaid
interest to the date of acceleration; provided, however, that after such
acceleration but before a judgment or decree based on acceleration is obtained
by the Trustee, the registered holders of a majority in aggregate principal
amount of the Debentures then outstanding, may, under certain circumstances,
rescind and annul such acceleration if all Events of Default, other than the
nonpayment of accelerated principal, premium or interest, have been cured or
waived as provided in the Indenture. In case an Event of Default resulting from
certain events of bankruptcy, insolvency or reorganization with respect to the
Company or a Restricted Subsidiary shall occur, such amount with respect to all
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of the Debentures shall be due and payable immediately without any declaration
or other act on the part of the Trustee or the holders of the Debentures.
The registered holders of a majority in principal amount of the Debentures
then outstanding shall have the right to waive any existing Default with respect
to the Debentures or compliance with any provision of the Indenture and to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee, subject to certain limitations specified in the
Indenture.
No holder of the Debentures will have any right to institute any proceeding
with respect to the Indenture or for any remedy thereunder, unless such holder
shall have previously given to the Trustee written notice of a continuing Event
of Default and unless also the registered holders of at least 25% in aggregate
principal amount of the Debentures then outstanding shall have made written
request and offered reasonable indemnity to the Trustee to institute such
proceeding as a trustee, and unless the Trustee shall not have received from the
registered holders of a majority in aggregate principal amount of the Debentures
then outstanding a direction inconsistent with such request and shall have
failed to institute such proceeding within 60 days. However, such limitations do
not apply to a suit instituted by a holder of any Debenture for enforcement of
payment of the principal of and premium, if any, or interest on such Debenture
on or after the respective due dates expressed in such Debenture.
AMENDMENTS AND WAIVERS
The Indenture may be amended with the consent of the registered holders of
a majority in principal amount of the Debentures to be affected then outstanding
(including consents obtained in connection with a tender offer or exchange offer
for the Debentures) and any past default or compliance with any provisions may
also be waived with the consent of the registered holders of a majority in
principal amount of the Debentures to be affected then outstanding. However,
without the consent of each holder of an outstanding Debenture to be affected,
no amendment may, among other things, (i) reduce the amount of Debentures whose
holders must consent to an amendment, (ii) reduce the rate of or extend the time
for payment of interest on any Debenture, (iii) reduce the principal of or
extend the Stated Maturity of any Debenture, (iv) make any Debenture payable in
money other than that stated in the Debenture, (v) impair the right of any
holder of the Debentures to receive payment of principal of and interest on such
holder's Debentures on or after the due dates therefor or to institute suit for
the enforcement of any payment on or with respect to such holder's Debentures,
(vi) subordinate in right of payment, or otherwise subordinate, the Debentures
to any other obligation of the Company, (vii) make any change in the amendment
provisions which require each holder's consent or in the waiver provisions or
(viii) reduce the premium payable upon the redemption of any Debenture or change
the time at which any Debenture may or shall be redeemed as described under " --
Optional Redemption."
Without the consent of any holder of the Debentures, the Company and the
Trustee may amend the Indenture to cure any ambiguity, omission, defect or
inconsistency, to provide for the assumption by a successor corporation of the
obligations of the Company under the Indenture, to provide for uncertificated
Debentures in addition to or in place of certificated Debentures (provided that
the uncertificated Debentures are issued in registered form for purposes of
Section 163(f) of the Internal Revenue Code of 1986, as amended (the "Code"), or
in a manner such that the uncertificated Debentures are described in Section
163(f)(2)(B) of the Code), to add Guarantees with respect to the Debentures, to
secure the Debentures, to add to the covenants of the Company for the benefit of
the holders of the Debentures or to surrender any right or power conferred upon
the Company, to make any change that does not adversely affect the rights of any
holder of the Debentures or to comply with any requirement of the Commission in
connection with the qualification of the Indenture under the Trust Indenture
Act.
The consent of the holders of the Debentures is not necessary under the
Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to registered holders of the Debentures affected a notice
briefly describing such amendment. However, the failure to give such notice to
all holders of the Debentures, or any defect therein, will not impair or affect
the validity of the amendment.
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DEFEASANCE
The Company at any time may terminate all its obligations under the
Debentures and the Indenture ("legal defeasance"), except for certain
obligations, including those respecting the defeasance trust and obligations to
register the transfer or exchange of the Debentures, to replace mutilated,
destroyed, lost or stolen Debentures and to maintain a registrar and paying
agent in respect of the Debentures. The Company at any time may terminate its
obligations under the covenants described under " -- Certain Covenants" (other
than the covenant described under " -- Merger, Consolidation and Sale of
Assets"), the operation of the cross acceleration provisions, the bankruptcy
provisions with respect to Restricted Subsidiaries and the judgment default
provisions described under " -- Events of Default" above and the limitations
contained in clause (d) under " -- Certain Covenants -- Merger, Consolidation
and Sale of Assets" above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Debentures may not be accelerated
because of an Event of Default with respect thereto. If the Company exercises
its covenant defeasance option, payment of the Debentures may not be accelerated
because of an Event of Default specified in clause (iii)(with respect to the
covenants described under " -- Certain Covenants," other than the covenant
described under " -- Merger, Consolidation and Sale of Assets" above), (iv), (v)
or (vi) (with respect only to Restricted Subsidiaries) under " -- Events of
Default" above or because of the failure of the Company to comply with clause
(d) under " -- Merger, Consolidation and Sale of Assets" above.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal and interest on the
Debentures to maturity or an earlier redemption in accordance with the terms of
the Indenture and must comply with certain other conditions, including delivery
to the Trustee of an Opinion of Counsel to the effect that holders of the
Debentures of such Series will not recognize income, gain or loss for Federal
income tax purposes as a result of such deposit and defeasance and will be
subject to Federal income tax on the same amount and in the same manner and at
the same times as would have been the case if such deposit and defeasance had
not occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable Federal income tax law).
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms as well as any other capitalized terms used herein for which no
definition is provided.
"ADDITIONAL ASSETS" means (i) any Property (other than cash, cash
equivalents or securities) to be owned by the Company or a Restricted Subsidiary
and used in a Related Business, (ii) the costs of improving or developing any
Property owned by the Company or a Restricted Subsidiary which is used in a
Related Business and (iii) Investments in any other Person engaged primarily in
a Related Business (including the acquisition from third parties of Capital
Stock of such Person) as a result of which such other Person becomes a
Restricted Subsidiary or is merged or consolidated with or into the Company or
any Restricted Subsidiary.
"AFFILIATE" of any specified Person means (i) any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person or (ii) any other Person who is a director or
executive officer (a) of such specified Person, (b) of any Subsidiary of such
specified Person or (c) of any Person described in clause (i) above. For the
purposes of this definition, "control" when used with respect to any Person
means the power to direct the management and policies of such Person, directly
or indirectly, whether through the ownership of voting securities, by contract
or otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing. "Affiliate" shall also mean any beneficial owner
of shares representing 10% or more of the total voting power of the Voting Stock
(on a fully diluted basis) of the Company or of rights or warrants to purchase
such Voting Stock (whether or not currently exercisable) and any Person who
would be an Affiliate of any such beneficial owner pursuant to the first
sentence hereof.
"ANNUALIZED PRO FORMA EBITDA" means, with respect to any Person, the
product of such Person's Pro Forma EBITDA for the two most recent full fiscal
quarters for which financial statements are available multiplied by two.
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"ASSET SALE" means, with respect to any Person, any transfer, conveyance,
sale, lease or other disposition (including, without limitation, dispositions
pursuant to any consolidation or merger or a Sale and Leaseback Transaction) by
such Person or any of its Restricted Subsidiaries in any single transaction or
series of transactions of (a) shares of Capital Stock or other ownership
interests in another Person (including, with respect to the Company and its
Restricted Subsidiaries, Capital Stock of Unrestricted Subsidiaries) or (b) any
other Property of such Person or any of its Restricted Subsidiaries; PROVIDED,
HOWEVER, that the term "Asset Sale" shall not include: (i) the sale or transfer
of Temporary Cash Investments, inventory, accounts receivable or other Property
in the ordinary course of business; (ii) the liquidation of Property received in
settlement of debts owing to such Person or any of its Subsidiaries as a result
of foreclosure, perfection or enforcement of any Lien or debt, which debts were
owing to such Person or any of its Restricted Subsidiaries in the ordinary
course of business; (iii) when used with respect to the Company, any asset
disposition permitted pursuant to " -- Merger, Consolidation and Sale of Assets"
which constitutes a disposition of all or substantially all of the Company's
Property; (iv) the sale or transfer of any Property by such Person or any of its
Restricted Subsidiaries to such Person or any of its Restricted Subsidiaries;
(v) a disposition in the form of a Restricted Payment permitted to be made
pursuant to " -- Certain Covenants -- Limitation on Restricted Payments" or (vi)
a disposition with a Fair Market Value and a sale price of less than $5 million.
"ATTRIBUTABLE INDEBTEDNESS" means (i) Indebtedness deemed to be incurred in
respect of a Sale and Leaseback Transaction and shall be, at the date of
determination, the present value (discounted at the actual rate of interest
implicit in such transaction, compounded annually), of the total obligations of
the lessee for rental payments during the remaining term of the lease included
in such Sale and Leaseback Transaction (including any period for which such
lease has been extended) and (ii) the amount of any Indebtedness incurred by any
special purpose company or trust in connection with any Permitted Receivables
Facility.
"AVERAGE LIFE" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of the numbers of years (rounded to the nearest one-twelfth of
one year) from the date of determination to the dates of each successive
scheduled principal payment of such Indebtedness or redemption or similar
payment with respect to such Preferred Stock multiplied by the amount of such
payment by (ii) the sum of all such payments.
"BOARD RESOLUTION" means a copy of a resolution certified by the Secretary
or an Assistant Secretary of the Company to have been duly adopted by the Board
of Directors, to be in full force and effect on the date of such certification
and delivered to the Trustee.
"CAPITAL EXPENDITURE INDEBTEDNESS" means Indebtedness Incurred by any
Person to finance a capital expenditure so long as (i) such capital expenditure
is or should be included as an addition to "Property and Equipment, at cost" in
accordance with GAAP, and (ii) such Indebtedness is Incurred within 180 days of
the date such capital expenditure is made.
"CAPITAL LEASE OBLIGATIONS" means Indebtedness represented by obligations
under a lease that is required to be capitalized for financial reporting
purposes in accordance with GAAP and the amount of such Indebtedness shall be
the capitalized amount of such obligations determined in accordance with GAAP.
For purposes of " -- Certain Covenants -- Limitation on Liens", a Capital Lease
Obligation shall be deemed secured by a Lien on the property being leased.
"CAPITAL STOCK" means, with respect to any Person, any and all shares or
other equivalents (however designated) of corporate stock, partnership interests
or any other participation, right, warrant, option or other interest in the
nature of an equity interest in such Person, but excluding any debt security
convertible or exchangeable into such equity interest.
"CAPITAL STOCK SALE PROCEEDS" means the aggregate Net Cash Proceeds
received by the Company from the issue or sale (other than to a Subsidiary or an
employee stock ownership plan or trust established by the Company or any
Subsidiary) by the Company of any class of its Capital Stock (other than
Redeemable Stock) after the Issue Date.
"CHANGE OF CONTROL" means the occurrence of any of the following events:
(i) any "person" or "group" (within the meaning of Sections 13(d)(3) and
14(d)(2) of the Exchange Act or any successor provision to either of the
foregoing, including any group acting for the purpose of acquiring, holding or
disposing of securities within the meaning of Rule 13d-5(b)(1) under the
Exchange Act) other than one or more of the Permitted Holders is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of 40% or
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more of the total voting power of the Voting Stock (on a fully diluted basis) of
the Company, (ii) during any period of two consecutive years, individuals who at
the beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election by the Board of Directors of the
Company or whose nomination for election by the shareholders of the Company was
approved by a vote of 66 2/3% of the directors of the Company then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for any
reason to constitute a majority of the Board of Directors of the Company then in
office, (iii) the Company consolidates or merges with or into any other Person
(other than one or more Permitted Holders) or any other Person (other than one
or more Permitted Holders) consolidates or merges with or into the Company, in
either case, other than a consolidation or merger with a Wholly Owned Subsidiary
in which all of the Voting Stock of the Company outstanding immediately prior to
the effectiveness thereof is changed into or exchanged for substantially the
same consideration or (iv) the Company sells, conveys, transfers or leases,
directly or indirectly, all or substantially all of its assets (other than a
transfer of such assets as an entirety or virtually as an entirety to a Wholly
Owned Subsidiary or one or more Permitted Holders).
"CHANGE OF CONTROL TRIGGERING EVENT" means the occurrence of both a Change
of Control and a Rating Decline with respect to the Debentures.
"CONSOLIDATED INTEREST EXPENSE" means, for any Person (or in the case of
the Company, the Company and its Restricted Subsidiaries), for any period, the
amount of interest in respect of Indebtedness (including amortization of
original issue discount, fees payable in connection with financings, including
commitment, availability and similar fees, and amortization of debt issuance
costs, non-cash interest payments on any Indebtedness and the interest portion
of any deferred payment obligation and after taking into account the effect of
elections made under, and the net costs associated with, any Interest Rate
Agreement, however denominated, with respect to such Indebtedness), the amount
of Redeemable Dividends, the amount of Preferred Stock dividends in respect of
all Preferred Stock of Subsidiaries of such Person held other than by such
Person or a Subsidiary of such Person, commissions, discounts and other fees and
charges owed with respect to letters of credit and bankers' acceptance
financing, and the interest component of rentals in respect of any Capital Lease
Obligation or Sale and Leaseback Transaction paid, accrued or scheduled to be
paid or accrued by such Person during such period, determined on a consolidated
basis in accordance with GAAP. For purposes of this definition, interest on a
Capital Lease Obligation or a Sale and Leaseback Transaction shall be deemed to
accrue at an interest rate reasonably determined by such Person to be the rate
of interest implicit in such Capital Lease Obligation or Sale and Leaseback
Transaction in accordance with GAAP consistently applied.
"CONSOLIDATED NET INCOME" of a Person means for any period, the net income
(loss) of such Person and its Subsidiaries; PROVIDED, HOWEVER, that there shall
not be included in such Consolidated Net Income (i) with respect to the Company,
any net income (loss) of any Person if such Person is not a Restricted
Subsidiary, except that (a) subject to the limitations contained in clause (iv)
below, the Company's equity in the net income of any such Person for such period
shall be included in such Consolidated Net Income up to the aggregate amount of
cash actually distributed by such Person during such period to the Company or a
Restricted Subsidiary as a dividend or other distribution (subject, in the case
of a dividend or other distribution to a Restricted Subsidiary, to the
limitations contained in clause (iii) below) and (b) the Company's equity in a
net loss of any such Person (other than an Unrestricted Subsidiary) for such
period shall be included in determining such Consolidated Net Income, (ii) any
net income (loss) of any Person acquired by such Person or a Subsidiary of such
Person in a pooling of interests transaction for any period prior to the date of
such acquisition, (iii) with respect to the Company, any net income (loss) of
any Restricted Subsidiary if such Subsidiary is subject to restrictions,
directly or indirectly, on the payment of dividends or the making of
distributions by such Restricted Subsidiary, directly or indirectly, to the
Company, except that (a) subject to the limitations contained in clause (iv)
below, the Company's equity in the net income of any such Restricted Subsidiary
for such period shall be included in such Consolidated Net Income up to the
aggregate amount of cash that could have been distributed by such Restricted
Subsidiary during such period to the Company or another Restricted Subsidiary as
a dividend (subject, in the case of a dividend to another Restricted Subsidiary,
to the limitation contained in this clause) and (b) the Company's equity in a
net loss of any such Restricted Subsidiary for such period shall be included in
determining such Consolidated Net Income, (iv) any gain (but not loss) realized
upon the sale or other disposition of any Property of such Person or its
consolidated Subsidiaries (including pursuant to any Sale and Leaseback
Transaction) which is not sold or otherwise disposed of in the ordinary course
of business, (v) any extraordinary gain or loss and (vi) the cumulative effect
of a change in accounting principles.
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Notwithstanding the provisions of clause (iii) in the preceding paragraph,
in the event that Consolidated Net Income is being calculated with respect to
the Company or any Surviving Entity (a) for purposes of determining whether the
Company or any Surviving Entity could incur at least $1.00 of additional
Indebtedness pursuant to clause (a) of the first paragraph of " -- Certain
Covenants -- Limitation on Indebtedness" for purposes of (i) clause (b) of the
first sentence under " -- Certain Covenants -- Limitation on Restricted
Payments," (ii) clause (d) under " -- Merger, Consolidation and Sale of Assets"
or (iii) the definition of "Unrestricted Subsidiary" or (b) for purposes of
calculating Cumulative EBITDA pursuant to clause (c) of the first sentence of
" -- Certain Covenants -- Limitation on Restricted Payments," restrictions on
the payment of dividends or the making of distributions to the Company by
Vanguard Cellular Financial Corp. referred to in clause (1)(iii) of the second
sentence under " -- Certain Covenants -- Limitation on Restrictions on
Distributions From Restricted Subsidiaries" shall be disregarded.
Notwithstanding the provisions of clause (iii) in the first paragraph of
this definition, in the event that Consolidated Net Income is being calculated
with respect to the Company for purposes of determining whether the Incurrence
of Indebtedness proposed to be Incurred is permissible under clause (a) of the
first paragraph of " -- Certain Covenants -- Limitation on Indebtedness," then
(i) if such proposed Indebtedness is proposed to be Incurred by Vanguard
Cellular Financial Corp. or any Subsidiary thereof that is a Restricted
Subsidiary, restrictions on the payment of dividends or the making of
distributions to the Company by Vanguard Cellular Financial Corp. referred to in
clause (1)(iii) of the second sentence under " -- Certain
Covenants -- Limitation on Restrictions on Distributions From Restricted
Subsidiaries" shall be disregarded and (ii) if such proposed Indebtedness is
proposed to be Incurred by the Company or any Subsidiary of the Company (other
than Vanguard Cellular Financial Corp. and its Subsidiaries) that is a
Restricted Subsidiary, restrictions on the payment of dividends or the making of
distributions to the Company by Vanguard Cellular Financial Corp. referred to in
clause (1)(iii) of the second sentence under " -- Certain
Covenants -- Limitation on Restrictions on Distributions From Restricted
Subsidiaries" shall be disregarded, PROVIDED that the lenders pursuant to the
Credit Facility modify the Credit Facility to allow for the payment of dividends
or the making of distributions to the Company in amounts sufficient to pay the
scheduled principal and interest payments on such proposed Indebtedness when due
and payable or, in the case of a proposed Incurrence of Indebtedness by a
Subsidiary, in an amount sufficient to fund capital contributions or other
Investments to or in such Subsidiary in amounts sufficient to pay the scheduled
principal and interest payments on such proposed Indebtedness when due and
payable.
"CREDIT FACILITY" means the $675 million credit facility pursuant to the
Amended and Restated Loan Agreement dated as of December 23, 1994 among the
Company, various lenders, and The Toronto-Dominion Bank and The Bank of New York
and any extensions, revisions, refinancings or replacements thereof by a bank or
syndicate of banks.
"CUMULATIVE EBITDA" means at any date of determination the cumulative
EBITDA of the Company from and after the last day of the fiscal quarter of the
Company immediately preceding the Issue Date to the end of the fiscal quarter
immediately preceding the date of determination or, if such cumulative EBITDA
for such period is negative, minus the amount by which such cumulative EBITDA is
less than zero.
"CUMULATIVE INTEREST EXPENSE" means at any date of determination the
aggregate amount of Consolidated Interest Expense paid, accrued or scheduled to
be paid or accrued by the Company and its Restricted Subsidiaries from the last
day of the fiscal quarter of the Company immediately preceding the Issue Date to
the end of the fiscal quarter immediately preceding the date of determination.
"DEFAULT" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"EBITDA" means, for any Person, for any period, an amount equal to (A) the
sum of (i) Consolidated Net Income for such period, plus (ii) the provision for
taxes for such period based on income or profits to the extent such income or
profits were included in computing Consolidated Net Income and any provision for
taxes utilized in computing net loss under clause (i) hereof, plus (iii)
Consolidated Interest Expense for such period, plus (iv) depreciation for such
period on a consolidated basis, plus (v) amortization of intangibles for such
period on a consolidated basis, plus (vi) any other non-cash items reducing
Consolidated Net Income for such period, minus (B) all non-cash items increasing
Consolidated Net Income for such period, all for such Person and its
Subsidiaries determined in accordance with GAAP consistently applied, except
that with respect to the Company each of the foregoing items shall be determined
on a consolidated basis with respect to the Company and its Restricted
Subsidiaries only.
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"EVENT OF DEFAULT" has the meaning set forth under " -- Events of Default".
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"FAIR MARKET VALUE" means with respect to any Property, the price which
could be negotiated in an arm's-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under undue
pressure or compulsion to complete the transaction. Fair Market Value will be
determined, except as otherwise provided, (i) if such property or asset has a
Fair Market Value of less than $15 million, by any Officer of the Company or
(ii) if such property or asset has a Fair Market Value in excess of $15 million,
by a majority of the Board of Directors of the Company and evidenced by a Board
Resolution, dated within 30 days of the relevant transaction.
"GAAP" means United States generally accepted accounting principles as in
effect on the Issue Date, unless stated otherwise.
"GEOTEK MANAGEMENT CONSULTING AGREEMENT" means the management consulting
agreement between the Company and Geotek Communications, Inc. as in effect on
the Issue Date and renewals or extensions thereof on terms no less favorable to
the Company and its Restricted Subsidiaries.
"GUARANTEE" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness of such other Person (whether arising by virtue of partnership
arrangements, or by agreements to keep-well, to purchase assets, goods,
securities or services, to take-or-pay or to maintain financial statement
conditions or otherwise) or (ii) entered into for the purpose of assuring in any
other manner the obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"HEDGING OBLIGATION" of any Person means any obligation of such Person
pursuant to any Interest Rate Agreement, foreign exchange contract, currency
swap agreement, currency option or any other similar agreement or arrangement.
"INCUR" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by merger, conversion, exchange or otherwise),
extend, assume, Guarantee or become liable in respect of such Indebtedness or
other obligation or the recording, as required pursuant to GAAP or otherwise, of
any such Indebtedness or obligation on the balance sheet of such Person (and
"Incurrence", "Incurred", "Incurrable" and "Incurring" shall have meanings
correlative to the foregoing); PROVIDED, HOWEVER, that a change in GAAP that
results in an obligation of such Person that exists at such time, and is not
theretofore classified as Indebtedness, becoming Indebtedness shall not be
deemed an Incurrence of such Indebtedness; PROVIDED FURTHER, that solely for
purposes of determining compliance with "Certain Covenants -- Limitation on
Indebtedness", amortization of debt discount shall not be deemed to be the
Incurrence of Indebtedness, provided, that in the case of Indebtedness sold at a
discount, the amount of such Indebtedness Incurred shall at all times be the
aggregate principal amount at Stated Maturity.
"INDEBTEDNESS" means (without duplication), with respect to any Person, any
indebtedness, secured or unsecured, contingent or otherwise, which is for
borrowed money (whether or not the recourse of the lender is to the whole of the
assets of such Person or only to a portion thereof), or evidenced by bonds,
notes, debentures or similar instruments or representing the balance deferred
and unpaid of the purchase price of any property (excluding any balances that
constitute customer advance payments and deposits, accounts payable or trade
payables, and other accrued liabilities arising in the ordinary course of
business) if and to the extent any of the foregoing indebtedness would appear as
a liability upon a balance sheet of such Person prepared in accordance with
GAAP, and shall also include, to the extent not otherwise included (i) any
Capital Lease Obligations, (ii) Indebtedness of other Persons secured by a Lien
to which the Property owned or held by such first Person is subject, whether or
not the obligation or obligation secured thereby shall have been assumed (the
amount of such Indebtedness being deemed to be the lesser of the value of such
property or assets or the amount of the Indebtedness so secured), (iii)
Guarantees of Indebtedness of other Persons, (iv) any Redeemable Stock
(PROVIDED, HOWEVER, that Redeemable Stock of the Company shall not constitute
Indebtedness if such Redeemable Stock may not be redeemed prior to the first
anniversary of the Stated Maturity of the Debentures), (v) any Attributable
Indebtedness, (vi) all reimbursement obligations of such Person in respect of
letters of credit, bankers' acceptances or other similar
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instruments or credit transactions issued for the account of such Person, (vii)
in the case of the Company, Preferred Stock of its Restricted Subsidiaries and
(viii) to the extent not otherwise included in clauses (i) through (vii) of this
paragraph, any payment obligations of any such Person at the time of
determination under any Hedging Obligation. For purposes of this definition, the
maximum fixed repurchase price of any Redeemable Stock that does not have a
fixed repurchase price shall be calculated in accordance with the terms of such
Redeemable Stock as if such Redeemable Stock were repurchased on any date on
which Indebtedness shall be required to be determined pursuant to the Indenture;
PROVIDED, HOWEVER, that if such Redeemable Stock is not then permitted to be
repurchased, the repurchase price shall be the book value of such Redeemable
Stock. The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability of any contingent obligations in respect thereof
at such date. For purposes of this definition, the amount of the payment
obligation with respect to any Hedging Obligation shall be an amount equal to
(i) zero, if such obligation is an Interest Rate Obligation permitted pursuant
to clause (vi) of the second paragraph of " -- Certain Covenants -- Limitation
on Indebtedness" or (ii) the notional amount of such Hedging Obligation, if such
Hedging Obligation is not an Interest Rate Agreement so permitted.
"INTEREST RATE AGREEMENT" means, for any Person, any interest rate swap
agreement, interest rate cap agreement, interest rate collar agreement or other
similar agreement.
"INVESTMENT" by any Person means any direct or indirect loan, advance or
other extension of credit or capital contribution (by means of transfers of cash
or other Property to others or payments for Property or services for the account
or use of others, or otherwise) to, or Incurrence of a Guarantee of any
obligation of, or purchase or acquisition of Capital Stock, bonds, notes,
debentures or other securities or evidence of Indebtedness issued by, any other
Person. In determining the amount of any Investment made by transfer of any
Property other than cash, such Property shall be valued at its Fair Market Value
at the time of such Investment.
"INVESTMENT GRADE RATING" means a rating equal to or higher than Baa3 (or
the equivalent) by Moody's Investors Service, Inc. (or any successor to the
rating agency business thereof) and BBB- (or the equivalent) by Standard &
Poor's Ratings Group (or any successor to the rating agency business thereof).
"ISSUE DATE" means the date on which the Debentures are initially issued.
"LEVERAGE RATIO" is defined as the ratio of (i) the outstanding
Indebtedness of a Person and its Subsidiaries (or in the case of the Company,
its Restricted Subsidiaries) divided by (ii) the Annualized Pro Forma EBITDA of
such Person.
"LIEN" means, with respect to any Property of any Person, any mortgage or
deed of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien, charge, easement (other than any easement not materially
impairing usefulness or marketability), encumbrance, preference, priority, or
other security agreement or preferential arrangement of any kind or nature
whatsoever on or with respect to such Property (including any Capital Lease
Obligation, conditional sale or other title retention agreement having
substantially the same economic effect as any of the foregoing or any Sale and
Leaseback Transaction).
"NET AVAILABLE CASH" from an Asset Sale means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only as
and when received, but excluding any other consideration received in the form of
assumption by the acquiring person of Indebtedness or other obligations relating
to such Properties or assets or received in any other noncash form) in each case
net of all legal, title and recording tax expenses, commissions and other fees
and expenses incurred, and all Federal, state, provincial, foreign and local
taxes required to be accrued as a liability under GAAP, as a consequence of such
Asset Sale, and in each case net of all payments made on any Indebtedness which
is secured by any assets subject to such Asset Sale, in accordance with the
terms of any Lien upon or other security agreement of any kind with respect to
such assets, or which must by its terms, or in order to obtain a necessary
consent to such Asset Sale, or by applicable law be repaid out of the proceeds
from such Asset Sale, and net of all distributions and other payments required
to be made to minority interest holders in Subsidiaries or joint ventures as a
result of such Asset Sale.
"NET CASH PROCEEDS" with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale, net of attorney's fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
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"OFFICER" means the Chief Executive Officer, the President, the Chief
Financial Officer or any Executive Vice President of the Company.
"OFFICERS' CERTIFICATE" means a certificate signed by two Officers of the
Company, at least one of whom shall be the principal executive officer or
principal financial officer of the Company, and delivered to the Trustee.
"OPINION OF COUNSEL" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"PERMITTED HOLDERS" means Haynes G. Griffin, Stephen R. Leeolou, L.
Richardson Preyer, Jr., Stuart S. Richardson, their estates, spouses, ancestors,
and lineal descendants, the legal representatives of any of the foregoing and
the trustee of any bona fide trust of which the foregoing are the sole
beneficiaries or the grantors, or any Person of which the foregoing
"beneficially owns" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act)
voting securities representing at least 66 2/3% of the total voting power of all
classes of Capital Stock of such Person (exclusive of any matters as to which
class voting rights exist) and the Richardson Family.
"PERMITTED INVESTMENT" means an Investment by the Company or any Restricted
Subsidiary in (i) a Restricted Subsidiary or a Person which will, upon the
making of such Investment, become a Restricted Subsidiary; PROVIDED, HOWEVER,
that the primary business of such Restricted Subsidiary is a Related Business;
(ii) another Person if as a result of such Investment such other Person is
merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted Subsidiary;
PROVIDED, HOWEVER, that such Person's primary business is a Related Business;
(iii) Temporary Cash Investments; (iv) receivables owing to the Company or any
Restricted Subsidiary, if created or acquired in the ordinary course of business
and payable or dischargeable in accordance with customary trade terms; (v)
payroll, travel and similar advances to cover matters that are expected at the
time of such advances ultimately to be treated as expenses for accounting
purposes and that are made in the ordinary course of business; (vi) loans and
advances to employees made in the ordinary course of business consistent with
past practice of the Company or such Restricted Subsidiary, as the case may be,
PROVIDED, that such loans and advances do not exceed $15 million at any one time
outstanding; and (vii) stock, obligations or securities received in settlement
of debts created in the ordinary course of business and owing to the Company or
any Restricted Subsidiary or in satisfaction of judgments.
"PERMITTED LIENS" means (i) Liens on the Property of the Company or any
Restricted Subsidiary existing on the Issue Date; (ii) Liens to secure
Indebtedness permitted to be Incurred under clause (ii) of the second paragraph
of " -- Certain Covenants -- Limitation on Indebtedness"; (iii) Liens on the
Property of the Company or any Restricted Subsidiary to secure any extension,
renewal, refinancing, replacement or refunding (or successive extensions,
renewals, refinancings, replacements or refundings), in whole or in part, of any
Indebtedness secured by Liens referred to in any of clauses (i), (ii), (vii) or
(x); PROVIDED, HOWEVER, that any such Lien will be limited to all or part of the
same Property that secured the original Lien (plus improvements on such
Property) and the aggregate principal amount of Indebtedness that is secured by
such Lien will not be increased to an amount greater than the sum of (A) the
outstanding principal amount, or, if greater, the committed amount, of the
Indebtedness secured by Liens described under clauses (i), (ii), (vii) or (x) at
the time the original Lien became a Permitted Lien under the Indenture and (B)
an amount necessary to pay any premiums, fees and other expenses incurred by the
Company in connection with such refinancing, refunding, extension, renewal or
replacement; (iv) Liens for taxes, assessments or governmental charges or levies
on the Property of the Company or any Restricted Subsidiary if the same shall
not at the time be delinquent or thereafter can be paid without penalty, or are
being contested in good faith and by appropriate proceedings; (v) Liens imposed
by law, such as carriers', warehousemen's and mechanics' Liens and other similar
Liens on the Property of the Company or any Restricted Subsidiary arising in the
ordinary course of business and securing payment of obligations which are not
more than 60 days past due or are being contested in good faith and by
appropriate proceedings; (vi) Liens on the Property of the Company or any
Restricted Subsidiary Incurred in the ordinary course of business to secure
performance of obligations with respect to statutory or regulatory requirements,
performance or return-of-money bonds, surety bonds or other obligations of a
like nature and Incurred in a manner consistent with industry practice; (vii)
Liens on Property at the time the Company or any Restricted Subsidiary acquired
such Property, including any acquisition by means of a merger or consolidation
with or into the Company or any Restricted Subsidiary; PROVIDED, HOWEVER, that
such Lien shall not have been Incurred in anticipation or in connection with
such transaction or series of related transactions pursuant to which such
Property was acquired by the Company or any Restricted Subsidiary; (viii) other
Liens on the Property of the Company or any Restricted Subsidiary incidental to
the conduct of their respective businesses or the ownership of their
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respective Properties which were not created in connection with the Incurrence
of Indebtedness or the obtaining of advances or credit and which do not in the
aggregate materially detract from the value of their respective Properties or
materially impair the use thereof in the operation of their respective
businesses; (ix) pledges or deposits by the Company or any Restricted Subsidiary
under workmen's compensation laws, unemployment insurance laws or similar
legislation, or good faith deposits in connection with bids, tenders, contracts
(other than for the payment of Indebtedness) or leases to which the Company or
any Restricted Subsidiary is party, or deposits to secure public or statutory
obligations of the Company, or deposits for the payment of rent, in each case
Incurred in the ordinary course of business; (x) Liens on the Property of a
Person at the time such Person becomes a Restricted Subsidiary; PROVIDED,
HOWEVER, that any such Lien may not extend to any other Property of the Company
or any other Restricted Subsidiary which is not a direct Subsidiary of such
Person; PROVIDED FURTHER, HOWEVER, that any such Lien was not Incurred in
anticipation of or in connection with the transaction or series of related
transactions pursuant to which such Person became a Restricted Subsidiary, or
(xi) utility easements, building restrictions and such other encumbrances or
charges against real property as are of a nature generally existing with respect
to properties of a similar character.
"PERMITTED RECEIVABLES FACILITY" means a receivables financing facility
pursuant to which any Restricted Subsidiary sells accounts receivable to a
special purpose company or trust and in connection therewith such company or
trust incurs Indebtedness secured by, or issues interests supported by, such
accounts receivable.
"PERMITTED REFINANCING INDEBTEDNESS" means any renewals, extensions,
substitutions, refinancings or replacements of any Indebtedness, including any
successive extensions, renewals, substitutions, refinancings or replacements so
long as (i) the aggregate amount of Indebtedness represented thereby is not
increased by such renewal, extension, substitution, refinancing or replacement
(other than to finance fees and expenses, including any premium and defeasance
costs), (ii) the Average Life of such Indebtedness is equal to or greater than
the Average Life of the Indebtedness being refinanced, (iii) the Stated Maturity
of such Indebtedness is no earlier than the Stated Maturity of the Indebtedness
being refinanced and (iv) the new Indebtedness shall not be senior in right of
payment to the Indebtedness that is being extended, renewed, substituted,
refinanced or replaced; PROVIDED, that Permitted Refinancing Indebtedness shall
not include (a) Indebtedness of a Subsidiary that refinances Indebtedness of the
Company or (b) Indebtedness of the Company or a Restricted Subsidiary that
refinances Indebtedness of an Unrestricted Subsidiary.
"PERSON" means any individual, corporation, company (including any limited
liability company), partnership, joint venture, trust, unincorporated
organization or government or any agency or political subdivision thereof.
"PREFERRED STOCK" means any Capital Stock of a Person, however designated,
which entitles the holder thereof to a preference with respect to dividends,
distributions or liquidation proceeds of such Person over the holders of other
Capital Stock issued by such Person.
"PRO FORMA EBITDA" means for any Person, for any period, the EBITDA of such
Person as determined on a consolidated basis in accordance with GAAP
consistently applied after giving effect to the following: (i) if, during or
after such period, such Person or any of its Subsidiaries shall have made any
disposition of assets, Pro Forma EBITDA of such Person and its Subsidiaries
shall be computed so as to give pro forma effect to such Asset Sale and (ii) if,
during or after such period, such Person or any of its Subsidiaries completes an
acquisition of any Person or business which immediately after such acquisition
is a Subsidiary of such Person or whose assets are held directly by such Person
or a Subsidiary of such Person, Pro Forma EBITDA shall be computed so as to give
pro forma effect to the acquisition of such Person or business; PROVIDED,
HOWEVER, that, with respect to the Company, all of the foregoing references to
"Subsidiary" or "Subsidiaries" shall be deemed to refer only to the "Restricted
Subsidiaries" of the Company.
"PROPERTY" means, with respect to any Person, any interest of such Person
in any kind of property or asset, whether real, personal or mixed, or tangible
or intangible, including, without limitation, Capital Stock in, and other
securities of, any other Person (but excluding Capital Stock or other securities
issued by such first mentioned Person).
"RATING AGENCIES" mean Standard & Poor's Ratings Group, a division of
McGraw Hill, Inc., and Moody's Investors Service, Inc. or any successor to the
respective rating agency businesses thereof.
"RATING DATE" means the date which is 90 days prior to the earlier of (i) a
Change of Control and (ii) public notice of the occurrence of a Change of
Control or of the intention of the Company to effect a Change of Control.
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"RATING DECLINE" means, with respect to the Debentures, the occurrence of
the following on, or within 90 days after, the date of public notice of the
occurrence of a Change of Control or of the intention by the Company to effect a
Change of Control (which period shall be extended so long as the rating of such
Debentures is under publicly announced consideration for possible downgrade by
any of the Rating Agencies): (a) in the event the Debentures are assigned an
Investment Grade Rating by both Rating Agencies on the Rating Date, the rating
of the Debentures by one of the Rating Agencies shall be below an Investment
Grade Rating; or (b) in the event the Debentures are rated below an Investment
Grade Rating by at least one of the Rating Agencies on the Rating Date, the
rating of the Debentures by at least one of the Rating Agencies shall be
decreased by one or more gradations (including gradations within rating
categories as well as between rating categories).
"REDEEMABLE DIVIDEND" means, for any dividend with regard to Redeemable
Stock, the quotient of the dividend divided by the difference between one and
the maximum statutory federal income tax rate (expressed as a decimal number
between 1 and 0) then applicable to the issuer of such Redeemable Stock.
"REDEEMABLE STOCK" means, with respect to any Person, any Capital Stock
that by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or otherwise (i) matures or is mandatorily
redeemable pursuant to a sinking fund obligation or otherwise, (ii) is or may
become redeemable or repurchaseable at the option of the holder thereof, in
whole or in part, or (iii) is convertible or exchangeable for Indebtedness.
"RELATED BUSINESS" means any business directly related to the ownership,
development, operation and acquisition of telecommunications systems.
"RELATED ENTITY" means a Person substantially all of whose Property
consists of Subsidiaries and Investments in Persons, the primary businesses of
which are Related Businesses.
"RESTRICTED PAYMENT" means (i) any dividend or distribution (whether made
in cash, property or securities) declared or paid on or with respect to any
shares of Capital Stock of the Company or Capital Stock of any Restricted
Subsidiary except for any dividend or distribution which is made solely to the
Company or a Restricted Subsidiary (and, if such Restricted Subsidiary is not a
Wholly Owned Subsidiary, to the other shareholders of such Restricted Subsidiary
on a pro rata basis) or dividends or distributions payable solely in shares of
Capital Stock (other than Redeemable Stock) of the Company; (ii) a payment made
by the Company or any Restricted Subsidiary to purchase, redeem, acquire or
retire any Capital Stock of the Company or Capital Stock of any Affiliate of the
Company (other than a Restricted Subsidiary) or any warrants, rights or options
to directly or indirectly purchase or acquire any such Capital Stock or any
securities exchangeable for or convertible into any such Capital Stock; (iii) a
payment made by the Company or any Restricted Subsidiary to redeem, repurchase,
defease or otherwise acquire or retire for value, prior to any scheduled
maturity, scheduled sinking fund or mandatory redemption payment (other than the
purchase, repurchase, or other acquisition of any Indebtedness subordinate in
right of payment to the Debentures purchased in anticipation of satisfying a
sinking fund obligation, principal installment or final maturity, in each case
due within one year of the date of acquisition), Indebtedness of the Company
which is subordinate (whether pursuant to its terms or by operation of law) in
right of payment to the Debentures; or (iv) an Investment (other than Permitted
Investments) in any Person.
"RESTRICTED SUBSIDIARY" means (i) any Subsidiary of the Company after the
Issue Date unless such Subsidiary shall have been designated an Unrestricted
Subsidiary as permitted or required pursuant to the definition of "Unrestricted
Subsidiary" and (ii) an Unrestricted Subsidiary which is redesignated as a
Restricted Subsidiary as permitted pursuant to the definition of "Unrestricted
Subsidiary".
"RICHARDSON FAMILY" means, collectively, the descendants of Lunsford
Richardson, Sr., and any of their respective spouses, estates, lineal
descendants, heirs, executors, personal representatives, administrators, trusts
for any of their benefit and charitable foundations to which shares of the
Company's Capital Stock beneficially owned by any of the foregoing have been
transferred.
"SALE AND LEASEBACK TRANSACTION" means, with respect to any Person, any
direct or indirect arrangement pursuant to which Property is sold or transferred
by such Person or a Subsidiary of such Person and is thereafter leased back from
the purchaser or transferee thereof by such Person or one of its Subsidiaries.
"STATED MATURITY" means, with respect to any security, the date specified
in such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder
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thereof upon the happening of any contingency beyond the control of the issuer
unless such contingency has occurred).
"SUBSIDIARY" of any specified Person means any corporation, partnership,
joint venture, association or other business entity, whether now existing or
hereafter organized or acquired, (i) in the case of a corporation, of which at
least 50% of the total voting power of the Voting Stock is held by such
first-named Person or any of its Subsidiaries and such first-named Person or any
of its Subsidiaries has the power to direct the management, policies and affairs
thereof; or (ii) in the case of a partnership, joint venture, association, or
other business entity, with respect to which such first-named Person or any of
its Subsidiaries has the power to direct or cause the direction of the
management and policies of such entity by contract or otherwise if in accordance
with generally accepted accounting principles such entity is consolidated with
the first-named Person for financial statement purposes.
"TEMPORARY CASH INVESTMENTS" means any of the following: (i) Investments in
U.S. Government Obligations maturing within 90 days of the date of acquisition
thereof, (ii) Investments in time deposit accounts, certificates of deposit and
money market deposits maturing within 90 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America or any state thereof having capital, surplus and
undivided profits aggregating in excess of $500,000,000 and whose long-term debt
is rate "A-3" or "A-" or higher according to Moody's Investors Service, Inc. or
Standard & Poor's Ratings Group (or such similar equivalent rating by at least
one "nationally recognized statistical rating organization" (as defined in Rule
436 under the Securities Act)), (iii) repurchase obligations with a term of not
more than 7 days for underlying securities of the types described in clause (i)
entered into with a bank meeting the qualifications described in clause (ii)
above, and (iv) Investments in commercial paper, maturing not more than 90 days
after the date of acquisition, issued by a corporation (other than an Affiliate
of the Company) organized and in existence under the laws of the United States
of America with a rating at the time as of which any Investment therein is made
of "P-1" (or higher) according to Moody's Investors Service, Inc. or "A-1" (or
higher) according to Standard & Poor's Ratings Group (or such similar equivalent
rating by at least one "nationally recognized statistical rating organization"
(as defined in Rule 436 under the Securities Act)).
"UNRESTRICTED SUBSIDIARY" means (a) Vanguard Cellular Services, Inc. and
any other Subsidiary of the Company in existence on the Issue Date that is not a
Restricted Subsidiary and (b) any Subsidiary of an Unrestricted Subsidiary. The
Company's Board of Directors may designate any Subsidiary of the Company or any
Restricted Subsidiary to be an Unrestricted Subsidiary if (i) the Subsidiary to
be so designated does not own any Capital Stock or Indebtedness of, or own or
hold any Lien on any Property of, the Company or any other Restricted
Subsidiary, (ii) the Subsidiary to be so designated is not obligated under any
Indebtedness or other obligation that, if in default, would result (with the
passage of time or notice or otherwise) in a default on any Indebtedness of the
Company or any Restricted Subsidiary and (iii) either (A) the Subsidiary to be
so designated has total assets of $1,000 or less or (B) such designation is
effective immediately upon such entity becoming a Subsidiary of the Company or
any Restricted Subsidiary. Unless so designated as an Unrestricted Subsidiary,
any Person that becomes a Subsidiary of the Company or of any Restricted
Subsidiary will be classified as a Restricted Subsidiary; PROVIDED, HOWEVER,
that such Subsidiary shall not be designated a Restricted Subsidiary and shall
be automatically classified as an Unrestricted Subsidiary if the Company would
be unable to Incur at least $1.00 of additional Indebtedness pursuant to the
first paragraph of " -- Certain Covenants -- Limitation on Indebtedness". Except
as provided in the second sentence of this paragraph, no Restricted Subsidiary
may be redesignated as an Unrestricted Subsidiary. The Company's Board of
Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary if, immediately after giving PRO FORMA effect to such designation,
(x) the Company could Incur at least $1.00 of additional indebtedness pursuant
to clause (a) of the first paragraph of " -- Certain Covenants -- Limitation on
Indebtedness" and (y) no Default or Event of Default shall have occurred and be
continuing or would result therefrom. Any such designation by the Company's
Board of Directors will be evidenced to the Trustee by filing with the Trustee a
copy of the Board Resolution giving effect to such designation and an Officers'
Certificate certifying (i) that such designation complies with the foregoing
provisions and (ii) giving the effective date of such designation, such filing
with the Trustee to occur within 75 days after the end of the fiscal quarter of
the Company in which such designation is made (or in the case of a designation
made during the last fiscal quarter of the Company's fiscal year, within 120
days after the end of such fiscal year).
"U.S. GOVERNMENT OBLIGATIONS" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment
S-61
<PAGE>
of which the full faith and credit of the United States of America is pledged
and which are not callable or redeemable at the issuer's option.
"VOTING STOCK" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
NOTICES
Notices to holders of Debentures will be given by mail to the addresses of
such holders as they may appear in the Security Register.
GOVERNING LAW
The Indenture and the Debentures are governed by and construed in
accordance with the internal laws of the State of New York without reference to
principles of conflicts of law.
THE TRUSTEE
The Bank of New York is the Trustee under the Indenture.
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the Trustee will
exercise such of the rights and powers vested in it under the Indenture and use
the same degree of care and skill in its exercise as a prudent Person would
exercise under the circumstances in the conduct of such Person's own affairs.
S-62
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement"), the Company has agreed to issue and sell to the
Underwriters listed below and each of the Underwriters has agreed to purchase,
the principal amount of Debentures set forth opposite its name below.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
UNDERWRITER DEBENTURES
<S> <C>
Salomon Brothers Inc ........................................................................................... $
Goldman, Sachs & Co.............................................................................................
NationsBanc Capital Markets, Inc................................................................................
Smith Barney Inc................................................................................................
Toronto Dominion Securities (USA) Inc...........................................................................
Total.................................................................................................... $
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions set forth therein. The
Underwriters will be obligated to purchase all the Debentures offered hereby if
any Debentures are purchased.
The Underwriters have advised the Company that they propose initially to
offer the Debentures to the public at the public offering price set forth on the
cover page of this Prospectus Supplement and to certain dealers at such price
less a concession not in excess of % of the principal amount of the
Debentures. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of % of such principal amount to certain other
dealers. After the initial public offering, the public offering price and such
concessions may be changed.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities and expenses, including liabilities
under the Securities Act, or contribute to payments the Underwriters may be
required to make in respect thereof.
The Company has been advised by the Underwriters that they presently intend
to make a market in the Debentures, as permitted by applicable laws and
regulations, although they are under no obligation to do so. There is no
existing market for the Debentures and there can be no assurance that a market
will develop. See "Risk Factors -- Absence of Active Trading Market."
Salomon Brothers Inc has from time to time rendered investment banking and
financial advisory services to the Company, for which it has received customary
fees. Toronto Dominion Securities (USA) Inc. and NationsBanc Capital Markets,
Inc. are affiliates of The Toronto-Dominion Bank, the Document Agent under the
Credit Facility, and NationsBank of North Carolina, N.A., a Co-Agent under the
Credit Facility, respectively. In addition, Toronto Dominion Securities (USA)
Inc., is an affiliate of Toronto-Dominion (Texas), Inc., the Collateral Agent
under the Credit Facility.
The Toronto-Dominion Bank and NationsBank of North Carolina, N.A. will
receive approximately $27.4 million of the net proceeds of the Offering, which
represents their proportionate share of the repayment by the Company of a
portion of the borrowings outstanding under the Credit Facility with the
proceeds of this Offering.
Under the Rules of Fair Practice of the National Association of Securities
Dealers, Inc. (the "NASD"), when more than 10 percent of the net proceeds of a
public offering of debt securities, not including underwriting compensation, are
to be paid to a member of the NASD participating in such public offering of debt
securities or an affiliate of such member, the yield at which the debt
securities are distributed to the public must be no lower than that recommended
by a "qualified independent underwriter" meeting certain standards. Toronto
Dominion Securities (USA) Inc. and NationsBanc Capital Markets, Inc. are members
of the NASD and are affiliates of The Toronto-Dominion Bank and NationsBank of
North Carolina, N.A., respectively, lenders under the Credit Facility. The
Toronto-Dominion Bank and NationsBank of North Carolina, N.A., will receive more
than 10 percent of the net proceeds from this Offering as a result of the use of
such proceeds to repay a portion of the borrowings under the Credit Facility.
See "Use of Proceeds." As a result, this Offering is being made in compliance
with paragraph (8) of Section 44(c) of The Corporate Financing Rule of the NASD
which relates to offerings where proceeds are directed to a member of the NASD.
Salomon Brothers Inc will act as a qualified independent underwriter in
connection with this Offering and assume the customary responsibilities of
acting as a qualified independent underwriter in pricing
S-63
<PAGE>
and conducting due diligence for this Offering. The Company has also agreed to
indemnify Salomon Brothers Inc against certain liabilities, including
liabilities under the Securities Act, and to afford Salomon Brothers Inc certain
rights of contribution.
LEGAL MATTERS
Certain legal matters in connection with the Offering, including with
respect to the legality of the Debentures offered hereby, will be passed upon
for the Company by Schell Bray Aycock Abel & Livingston L.L.P., Greensboro,
North Carolina. Certain legal matters will be passed upon for the Underwriters
by Cravath, Swaine & Moore, New York, New York. Certain additional legal matters
will be passed upon for the Company by Richard C. Rowlenson, Senior Vice
President and General Counsel for the Company. As of March 15, 1996, Mr.
Rowlenson beneficially owned 139,685 shares of the Company's Class A Common
Stock. Doris R. Bray, a partner of Schell Bray Aycock Abel & Livingston L.L.P.,
is a director of the Company and, as of March 15, 1996, beneficially owned 4,800
shares of the Company's Class A Common Stock.
EXPERTS
The financial statements and schedules included and incorporated by
reference in this Prospectus Supplement or the accompanying Prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports with respect thereto, and are included and incorporated by
reference in reliance upon the authority of said firm as experts in accounting
and auditing in giving said reports.
S-64
<PAGE>
GLOSSARY
Certain terms used in this Prospectus Supplement are defined with
particular meanings as used herein.
AIRTIME: The total time that a cellular telephone channel is occupied
including call time, call set-up and clear-down time.
ANALOG: Transmission method employing a continuous (rather than pulsed or
digital) electrical signal that varies in amplitude or frequency in response to
changes in sound, light or position.
BANDWIDTH: (1) Difference between the top and bottom limiting frequencies
of a continuous frequency band. (2) Indicates the information-carrying capacity
of a channel. FCC-licensed cellular operators have been allocated a continuous
25 MHz bandwidth in the 850-900 MHz band.
BROADBAND: The type of FCC license that has been or will be awarded in the
PCS auctions in the 1850 to 1990 MHz band.
BTA: One of the 493 Basic Trading Areas, which are smaller than MTAs, into
which the licensing for broadband PCS has been divided based on the geographic
divisions in the 1992 Rand McNally COMMERCIAL ATLAS & MARKETING GUIDE.
CDMA: Code Division Multiple Access digital technology. Technique that
spreads a signal over a frequency band that is larger than the signal to enable
the use of a common band by many users and to achieve signal security and
privacy.
CDPD: Cellular Digital Packet Data, a new packet data network protocol
which offers fast and reliable data transmission without using large amounts of
network capacity.
CELL SITE: The entire infrastructure and radio equipment associated with a
cellular transmitting and receiving station, including the land, building,
tower, antennas and electrical equipment.
CELL SPLITTING: Dividing a single cell into a number of smaller cells
served by lower tower transmitters, thereby increasing the ability to reuse
frequency and the number of calls that can be handled in a given area.
CLUSTERS: A group of contiguous markets, the provision of which facilitates
wide areas of uninterrupted cellular service, reduced airtime rates, automatic
delivery of inbound calls and simplified dialing patterns.
COMMUNICATIONS ACT: The Communications Act of 1934, as amended.
CONTROLLED MARKETS: Markets in which the Company's ownership interest is
greater than 50% as well as the Wilmington and Jacksonville, North Carolina
markets which are jointly controlled by the Company and a subsidiary of GTE
Corporation.
CONTROLLED POPS: The Net POPs in a controlled market.
CTIA: The Cellular Telecommunications Industry Association.
DIGITAL: Transmission system in which information is transmitted in a
series of pulses.
ESMR: Enhanced Specialized Mobile Radio communications services, supplied
by converting analog SMR services into an integrated, digital transmission
system providing for call hand-off, frequency reuse and wide-call delivery
networks.
FAA: The United States Federal Aviation Administration.
FCC: The United States Federal Communications Commission.
FCC RULES: The rules promulgated by the FCC governing the construction and
operation of cellular communications systems and licensing and technical
standards for the provision of cellular communications service.
IXC: Usually referred to as long-distance providers. There are many
facilities-based IXCs including AT&T, MCI, WorldCom, Sprint and Frontier, as
well as a select few competitive access providers that are authorized for IXC
services.
LEC: A company providing local telephone services.
MARKET: An MSA or RSA.
METRO-CLUSTER: A group of contiguous markets, the provision of which
facilitates wide areas of uninterrupted cellular service, reduced airtime rates,
automatic delivery of inbound calls and simplified dialing patterns.
S-65
<PAGE>
MSA: One of the Metropolitan Statistical Areas for which the FCC licensed
cellular communications systems.
MTA: One of the 51 Major Trading Areas into which the licensing for
broadband PCS has been divided based on the geographic divisions in the 1992
Rand McNally COMMERCIAL ATLAS & MARKETING GUIDE.
MTSO: A mobile telephone switching office, through which cell sites are
connected to the local landline telephone network.
NET POPS: The estimated population with respect to a given service area
multiplied by the percentage interest that the Company owns in the entity
licensed by the FCC to operate a cellular communications system within that
service area.
NONWIRELINE LICENSE: The license for a market initially awarded to a
company or group that was not affiliated with a local landline telephone carrier
in such market.
PCS: Personal Communications Services. Emerging technologies providing
wireless access to the local and long distance telephone system. Most PCS plans
call for low-powered, light weight pocket phones with individual, personal
telephone numbers that can be accessed without geographic restriction.
PDA: Personal Digital Assistant, a wireless hand-held device that transmits
data.
PENETRATION: Customers divided by POPs in a given area.
POPS: The estimate of the 1994 population of a MSA or RSA, as derived from
the 1994 population estimates prepared by Strategic Mapping, Inc.
RBOCS: The Regional Bell Operating Companies.
RESELLER: A company that provides cellular service to customers but does
not hold an FCC cellular license or own cellular facilities. A reseller buys
blocks of cellular telephone numbers from a licensed carrier and, in turn, sells
service through its own distribution network to the public.
RF: Radio frequency.
ROAMER: A cellular customer who makes or receives calls when traveling in
another cellular company's market using his/her home cellular phone.
ROAMING: The ability of cellular customers to make or receive calls when
traveling in another cellular company's market. Occurs when a cellular customer
leaves the cellular carrier's home area and uses his cellular phone.
ROAMING AGREEMENT: Agreement entered into with other domestic cellular
companies that allow the Company's customers to make or receive calls when
traveling in another cellular company's market.
RSA: One of the Rural Service Areas for which the FCC licensed cellular
communications systems.
SERVICE AREA: An MSA or RSA.
SMR: Specialized Mobile Radio communications services.
TDMA: Time Division Multiple Access digital technology, which designates a
time frame for cellular users to transmit within a frequency.
WIRELINE LICENSE: The license for a market initially awarded to a company
or group that was affiliated with a local landline telephone carrier in such
market.
S-66
<PAGE>
VANGUARD CELLULAR SYSTEMS, INC
INDEX TO FINANCIAL STATEMENTS
The following consolidated financial statements of Vanguard Cellular
Systems, Inc. and Subsidiaries are filed as part of this report.
<TABLE>
<CAPTION>
PAGE
<S> <C>
Consolidated Balance Sheets, December 31, 1995 and 1994............................................................... F-2
Consolidated Statements of Operations for the Years ended December 31, 1995, 1994 and 1993............................ F-3
Consolidated Statements of Changes in Shareholders' Equity for the Years ended December 31, 1995, 1994, and 1993...... F-4
Consolidated Statements of Cash Flows for the Years ended December 31, 1995, 1994 and 1993............................ F-5
Notes to Consolidated Financial Statements............................................................................ F-6
Report of Independent Public Accountants Relating to Financial Statements............................................. F-18
</TABLE>
F-1
<PAGE>
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................................................................................ $ 8,085 $ 5,745
Accounts receivable, net of allowances for doubtful accounts of $5,823 and $2,761............... 31,270 22,664
Cellular telephone inventories.................................................................. 8,957 10,417
Prepaid expenses................................................................................ 1,498 717
Total current assets......................................................................... 49,810 39,543
INVESTMENTS....................................................................................... 306,760 257,203
PROPERTY AND EQUIPMENT, at cost:
Land............................................................................................ 1,997 1,666
Buildings....................................................................................... 536 1,027
Cellular telephones held for rental............................................................. 18,814 9,341
Cellular telephone systems...................................................................... 221,281 137,708
Office furniture and equipment.................................................................. 45,222 34,466
287,850 184,208
Less -- Accumulated depreciation................................................................ 94,057 80,022
193,793 104,186
Construction in progress........................................................................ 31,413 16,139
225,206 120,325
OTHER ASSETS, net of accumulated amortization of $3,390 and $635.................................. 14,801 14,640
Total assets................................................................................. $ 596,577 $ 431,711
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses........................................................... $ 43,147 $ 40,689
Customer deposits............................................................................... 1,666 632
Total current liabilities.................................................................... 44,813 41,321
LONG-TERM DEBT.................................................................................... 522,143 348,649
MINORITY INTERESTS................................................................................ 573 2,534
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY:
Preferred stock -- $.01 par value, 1,000,000 shares authorized, no shares issued................ -- --
Common stock, Class A -- $.01 par value, 250,000,000 shares authorized, 41,312,053
and 40,529,334 shares issued and outstanding................................................. 413 405
Common stock, Class B -- $.01 par value, 30,000,000 shares authorized, no shares issued......... -- --
Additional capital in excess of par value....................................................... 238,662 234,731
Net unrealized holding losses................................................................... (16,395) (9,310)
Accumulated deficit............................................................................. (193,632) (186,619)
Total shareholders' equity................................................................... 29,048 39,207
Total liabilities and shareholders' equity................................................... $ 596,577 $ 431,711
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-2
<PAGE>
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993
<S> <C> <C> <C>
REVENUE:
Service revenue.................................................................. $217,440 $146,417 $ 98,960
Cellular telephone equipment revenue............................................. 15,647 18,529 9,929
Other............................................................................ 2,984 3,055 175
236,071 168,001 109,064
COSTS AND EXPENSES:
Cost of service.................................................................. 27,043 21,008 14,461
Cost of cellular telephone equipment............................................. 25,605 29,933 13,410
General and administrative....................................................... 60,489 44,019 34,218
Marketing and selling............................................................ 54,906 37,102 21,693
Depreciation and amortization.................................................... 36,170 24,073 25,160
204,213 156,135 108,942
INCOME FROM OPERATIONS............................................................. 31,858 11,866 122
NET GAINS (LOSSES) ON DISPOSITIONS................................................. 1,787 (339) (657)
INTEREST EXPENSE................................................................... (38,293) (22,126) (15,389)
OTHER, net......................................................................... (2,362) (3,193) 795
LOSS BEFORE MINORITY INTERESTS..................................................... (7,010) (13,792) (15,129)
MINORITY INTERESTS................................................................. (3) (153) (154)
NET LOSS BEFORE EXTRAORDINARY ITEM................................................. (7,013) (13,945) (15,283)
EXTRAORDINARY LOSS ON EXTINGUISHMENT OF DEBT....................................... -- (8,402) (3,715)
NET LOSS........................................................................... $ (7,013) $(22,347) $(18,998)
NET LOSS PER SHARE BEFORE EXTRAORDINARY ITEM....................................... $ (0.17) $ (0.36) $ (0.40)
PER SHARE EFFECT OF EXTRAORDINARY ITEM............................................. -- (0.22) (0.10)
NET LOSS PER SHARE................................................................. $ (0.17) $ (0.58) $ (0.50)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING............................... 41,100,062 38,628,140 38,038,240
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-3
<PAGE>
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
ADDITIONAL NET
COMMON STOCK CAPITAL IN UNREALIZED TOTAL
CLASS A EXCESS OF HOLDING ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT PAR VALUE LOSSES DEFICIT EQUITY
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1993.................... 37,817,275 $378 $ 175,161 $ -- $(145,274) $ 30,265
Shares issued upon exercise of stock
options................................... 90,150 1 615 -- -- 616
Shares issued for cash...................... 26,591 -- 335 -- -- 335
Shares issued in exchange for
cellular interests........................ 464,064 5 9,675 -- -- 9,680
Net loss.................................... -- -- -- -- (18,998) (18,998)
BALANCE, December 31, 1993.................. 38,398,080 384 185,786 -- (164,272) 21,898
Shares issued upon exercise of stock
options................................... 210,719 2 1,061 -- -- 1,063
Shares issued for cash...................... 28,576 -- 499 -- -- 499
Shares issued in exchange for
cellular interests........................ 1,891,959 19 47,385 -- -- 47,404
Net unrealized holding losses............... -- -- -- (9,310) -- (9,310)
Net loss.................................... -- -- -- -- (22,347) (22,347)
BALANCE, December 31, 1994.................. 40,529,334 405 234,731 (9,310) (186,619) 39,207
Shares issued upon exercise of stock
options................................... 755,906 8 3,294 -- -- 3,302
Shares issued for cash...................... 26,813 -- 637 -- -- 637
Net unrealized holding losses............... -- -- -- (7,085) -- (7,085)
Net loss.................................... -- -- -- -- (7,013) (7,013)
BALANCE, December 31, 1995.................. 41,312,053 $413 $ 238,662 $(16,395) $(193,632) $ 29,048
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-4
<PAGE>
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................................ $ (7,013) $ (22,347) $(18,998)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization................................................ 36,170 24,073 25,160
Amortization of deferred financing costs..................................... 1,322 1,334 953
Equity in losses (earnings) of unconsolidated investments.................... 2,261 (206) (500)
Minority interests........................................................... 3 153 154
Net (gains) losses on dispositions........................................... (1,787) 339 657
Extraordinary loss on extinguishment of debt................................. -- 8,402 3,715
Stock received for management consulting services............................ (2,436) (2,496) --
Changes in current items:
Accounts receivable, net................................................... (8,250) (8,974) (4,898)
Cellular telephone inventories............................................. 1,649 (5,744) (2,072)
Accounts payable and accrued expenses...................................... 8,363 7,223 4,844
Other, net................................................................. (321) 494 (397)
Net cash provided by operating activities.................................. 29,961 2,251 8,618
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................................. (136,149) (51,017) (21,009)
Proceeds from dispositions of property and equipment............................ 380 109 17
Payments for acquisition of investments......................................... (69,908) (54,813) (19,852)
Proceeds from dispositions of cellular interests................................ 1,413 446 1,204
Capital contributions to unconsolidated cellular entities....................... (318) (651) (344)
Net cash used in investing activities...................................... (204,582) (105,926) (39,984)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt............................................ -- (334,006) (212,559)
Net proceeds from issuance of common stock...................................... 3,939 1,415 951
Proceeds of long-term debt...................................................... 173,494 444,500 251,000
Debt issuance costs............................................................. (124) (11,180) (8,112)
Other........................................................................... (348) (407) (289)
Net cash provided by financing activities.................................. 176,961 100,322 30,991
NET INCREASE (DECREASE) IN CASH................................................... 2,340 (3,353) (375)
CASH, beginning of year........................................................... 5,745 9,098 9,473
CASH, end of year................................................................. $ 8,085 $ 5,745 $ 9,098
SUPPLEMENTAL DISCLOSURE OF CASH PAID DURING THE YEAR FOR INTEREST, net of amounts
capitalized..................................................................... $ 32,597 $ 21,914 $ 14,862
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
<PAGE>
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
Vanguard Cellular Systems, Inc. (Vanguard) (a North Carolina corporation)
is a provider of cellular telephone service to various markets in the eastern
United States. The majority of Vanguard's operations are conducted in the
Mid-Atlantic Supersystem covering areas of Pennsylvania and New York. The
primary activities of Vanguard, its wholly owned subsidiaries and its majority
owned cellular entities (collectively referred to as the Company) include
acquiring interests in entities which have been granted nonwireline Federal
Communications Commission (FCC) permits to construct or authorizations to
operate cellular telephone systems, and constructing and operating cellular
telephone systems.
All of the Company's cellular entities operate under the trade name of
CellularONE(Register mark), which is the trade name many nonwireline carriers
have adopted to provide uniformity throughout the industry. The trade name is
owned by a partnership in which the Company holds a minority ownership interest.
NOTE 2 -- SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Vanguard, its
wholly owned subsidiaries and the entities in which it has a majority ownership
interest. Investments 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. Investments in which the Company does not
exercise significant influence or control through majority ownership have been
accounted for using the cost method of accounting. All significant intercompany
accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of these consolidated financial statements required the use
of certain estimates by management in determining the Company's financial
position and results of operations. Actual results could differ from those
estimates.
CELLULAR TELEPHONE INVENTORIES
Inventories, consisting primarily of cellular telephones held for resale,
are valued at the lower of first-in, first-out (FIFO) cost or market.
INVESTMENTS
CELLULAR ENTITIES -- Investments in cellular entities consist of the costs
incurred to acquire FCC licenses or interests in entities that have been awarded
FCC licenses to provide cellular service, and capital contributions to
unconsolidated cellular entities. Acquisition costs, referred to as deferred
cellular license acquisition costs, consist primarily of amounts paid for the
acquisition of ownership interests and payments of other acquisition related
expenses, net of the Company's share of the fair value of the net assets
acquired. Exchanges of minority ownership interests in cellular entities are
recorded based on the fair value of the ownership interests acquired.
The Company recognizes its pro rata share of the net income or losses
generated by the unconsolidated cellular entities carried on the equity method
of accounting.
INVESTMENTS IN NONCELLULAR ENTITIES -- Investments in noncellular entities
consist of the Company's investments in International Wireless Communications,
Inc. (IWC), Inter(Bullet)Act Systems, Inc. (Inter(Bullet)Act) and Geotek
Communications, Inc. (Geotek). The investments in IWC and Inter(Bullet)Act are
recorded using the equity method. The investment in Geotek is considered to be
"available for sale" under the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Accordingly, the Company's investment in marketable equity
securities of Geotek is recorded at its fair value and the investment in other
securities of Geotek is recorded at cost.
F-6
<PAGE>
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 2 -- SIGNIFICANT ACCOUNTING AND REPORTING POLICIES -- Continued
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is calculated on
a straight-line basis for financial reporting purposes over the following
estimated useful lives:
<TABLE>
<S> <C>
Buildings.............................................................................. 20 years
Cellular telephones held for rental.................................................... 3 years
Cellular telephone systems............................................................. 7-20 years
Office furniture and equipment......................................................... 3-10 years
</TABLE>
Effective January 1, 1994, the Company changed the depreciable lives of
certain of its property and equipment to more closely approximate its historical
experience and the useful lives of these assets. These life changes affected
assets representing approximately 30% of the cost of the Company's depreciable
assets. This change reduced depreciation expense and net loss for 1994 by
approximately $4.5 million.
At December 31, 1995 and 1994, construction in progress was composed
primarily of the cost of uncompleted additions to the Company's cellular
telephone systems in majority owned cellular markets. The Company capitalized
interest costs of $1.3 million, $684,000 and $188,000 in 1995, 1994 and 1993,
respectively, as part of the cost of cellular telephone systems.
Maintenance, repairs and minor renewals are charged to operations as
incurred. Gains or losses at the time of disposition of property and equipment
are reflected in the statements of operations currently.
Cellular telephones are rented to certain customers generally with a
contract for a minimum stipulated length of service. Such customers have the
option to purchase the cellular telephone at any time during the term of the
agreement.
OTHER ASSETS
Other assets include deferred financing costs which are being amortized
over the period of the related agreements. Amortization of $1.3 million, $1.3
million and $1.0 million has been included in interest expense in the
accompanying December 31, 1995, 1994 and 1993 Statements of Operations,
respectively. In addition, payments related to agreements not to compete in
certain cellular markets are being amortized over the period of the related
agreements. Amortization expense relating to these agreements of $40,000,
$160,000 and $1.3 million has been included in the accompanying December 31,
1995, 1994 and 1993 Statements of Operations, respectively. Other assets also
include $6.9 million allocated to the acquired customer bases in connection with
the acquisitions of the Union, PA (PA-8) RSA in January 1995, and the
Binghamton, NY and Elmira, NY MSAs in December 1994. The customer bases are
being amortized over a four-year period and accordingly amortization of $1.7
million has been included in the accompanying December 31, 1995 Statement of
Operations.
REVENUE RECOGNITION
Service revenue is recognized at the time cellular services are provided
and service fees related to prebilled services are not recognized until earned.
Cellular telephone equipment revenues consist primarily of sales of cellular
telephones to subscribers and are recognized at the time equipment is delivered
to the subscriber.
NET LOSS PER SHARE
Net loss per share is computed based upon the weighted average number of
common shares outstanding during the year. Stock options have not been included
in the calculation of net loss per share as their effect would be antidilutive.
F-7
<PAGE>
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 2 -- SIGNIFICANT ACCOUNTING AND REPORTING POLICIES -- Continued
STATEMENTS OF CASH FLOWS
Additional required disclosures of noncash investing and financing
activities for the years ended December 31, 1995, 1994 and 1993 are as follows:
The Company acquired ownership interests in certain cellular entities and
other investments for cash and noncash consideration, as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Fair value of investments acquired.......................................... $ 78,297 $105,296 $35,266
Fair value of noncash consideration given up:
Cellular licenses and interests........................................... 7,366 882 6,938
Issuance of common stock.................................................. -- 47,551 9,680
Stock received for management consulting services......................... 2,436 2,496 --
9,802 50,929 16,618
Net cash paid............................................................... 68,495 54,367 18,648
Proceeds from dispositions of cellular interests............................ 1,413 446 1,204
Cash acquisitions of investments............................................ $ 69,908 $ 54,813 $19,852
</TABLE>
The Company acquired property and equipment for cash and noncash
consideration, as follows:
<TABLE>
<S> <C> <C> <C>
Cash........................................................................ $136,149 $ 51,017 $21,009
Increase (decrease) in accounts payable..................................... (6,255) 11,615 --
$129,894 $ 62,632 $21,009
</TABLE>
RECLASSIFICATION
Certain amounts in the 1993 financial statements have been reclassified to
conform to the 1995 and 1994 presentation. Beginning in 1994, the Company
reclassified certain direct pass through items previously recognized as service
revenue in its Statements of Operations to cost of service expenses to conform
with industry practice. These reclassified items relate to charges associated
with the Company's subscribers roaming into adjacent cellular markets. The
reclassification has had no effect on the Company's net loss or net loss per
share.
NOTE 3 -- INVESTMENTS
Investments consist of the following as of December 31, 1995 and 1994 (in
thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Investments in cellular entities:
Consolidated cellular entities:
License costs...................................................................... $273,111 $223,051
Accumulated amortization........................................................... (29,546) (23,119)
243,565 199,932
Cellular entities carried on the equity method........................................ 10,370 10,087
Cellular entities carried on the cost method.......................................... 13,853 16,885
267,788 226,904
Investments in noncellular entities..................................................... 38,972 30,299
$306,760 $257,203
</TABLE>
F-8
<PAGE>
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 3 -- INVESTMENTS -- Continued
INVESTMENTS IN CELLULAR ENTITIES
The Company continues to expand its ownership of cellular markets through
strategic acquisitions. The Company's significant activity relating to its
cellular investments is as follows:
CONSOLIDATED CELLULAR ENTITIES
The Company completed the acquisition of the PA-12 RSA in August 1993 for a
purchase price of $9.7 million which consisted of cash and the issuance of
464,064 shares of the Company's Class A common stock. In October 1993, the
Company completed the acquisition, valued at approximately $23.0 million, of
additional ownership interests in four majority owned markets in the
Mid-Atlantic Supersystem in exchange for ownership interests in certain minority
owned cellular markets outside its regional metro-clusters and $18.2 million in
cash.
In April 1994, the Company completed the acquisition of the Altoona, PA MSA
and the Chambersburg, PA (PA-10) RSA, which are contiguous to its Mid-Atlantic
SuperSystem in exchange for $4.4 million in cash, the exchange of Hagerstown, MD
cellular market and the Company's minority ownership interest in one cellular
market.
The Company purchased in October 1994, for $6.9 million in cash and $3.3
million in the Company's Class A common stock, the Washington, ME (ME-4) RSA and
three of the four counties of the Mason, WV (WV-1) RSA. The Maine RSA is
approximately 40 miles north of the Portland, ME MSA, which is already operated
by the Company. The West Virginia RSA is contiguous to the Company's Charleston,
WV MSA.
On December 14, 1994, the Company purchased the Binghamton, NY MSA and the
Elmira, NY MSA for a purchase price consisting of 1,766,674 shares of the
Company's Class A common stock and $6.1 million in cash. These markets are
contiguous to the Company's Mid-Atlantic SuperSystem.
Pro forma consolidated results of operations, as if the acquisitions of the
Altoona, PA MSA, the ME-4 RSA, the WV-1 RSA, the Binghamton, NY MSA, and the
Elmira, NY MSA, had occurred January 1, 1993, are as follows (in thousands,
except per share data):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
1994 1993
<S> <C> <C>
Revenue................................................................................. $176,277 $116,180
Net loss before extraordinary item...................................................... (15,159) (17,844)
Net loss................................................................................ (23,561) (21,559)
Net loss per share before extraordinary item............................................ (0.37) (0.45)
Net loss per share...................................................................... (0.58) (0.54)
</TABLE>
In January 1995, the Company purchased the Union, PA (PA-8) RSA for a cash
price of $51.3 million. The PA-8 RSA lies in the center of the Company's
Mid-Atlantic SuperSystem and is an operational cellular system. Pro forma
consolidated results of operations, as if the acquisition of the Union, PA RSA
had occurred January 1, 1994, are as follows (in thousands, except per share
data):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
1995 1994
<S> <C> <C>
Revenue................................................................................. $236,578 $173,735
Net loss before extraordinary item...................................................... (7,254) (18,155)
Net loss................................................................................ (7,254) (26,557)
Net loss per share before extraordinary item............................................ (0.18) (0.47)
Net loss per share...................................................................... (0.18) (0.69)
</TABLE>
F-9
<PAGE>
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 3 -- INVESTMENTS -- Continued
In December 1995, the Company completed the acquisition of the remaining
13.24% ownership interests in the Harrisburg, PA MSA in exchange for ownership
interests in cellular markets outside its regional metro-clusters and $2.9
million in cash.
CELLULAR ENTITIES ON THE EQUITY METHOD
The Company holds an investment in a joint venture, owned 50% by the
Company, created to acquire, own and operate various cellular markets located
primarily in eastern North Carolina. The underlying net assets of the joint
venture consist principally of its investment in the FCC licenses in the
Wilmington, NC and Jacksonville, NC MSA cellular markets.
CELLULAR ENTITIES ON THE COST METHOD
The investment balance of approximately $13.9 million at December 31, 1995
represents the Company's investment in approximately 40 cellular markets with
ownership interests ranging from 0.3% to 18.3%. The Company holds these
ownership interests for investment purposes.
NONCELLULAR INVESTMENTS
GEOTEK COMMUNICATIONS, INC.
In February 1994, the Company purchased for $30 million from Geotek 2.5
million shares of Geotek common stock and options to invest up to $167 million
for an aggregate of 10 million additional shares. Geotek is a telecommunications
company that is developing a wireless communications network in certain
metropolitan markets in the United States based on its FHMA(TM) digital
technology. The original agreement was amended in May 1995 to reduce the amount
of options available for exercise and to lengthen substantially the time during
which the Company may exercise its remaining options. In addition, pursuant to
the May 1995 agreement, the Company agreed to purchase for $5 million in cash
531,463 shares of convertible preferred stock of Geotek. Dividends on the
preferred shares are payable quarterly at a rate of 7 1/2% per annum, in cash or
preferred shares. The shares are convertible into common shares of Geotek at a
conversion price of $9.408 per share subject to certain adjustments. Geotek's
common stock is traded on the Nasdaq National Market System.
As amended by the May 1995 agreement, the options held by the Company at
December 31, 1995 are in three series as follows: (i) Series A options
exercisable for 1,000,000 shares at $15 per share, (ii) Series B options
exercisable for 1,714,200 shares at $16 per share and (iii) Series C options
exercisable for 2,571,400 shares at $17 per share. All options are exercisable
immediately and expire at various dates over the next several years. The Company
has also entered into a five-year management consulting agreement to provide
operational and marketing support to Geotek in exchange for 300,000 shares of
Geotek common stock per year. However, should any portion of the Series A, B or
C options expire without exercise, the management consulting agreement
terminates. Also, the Company's management consulting agreement with Geotek, as
amended, provides that, if the Series C options are exercised prior to the
fourth anniversary date of the management consulting agreement, the 300,000
shares issuable on the fifth anniversary date would be issuable on the fourth
anniversary date. Under the management agreement, the Company earned and
recorded as revenue approximately 300,000 shares with an aggregate value of $2.4
million in 1995 and approximately 250,000 shares with an aggregate value of $2.5
million in 1994. The Company currently owns less than 10% of Geotek's
outstanding common stock and, in the event the options were exercised would
continue to own less than 10% of such stock.
Under the provisions of Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities", the
Company's investment in Geotek common stock is classified as "available for
sale". As such, the investment is recorded at its market value, and a net
unrealized holding loss of $16.4 million has been recorded as a separate
component of shareholders' equity. The Company's investment in Geotek preferred
stock is recorded at cost.
F-10
<PAGE>
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 3 -- INVESTMENTS -- Continued
INTERNATIONAL WIRELESS COMMUNICATIONS, INC.
During 1995, the Company invested $6.5 million and merged its 100% owned
subsidiary, Vanguard International Telecommunications, Inc., into IWC in
exchange for additional ownership interests. Through these transactions, the
Company increased its ownership interest in IWC from approximately 20% to
approximately 35%. As of December 31, 1995, the Company has invested an
aggregate of approximately $13.5 million. IWC is a development stage company
specializing in securing, building and operating wireless businesses generally
other than cellular telephone systems primarily in Latin America and Southeast
Asia. The Company's investment is recorded in the accompanying consolidated
financial statements using the equity method of accounting.
INTER(BULLET)ACT SYSTEMS, INC.
During 1995, the Company invested approximately $3.8 million in
Inter(Bullet)Act for ownership of approximately 10%. Additionally, the Company
has committed to invest an additional $6.2 million in Inter(Bullet)Act, subject
to Inter(Bullet)Act's ability to raise funds from additional outside investors.
Inter(Bullet)Act is a development stage company that provides targeted product
promotions to retail customers at the point of entry of a retail outlet,
primarily supermarkets, through a computer-equipped kiosk. The Company's
investment is recorded using the equity method in the accompanying financial
statements due to the fact that an additional 19% ownership interest of
Inter(Bullet)Act is held by certain officers and directors of the Company, as
well as entities affiliated with certain directors of the Company.
FINANCIAL INFORMATION OF EQUITY METHOD INVESTEES
Combined financial position and operating results measures of the Company's
equity method investees, Eastern North Carolina Cellular Joint Venture, IWC and
Inter(Bullet)Act, for the last three years are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Current assets................................................................ $29,069 $14,367 $ 807
Non-current assets............................................................ 121,369 52,530 46,203
Current liabilities........................................................... 15,063 6,462 2,190
Non-current liabilities....................................................... 2,561 353 339
Revenues...................................................................... 14,080 9,386 5,519
Gross profit.................................................................. 10,372 7,265 4,389
Loss from operations.......................................................... (6,276) (2,773) (812)
Net loss...................................................................... $(9,994) $(3,327) $ (966)
</TABLE>
Information for each investee is presented only for the years in which the
Company maintained an investment.
NOTE 4 -- LONG-TERM DEBT
Long-term debt consisted of the following as of December 31, 1995 and 1994
(in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Borrowings under the 1994 Credit Facility:
Term loan............................................................................. $325,000 $325,000
Revolving loan........................................................................ 197,000 23,500
Other long-term debt.................................................................... 143 149
$522,143 $348,649
</TABLE>
F-11
<PAGE>
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 4 -- LONG-TERM DEBT -- Continued
The future maturities of the principal amount outstanding at December
31,1995 were as follows (in thousands):
<TABLE>
<S> <C>
1996..................................................................................... $ --
1997..................................................................................... --
1998..................................................................................... 39,293
1999..................................................................................... 65,250
2000..................................................................................... 78,300
Thereafter............................................................................... 339,300
$522,143
</TABLE>
1994 CREDIT FACILITY
On December 23, 1994, the Company completed the closing of a $675 million
credit facility, pursuant to an Amended and Restated Loan Agreement (the "1994
Credit Facility"), with various lenders led by The Toronto-Dominion Bank and The
Bank of New York.
The 1994 Credit Facility is 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 1994 Credit Facility refinanced
the Company's then existing $390 million credit facility (the "1993 Loan
Agreement"). The 1993 Loan Agreement closed in April 1993 and refinanced the
Company's previously existing credit facility. In connection with the
refinancings, the Company recorded extraordinary losses of $8.4 million ($0.22
per share) in 1994 and $3.7 million ($0.10 per share) in 1993, which represented
the write-offs of all unamortized deferred financing costs related to the
refinanced facilities.
The 1994 Credit Facility consists of a "Term Loan" and a "Revolving Loan."
The Term Loan, in the amount of $325 million, was used to repay the Company's
borrowings under the 1993 Loan Agreement. The Revolving Loan, in the amount of
up to $350 million, is available for capital expenditures, to make acquisitions
of and investments in cellular and other wireless communication interests, and
for other general corporate purposes. As of December 31, 1995, the terms of
these agreements limit available borrowing during the first quarter of 1996 to
$140 million.
The outstanding amount of the Term Loan as of March 30, 1998 is to be
repaid in increasing quarterly installments commencing on March 31, 1998 and
terminating at the maturity date of December 31, 2003. The quarterly installment
payments begin at 1.875% of the outstanding principal amount at March 30, 1998
and gradually increase to 5.625% at March 31, 2003. The available borrowings
under the Revolving Loan shall be reduced on a quarterly basis also commencing
on March 31, 1998 and terminating on December 31, 2003. The quarterly reduction
begins at 1.875% of the Revolving Loan commitment at March 30, 1998 and
gradually increases to 5.625% on March 31, 2003. The outstanding borrowings
under the Term Loan are due and the Revolving Loan commitment is reduced
quarterly as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING LOANS
<S> <C>
1996............................................................................. --%
1997............................................................................. --
1998............................................................................. 7.5
1999............................................................................. 12.5
2000............................................................................. 15.0
2001............................................................................. 20.0
2002............................................................................. 22.5
2003............................................................................. 22.5
100.0%
</TABLE>
F-12
<PAGE>
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 4 -- LONG-TERM DEBT -- Continued
The Term Loan and the Revolving Loan 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 1.375% for the Prime Rate and 1.125% to
2.625% for the Eurodollar Rate. As of December 31, 1995 the leverage ratio,
which is computed as the ratio of Total Debt (as defined) to Adjusted Cash Flow
(as defined), was at such a level as to cause the applicable margins on the
borrowings to be 0.375% and 1.625% per annum for the Prime Rate and Eurodollar
Rate, respectively. At December 31, 1995, the Company's effective interest rate
on its outstanding borrowings was 7.5%.
As security for borrowings under the 1994 Credit Facility, the Company has
pledged substantially all of its tangible and intangible assets and future cash
flows. Among other restrictions, the credit facility restricts the payment of
cash dividends, limits the use of borrowings, limits the creation of additional
long-term indebtedness and requires the maintenance of certain financial ratios.
The requirements of the 1994 Credit Facility were established in relation to the
Company's projected capital needs and projected results of operations and cash
flow. These requirements generally were designed to require continued
improvement in the Company's operating performance such that its cash flow would
be sufficient to continue servicing the debt as repayments are required. The
Company is in compliance with all loan covenants.
PROPOSED DEBENTURE FINANCING
The Company is pursuing the issuance of approximately $200 million of
debentures that will be structurally subordinated to the 1994 Credit Facility.
The proposed debentures will mature in 2006 and will be redeemable at the
Company's option, in whole or in part, five years after the date of issuance.
The net proceeds will be used to reduce borrowings outstanding under the
revolving loan portion of the 1994 Credit Facility. The issuance of these
debentures will require amendment of the 1994 Credit Facility.
INTEREST RATE PROTECTION AGREEMENTS
The Company maintains interest rate swaps and interest rate caps which
provide protection against interest rate risk. At year-end the Company had
interest rate cap agreements in place covering a notional amount of $150
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):
<TABLE>
<CAPTION>
STRIKE LEVEL NOTIONAL AMOUNT EXPIRATION DATE
<S> <C> <C>
9.0% $ 50,000 December 1996
9.0% 50,000 December 1997
9.63%-9.75% 50,000 December 1997
$ 150,000
</TABLE>
The total cost of these interest rate cap agreements of $597,000 has been
recorded in other assets in the consolidated balance sheets and is being
amortized over the lives of the agreements as a component of interest expense.
Additionally, the Company maintains interest rate swap agreements that fix
the LIBOR interest rate at 6.1% on a notional amount of $100 million through May
1996 and 5.5% on a notional amount of $100 million through November 1996. 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.
The effect of interest rate protection agreements on the operating results
of the Company was to increase interest expense by $82,000, $95,000 and $884,000
in 1995, 1994 and 1993, respectively. The Company does not hold or issue
financial instruments for trading purposes.
F-13
<PAGE>
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases office space, furniture, equipment, vehicles and land
under noncancelable operating leases expiring through 2019. As of December 31,
1995, the future minimum rental payments under these lease agreements having an
initial or remaining term in excess of one year were as follows (in thousands):
<TABLE>
<S> <C>
1996...................................................................................... $ 7,149
1997...................................................................................... 6,585
1998...................................................................................... 5,169
1999...................................................................................... 4,671
2000...................................................................................... 4,304
Thereafter................................................................................ 54,901
$82,779
</TABLE>
Rent expense under operating leases was $6.6 million, $4.2 million and $3.5
million for the years ended December 31, 1995, 1994 and 1993, respectively.
CONSTRUCTION AND CAPITAL COMMITMENTS
Capital expenditures for 1996 are estimated to be approximately $127
million for the Company, and are expected to be funded primarily with internally
generated funds.
NOTE 6 -- INCOME TAXES
Deferred income taxes are provided for the temporary differences between
the financial reporting and tax basis of the Company's assets and liabilities.
The components of net deferred taxes as of December 31, 1995 and 1994 were
as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...................................................... $126,684 $119,073
Property and equipment................................................................ 13,157 7,052
Other liabilities and reserves........................................................ 811 1,854
Valuation allowance................................................................... (81,388) (61,432)
Total deferred tax assets............................................................. 59,264 66,547
Deferred tax liabilities -- Investments and other intangible assets..................... (59,264) (66,547)
Net deferred taxes...................................................................... $ -- $ --
</TABLE>
The valuation allowance of $61.4 million as of December 31, 1994 was
provided because, in the Company's assessment, it was uncertain whether the net
deferred tax assets would be realized. In addition, because of its continuing
assessment that it is uncertain whether the net deferred tax assets will be
realized, the Company increased the valuation allowance during 1995 by $20.0
million to offset the 1995 net deferred tax benefit.
For Federal income tax reporting purposes, the Company had net operating
loss carryforwards of approximately $335 million at December 31, 1995. These
losses may be used to reduce future taxable income, if any, and expire through
2010. These carryforwards may be subject to annual limitation in the future in
accordance with the Tax Reform Act of 1986. 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 the stock compensation plan.
F-14
<PAGE>
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 6 -- INCOME TAXES -- Continued
Of the total net operating loss carryforwards, approximately $91 million
relates to additional deductions arising from restricted stock bonuses, stock
options and stock purchase warrants. In addition, the Company has a net
unrealized holding loss on the investment in Geotek of $16.4 million. To the
extent the tax benefit of these amounts is realized in future years, the benefit
will be recorded as a direct addition to shareholders' equity.
NOTE 7 -- CAPITAL STOCK
COMMON STOCK
In July 1994, the Board of Directors declared a 3 for 2 stock split of the
Company's Class A common stock which was effected in the form of a dividend paid
to shareholders on August 24, 1994 with cash paid for resultant fractional
shares. The effect of the split has been retroactively applied to all Class A
common stock and per share amounts disclosed in the accompanying financial
statements and footnotes.
Effective May 10, 1995, the number of shares of Class A Common Stock
authorized to be issued was increased from 60 million to 250 million.
ACQUISITION OF CELLULAR INTERESTS
The Company has registered 4,500,000 shares of its Class A common stock and
3,000,000 shares of its Class B common stock. The shares may be offered in
connection with the acquisition of entities which have received or may receive
an authorization or license from the FCC to provide cellular service. Through
December 31, 1995, 2,707,957 of these registered shares of Class A common stock
have been issued in conjunction with the acquisition of cellular markets.
STOCK COMPENSATION PLANS
During 1994, the Board adopted the 1994 Long-Term Incentive Plan (the 1994
Plan). Under the provisions of the 1994 Plan, the Company may grant up to
3,000,000 shares of the Company's Class A common stock to officers, directors
and key employees in the form of nonqualified stock options, incentive stock
options, stock appreciation rights, unrestricted stock, restricted stock and
performance shares. All stock options must require exercise prices of not less
than the fair market value of the Company's Class A common stock on the date of
the grant, except that certain incentive stock options must require exercise
prices of not less than 110% of fair market value of the Company's Class A
common stock on the date of the grant. Options granted under the 1994 Plan may
not have a term greater than ten years from the date of grant and are not
transferable except upon death. As of December 31, 1995, 1,347,500 shares were
available for future grants.
Upon adoption of the 1994 Plan, the Company's previously adopted stock
option and stock compensation plans were terminated. Options granted and
outstanding under these previous plans are still exercisable, but no further
grants may be made under these plans.
RESTRICTED STOCK BONUSES
During 1987, the Board granted restricted stock bonuses for a total of
3,469,554 shares of Class A common stock (i) to three key officers for 1,077,768
shares each and (ii) to a director and a key employee for an aggregate of
236,250 shares. In the event of a change in control of the Company prior to
December 31, 1998, the participants will be reimbursed for certain individual
income tax payments, as defined, on the shares vesting after February 1991. As
of December 31, 1995, all of the shares have vested.
F-15
<PAGE>
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 7 -- CAPITAL STOCK -- Continued
STOCK OPTIONS
Under the terms of the Company's previous and current stock compensation
plans, the Board has granted incentive stock options and nonqualified stock
options requiring exercise prices approximating the fair market value of the
Company's Class A common stock on the date of the grant.
Stock option activity under the plans was as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES EXERCISE PRICE
UNDER OPTION PER SHARE
<S> <C> <C>
Balance, January 1, 1993................................................ 1,920,230 $ 2.22 to $24.00
Granted................................................................. 1,043,550 $15.17 to $15.75
Exercised............................................................... (90,150) $ 2.22 to $13.92
Forfeited............................................................... (11,205) $13.92 to $17.17
Balance, December 31, 1993.............................................. 2,862,425 $ 2.22 to $24.00
Granted................................................................. 1,140,743 $19.25 to $21.50
Exercised............................................................... (210,719) $ 2.22 to $17.17
Forfeited............................................................... (15,332) $13.92 to $15.58
Balance, December 31, 1994.............................................. 3,777,117 $ 2.22 to $24.00
Granted................................................................. 907,500 $24.75 to $25.13
Exercised............................................................... (760,765) $ 2.22 to $24.00
Forfeited............................................................... (20,750) $15.17 to $19.25
Balance, December 31, 1995.............................................. 3,903,102 $ 2.22 to $25.13
</TABLE>
These options expire at various dates through 2005. Options for 1,469,380
shares had vested at December 31, 1995 and were exercisable at prices ranging
from $2.22 to $25.13.
SHARES RESERVED FOR ISSUANCE
At December 31, 1995, 5,250,602 shares of the Company's Class A common
stock are reserved primarily for exercise and grant under the Company's stock
compensation plans. In addition, 1,792,043 shares of Class A common stock and
3,000,000 shares of Class B common stock are reserved for issuance in
conjunction with the acquisition of cellular interests discussed above.
NOTE 8 -- ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses were composed of the following at
December 31, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Accounts payable.......................................................................... $23,979 $25,030
Accrued expenses:
Interest................................................................................ 4,631 129
Payroll and commissions................................................................. 9,504 5,865
Other................................................................................... 5,033 9,665
$43,147 $40,689
</TABLE>
NOTE 9 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each category of financial instruments for which it is practicable to
estimate that value:
F-16
<PAGE>
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 9 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS -- Continued
CELLULAR ENTITIES CARRIED ON THE COST METHOD -- The fair value of these
instruments is estimated based upon recent transactions from this portfolio.
INVESTMENT IN GEOTEK -- The fair value of publicly-traded securities is
based upon quoted market price. The fair value of the remaining securities
approximates the carrying value.
INTEREST RATE PROTECTION AGREEMENTS -- The fair value of interest rate cap
and swap agreements is based on quoted market prices as if the agreements were
entered into on the measurement date.
LONG-TERM DEBT -- The fair value of the long-term debt of the Company
approximates the carrying value.
The estimated fair values of the Company's financial assets (liabilities)
are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
<S> <C> <C> <C> <C>
Cellular entities carried on the cost method................... $ 13,853 $ 24,300 $ 16,885 $ 27,100
Investment in Geotek........................................... 24,253 24,253 23,719 23,719
Interest rate protection agreements............................ 380 (400) 80 1,800
Long-term debt................................................. (522,143) (522,143) (348,649) (348,649)
</TABLE>
NOTE 10 -- QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1995 QUARTERS FIRST SECOND THIRD FOURTH TOTAL
<S> <C> <C> <C> <C> <C>
Revenue.......................................................... $49,817 $58,754 $62,704 $64,796 $236,071
Income from operations........................................... 1,963 7,928 13,805 8,162 31,858
Net income (loss)................................................ (7,157) (1,327) 3,291 (1,820) (7,013)
Net income (loss) per share...................................... (0.18) (0.03) 0.08 (0.04) (0.17)
<CAPTION>
1994 QUARTERS FIRST SECOND THIRD FOURTH TOTAL
<S> <C> <C> <C> <C> <C>
Revenue.......................................................... $33,091 $40,755 $44,717 $49,438 $168,001
Income from operations........................................... 1,442 3,430 5,989 1,005 11,866
Net loss before extraordinary item............................... (3,055) (1,243) (263) (9,384) (13,945)
Net loss (1)..................................................... (3,055) (1,243) (263) (17,786) (22,347)
Net loss per share before extraordinary item..................... (0.08) (0.03) (0.01) (0.24) (0.36)
Net loss per share (1)........................................... (0.08) (0.03) (0.01) (0.46) (0.58)
</TABLE>
(1) The fourth quarter of 1994 includes an extraordinary item of $8,402 ($0.22
per share) relating to the write-off of deferred financing costs associated
with the Company's 1993 Loan Agreement that was refinanced in December 1994.
F-17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO VANGUARD CELLULAR SYSTEMS, INC.:
We have audited the accompanying consolidated balance sheets of Vanguard
Cellular Systems, Inc. (a North Carolina corporation) and subsidiaries as of
December 31, 1995 and 1994, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Vanguard Cellular Systems,
Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Greensboro, North Carolina,
March 1, 1996.
F-18
<PAGE>
PROSPECTUS
(Vanguard Logo appears here)
SENIOR DEBENTURES, SENIOR SUBORDINATED DEBENTURES,
SUBORDINATED DEBENTURES, PREFERRED STOCK, CLASS A COMMON STOCK,
CLASS B COMMON STOCK AND WARRANTS
Vanguard Cellular Systems, Inc. (the "Company") may offer and issue from
time to time (i) its senior debentures ("Senior Debentures"), senior
subordinated debentures ("Senior Subordinated Debentures"), and subordinated
debentures ("Subordinated Debentures") (collectively, the "Debentures"), (ii)
shares of its Preferred Stock, $.01 par value per share, which may be
represented by depositary shares as described herein (the "Preferred Stock"),
(iii) shares of its Class A Common Stock, par value $.01 per share (the "Class A
Common Stock"), (iv) shares of its Class B Common Stock, par value $.01 per
share (the "Class B Common Stock") or (v) Warrants to purchase Debentures,
Preferred Stock, Class A Common Stock or Class B Common Stock or other
securities or rights (the "Warrants"), all for an aggregate initial offering
price not to exceed $250,000,000 (or the equivalent thereof denominated in one
or more foreign currencies or foreign currency units). The Debentures, Preferred
Stock, Class A Common Stock, Class B Common Stock and Warrants are herein
collectively referred to as the "Securities." The Securities may be offered in
one or more separate classes or series, in amounts, at prices and on terms to be
determined by market conditions at the time of sale and to be set forth in a
supplement or supplements to this Prospectus (a "Prospectus Supplement"). Any
Securities may be offered with other Securities or separately. Securities may be
sold for U.S. dollars, foreign currency or currency units; amounts payable with
respect to any Securities may likewise be payable in U.S. dollars, foreign
currency or currency units -- in each case, as the Company designates.
Debentures and Preferred Stock may be convertible and/or exchangeable for
Securities or other securities or rights.
Certain terms of any Debentures in respect of which this Prospectus is
being delivered will be set forth in the accompanying Prospectus Supplement
including, where applicable, the specific designation (including whether senior,
senior subordinated or subordinated and whether convertible and/or
exchangeable), aggregate principal amount, purchase price, maturity, interest
rate and time of payment of interest (if any), terms (if any) for the
redemption, conversion or exchange thereof, listing (if any) on a securities
exchange and any other specific terms of the Debentures. The Prospectus
Supplement will include a description of any debt covenants or provisions with
respect to the Debentures that afford a holder of Debentures protection in the
event of a highly leveraged transaction. Certain terms of any Preferred Stock in
respect of which this Prospectus is being delivered will be set forth in the
accompanying Prospectus Supplement, including the specific designation, number
of shares, purchase price and the rights, preferences and privileges thereof and
any qualifications or restrictions thereon (including dividends, liquidation
value, voting rights, terms for the redemption, conversion or exchange thereof
and any other specific terms of the Preferred Stock), listing (if any) on a
securities exchange, and whether the Company has elected to offer the Preferred
Stock in the form of depositary shares. Certain terms of any Warrants in respect
of which this Prospectus is being delivered will be set forth in the
accompanying Prospectus Supplement, including the specific designation, the
number, purchase price and terms thereof, any listing of the Warrants or the
underlying Securities on a securities exchange and any other terms in connection
with the offering, sale and exercise of the Warrants, as well as the terms on
which and the securities for which such Warrants may be exercised.
SEE "RISK FACTORS" BEGINNING ON PAGE 4 HEREOF FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
The Debentures will represent unsecured general obligations of the Company,
unless otherwise provided in the Prospectus Supplement. The Senior Debentures
will be senior to all subordinated indebtedness of the Company, and pari passu
with other unsecured, unsubordinated indebtedness of the Company. The Senior
Subordinated Debentures will be subordinate in right of payment to the Senior
Debentures and the certain other debt obligations of the Company and senior to
the Subordinated Debentures. The Subordinated Debentures will be subordinate in
right of payment to the Senior Debentures, the Senior Subordinated Debentures
and to certain other debt obligations of the Company. See "Description of
Debentures." ALTHOUGH THE SENIOR DEBENTURES AND THE SENIOR SUBORDINATED
DEBENTURES ARE ENTITLED "SENIOR," THE COMPANY HAS NOT ISSUED AND DOES NOT HAVE
ANY CURRENT FIRM ARRANGEMENTS TO ISSUE ANY SIGNIFICANT INDEBTEDNESS TO WHICH ANY
DEBENTURES WOULD NOT BE EFFECTIVELY SUBORDINATED. SEE "RISK FACTORS -- HOLDING
COMPANY STRUCTURE." AS OF JUNE 30, 1995, THE COMPANY AND ITS SUBSIDIARIES HAD
APPROXIMATELY $499.7 MILLION OF INDEBTEDNESS AND OTHER LIABILITIES TO WHICH THE
DEBENTURES WOULD BE EFFECTIVELY SUBORDINATED AND THE INDENTURES GOVERNING THESE
DEBENTURES DO NOT LIMIT THE ADDITIONAL INCURRENCE OF SUCH INDEBTEDNESS AND OTHER
LIABILITIES.
The Securities may be sold on a negotiated or competitive bid basis to or
through underwriters or dealers designated from time to time or to other
purchasers directly or through agents designated from time to time. Certain
terms of the offering and sale of the Securities, including, where applicable,
the names of the underwriters, dealers or agents, if any, the principal amount
or number of shares or Warrants to be purchased, the purchase price of the
Securities and the proceeds to the Company from such sale, and any applicable
commissions, discounts and other items constituting compensation of such
underwriters, dealers or agents, will also be set forth in the accompanying
Prospectus Supplement.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED ON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS, ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE
THE DATE OF THIS PROSPECTUS IS OCTOBER 4, 1995
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS, IF ANY, MAY OVER-ALLOT
OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE
SECURITIES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been previously filed by the Company with the
Securities and Exchange Commission (the "Commission") and are hereby
incorporated by reference in this Prospectus as of their respective dates: (a)
Annual Report on Form 10-K for the year ended December 31, 1994, as amended by a
Form 10-K/A dated September 22, 1995, (b) Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995, (c) Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995, (d) Current Report on Form 8-K filed on January 9, 1995,
(e) Current Report on Form 8-K filed on February 13, 1995 and (f) description of
the Company's Class A Common Stock contained in a Registration Statement of the
Company on Form 8-A dated February 29, 1988, as amended by a Form 8-A/A dated
July 25, 1995.
Additionally, all reports and any definitive proxy or information
statements filed by the Company with the Commission pursuant to Section 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), subsequent to the date of this Prospectus and prior to the
termination of the offering hereby shall be deemed to be incorporated by
reference in this Prospectus and to be a part hereof from the date of filing of
such documents. Any statements contained in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, on the written or oral request of any such person, a
copy of any or all of the documents incorporated herein by reference (other than
exhibits to such documents which are not specifically incorporated by reference
in such documents). Written requests for such copies should be directed to the
Assistant Treasurer, Vanguard Cellular Systems, Inc., 2002 Pisgah Church Road,
Suite 300, Greensboro, NC 27455. Telephone requests may be directed to (910)
282-3690.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports, proxy and information statements
and other information with the Commission. Such reports, proxy and information
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices
located at Suite 1400, 500 West Madison Street, Chicago, Illinois 60661 and 7
World Trade Center, New York, New York 10048, and copies of such materials can
be obtained from the Public Reference Section of the Commission, Washington,
D.C. 20549, at prescribed rates.
This Prospectus constitutes a part of a Registration Statement on Form S-3
(the "Registration Statement") filed by the Company with the Commission under
the Securities Act of 1933 (the "Securities Act"). This Prospectus omits certain
of the information contained in the Registration Statement in accordance with
the rules and regulations of the Commission. Reference is hereby made to the
Registration Statement and related exhibits for further information with respect
to the Company and the Securities. Statements contained herein concerning the
provisions of any document are not necessarily complete and, in each instance,
reference is made to the copy of such document filed as an exhibit to the
Registration Statement or otherwise filed with the Commission. Each such
statement is qualified in its entirety by such reference.
2
<PAGE>
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH ANY OFFERING OF
SECURITIES DESCRIBED HEREIN, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THOSE SPECIFICALLY
OFFERED HEREBY OR ANY SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE AN OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
CERTAIN DEFINITIONS
As used in this Prospectus, "pops" means the Donnelly Marketing Service
estimate of the 1994 population of a Metropolitan Statistical Area ("MSA") or
Rural Service Area ("RSA") multiplied by a percentage ownership interest in an
entity licensed or designated to receive a license by the Federal Communications
Commission (the "FCC") to construct or operate a cellular telephone system in
that MSA or RSA. An MSA or RSA is referred to herein as a "market." The number
of pops should not be confused with the current number of users of cellular
service and is not necessarily indicative of the number of users of cellular
services in the future. "Nonwireline" refers to a company that is not owned by
or primarily affiliated with a landline telephone company. A nonwireline license
is one of two licenses granted in each cellular market area. "Control markets"
refer to all markets in which the Company's current ownership interest is in
excess of 50.0% as well as the Wilmington and Jacksonville, North Carolina
markets which are jointly controlled by the Company and a subsidiary of GTE
Corporation. "Operating Cash Flow" or "EBITDA" refers to the Company's income
(loss) from operations before depreciation and amortization. Operating Cash Flow
has been used by the Company, in conjunction with external financing, to satisfy
debt service obligations and to fund capital expenditures and other operational
needs. In addition, certain covenants in the long-term credit facility are based
upon calculations using Operating Cash Flow. Operating Cash Flow does not
represent and should not be considered as an alternative to net income or
operating income as determined by generally accepted accounting principles.
3
<PAGE>
THE COMPANY
The Company owns and operates nonwireline cellular telephone systems in the
Eastern United States and is one of the largest independent operators of
cellular telephone systems in the United States based on aggregate pops and
number of subscribers. As of June 30, 1995, the Company has 28 control markets
with 7.5 million aggregate pops and 314,000 subscribers. The Company's control
cellular markets are grouped into five operating metro-clusters consisting of
the Mid-Atlantic Supersystem and the Florida, Carolinas, New England and West
Virginia metro-clusters. The Mid-Atlantic Supersystem, together with the New
England metro-cluster, represent 75% of the Company's pops as of June 30, 1995
and are contiguous to four of the nation's seven largest MSAs -- New York,
Philadelphia, Baltimore/Washington and Boston.
The Company was founded as a Delaware corporation in July 1984 and
reincorporated under North Carolina law in February 1987. As used in this
Prospectus, the term "Company" refers to Vanguard Cellular Systems, Inc. and its
subsidiaries, as well as the partnerships or corporations holding cellular
licenses for markets not 100% owned by the Company or its subsidiaries, to the
extent of their interests therein. The location and mailing address of the
principal executive offices of the Company is 2002 Pisgah Church Road, Suite
300, Greensboro, North Carolina 27455, telephone (910) 282-3690.
USE OF PROCEEDS
Except as may otherwise be set forth in the Prospectus Supplement, the net
proceeds from the sale of the Securities offered hereby will be used for capital
expenditures, acquisitions, working capital and general corporate purposes.
Pending such application of the proceeds, the Company will temporarily reduce
bank debt or invest the proceeds of this offering in certificates of deposit,
United States government securities or certain other interest-bearing
securities.
RISK FACTORS
Before purchasing any Securities offered hereby a prospective investor
should consider, among other things, the following factors:
NET LOSSES. The Company's activities have concentrated on the investment in
and development of its cellular systems to improve service and expand geographic
coverage. As a result, in each year of its operations the Company has incurred a
net loss and, as of June 30, 1995, the Company had an accumulated deficit of
$195.1 million. See the documents listed under "Incorporation of Certain
Documents by Reference." There can be no assurance that the Company will become
and/or remain profitable in the future.
EXISTING INDEBTEDNESS; ADDITIONAL FINANCING. The Company has relied
primarily upon borrowings under its bank credit facilities to finance
operations, capital expenditures, acquisitions and other cash requirements.
Total outstanding borrowings under its existing loan agreement (the "Loan
Agreement") were $459.0 million at June 30, 1995 and the Company expects to
continue to borrow funds under this agreement. The Loan Agreement is secured by
substantially all of the assets of the Company. The Loan Agreement provides for
total borrowings of up to $675 million; however, under the financial covenants
of the agreement, borrowing availability is dependent on continued improvement
in the Company's operating performance. In addition, the Company is currently
required to pay only interest under the Loan Agreement at rates which vary with
specified indices, but beginning March 31, 1998, the Company will be required to
begin repaying principal under the Loan Agreement with all amounts due by
December 31, 2003. The Company's interest payments under the Loan Agreement have
been $16.1 million, $15.1 million and $22.6 million in 1992, 1993 and 1994,
respectively. The Loan Agreement consists of a "Term Loan" and a "Revolving
Loan." The outstanding amount of the Term Loan as of March 31, 1998 is to be
repaid in increasing quarterly installments commencing on March 31, 1998 and
terminating at its maturity date of December 31, 2003. The quarterly installment
payments begin at 1.875% of the outstanding principal amount at March 30, 1998
and gradually increase to 5.625% at March 31, 2003. The available borrowings
under the Revolving Loan shall be reduced on a quarterly basis also commencing
on March 31, 1998 and terminating on December 31, 2003. The quarterly reduction
begins at 1.875% of the Revolving Loan commitment at March 30, 1998 and
gradually increases to 5.525% on March 31, 2003.
Although the Company has generated positive Operating Cash Flow or EBITDA
(income (loss) from operations before depreciation and amortization) since 1991
and Operating Cash Flow has increased from $14.0 million in 1992 to $25.3
million in 1993 and $35.9 million in 1994, Operating Cash Flow has not been
sufficient to meet the Company's working capital and other operational needs nor
has it provided funds for capital expenditures, acquisitions or other cash
requirements. Cash for these purposes has been generated through the Company's
bank credit facilities and the proceeds of the sale of common stock. The
Company's cash flow must continue to improve for it to meet the financial
covenants of the Loan
4
<PAGE>
Agreement and to service its debt and meet its other cash requirements without
additional financing. There can be no assurance that such improvements will be
achieved or, if not achieved, that additional financing will be available, or
that any available financing will be on terms that are attractive to the
Company. If cash flows do not continue to improve sufficiently or if such
financing is not available to the Company, the Company may be materially limited
in its ability to make acquisitions and capital expenditures to improve its
operations or may fail to meet the financial covenants and debt service
requirements of the Loan Agreement which would result in outstanding borrowings
under the agreement becoming immediately due and payable.
DEFICIENCY OF EARNINGS TO FIXED CHARGES. Fixed charges of the Company have
exceeded its earnings before extraordinary item and fixed charges in each year
of its operations. There can be no assurance that the Company's earnings before
fixed charges will be sufficient to pay interest on any debt securities offered
hereby. See "Ratio of Earnings to Combined Fixed Charges and Preferred Stock
Dividends." The financial covenants of the Company's Loan Agreement do not
include any required minimum ratio of earnings to fixed charges. For a
description of the financial covenants of the Loan Agreement, see the documents
listed in "Documents Incorporated by Reference."
HOLDING COMPANY STRUCTURE. The Debentures will be obligations exclusively
of the Company. The Company's subsidiaries hold substantially all of the
Company's assets and conduct substantially all of its operations. To that
extent, the Company is effectively a holding company. The Company must rely on
dividends, loan repayments and other intercompany cash flows from its
subsidiaries to generate the funds necessary to meet the Company's debt service
obligations. In addition, substantially all of the Company's subsidiaries have
guaranteed the Company's Loan Agreement and such guarantees are secured by the
assets of the respective subsidiaries. The Debentures will be effectively
subordinated to all indebtedness and other liabilities and commitments of the
subsidiaries, including trade payable and lease obligations and the guarantees
of the Loan Agreement. Any right of the Company to receive assets of any such
subsidiary upon the liquidation or reorganization of any such subsidiary (and
the consequent right of the holders of Debentures to participate in those
assets) will be effectively subordinated to the claims of that subsidiary's
creditors (including the claims of the Company's creditors under the Loan
Agreement guaranteed by the subsidiary), except to the extent the Company is
itself recognized as a creditor of such subsidiary, in which case the claims of
the Company would still be subject to any security in the assets of such
subsidiary and subordinate to any indebtedness of such subsidiary senior to that
held by the Company. As of June 30, 1995, the Company and its subsidiaries had
approximately $499.7 million of indebtedness and other liabilities, including
approximately $459.0 million of indebtedness under the Loan Agreement, to which
the Debentures may be effectively subordinated. The indentures governing the
Debentures do not limit the incurrence of additional indebtedness and other
liabilities to which the Debentures may be effectively subordinated. See
"Description of Debentures."
COMPETITION FROM WIRELINE TELEPHONE COMPANIES AND NEW TECHNOLOGIES.
Although current policies of the FCC authorize only two licensees to operate
cellular systems in each market, there is, and the Company expects there will
continue to be, significant competition from the other licensee authorized to
serve each cellular market in which the Company operates. Competition for
subscribers between cellular licensees is based principally upon the services
and enhancements offered, the technical quality of the cellular system, customer
service, system coverage and capacity, and price. The Company competes with a
wireline licensee in each of its cellular markets, some of which are larger and
have access to more substantial capital resources than does the Company.
As a result of regulatory and legislative initiatives, the Company's
cellular operations are also expected to face increased competition from
entities providing other communications technologies and services, including but
not limited to personal communications services ("PCS"). Some of these
technologies and services are currently operational and others are being
developed or may be developed in the future. Accordingly, there can be no
assurance that one or more of the technologies currently utilized by the Company
in its business will not become obsolete at some time in the future.
REGULATION. The licensing, construction, operation and sale of controlling
interests in cellular systems are regulated by the FCC. In addition, certain
aspects of cellular system operations, including but not limited to rates and
the resale of cellular service, may be subject to public utility regulation in
the state in which service is provided. Changes in the regulation of the
Company's activities, such as increased price regulation or deregulation of
interconnection arrangements or a decision by the FCC to permit more than two
licensees in each cellular market, could adversely affect the Company's results
of operations. In addition, all cellular licenses in the United States were
granted for an initial 10-year term and are subject to renewal. The majority of
the Company's cellular licenses expire within the next two years. While the
Company believes that each of these licenses will be renewed based upon FCC
rules establishing a presumption in favor of licensees that have complied with
their regulatory obligations during the initial license period, there can be no
assurance that all of the Company's licenses will be renewed.
5
<PAGE>
CHALLENGES OF GROWTH BY ACQUISITIONS. The Company will continue to pursue
opportunities to acquire additional interests in cellular systems proximate to
its existing metro-clusters as well as additional interests in licensees in
which it currently owns less than a 100% interest. If the Company is successful
in pursuing such acquisitions, the Company may require substantial additional
financing to acquire and develop additional systems. There can be no assurance
that the Company will be able to obtain such additional financing. Furthermore,
in acquiring additional cellular systems, the Company will be subject to the
risks that new systems will not perform as expected and that the returns from
such systems will not support the indebtedness incurred to acquire, or the
capital expenditures incurred to develop, such systems. Any additional
borrowings to finance acquisitions or related capital expenditures will increase
the Company's future debt service obligations and the amount of Operating Cash
Flow necessary to fund these obligations. In addition, in seeking to acquire
additional cellular systems or licenses in its primary markets, the Company
competes with other communications companies, many of which are larger and have
access to more substantial capital resources than does the Company. Competition
among bidders for acquisition targets is based upon a variety of factors,
including price, terms and conditions, size and access to capital, ability to
offer cash, stock or other forms of consideration, and similar matters. Although
the Company explores, on an ongoing basis, possible acquisitions of additional
cellular systems and licenses, the Company currently has no such pending
acquisition nor has it reached any agreement in principle regarding such an
acquisition.
OPTIONS TO MAKE ADDITIONAL INVESTMENT IN GEOTEK. As of June 30, 1995, the
Company had purchased 2,500,000 shares of Common Stock of Goetek Communications,
Inc. ("Geotek"), for a purchase price of $30 million and had agreed to purchase
531,463 shares of Geotek Series L Cumulative Convertible Preferred Stock on
September 1, 1995 for a purchase price of $5 million. In addition, as of June
30, 1995, the Company had earned approximately 400,000 shares of Goetek Common
Stock pursuant to a five year consulting agreement with Geotek expiring in 1999
and the Company holds options to invest up to $86 million for an aggregate of
approximately 5.3 million shares of common stock of Geotek. The options are
exercisable in series on or before September 1, 1996, subject to certain
extensions and qualifications. Should the Company exercise all or any portion of
these options, the exercise would require funds that might otherwise be
available for cellular system acquisitions, capital expenditures or other
corporate purposes. Any exercise would require approval of the Company's lenders
under its Loan Agreement or other financing alternatives.
DIVIDEND AND OTHER RESTRICTIONS UNDER THE LOAN AGREEMENT. The terms of the
Company's Loan Agreement prohibit the payment of dividends or other
distributions on any shares of the Company's capital stock (other than dividends
payable in shares of the Company's capital stock). The Company does not
anticipate paying any cash dividend or other distribution on its Common Stock in
the foreseeable future.
CONTROL OF THE COMPANY; CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION
AND BYLAWS. Existing management of the Company and members and affiliates of the
"Richardson Family" own approximately 30% of the Company's outstanding Class A
Common Stock as of June 30, 1995, and consequently, if they act in concert, are
probably in a position to control the management and the affairs of the Company.
The articles of incorporation and bylaws of the Company contain certain
provisions that may render more difficult a hostile takeover, make it more
difficult to remove or change the composition of the Company's incumbent Board
of Directors and its officers, adversely affect shareholders who desire to
participate in a tender offer and deprive shareholders of possible opportunities
to sell their shares at prices higher than prevailing market prices. See
"Description of Common Stock."
VALUE OF FCC LICENSES. The underlying value of the Company's assets relates
primarily to its intangible assets, principally interests in entities holding
FCC construction permits and licenses, the value of which depend significantly
upon the success of the Company's business and the growth of the industry in
general. While the Company believes that there is presently a market for such
assets, such market may not exist in the future or the values obtainable may be
lower than at present. As a consequence, in the event of default on indebtedness
of the Company or any other event which would result in the liquidation of the
Company's assets, there can be no assurance that the proceeds would be
sufficient to pay its obligations, including any obligations pursuant to the
Securities offered hereby.
RADIOFREQUENCY EMISSION CONCERNS. Media reports have suggested that certain
radiofrequency ("RF") emissions from portable cellular telephones may be linked
to cancer. The FCC has a rulemaking proceeding pending to update the guidelines
and methods it uses for evaluating RF emissions from radio equipment, including
cellular telephones. While the proposal would impose more restrictive standards
on RF emissions from low power devices such as portable cellular telephones, it
is anticipated that all cellular telephones currently marketed and in use
already comply with the new proposed standards.
6
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RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
For the purposes of calculating the Company's ratio of earnings to combined
fixed charges and preferred stock dividends, "earnings" consist of income from
continuing operations before income taxes, extraordinary items, minority
interests and fixed charges (other than capitalized interest) and "fixed
charges" consist of interest, whether expensed or capitalized. The Company has
never issued any shares of preferred stock. Earnings have not been adequate to
cover fixed charges in any period of the Company's operations. The following
table sets forth the amount of the coverage deficiency in the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
1990 1991 1992 1993 1994 1994 1995
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Fixed charges in excess of earnings.......... $(30,717) $(33,738) $(27,151) $(15,317) $(14,476) $(4,625) $(8,932)
</TABLE>
7
<PAGE>
DESCRIPTION OF DEBENTURES
The Company may offer under this Prospectus Senior Debentures, Senior
Subordinated Debentures and Subordinated Debentures, any of which Debentures may
be issued as convertible and/or exchangeable Debentures.
The Debentures will represent unsecured general obligations of the Company,
unless otherwise provided in the Prospectus Supplement. The Senior Debentures
will be senior to all subordinated indebtedness of the Company, and pari passu
with any other unsecured, unsubordinated indebtedness of the Company. The Senior
Subordinated Debentures will be subordinate in right of payment to the Senior
Debentures and to certain other debt obligations of the Company and senior to
the Subordinated Debentures. The Subordinated Debentures will be subordinate in
right of payment to the Senior Debentures, the Senior Subordinated Debentures
and to certain other debt obligations of the Company. Although the Senior
Debentures and the Senior Subordinated Debentures are entitled "senior," the
Company has not issued and does not have any current firm arrangements to issue
any significant indebtedness to which any Debentures would not be effectively
subordinated. See "Risk Factors -- Holding Company Structure." As of June 30,
1995 the Company and its subsidiaries had approximately $499.7 million of
indebtedness and other liabilities to which the Debentures may be effectively
subordinated and the Indentures do not limit the additional incurrence of such
indebtedness or liabilities.
The Senior Debentures, the Senior Subordinated Debentures and the
Subordinated Debentures will be issued under separate Indentures that have been
qualified under the Trust Indenture Act of 1939 and that will be entered into
between the Company and trustees eligible under the Trust Indenture Act of 1939
to be designated prior to issuance of the respective Debentures. In this
Prospectus, the indentures with respect to the Senior Debentures, Senior
Subordinated Debentures and Subordinated Debentures are referred to as the
"Senior Indenture," "Senior Subordinated Indenture" and "Subordinated
Indenture," respectively. In addition, the Senior Indenture, the Senior
Subordinated Indenture and the Subordinated Indenture are sometimes collectively
referred to herein as the "Indentures" and the Trustee under the Senior
Indenture, the Trustee under the Senior Subordinated Indenture and the Trustee
under the Subordinated Indenture are sometimes collectively referred to as the
"Trustees" and individually as a "Trustee." The following summary of certain
provisions of the Indentures does not purport to be complete and is subject to,
and qualified in its entirety by, reference to all the provisions of the
Indentures, including the definitions therein of certain terms. Wherever
particular sections or defined terms of the Indentures are referred to, it is
intended that such sections or defined terms shall be incorporated herein by
reference. As used in the Indentures and in this section, the term the "Company"
means Vanguard Cellular Systems, Inc. without reference to its consolidated
subsidiaries.
GENERAL
The Indentures do not limit the aggregate principal amount of Debentures
which may be issued thereunder and provide that Debentures may be issued in one
or more series, in such form or forms, with such terms and up to the aggregate
principal amount authorized from time to time by the Company (Sections 2.1 and
2.2 of the Indentures). Unless otherwise provided in the Prospectus Supplement,
the Debentures may be presented for registration of transfer and exchange and
for payment or, if applicable, for conversion and/or exchange at the office of
the applicable Trustee, unless the Company appoints a different office or agency
for such purpose. (Section 4.2 of the Indentures). At the option of the Company,
the payment of interest may also be made by check mailed to the address of the
person entitled thereto as it appears in the Debenture register. (Section 4.1 of
the Indentures).
The applicable Prospectus Supplement will describe the following terms of
any Debentures (the "Offered Debentures") in respect of which this Prospectus is
being delivered (to the extent applicable to the Offered Debentures): (1) the
designation (including whether they are Senior Debentures, Senior Subordinated
Debentures or Subordinated Debentures), aggregate principal amount and
authorized denominations, if other than denominations of $1,000 and any integral
multiple thereof, of the Offered Debentures; (2) the percentage of the principal
amount at which such Offered Debentures will be issued; (3) the date or dates
(and whether fixed or extendable) on which the principal of the Offered
Debentures is payable or the method of determination thereof; (4) the rate or
rates at which the Offered Debentures will bear interest, if any, the method of
calculating such rates, the date or dates from which such interest will accrue,
the interest payment dates on which such interest shall be payable and the
record dates for the determination of Debentureholders to whom interest will be
payable; (5) the place or places where the principal of, premium, if any, and
interest, if any, on the Offered Debentures will be payable; (6) any provisions
relating to the issuance of the Offered Debentures at an original issue
discount; (7) the price or prices at which, the period or periods within which,
and the terms and conditions upon which the Offered Debentures may be redeemed,
in whole or in part, at the option of the Company, pursuant to any sinking fund
or otherwise (including the form or method of payment if other than cash, which
may include securities of other issuers); (8) the obligation, if any, of the
Company to redeem, repay
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or purchase the Offered Debentures pursuant to any mandatory redemption, sinking
fund or analogous provisions or at the option of the Debentureholder and the
price or prices at which, the period or periods within which and the terms and
conditions upon which the Offered Debentures will be redeemed, repaid or
purchased, in whole or in part, pursuant to any such obligation (including the
form or method of payment if other than in cash, which may include securities of
other issuers), and any provisions for the remarketing of such Debentures; (9)
if other than the principal amount thereof, the portion of the principal amount
of the Offered Debentures which will be payable upon declaration of acceleration
of the maturity thereof or provable in bankruptcy; (10) any Events of Default in
addition to or in lieu of those described herein and remedies therefor; (11)
whether the Offered Debentures are convertible or exchangeable and, if so, the
securities or rights into which the Offered Debentures are convertible or
exchangeable (which may include other Debentures, Preferred Stock, Class A
Common Stock, Class B Common Stock or other securities or rights of the Company
(including rights to receive payment in cash or securities based on the value,
rate or price of one or more specified commodities, currencies or indices) or
exchangeable for securities of other issuers or a combination of the foregoing)
and the terms and conditions upon which such conversion or exchange will be
effected including the initial conversion or exchange price or rate, the
conversion or exchange period and any other provision in addition to or in lieu
of those described herein; (12) any trustees, authenticating or paying agents,
transfer agents or registrars or any other agents with respect to the Offered
Debentures; (13) the currency or currencies, including composite currencies, in
which the Offered Debentures will be denominated if other than the currency of
the United States of America; (14) if other than the coin or currency in which
the Offered Debentures are denominated, the coin or currency in which payment of
the principal of, premium, if any, or interest on the Offered Debentures will be
payable; (15) if the principal of, premium, if any, or interest on the Offered
Debentures are to be payable, at the election of the Company or a holder
thereof, in a coin or currency other than that in which the Offered Debentures
are denominated, the period or periods within which, and terms and conditions
upon which, such election may be made; (16) if the amount of payments of
principal of, premium, if any, and interest on the Offered Debentures may be
determined with reference to the value, rate or price of one or more specified
commodities, currencies or indices, the manner in which such amounts shall be
determined; (17) whether and under what circumstances the Company will pay
additional amounts on the Offered Debentures held by a person who is not a
United States of America person in respect of any tax, assessment or
governmental charge withheld or deducted and, if so, whether the Company will
have the option to redeem such Debentures rather than pay such additional
amounts; (18) if receipt of certain certificates or other documents or
satisfaction of other conditions will be necessary for any purpose, including,
without limitation, as a condition to the issuance of the Offered Debentures in
definitive form (whether upon original issue or upon exchange of a temporary
Debenture), the form and terms of such certificates, documents or conditions;
(19) any other affirmative or negative covenants with respect to the Offered
Debentures; (20) whether the Offered Debentures will be issued in whole or in
part in the form of one or more Global Debentures and, in such case, the
Depositary therefor and the circumstances under which any Global Debenture may
be exchanged for Offered Debentures registered in the name of, and under which
any transfer of such Global Debenture may be registered in the name of, any
person other than the Depositary; and (21) any other specific terms of the
Offered Debentures. (Section 2.2 of the Indentures).
The Debentures will be exchangeable or transferable without charge
therefor, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith. (Sections 2.6
and 2.10 of the Indentures).
Debentures may be issued and sold at a substantial discount below their
principal amount or their redemption value. (Section 2.2 of the Indentures). If
so issued, certain federal income tax and other considerations, if applicable,
will be described in the Prospectus Supplement relating thereto.
GLOBAL DEBENTURES
The Debentures of a series may be issued in whole or in part in the form of
one or more Global Debentures that will be deposited with a Depositary or with a
nominee for a Depositary identified in the Prospectus Supplement relating to
such series. The specific terms of the depository arrangement with respect to
the Debentures of a series will be described in the Prospectus Supplement
relating to such series. The Company anticipates that the following provisions
will apply to all depository arrangements for registered Debentures issued by
it.
Unless otherwise specified in an applicable Prospectus Supplement,
Debentures which are to be represented by a Global Debenture to be deposited
with or on behalf of a Depositary will be represented by a Global Debenture
registered in the name of such Depositary or its nominee. Upon issuance of a
Global Debenture in registered form, the Depositary of such Global Debenture
will credit, on its book-entry registration and transfer system, the respective
principal amounts of the Debentures represented by such Global Debentures to the
accounts of institutions that have accounts with such Depositary or its nominee
("Participants"). The accounts to be credited shall be designated by the
underwriters or agents of such Debentures, or by the
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<PAGE>
Company if such Debentures are offered and sold directly by the Company.
Ownership of beneficial interests in a Global Debenture will be limited to
Participants or persons that may hold interests through Participants. Ownership
of beneficial interests in such Global Debentures will be shown on, and the
transfer of that ownership will be effected only through records maintained by
the Depositary (with respect to Participants' interests) or its nominee for such
Global Debenture or by Participants or persons that hold through Participants.
The laws of some jurisdictions require that certain purchasers of Debentures
take physical delivery of such securities in definitive form. Such laws may
impair the ability to transfer beneficial interests in a Global Debenture.
So long as the Depositary for a Global Debenture in registered form, or its
nominee, is the registered owner of such Global Debentures, such Depositary or
such nominee, as the case may be, will be considered the sole owner or holder of
the Debentures represented by such Global Debentures for all purposes under the
Indenture for such Debentures. Except as set forth below, owners of beneficial
interests in such Global Debenture will not be entitled to have Debentures of
the series represented by such Global Debentures registered in their names, will
not receive or be entitled to receive physical delivery of Debentures of such
series in definitive form and will not be considered the owners or holders
thereof under the Indenture for such Debentures.
Principal, premium, if any, and interest payments on Debentures registered
in the name of or held by a Depositary or its nominee will be made to the
Depositary or its nominee, as the case may be, as the registered owner or the
holder of the Global Debenture representing such Debentures. Neither the
Company, the Trustee, or any paying agent for such Debentures will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in a Global Debenture
for such Debentures or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests. The Company expects that the
Depositary for Debentures of a series, upon receipt of any payments of
principal, premium, if any, or interest in respect to a Global Debenture, will
credit immediately the accounts of the related Participants with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of such Global Debentures as shown on the records of such Depositary. The
Company also expects that payments by Participants to owners of beneficial
interests in such Global Debentures held through such Participants will be
governed by standing instructions and customary practices, as is now the case
with securities held for the accounts of customers in bearer form or registered
in "street name," and will be the responsibility of such Participants.
Unless and until it is exchanged in whole or in part for Debentures in
definitive form in accordance with the terms of the Debentures, a Global
Debenture may not be transferred except as a whole by a nominee of the
Depositary to such Depositary or another nominee of such Depositary or by the
Depositary or any such nominee or a successor of the Depositary or a nominee of
such successor. If (i) a Depositary for Debentures notifies the Company that it
is unwilling or unable to continue as Depositary for the Global Debentures of
any series of Debentures or if at any time such Depositary ceases to be a
clearing agency registered under the Securities Exchange Act, (ii) the Company
in its sole discretion determines that the Global Debentures of any series of
Debentures then outstanding under an Indenture shall be exchangeable for
definitive Debentures of such series in registered form or (iii) an Event of
Default with respect to the Debentures of a series represented by a Global
Debenture has occurred and is continuing, then the Company will issue definitive
Debentures of such series in registered form in exchange for the Global
Debentures representing such Debentures. In any such instance, such definitive
Debentures of such series shall be registered in the names of the owners of the
beneficial interests in such Global Debentures.
SUBORDINATION
The Subordinated Debentures will be subordinated, to the extent and in the
manner set forth in the Subordinated Indenture, in right of payment to the prior
payment in full of all Senior Indebtedness as defined in the Subordinated
Indenture. (Section 3.1 of the Subordinated Indenture). Senior Indebtedness is
defined in the Subordinated Indenture as (a) the principal of and premium, if
any, and interest on: (i) all indebtedness for money borrowed by the Company,
whether outstanding on the date of the Indenture or thereafter created or
incurred; (ii) all indebtedness for money borrowed by another person, in which
the Company has an equity interest or has the right to purchase an equity
interest, and guaranteed directly or indirectly by the Company (whether such
guarantee is outstanding on the date of the Indenture or thereafter created or
incurred); and (iii) all indebtedness constituting purchase money indebtedness
(as defined) for the payment of which the Company is directly or contingency
liable (whether outstanding on the date of the Indenture or thereafter created
or incurred); (b) any obligation to purchase or guarantee indebtedness of, to
supply funds to or invest in, another person in which the Company has an equity
interest or has the right to purchase an equity interest (whether such
obligation is outstanding on the date of the Indenture or is thereafter created
or incurred); (c) any obligation of the Company to any person in respect of
surety or similar bonds issued by such person in connection with entering into,
renewing or extending any cellular license granted by a governmental authority
or any construction in respect of any cellular telephone system by the Company
or any other person in
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<PAGE>
which the Company has an equity interest or has the right to purchase an equity
interest; and (d) all renewals, extensions or refundings of any such
obligations, indebtedness and guarantees; provided, however, that Senior
Indebtedness shall not include any obligation, indebtedness or guarantee which
is created or evidenced by an instrument the terms of which expressly provide
that such obligation, indebtedness or guarantee is subordinate to the
Subordinated Debentures or to all other indebtedness of the Company or is not
superior in right of payment or performance to the Subordinated Debentures.
(Section 1.1 of the Subordinated Indenture).
The Senior Subordinated Debentures will be subordinated to the extent and
in the manner set forth in the Senior Subordinated Indenture, in right of
payment to the prior payment in full of all Senior Indebtedness as defined in
the Senior Subordinated Indenture. (Section 3.1 of the Senior Subordinated
Indenture). Senior Indebtedness is defined in the Senior Subordinated Indenture
in the same manner as Senior Indebtedness is defined in the Subordinated
Indenture except that Senior Indebtedness as defined in the Senior Subordinated
Indenture does not include: (i) the Subordinated Debentures; or (ii) any
obligation, indebtedness or guarantee which is created or evidenced by an
instrument the terms of which expressly provide that such obligation,
indebtedness or guarantee is subordinate to the Senior Subordinated Indentures
or to all other indebtedness of the Company or is not superior in right of
payment or performance to the Senior Subordinated Debentures or that such
obligation, indebtedness or guarantee is subordinate to senior indebtedness and
senior indebtedness is defined by such instrument in substantially the same
manner as senior indebtedness is defined in the indenture for the Subordinated
Debentures unless the definition of senior indebtedness expressly provides that
such obligation, indebtedness or guarantee is not subordinate to the Senior
Subordinate Debentures or is superior in right of payment or performance to the
Senior Subordinated Debentures. (Section 1.1 of the Senior Subordinated
Indentures).
At June 30, 1995, the Company had approximately $459.1 million of Senior
Indebtedness and other indebtedness to which the Subordinated Debentures and the
Senior Subordinated Debentures may be effectively subordinated. The Debentures
may also be effectively subordinated to certain indebtedness and other
liabilities of the Company's subsidiaries. See "Risk Factors -- Holding Company
Structure." There is no limitation in the Indentures on the incurrence of
additional Senior Indebtedness or other indebtedness and liabilities and the
Company expects to incur such additional indebtedness or other liabilities.
No payment on account of the principal of, premium, if any, or interest on
the Senior Subordinated Debentures or Subordinated Debentures may be made, if,
at the time of such payment or immediately after giving effect thereto, there
exists a default in payment of the principal of, premium, if any, or interest on
any Senior Indebtedness (as defined in the Senior Subordinated Indenture or
Subordinated Indenture, as applicable), whether at expressed maturity,
acceleration thereof or otherwise, except as otherwise provided in the
applicable Indenture. (Section 3.2 of the Senior Subordinated and Subordinated
Indentures). Upon any payment or distribution of assets of the Company of any
kind or character, upon any dissolution or winding up or total or partial
liquidation or reorganization of the Company, whether voluntary or involuntary,
in bankruptcy, insolvency or receivership, or upon an assignment for the benefit
of creditors or any other marshalling of the assets and liabilities of the
Company or otherwise, all principal of, premium, if any, and interest due on all
Senior Indebtedness (including any outstanding Senior Debentures and, in the
case of the Subordinated Debentures, any outstanding Senior Subordinated
Indebtedness) must be paid or provided for in full before the holders of the
Senior Subordinated or Subordinated Debentures are entitled to receive or retain
any payment. (Section 3.2 of the Senior Subordinated and Subordinated
Indentures). Subject to the payment in full of all Senior Indebtedness (as
defined in the Senior Subordinated Indenture or the Subordinated Indenture, as
the case may be), the holders of the Senior Subordinated Debentures or
Subordinated Debentures, as applicable, will be subrogated to the rights of the
holders of Senior Indebtedness (as respectively defined) to receive payments or
distributions of assets of the Company applicable to Senior Indebtedness until
the Senior Subordinated or Subordinated Debentures are paid in full. (Section
3.2 of the Senior Subordinated and Subordinated Indentures). By reason of such
subordination, in the event of a distribution of assets upon insolvency, certain
general creditors of the Company may recover more, ratably, than the holders of
the Senior Subordinated or Subordinated Debentures.
CONVERTIBLE DEBENTURES
The terms, if any, on which Offered Debentures may be (mandatorily or
otherwise) exchanged for or converted into other Debentures or shares of
Preferred Stock, Class A Common Stock, Class B Common Stock or other securities
or rights of the Company (including rights to receive payments in cash or
securities based on the value, rate or price of one or more specified
commodities, currencies or indices) or securities of other issuers or any
combination of the foregoing will be set forth in the Prospectus Supplement for
such Offered Debentures.
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Unless otherwise indicated in the Prospectus Supplement, the following
provisions will apply to Offered Debentures that may be exchanged for or
converted into stock of any class of the Company ("Capital Stock"):
The holder of any Debentures convertible into capital stock will have the
right exercisable at any time during the time period specified in the Prospectus
Supplement, unless previously redeemed by the Company, to convert such
Debentures into shares of capital stock (which may include Preferred Stock,
Class A Common Stock or Class B Common Stock) as specified in the Prospectus
Supplement, at the conversion rate for each $1,000 principal amount of
Debentures set forth in the Prospectus Supplement, subject to adjustment. The
holder of a convertible Debenture may convert a portion thereof which is $1,000
or any integral multiple of $1,000. (Section 13.2 of the Indentures). In the
case of Debentures called for redemption, conversion rights will expire at the
close of business on the date fixed for the redemption as may be specified in
the Prospectus Supplement, except that in the case of redemption at the option
of the Debentureholder, if applicable, such right will terminate upon receipt of
written notice of the exercise of such option. (Section 13.2 of the Indentures).
In certain events, the conversion rate will be subject to adjustment as set
forth in the Indentures. Such events include the issuance of shares of any class
of Capital Stock of the Company as a dividend on the class of Capital Stock into
which the Debentures of such series are convertible; subdivisions, combination
and reclassifications of the class of Capital Stock into which Debentures of
such series are convertible; the issuance to all holders of the class of Capital
Stock into which Debentures of such series are convertible of rights or warrants
entitling the Debentureholders (for a period not exceeding 45 days) to subscribe
for or purchase shares of such class of Capital Stock at a price per share less
than the current market price per share of such class of Capital Stock (as
defined in the Indentures); and the distribution to all holders of the class of
Capital Stock into which Debentures of such series are convertible of evidences
of indebtedness of the Company or of assets (excluding cash dividends paid from
retained earnings and dividends payable in Capital Stock for which adjustment is
made as referred to above) or subscription rights or warrants (other than those
referred to above). No adjustment of the conversion rate will be required unless
an adjustment would require a cumulative increase or decrease of at least 1% in
such rate. (Section 13.5 of the Indentures.) Fractional shares of Capital Stock
will not be issued upon conversion but, in lieu thereof, the Company will pay a
cash adjustment. Convertible Debentures surrendered for conversion between the
record date for an interest payment, if any, and the interest payment date
(except convertible Debentures called for redemption on a redemption date during
such period) must be accompanied by payment of an amount equal to the interest
thereon which the registered holder is to receive. (Article 13 of the
Indentures).
MODIFICATION OF THE INDENTURES
Modification of any Indenture with respect to the Debentures of any series
may be made by the Company and the applicable Trustee with the consent of the
holders of not less than 66 2/3% in aggregate principal amount of outstanding
Debentures of such series; provided that no such modification may, without the
consent of the holder of each Debenture of such series affected thereby, (1)
extend the time or times of payment of the principal amount of, premium, if any,
or the interest on, any Debentures; (2) reduce the principal amount of, premium,
if any, or the rate of interest on any Debentures (and/or such other amount or
amounts as any Debentures or supplemental indentures with respect thereto may
provide to be due and payable upon declaration of acceleration of the maturity
thereof); (3) change the currency of payment of principal of, premium, if any,
or the interest on any Debenture; (4) reduce any amount payable on redemption
thereof; (5) alter or impair the right to convert or exchange the Debentures at
the rate and upon the terms provided in the Indenture; (6) alter or impair the
right to require redemption at the option of the holder; or (7) reduce the
percentage of Debentures of any series, the vote of the holders of which is
necessary to modify the Indenture. (Section 12.2 of the Indentures).
Modifications of any Indenture with respect to the Debentures of any series
may be made by the Company and the Trustee without the consent of the
Debentureholders: (a) to add to the covenants and agreements of the Company or
to surrender any right or power reserved to or conferred upon the Company in the
Indenture; (b) to cure any ambiguity or to cure, correct or supplement any
defect or inconsistent provision contained in the Indenture; (c) to make such
provisions in regard to matters arising under the Indenture which may be
necessary or desirable, or otherwise change the Indenture in any manner, which
shall not adversely affect the interests of the Debentureholders of any series;
(d) to evidence the succession of another corporation to the Company and the
assumption by the successor corporation of the covenants, agreements and
obligations of the Company pursuant to the Indenture and to provide for the
adjustment of conversion rights pursuant to Section 13.7 upon consolidation,
merger, sale or conveyance of the Company; (e) to establish the form or terms of
the Debentures of any series as permitted by the Indenture; (f) to change or
eliminate any of the provisions of the Indenture, provided that any such change
or elimination shall become effective only when there is no Debenture
outstanding of any series created prior thereto which is entitled to the benefit
of such provisions; (g) to add or change any of the provisions of the Indenture
to such extent as shall be necessary to permit or facilitate the issuance of
Debentures in bearer form or to
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provide for uncertificated Debenture (so long as any "registration-required
obligation" within the meaning of Section 163(f)(2) of the Internal Revenue Code
of 1986, as amended (the "Code"), is in registered form for purposes of the
Code); (h) to amend or supplement any provision contained in the Indenture,
which was required to be contained in the Indenture in order for the Indenture
to be qualified under the Trust Indenture Act of 1939, if the Trust Indenture
Act of 1939 or regulations thereunder change what is so required to be included
in qualified indentures, in any manner not inconsistent with what then may be
required for such qualification; (i) to add any additional events of default;
(j) to convey, transfer, assign, mortgage or pledge to the Trustee, as security
for the Debentures of one or more series, any property or assets; or (k) to add
to or change any of the provisions of the Indenture as contemplated in Section
11.7(b) relating to successor trustees. (Section 12.1 of the Indentures).
DEFAULTS AND NOTICE
The following are to be Events of Default with respect to Debentures of any
series, unless it is either inapplicable to a particular series or is
specifically deleted or modified for Debentures of a particular series, as
described in the Prospectus Supplement: (1) failure to pay the principal of, or
premium, if any, on any Debenture of such series when due and payable (whether
at maturity, by call for redemption, through any mandatory sinking fund, by
redemption at the option of the holder, by declaration of acceleration or
otherwise, and, with respect to Debentures issued pursuant to the Senior
Subordinated Indenture and the Subordinated Indenture, whether or not payment is
prohibited by the subordination provisions of such Indentures); (2) failure to
make a payment of any interest on any Debenture of such series when due,
continued for 30 days (with respect to Debentures issued pursuant to the Senior
Subordinated Indenture and the Subordinated Indenture, whether or not payment is
prohibited by the subordination provisions of such Indentures); (3) failure of
the Company to perform or observe any other covenants or agreements of the
Company in the Indenture or in the Debentures of such series (other than
agreements or covenants included in the Indentures solely for the benefit of a
series of Debentures other than the series), continued for 90 days after written
notice; (4) certain events of bankruptcy, insolvency or reorganization of the
Company; and (5) as to Senior Subordinated and Subordinated Debentures, an event
of default under any Senior Indebtedness (as respectively defined) that has
resulted in the acceleration of such indebtedness prior to the expressed
maturity thereof, which acceleration has not been rescinded or annulled within
30 business days after written notice and which acceleration is not contested by
the Company in good faith. If an Event of Default with respect to Debentures of
any series shall happen and be continuing, the Trustee or the holders of not
less than 25% in aggregate principal amount of the then outstanding Debentures
of such series may declare the principal amount (or, if the Debentures of such
series are issued at an original issue discount, such portion of the principal
amount as may be specified in the terms of the Debentures of such series) of all
Debentures of such series and/or such other amount or amounts as the Debentures
or supplemental indenture with respect to such series may provide, to be due and
payable immediately. (Section 7.1 of the Indentures).
The Indentures provide that the Trustee will, within 90 days after the
occurrence of a default, give to holders of Debentures of any series notice of
all incurred defaults with respect to such series known to it; provided,
however, that, except in the case of a default that results from the failure to
make any payment of the principal of, premium, if any, or interest on the
Debentures of any series, or in the payment of any mandatory sinking fund
installment with respect to Debentures of such series, the Trustee may withhold
such notice if it in good faith determines that the withholding of such notice
is in the interest of the holders of Debentures of such series. (Section 11.3 of
the Indentures).
The Indentures contain a provision entitling the Trustee to be indemnified
by holders of Debentures before proceeding to exercise any trust or power under
the Indentures at the request of such holders. (Section 11.1 of the Indentures).
The Indentures provide that the holders of a majority in aggregate principal
amount of the then outstanding Debentures of any series may direct the time,
method and place of conducting any proceedings for any remedy available to the
Trustee or of exercising any trust or power conferred upon the Trustee with
respect to the Debentures of such series, provided, however, that the Trustee
may decline to follow any such direction if, among other reasons, the Trustee
determines in good faith that the actions or proceedings as directed may not
lawfully be taken, would involve the Trustee in personal liability or would be
unduly prejudicial to the holders of the Debentures of such series not joining
in such direction. (Section 7.6 of the Indentures). The right of a holder to
institute a proceeding with respect to the Indenture is subject to certain
conditions precedent including, without limitation, that the holders of a
majority in aggregate principal amount of the Debentures of such series then
outstanding make a written request upon the Trustee to exercise its powers under
the Indenture, indemnify the Trustee and afford the Trustee reasonable
opportunity to act, but the holder has an absolute right to receipt of the
principal of, premium, if any, and interest when due, to require conversion or
exchange of Debentures if the Indentures provide for convertibility or
exchangeability at the option of the holder, and to institute suit for the
enforcement thereof. (Section 7.7 of the Indentures).
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REPORTS TO HOLDERS OF DEBENTURES
The Company intends to furnish to holders of Debentures all quarterly and
annual reports that it furnishes to holders of the Company's Class A Common
Stock.
DESCRIPTION OF PREFERRED STOCK
The Board of Directors of the Company is authorized to issue in one or more
series up to a maximum of 1,000,000 shares of preferred stock, par value $.01
per share. The shares can be issued with such designations, preferences,
qualifications, privileges, limitations, restrictions, options, conversion or
exchange rights and other special or relative rights as the Board of Directors
shall from time to time fix by resolution, which could adversely affect the
voting powers of the holders of Common Stock. Issuance of the Preferred Stock
could have the effect of acting as an anti-takeover device to delay or prevent a
change of control of the Company. The dividend, the liquidation preference, and
other specific terms of each series of the Preferred Stock will be set forth in
the Prospectus Supplement. The Company currently has no shares of Preferred
Stock outstanding.
The applicable Prospectus Supplement will describe the following terms of
any Preferred Stock in respect of which this Prospectus is being delivered (to
the extent applicable to such Preferred Stock): (1) the specific designation,
number of shares, seniority and purchase price; (2) any liquidation preference
per share; (3) any date of maturity; (4) any redemption, repayment or sinking
fund provisions; (5) any dividend rate or rates and the dates on which any such
dividends will be payable (or the method by which such rates or dates will be
determined); (6) any voting rights; (7) if other than the currency of the United
States of America, the currency or currencies including composite currencies in
which such Preferred Stock is denominated and/or in which payments will or may
be payable; (8) the method by which amounts in respect of such Preferred Stock
may be calculated and any commodities, currencies or indices, or value, rate or
price, relevant to such calculation; (9) whether the Preferred Stock is
convertible or exchangeable and, if so, the securities or rights to which such
Preferred Stock is convertible or exchangeable (which may include other
Preferred Stock, Debentures, Class A Common Stock, Class B Common Stock or other
securities or rights of the Company (including rights to receive payment in cash
or securities based on the value, rate or price of one or more specified
commodities, currencies or indices) or securities of other issuers or a
combination of the foregoing), and the terms and conditions upon which such
conversions or exchanges will be effected including the initial conversion or
exchange prices or rates, the conversion or exchange period and any other
related provisions; (10) the place or places where dividends and other payments
on the Preferred Stock will be payable; (11) any additional voting, dividend,
liquidation, redemption and other rights, preferences, privileges, limitations
and restrictions; and (12) if applicable, a discussion of certain federal income
tax considerations with respect to such Preferred Stock.
As described under "Description of Depositary Shares," the Company may, at
its option, elect to offer depositary shares ("Depositary Shares") evidenced by
depositary receipts ("Depositary Receipts"), each representing an interest (to
be specified in the Prospectus Supplement relating to the particular series of
the Preferred Stock) in a share of the particular series of the Preferred Stock
issued and deposited with a Depositary (as defined below).
All shares of Preferred Stock offered, or issuable upon conversion,
exchange or exercise of Securities, will, when issued, be fully paid and
nonassessable.
DESCRIPTION OF DEPOSITARY SHARES
The description below sets forth certain general terms and provisions of
the Deposit Agreement (as defined below) and of the Depositary Shares and
Depositary Receipts. The specific terms of the Depositary Shares and, if
applicable, a discussion of certain federal income tax considerations with
respect thereto will be described in the Prospectus Supplement relating to such
Depositary Shares. The following description does not purport to be complete and
is subject to, and qualified in its entirety by reference to, the form of
Deposit Agreement and form of Depositary Receipts relating to each series of the
Preferred Stock.
GENERAL
The Company may, at its option, elect to have shares of Preferred Stock
represented by Depositary Shares. The shares of any series of the Preferred
Stock underlying the Depositary Shares will be deposited under a separate
deposit agreement (the "Deposit Agreement") between the Company and a bank or
trust company selected by the Company (the "Depositary"). The Prospectus
Supplement relating to a series of Depositary Shares will set forth the name and
address of the Depositary. Subject to the terms of the Deposit Agreement, each
owner of a Depositary Share will be entitled, in proportion to the
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<PAGE>
applicable interest in the number of shares of Preferred Stock underlying such
Depositary Share, to all the rights and preferences of the Preferred Stock
underlying such Depositary Share (including dividend, voting, redemption,
conversion, exchange and liquidation rights).
The Depositary Shares will be evidenced by Depositary Receipts issued
pursuant to the Deposit Agreement, each of which will represent the applicable
interest in a number of shares of a particular series of the Preferred Stock
described in the applicable Prospectus Supplement.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Depositary will distribute all cash dividends or other cash
distributions received in respect of the Preferred Stock to the record holders
of Depositary Shares representing such Preferred Stock in proportion to the
number of such Depositary Shares owned by such holders on the relevant record
date.
In the event of a distribution other than in cash, the Depositary will
distribute property received by it to the record holders of Depositary Shares
entitled thereto or the Depositary may, with the approval of the Company, sell
such property and distribute the net proceeds from such sale to such holders.
The Deposit Agreement also contains provisions relating to the manner in
which any subscription or similar rights offered by the Company to holders of
Preferred Stock shall be made available to holders of Depositary Shares.
CONVERSION AND EXCHANGE
If any Preferred Stock underlying the Depositary Shares is subject to
conversion or exchange as set forth in the Prospectus Supplement relating
thereto, each record holder of Depositary Shares will have the right or
obligation to convert or exchange such Depositary Shares pursuant to the terms
thereof.
REDEMPTION OF DEPOSITARY SHARES
If Preferred Stock underlying the Depositary Shares is subject to
redemption, the Depositary Shares will be redeemed from the proceeds received by
the Depositary resulting from the redemption, in whole or in part, of the
Preferred Stock held by the Depositary. The redemption price per Depositary
Share will be equal to the aggregate redemption price payable with respect to
the number of shares of Preferred Stock underlying the Depositary Shares.
Whenever the Company redeems Preferred Stock from the Depositary, the Depositary
will redeem as of the same redemption date a proportionate number of Depositary
Shares representing the shares of Preferred Stock that were redeemed. If less
than all the Depositary Shares are to be redeemed, the Depositary Shares to be
redeemed will be selected by lot or pro rata as may be determined by the
Company.
After the date fixed for redemption, the Depositary Shares so called for
redemption will no longer be deemed to be outstanding and all rights of the
holders of the Depositary Shares will cease, except the right to receive the
redemption price payable upon such redemption. Any funds deposited by the
Company with the Depositary for any Depositary Shares which the holders thereof
fail to redeem shall be returned to the Company after a period of two years from
the date such funds are so deposited.
WITHDRAWAL OF STOCK
Any holder of Depositary Shares may, upon surrender of the Depositary
Receipts at the corporate trust office of the Depositary (unless the related
Depositary Shares have previously been called for redemption), receive the
number of whole shares of the related series of Preferred Stock and any money or
other property represented by such Depositary Receipts. Holders of Depositary
Shares making such withdrawals will be entitled to receive whole shares of
Preferred Stock on the basis set forth in the related Prospectus Supplement for
such series of Preferred Stock, but holders of such whole shares of Preferred
Stock will not thereafter be entitled to deposit such Preferred Stock under the
Deposit Agreement or to receive Depositary Receipts therefor. If the Depositary
Shares surrendered by the holder in connection with such withdrawal exceed the
number of Depositary Shares that represent the number of whole shares of
Preferred Stock to be withdrawn, the Depositary will deliver to such holder at
the same time a new Depositary Receipt evidencing such excess number of
Depositary Shares.
VOTING
Upon receipt of notice of any meeting, or action in lieu of any meeting, at
which the holders of any shares of Preferred Stock underlying the Depositary
Shares are entitled to vote, the Depositary will mail the information contained
in such notice
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to the record holders of the Depositary Shares relating to such Preferred Stock.
Each record holder of such Depositary Shares on the record date (which will be
the same date as the record date for the Preferred Stock) will be entitled to
instruct the Depositary as to the exercise of the voting rights pertaining to
the number of shares of Preferred Stock underlying such holder's Depositary
Shares. The Depositary will endeavor, insofar as practicable, to vote the number
of shares of Preferred Stock underlying such Depositary Shares in accordance
with such instructions, and the Company will agree to take all action which may
be deemed necessary by the Depositary in order to enable the Depositary to do
so.
AMENDMENT TO THE DEPOSIT AGREEMENT
The form of Depositary Receipt evidencing the Depositary Shares and any
provision of the Deposit Agreement may at any time be amended by agreement
between the Company and the Depositary, provided, however, that any amendment
which materially and adversely alters the rights of the existing holders of
Depositary Shares will not be effective unless such amendment has been approved
by a majority of the Depositary Shares then outstanding.
CHARGES OF DEPOSITARY
The Company will pay all transfer and other taxes and governmental charges
that arise solely from the existence of the depositary arrangements. The Company
will pay charges of the Depositary in connection with the initial deposit of the
Preferred Stock and any exchange or redemption of the Preferred Stock. Holders
of Depositary Shares will pay all other transfer and other taxes and
governmental charges, and, in addition, such other charges as are expressly
provided in the Deposit Agreement to be for their accounts.
MISCELLANEOUS
The Company, or at the option of the Company, the Depositary, will forward
to the holders of Depositary Shares all reports and communications from the
Company which the Company is required to furnish to the holders of Preferred
Stock.
Neither the Depositary nor the Company will be liable if it is prevented or
delayed by law or any circumstances beyond its control in performing its
obligations under the Deposit Agreement. The obligations of the Company and the
Depositary under the Deposit Agreement will be limited to performance in good
faith of their duties thereunder, and neither will be obligated to prosecute or
defend any legal proceeding in respect of any Depositary Share or Preferred
Stock unless satisfactory indemnity has been furnished. The Company and the
Depositary may rely upon written advice of counsel or accountants or information
provided by persons presenting Preferred Stock for deposit, holders of
Depositary Shares or persons believed to be competent and documents believed to
be genuine.
RESIGNATION AND REMOVAL OF DEPOSITARY; TERMINATION OF THE DEPOSIT AGREEMENT
The Depositary may resign at any time by delivering to the Company notice
of its election to do so, and the Company may at any time remove the Depositary,
any such resignation or removal to take effect upon the appointment of a
successor Depositary and its acceptance of such appointment. Such successor
Depositary will be appointed by the Company within 60 days after delivery of the
notice of resignation or removal. The Deposit Agreement may be terminated at the
direction of the Company or by the Depositary if a period of 90 days shall have
expired after the Depositary has delivered to the Company written notice of its
election to resign and a successor depositary shall not have been appointed.
Upon termination of the Deposit Agreement, the Depositary will discontinue the
transfer of Depositary Receipts, will suspend the distribution of dividends to
the holders thereof, and will not give any further notices (other than notice of
such termination) or perform any further acts under the Deposit Agreement except
that the Depositary will continue to deliver Preferred Stock certificates,
together with such dividends and distributions and the net proceeds of any sales
or rights, preferences, privileges or other property in exchange for Depositary
Receipts surrendered. Upon request of the Company, the Depositary shall deliver
all books, records, certificates evidencing Preferred Stock, Depositary Receipts
and other documents relating to the subject matter of the Deposit Agreement to
the Company.
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DESCRIPTION OF COMMON STOCK
The statements made under this caption include summaries of certain
provisions contained in the Company's Articles of Incorporation and bylaws.
These statements do not purport to be complete and are qualified in their
entirety by reference to such Articles of Incorporation and bylaws.
The authorized capital stock of the Company consists of 250,000,000 shares
of Class A Common Stock par value $.01 per share, 30,000,000 shares of Class B
Common Stock, par value $.01 per share, and the Preferred Stock. As of June 30,
1995, 41,190,848 shares of Class A Common Stock were issued and outstanding in
the names of approximately 1,200 holders of record, and no shares of Class B
Common Stock were issued and outstanding.
CLASS A COMMON STOCK
Holders of the Company's Class A Common Stock are entitled ratably, share
for share, to such dividends as may be declared upon the Class A Common Stock by
the Board of Directors and, upon any liquidation of the Company, to participate
ratably in the distribution of any corporate assets remaining after payment of
all debts and the liquidation preferences, if any, of Preferred Stock that then
may be issued and outstanding. However, the Company has entered into a Loan
Agreement which substantially prohibits the payment of dividends or other
distributions with respect to the Class A Common Stock. See "Risk
Factors -- Existing Indebtedness; Additional Financing" and "Dividend and Other
Restrictions under the Loan Agreement."
Holders of the Company's Class A Common Stock are entitled to one vote per
share on all matters submitted to a vote of holders of Class A Common Stock. No
holder of Class A Common Stock of the Company is entitled as a matter of right
to subscribe for or to purchase any shares of stock or any security convertible
into shares of stock of any class of the Company. Each outstanding share of
Class A Common Stock is validly issued, fully paid and nonassessable.
CLASS B COMMON STOCK
The Board of Directors has the authority, without any vote or action by the
shareholders, to issue Class B Common Stock. The Company's Articles of
Incorporation provide that the Class B Common Stock would have the same
characteristics as the Class A Common Stock, except that the holders of Class B
Common Stock would be entitled to one-tenth of one vote per share, voted as a
single class with the Class A Common Stock, except as required by law. Under
North Carolina law, the holders of Class B Common Stock generally would have the
right to vote as a separate voting group on (i) certain amendments to the
Articles of Incorporation, including amendments that would increase or decrease
the authorized number of shares of the class, effect an exchange or
reclassification of their shares for shares of another class, or change the
rights of the class, (ii) a plan of merger if the plan contains a provision
that, if contained in a proposed amendment to the Articles of Incorporation,
would give rise to the right to vote, except where the consideration to be
received in exchange for the shares consists solely of cash, and (iii) a plan of
share exchange if the shares are to be acquired in the exchange. Issuance of
Class B Common Stock could have the effect of acting as an anti-takeover device
to delay or prevent a change of control of the Company.
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND BYLAWS
A provision of the Company's Articles of Incorporation requires the holders
of at least 66 2/3% of the outstanding shares of stock of the Company then
entitled to vote in elections of directors or a majority of the "disinterested"
members of the Board of Directors to approve certain major corporate
transactions involving the Company and a holder of 10% or more of any class of
equity security of the Company ("Interested Shareholder") or the affiliate of an
Interested Shareholder, including a merger or consolidation with the Interested
Shareholder or the sale, lease or exchange of substantially all of the assets of
the Company or of the Interested Shareholder to the other, or any dissolution of
the Company. "Disinterested" directors are directors who are neither Interested
Shareholders nor affiliated with any Interested Shareholder. In addition, the
Company's bylaws permit (i) directors to be removed only for cause and upon the
affirmative vote of the holders of at least 66 2/3% of the outstanding shares of
the Company's capital stock entitled to vote generally in the election of
directors and (ii) newly created directorships and vacancies caused by any
reason to be filled only by the vote of the majority of directors then in office
or by the shareholders. Both the Articles of Incorporation and the bylaws
require the affirmative vote of the holders of at least 66 2/3% of the
outstanding shares of capital stock of the Company entitled to vote generally in
the election of directors to amend these provisions. These provisions could make
it more difficult for a third party to acquire control of the Company.
The Board of Directors of the Company is divided into three classes, with
one class elected annually by the shareholders to a three-year term. The effect
of the staggered Board of Directors is to negate substantially the possibility
of minority
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shareholders' obtaining representation on the Board of Directors. The holders of
common stock of the Company do not have the right to vote cumulatively in the
election of directors.
FCC RESTRICTIONS
The transfer of shares of Class A and Class B Common Stock may, in certain
circumstances, be subject to provisions of the Communications Act of 1934, as
amended, and rules and policies requiring prior FCC approval of the transfer of
control of cellular, microwave and other licensees, restricting the percentage
of alien ownership of such licensees, limiting the ownership of interests in
cellular systems serving the same area, and establishing other licensee
qualifications.
TRANSFER AGENT AND REGISTRAR
First Union National Bank, Charlotte, North Carolina, is the transfer agent
and registrar for the Class A Common Stock.
DESCRIPTION OF WARRANTS
GENERAL
The Company may issue Warrants to purchase Securities or other securities
or rights of the Company (including rights to receive payment in cash or
securities based on the value, rate or price of one or more specified
commodities, currencies or indices) or securities of other issuers or any
combination of the foregoing. Warrants may be issued independently or together
with any Securities and may be attached to or separate from such Securities.
Each series of Warrants will be issued under a separate warrant agreement (each
a "Warrant Agreement") to be entered into between the Company and a warrant
agent ("Warrant Agent"). The following sets forth certain general terms and
provisions of the Warrants. Further terms of the Warrants and the applicable
Warrant Agreement are set forth in the applicable Prospectus Supplement.
The applicable Prospectus Supplement will describe the following terms of
any Warrants in respect of which this Prospectus is being delivered: (1) the
title of such Warrants; (2) the aggregate number of such Warrants; (3) the price
or prices at which such Warrants will be issued; (4) the currency or currencies,
including composite currencies, in which the price of such Warrants may be
payable; (5) the Securities or other securities or rights of the Company
(including rights to receive payment in cash or securities based on the value,
rate or price of one or more specified commodities, currencies or indices) or
securities of other issuers or any combination of the foregoing purchasable upon
exercise of such Warrants; (6) the price at which and the currency or
currencies, including composite currencies, in which the Securities purchasable
upon exercise of such Warrants may be purchased; (7) the date on which the right
to exercise such Warrants shall commence and the date on which such right shall
expire; (8) if applicable, the minimum or maximum amount of such Warrants which
may be exercised at any one time; (9) if applicable, the designation and terms
of the Securities with which such Warrants are issued and the number of such
Warrants issued with each such Security; (10) if applicable, the date on and
after which such Warrants and the related Securities will be separately
transferable; (11) information with respect to book-entry procedures, if any;
(12) if applicable, a discussion of certain United States Federal income tax
considerations; and (13) any other terms of such Warrants, including terms,
procedures and limitations relating to the exchange and exercise of such
Warrants.
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<PAGE>
PLAN OF DISTRIBUTION
The Company may sell Securities on a negotiated or competitive bid basis to
or through underwriters or dealers and also may sell Securities directly to
other purchasers or through agents. Any such underwriter, dealer or agent
involved in the offer and sale of Securities, and any applicable commissions,
discounts and other items constituting compensation to such underwriters, dealer
or agent, will be set forth in the Prospectus Supplement.
The distribution of Securities may be effected from time to time in one or
more transactions at a fixed price or prices, which may be changed, or at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices.
Unless otherwise indicated in a Prospectus Supplement, the obligations of
any underwriters to purchase Securities will be subject to certain conditions
precedent and the underwriters will be obligated to purchase all of the
applicable Securities if any are purchased. If a dealer is utilized in the sale,
the Company will sell the Securities to the dealer as principal. The dealer may
then resell the Securities to the public at varying prices to be determined by
such dealer at the time of resale.
Offers to purchase Securities may be solicited by the Company or agents
designated by the Company from time to time. Unless otherwise indicated in a
Prospectus Supplement, any such agent will be acting on a best efforts basis for
the period of its appointment.
Underwriters, dealers and agents that participate in the distribution of
Securities may be deemed to be underwriters as that term is defined in the
Securities Act of 1933 (the "Securities Act"), and any discounts or commissions
received by them from the Company and any profits on the resale of the
Securities by them may be deemed to be underwriting discounts and commissions
under the Securities Act. Underwriters, dealers and agents may be entitled,
under agreements entered into with the Company, to indemnification against and
contribution toward certain civil liabilities, including liabilities under the
Securities Act.
If so indicated in the Prospectus Supplement, the Company will authorize
agents and underwriters to solicit offers by certain specified institutions to
purchase Securities from the Company at the public offering price set forth in
the Prospectus Supplement pursuant to delayed delivery contracts providing for
payment and delivery on a specified date in the future. Institutions with whom
such contracts, when authorized, may be made include commercial and savings
banks, insurance companies, pension funds, investment companies, educational and
charitable institutions and other institutions but shall in all cases be subject
to the approval of the Company. Such contracts will be subject to the following
conditions (i) the purchase by an institution of the Securities covered by these
contracts shall not at the time of delivery be prohibited under the laws of any
jurisdiction in the United States to which such institution is subject and (ii)
if the Securities are being sold to underwriters, the Company shall have sold to
such underwriters the total principal amount of the Securities less the
principal amount thereof covered by such contracts. Any additional conditions
will be described in the Prospectus Supplement. The Prospectus Supplement will
set forth the commission payable for solicitation of such contracts.
LEGAL OPINIONS
The validity of the Securities that may be offered hereby will be passed
upon for the Company by Schell Bray Aycock Abel & Livingston L.L.P. Greensboro,
North Carolina. Certain additional legal matters will be passed upon for the
Company by Richard C. Rowlenson, Senior Vice President and General Counsel for
the Company. As of June 30, 1995, Mr. Rowlenson beneficially owned 115,302
shares of Class A Common Stock. Doris R. Bray, a partner of Schell Bray Aycock
Abel & Livingston L.L.P., is a director of the Company and, as of June 30, 1995,
beneficially owned 4,800 shares of Class A Common Stock.
EXPERTS
The financial statements and schedules incorporated by reference in this
Prospectus and elsewhere in the Registration Statement, to the extent and for
the periods indicated in their reports, have been audited by Arthur Andersen
LLP, independent public accountants, and are incorporated by reference herein in
reliance upon the reports of said firm and upon the authority of said firm as
experts in accounting and auditing.
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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS, NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATES AS OF WHICH
INFORMATION IS GIVEN IN THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS. NEITHER
THIS PROSPECTUS SUPPLEMENT NOR THE ACCOMPANYING PROSPECTUS CONSTITUTES AN OFFER
OR SOLICITATION BY ANY PERSON IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
SOLICITATION.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary...................... S-5
Certain Risk Factors............................... S-10
Use of Proceeds.................................... S-14
Capitalization..................................... S-14
Selected Consolidated Financial and Operating
Data............................................. S-15
Management's Discussion and Analysis of Financial
Condition and Results
of Operations.................................... S-17
Business........................................... S-23
Management......................................... S-37
Principal Shareholders............................. S-39
Description of Credit Facility..................... S-41
Description of Debentures.......................... S-42
Underwriting....................................... S-63
Legal Matters...................................... S-64
Experts............................................ S-64
Glossary........................................... S-65
Index to Consolidated Financial Statements......... F-1
PROSPECTUS
Incorporation of Certain Documents
by Reference..................................... 2
Available Information.............................. 2
Certain Definitions................................ 3
The Company........................................ 4
Use of Proceeds.................................... 4
Risk Factors....................................... 4
Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends........................ 7
Description of Debentures.......................... 8
Description of Preferred Stock..................... 14
Description of Depositary Shares................... 14
Description of Common Stock........................ 17
Description of Warrants............................ 18
Plan of Distribution............................... 19
Legal Opinions..................................... 19
Experts............................................ 19
</TABLE>
$200,000,000
VANGUARD CELLULAR
SYSTEMS, INC.
% SENIOR DEBENTURES DUE 2006
(Vanguard Logo appears here)
SALOMON BROTHERS INC
GOLDMAN, SACHS & CO.
NATIONSBANC CAPITAL MARKETS, INC.
SMITH BARNEY INC.
TORONTO DOMINION SECURITIES
(USA) INC.
PROSPECTUS SUPPLEMENT
DATED , 1996
